Thursday, November 20, 2014

Why Working With Actuaries is Desirable, In My Humble Opinion

Actuaries often get a bad rap. In my thirtieth year in the profession, I feel like I have heard it all. We are nerds. We are numbers geeks. We can't think outside the proverbial box. We are literal. outgoing actuaries look at YOUR shoes when they talk to you.

Despite all that, there is much to be said that is positive about the profession. An employee (not an actuary) of the US Department of the Treasury once said to me that actuaries were the single most honest and ethical profession that he has dealt with.

Many of us majored in college in something like actuarial science, risk management, math, or economics. Probably, a large number of us thought about a career in academia. I have a number of friends who have remained in academia and that I can think of, every one of them to my knowledge is an honest and ethical person. But, generally, that is because of who they are, not what their professions require them to be. For much of academia, codes of conduct tend to relate to embarrassing the college or university that employs them. In my personal experience, those codes of conduct are not overly stringent, at least not if we compare to the actuarial Professional Code of Conduct.

Recently, much has been in the news, or at the very least, the conservative news of a particular Professor of Economics at MIT, Jonathan Gruber. Dr. Gruber is highly regarded by his peers as one of the preeminent health care economists that we could find. Dr. Gruber also developed many of the econometric models put forth with the Affordable Care Act (ACA, PPACA, ObamaCare). He has been engaged by either or both of the United States Congress or the current presidential administration for his expertise as well as by a number of the states to consult on the economics of the ACA. By his own admission, he helped to deceive the public about the ACA and its costs and sources of revenues. Paraphrasing Dr. Gruber, he justifies this as being for the greater good. That is, he has proclaimed that the ACA was a good and necessary law to pass and that the goodness of the law justifies any deception.

Dr. Gruber may be right about that. Or, he may not be. You may have an opinion on whether he is right. I'm not here to express mine on that particular issue.

There are many actuaries who are qualified, given the appropriate data and choices of assumptions and methods, to project health care costs or the costs of a health care plan or plans. Those who fit that bill have attained initial qualification through examination and maintained it through continuing education. While this process has a different rigor than does the process of attaining a Ph.D., it has created a relatively small community of individuals who work in the field.

Actuaries tend not to be political animals. Part of the reason for that may lie in our Code of Conduct. Quoting directly,
An actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession. [Precept 1] 
An actuary shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession. [Annotation 1-4]
Those are two strong statements. Actuaries who have failed to abide by the Code of Conduct have been counseled, censured, suspended, or even expelled from the profession. Many of those cases have been for violation of Precept 1 (and its annotations) among others.

So, while jokes have been told about actuaries regarding the variety of answers that we might provide, I suggest it is because ours is not an exact science. We use our experience to make sound professional judgments. But, we have a duty of honesty and of integrity. We have a duty to not misrepresent or deceive.

To me, this is laudable. It makes me proud to be a part of the profession. It's why there would not have been an attempt by actuaries to deceive the public had actuaries been used by the government to model the costs under the Affordable Care Act. It makes it desirable to work with actuaries.

Tuesday, November 18, 2014

Why 401(k) Plans May Not Be the Answer

Get a job. Find a new employer. Typical questions that get asked include compensation, health benefits, vacation, and do you have a 401(k) (or all too frequently, do you have a 401?)? Prospective employees usually don't ask about the 401(k) plan or about any other retirement plan, but simply want to know if there is a 401(k). Does it have a matching contribution? People don't ask.

According to a study from Aon Hewitt, 73% of those eligible are participating in 401(k) plans, but 40% of them are saving at a level below the full match level. Many of those plans have auto-enrollment, but that level of deferral is below the level required for a full matching contribution. Once people are enrolled at the automatic level, many tend not to defer enough to get a full match.

The Aon Hewitt study does not, as far as I could tell, explore why this may be. Is it a lack of employee education? Is it an inability to budget for a higher amount, especially in a time where costs of raising a family are increasing, but pay often is not? Is it a fear of the plan?

We can do the math. If a young worker (someone recently out of college, for example) participates in a 401(k) at a meaningful level throughout their career, and especially if there is a good matching contribution to go with it, those workers can eventually retire with a very good retirement income.

