tag:blogger.com,1999:blog-20093241871931575202024-02-18T23:43:20.457-05:00Benefits and Compensation with John LowellWhat's new, interesting, trendy, risky, and otherwise worth reading about in the benefits and compensation arenas.John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.comBlogger497125tag:blogger.com,1999:blog-2009324187193157520.post-88184785044155122652023-10-30T07:19:00.003-04:002023-10-30T07:19:44.033-04:00Pensions -- A Consistent Strike Issue<p>We're seeing it over and over again. Pensions are a consistent strike issue. It doesn't mean that every striking group gets or keeps a pension, but what we are seeing is that labor unions that do make pensions a strike issue or either getting (or keeping) those pensions or are receiving very significant concessions from management in other areas.</p><p>Yes, those kinds of pensions. The ones that reward long service and provide guaranteed lifetime income paid from an employer-sponsored, employer-provided plan. Those same pensions can benefit employers too, but instead of looking at how they might be useful or even accretive to the business when everything is considered, many companies simply look at pensions as an evil, albeit not a necessary one.</p><p>Let's consider the pros and the cons of these pensions. While I started by mentioning pros as is the custom {cons and pros simply sounds awkward], let's start with the cons.</p><p>Pensions cost money. They cost money over the long term. In fact, they are a form of deferred compensation. That is, an employee gives up current compensation to receive compensation in the future of presumably equal value. Because of that, there are several costs: the cost of administering the pension, the accounting or accrual cost of the pension, and the cash cost of funding the pension. </p><p>Those last two are not additive. In fact, they are duplicative, separated only by timing. It's that separation, however, that has over time caused many organizations to stop offering pensions. You see, in a 401(k) plan, a company expenses for a year the amount it pays for the year [sometimes off by a very minor timing differential, meaning weeks or months, not years]. In a pension plan, that same company might have a prepaid pension cost (it has funded more than it has accrued) or an accrued pension cost (it has accrued more than it has funded) on the balance sheet.</p><p>But don't tell me pensions are inherently too expensive. I can design a pension plan to have a typical cost of essentially whatever amount you are willing to spend. You want a pension that costs 1% of payroll? Just like a 401(k) plan that costs 1% of payroll, it won't provide large benefits, but I can design it. You're willing to provide a plan that costs 10 times that, I can design it too.</p><p>There are more pros than cons. Pensions have been shown to be a useful tool in attracting and retaining workers. They can be used as a workforce management tool. And, they do a far better job of evening out the retiree wealth gap in ways that are consistent with your DEI initiative than do 401(k) plans. </p><p>How do I know that workers want pensions? I see what they are asking for. In the UAW strike, they asked for pensions. The companies made large concessions to convince the UAW brass to give up on that piece. In various hoospital strikes, workers have asked for and are asking for pensions. In fact, my own research shows that the most asked for elements in union demands in strikes in 2023 have been more pay and pay increases, better working conditions, and pensions. Yes, pensions. In the same strikes, I've not seen demands for different 401(k) investment options, 401(k) auto-enrollment, or 401(k) in-plan annuities. Yes, I'll grant you, the latter have been the outcome in some cases, but they have been a union concession in order to get something else they really want or need.</p><p>Another major clue that workers want pensions comes to me from employers. One such employer that froze its pension noted that employee turnover has increased noticeably (they haven't measured it exactly yet) and that they expect the cost of turnover exceeds the cost of providing a pension. Another employer in an industry that is struggling with hiring said they have no problem doing so. They simply trumpet their pension and recruit at competitors that don't have one. </p><p>In Franklin Templeton's "Voice of the American Worker" survey published in early 2023, the number one financial issue for American workers is financial independence in retirement. Yes, mean 401(k) account balances are large, but means are skewed by the large account balances. When we look at medians, however, (50% of balances larger and 50% smaller), they are entirely inadequate. </p><p>Even the data coming from the large 401(k) recordkeepers show that roughly (some report more than 50%, some less than 50%) half of American workers are on track to retire. If you, unlike me, think that is a good thing, let me recast that data point.</p><p>If 50% of Americans are on track to retire, then the other 50% can't retire. So much for the American Dream. </p><p>It's no wonder pensions are a consistent strike issue. When the Big 3 US automakers offered pensions, you didn't see their lifelong UAW workers not being able to retire. In fact, my observation is that they have tended to live better financially in retirement than they did while they were working. </p><p>Consider that cost of unwanted turnover. Consider the cost of unhappy workers sticking around. Consider what a pension might do to fix that.</p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-69855442567342593922022-06-21T08:18:00.002-04:002022-06-21T08:18:34.836-04:00Survey: The Most Important Benefit Employees Want Their Employers to Focus on Is Retirement<p><b>News flash, </b>although not to people who follow my ramblings, employees want their employers to focus on <b><i>retirement benefits</i></b>. Not flexible work, not health benefits, but retirement. And of workers whose top priority in the survey is retirement, more view a guaranteed lifetime income benefit as a high priority than anything else.</p><p>The National Association of Plan Advisers (NAPA) wrote an <a href="https://www.napa-net.org/news-info/daily-news/struggling-workers-look-employers-">article</a> on this <a href="https://www.wtwco.com/en-US/Insights/2022/06/2022-global-benefits-attitude-survey">survey</a> done by a former employer of mine. Curiously, many retirement firms in other publications seem to be telling employers not to focus on retirement benefits. Perhaps I am reading their materials incorrectly.</p><p>The data in this survey screams one thing: <b>Defined Benefit Plans </b>(DB). This does not come as a surprise to me. I've been saying this for at least 30 years. The average worker does not have the combination of discipline to save and financial acumen to invest in ways to build up sufficient assets on which to retire well unless the financial markets really cooperate.</p><p>Today, the trend is to try to make 401(k) plans work like DB plans. Have I