But, what about the ones who participate at a lower level, so that they get less than the full match? What about the ones who face temporary unemployment as so many of us do these days and may have to withdraw their 401(k) for funds to live on?

As Roth 401(k) plans have become the rage, this has become even more of a problem. While in a traditional 401(k), access to funds is essentially limited (large tax penalties) prior to age 59 1/2, in a Roth, that inaccessibility largely disappears after the employee money has been in the plan for 5 years. This means that practically speaking, Roths, for all their benefits, may be less retirement plans than their better known predecessors.

If these trends continue, 401(k)s in any form will not be the answer. In fact, for those people who are not using their plans to the fullest extent that they were intended, retirement may be nothing more than a pipe dream.

35 years ago, the answer was defined benefit plans. They provided retirement income pure and simple. But, do to Congress' ongoing efforts to protect pension plans, or so they would have you believe, that dinosaur is nearly extinct. But, 401(k)s will do the trick for only a small percentage of the workforce. For the rest, retirement planning is imperative. And, when they do the modeling, they may not like the future that they see.

Friday, November 14, 2014

Pensions: Are They Just a Toy For Congress to Play With?

In 1963, Studebaker, once a large and proud American auto maker closed its doors in the US for the last time. With that door closing, as legend has it, New York Senator Jacob Javitz had the idea that the retirement income promised to employees needed more security. So was born in his mind the law that in 1974 became the Employee Retirement Income Security Act (ERISA). While it did far more than take steps to make pensions more secure, that was purportedly its primary purpose.

ERISA provided a framework for corporate retirement plans. And, in 1974, before paragraph (k) had been added to Section 401 of the Internal Revenue Code, the predominant employer-provided retirement income came from defined benefit (DB) plans. Unions bargained for them, and what the unions got, management wanted. Also, back in 1974, it was not unusual that if there was a company that an employee worked for in their mid-to-late 20s that that employee would eventually retire from that company. If you, as an employer, promised that employee a pension, you could expect 30 or more years of loyalty from that employee.

So, ERISA set up a minimum funding regime regime for DB plans. If you were using what is known as an immediate gain (or loss) actuarial cost method (if you know what that means, you don't need an explanation and if you don't know what it means, you don't want an explanation), then your minimum funding requirement for the year was the sum of these elements:

  • The normal cost or the actuarial present value of benefits accruing during the year
  • Amortization over 30 (or 40) years of the unfunded liability remaining from inception of the plan or transition to ERISA
  • Amortization over 30 years of the actuarial liability emerging due to changes in plan provisions, the thought likely being that you got 30 years of value from the amendment
  • Amortization over 30 years of the actuarial liability emerging due to changes in actuarial assumptions
  • Amortization over 15 years of the actuarial liability emerging due to actuarial gains and losses (deviations from the expected)
  • A few other elements that rarely came up
By the mid-1980s, DB plans were generally pretty well funded, and most of those that were not yet fully funded were getting much closer than they had been. The exceptions, for the most part, were plans sponsored by companies in dire financial straits that often convinced their actuaries to use fairly aggressive actuarial assumptions, or companies that frequently provided large benefit increases that had not yet been funded.

In 1986, we were graced with the Tax Reform Act (TRA86), a massive and sweeping change to the entire Internal Revenue Code -- so massive, in fact, that the Code was renamed from the Internal Revenue Code of 1954 to the Internal Revenue Code of 1986, a moniker it keeps to this day. A not insignificant portion of TRA86 included changes to pension funding rules. Amortization periods were shortened. For the most part, this increased required contributions for underfunded plans, which in turn increased corporate tax deductions.

Those new rules were revamped quickly. Just a year later, embedded in the Omnibus Budget Reconciliation Act of 1987 (OBRA87) was the Pension Protection Act of 1987. OBRA87 was the annual budget bill. And, has become the trend, each powerful legislator had his own pet spending project. To pay for all that pork, either a revenue generator or a decrease in tax expenditures (a fancy name for deductions) was needed. OBRA87 found a useful tool in DB pension plans. How is that? Just change the funding rules to decrease required contributions and tax deductions will go down which in a backhanded sort of way increases revenue for the government. of course, this was thinly veiled in a complex set of new requirements that applied only to underfunded plans.

A star was born!

Congress needs a revenue raiser? Change the funding rules. Cut the maximum benefit limitations. Change required interest rates. 

With this new toy, Congress looked at changes in pension rules at least every other year. It created uncertainty for employers. Yes, they could plan and budget based on current rules, but they lived in fear that the rules would change. That's a tough way to run a business. Many of those plan sponsors froze their pension plans. Many of them wanted to terminate their plans, but interest rates were so low that the cost of terminating those plans was too high. 

Fast forward to 2006. Coming out of the economic malaise and stock market tumble at the beginning of the decade, many plans were underfunded on an accrued benefit basis using market-based discount rates. It was time to protect pensions yet again. Thus was born the Pension Protection Act of 2006 (PPA), the most sweeping change to corporate pensions since ERISA. It provided a regime that essentially ensured that underfunded plans would be fully funded within 7 years. Employees would get their pensions. 

But, those extra contributions from employers are tax deductible. That's an extra burden on the government. And, it was just one year later (falling from its October 11, 2007 peak) that the markets crashed yet again. Employers couldn't afford these new levels of required contributions. But. Congress had an agenda to help those employers and help themselves. 

Welcome pension smoothing in the form of several laws since then. PPA brought us 7-year funding based on "fair market" conditions and assumptions. Pension smoothing undid that and then undid it again and undid it again as Congress invoked its favorite toy at least 3 times in the period following the signing of PPA. Employers had funding relief. Congress had its decrease in tax expenditures. Employees in pension plans had less funded benefits and the rules got so complex that almost nobody wanted to sponsor a pension plan anymore.

And, the places that pension funding relief gets buried are just amusing. I think the 2014 relief is my favorite -- the Highway and Transportation Funding Act of 2014 (HATFA). That's right. Congress decided it was time to improve our roadway system, but new roads don't come for free. So, to help pay for this, Congress invoked its favorite tax toy, pension funding relief.

Shame on them!

Thursday, November 13, 2014

Executives Need Retirement Education, Too

It's been a long time since I blogged. I needed a break. I needed some fresh ideas. I didn't feel like writing on anything technical. I didn't feel like offering my opinions. I just needed to stop writing for a little while.

This morning, however, I saw an article in the News Dash put out by Plan Sponsor. It stressed that plan sponsors feel that perhaps the biggest issue in nonqualified plans is participant education. Citing from the article, one in five said that education was a top challenge while 18% cited participation and appreciation. I think that they are essentially the same thing, so that makes 40% (rounded) and that's enough for me to conclude that this is a major issue.

Why is this? Executives generally make a lot of money (whatever a lot is). They are generally used to dealing with financial matters. They already have their qualified plans. What makes these plans so different?

There's a lot. Taxation is different. They usually don't have a real pool of assets that they can play with. They don't get the same level of disclosures. They don't understand Code Section 409A. And, they generally don't know if what they are getting is good compared to what their peers at other companies are getting or not.

What's the answer?

I suggest rewards education for executives. In my experience, it is rare that this can be done internally. Internal people are often considered to have a bias or an agenda. It comes better from the outside.

Who or what should that outsider be? It should be an independent person, one who has no horse in the race, so to speak. It should be a person who can speak to all facets of executive rewards -- cash compensation, deferred compensation, equity compensation, retirement compensation, change-in-control agreements, and the like. Unfortunately, there are not too many of them around.

Oh, wait, I can do all that!

Wednesday, June 4, 2014

Statins Linked to Diabetes

In an article in the British Medical Journal, researchers document that they have found a link between higher potency statins and new onset of Type II (adult onset) diabetes. This is stunning, at least to me.

The three drugs that were defined for the study as higher potency were these:

  • 10 or more mg rosuvastatin (Crestor)
  • 20 or more mg atorvastatin (Lipitor)
  • 40 or more mg simvastatin (Zocor)
In the US, these are all among the 50 most prescribed drugs. In fact, depending on which list you use, they might all be among the 10 most prescribed drugs. And, according to this study, they increase the likelihood of a patient developing diabetes.

That's not good news.

Often, I read data similar to this and really wonder about its credibility. The data is reported by people with no background in statistics and is published in a non-refereed journal. That is not the case here. The researchers working on behalf of the Canadian Network for Observational Drug Effect Studies include a variety of academics including some with measurement and statistical training. The descriptions of their methods and data sources are sound.

So, what did they find?

The study looked at patients who were prescribed higher potency versus lower potency statins for secondary prevention. In other words, these were patients (at least age 40) who had been hospitalized for a major cardiovascular event (heart attack, stroke, bypass, etc.) who had never previously been diagnosed with diabetes and who were newly prescribed a statin. The key metric that the researchers used is a rate ratio, a common term in epidemiology.

Simply stated, the rate ratio is the ratio of incidences. A rate ratio of 1.20, for example, would indicate that the incidence rate for the studied group is 20 percent higher than that for the control group. They reported data at the 95th confidence interval.

In the first two years post-statin intervention, the researchers found a rate ratio of 1.15 (95% confidence interval of  1.05 to 1.26). In the first four months of use, however, the rate ratio was 1.26 (95% CI of 1.07 to 1.47).

I repeat. This is stunning. the increase in the likelihood of a new diabetes diagnosis for higher potency statin users in the first four months post-intervention was 26%. Increases between four months and two years were much lower, but there were still more newly diagnosed or treated diabetics among higher potency statin users than lower potency users. And, both levels of statin users showed increases in diagnoses of diabetics.

From a practical standpoint, what does this mean?

It's a little bit difficult to tell. From a purely lay standpoint (I have no medical training), the researchers present no data that suggests if there is a similar effect for patients who have not had a major cardiovascular event. However, it is clear that the use of high potency statins is linked to the onset of diabetes. The data set is large and the confidence interval sufficiently high.

What I suspect (and I repeat that I have no medical training) is that people who have a predisposition toward diabetes are significantly more likely to become diabetic after taking statins, especially high potency statins. The researchers note that higher potency statins have not shown statistically significant better results for secondary intervention than lower potency statins.

Looking at this from a statistical and financial standpoint, I would note the following:
  • The three drugs considered higher potency seem to result a statistically significantly higher rate of diabetes onset.
  • Diabetes is one of the highest cost and most dangerous chronic medical conditions, at least in the US.
  • Diabetes, when found in a comorbid state (other chronic conditions exist), increases medical risk very meaningfully.
  • Patients with a predisposition to diabetes along with their physicians should very carefully weigh the risk and benefits of various statins and their dosages as compared to other forms of treatment.

Friday, March 21, 2014

Why Doctors Must Give in and Use EMRs

Admit it; you have a real interest in health care. Oh, you may be like most of the rest of Americans and not really care about the field or science of health care, but you probably do have a real interest in caring for your own health. Most of us do. Most of us, even if we don't show it by our actions and behaviors would like to be really healthy.

When we choose our physicians, most of us make that selection because of several factors. Among them might be these:

  • Whether the physician is "in network"
  • Whether we have a level of comfort with the physician
  • Whether we think the quality of care will be excellent
How do we know if the quality of care will be excellent? We generally don't, but we have our ways of thinking that we might know. We ask our friends and relatives. We might go to a site like Angie's List or to see what they say. 

Do you know what else is really important? According to a survey done jointly by Aeffect and 88 Brand Partners, 82% of patients believe that physicians who use electronic medical records (EMRs) provide better quality of care. (While I cannot find the actual complete survey results, you can see snippets here.)

To me, that is astounding. Many physicians that I know like EMRs, but perhaps just as many dislike them. They say that the EMRs cause physicians like them to have to spend extra time inputting a bunch of data. They say that they have to hire additional staff that increases their cost of providing care, but that insurers often provide them with nothing to compensate for this cost. But, according to the same survey, 44% of patients have a more positive impression of physicians that use EMRs (while I don't have the data, I am guessing that the number who say they have negative impressions is very small). 

While we are moving more to a value-based system, physicians still receive most of their compensation from seeing more patients. Other than scheduling on a much tighter basis and hoping that their schedules fill up, physicians can increase demand for their services. When they do that, their schedules will fill up and that will probably allow them to earn more income which most of them will view as a positive. 

So, the connection (perhaps pun intended) is that even for physicians who don't like them, EMRs are becoming a necessary part of a practice. Physicians must give in and use EMRs. Soon, they will really have no practical choice.

Wednesday, March 19, 2014

If We Only Knew What 401(k) Participants Really Want

I read an article this morning called "What Participants Really Want From Their Bond Fund." It was written by a gentleman named Chip Castille. Mr. Castille is the head of the BlackRock US Retirement Group. As such, Mr. Castille is likely a participant in a 401(k) plan, although to be truthful, I don't even know if BlackRock offers a 401(k) plan to its employees.

More to the point, the article tells us what participants really want in a 401(k) plan and specifically in a bond fund in such a plan. While I could not find where the author cited any survey data, either he has some on which he is basing his conclusions or he is divining the answers because he seems to really know better from my read of the article (more on that later).

The author implies that participants are looking for safety, return or retirement income. That is a pretty broad spectrum. But, he doesn't dig into it enough for us to know how a plan sponsor or an investment professional would decide. What he does do is point out that an investment manager in a bond fund looks at how closely his fund is tracking a benchmark while participants look at whether the fund has gained or lost money or it will produce sufficient income.

I don't mean to demean what any professional says. But, here I beg to differ with the author. Participants get a lot of junk in the mail these days (not that these days are really any different from any other days in that regard). If the participants to whom he is referring are anything like the ones that I know, they don't look at individual fund performance very often. In fact, in the case of most that I know, "not very often" is spelled N-E-V-E-R. That's right; they don't look at individual fund performance. They look to see how their total account is doing. They judge (that's spelled G-U-E-S-S) whether it's a good day to be in equities or a good day to be in fixed income and periodically move their money around because they think they know.

Typically, participants don't like losses in their accounts. In fact, I would say that if you were to rank account balance events in order of importance, my guess would be that far more participants would say that they would like to avoid meaningful losses perhaps at the expense of a few big gains than the number who would say they would like to go for big gains at the potential expense of taking some very large losses.

But, I'm just guessing. I don't really know. And, frankly, the author of the article doesn't know any of this either. Face it, he hangs around with investment professionals. Investment professionals are not representative of your average garden variety 401(k) participants.

I happen to be an equal opportunity dumper, however. While I cannot find data that the author is using to draw his conclusions from, I will also take this opportunity to dump on many authors who do use data, usually from surveys.

Let me show you why with an example. Suppose a survey question is worded like this:

What do you want from your 401(k) bond fund?

  1. Safety
  2. Return
  3. Retirement income
  4. Guacamole
  5. Health care
I've never posed this question this way, so I get to guess at hypothetical results. Some number of people will answer with 4 or 5. Among those who don't, that is, they answer with 1, 2, or 3, or they just skip the question entirely, do they know what I mean by each of 1, 2, and 3? My guess is that they don't. Safety has lots of meanings in life. To an investment professional, it means one thing. To a plan participant, it might mean NEVER losing money. You and I know that is essentially impossible in a bond fund, but the average participant may not.

Some firm out there that wants to prove their own point will have a survey question like this one. They will ask about 1,000 random selected people to answer the questions and some smart people in the proverbial back room will analyze the answers so that the author of the next great white paper will have the definitive solution. 

Suppose the potential answers were flip-flopped (that is, health care was at the top followed by guacamole with safety last), would that change the results? What does a participant do if they wanted to answer none of the above? Or, suppose they don't understand one of the answers. Or, perhaps, in their mind, it's a tie between two answers. Or, maybe last week they would have answered return, but after they got their most recent statement and saw a 10% decline in their account balance, they suddenly place significant value on safety.

Let's face it, none of us know what the average participant wants in a 401(k) bond fund. We don't even know what an average participant is. 

Remember the two words that I capitalized -- NEVER and GUESS. That should tell you something.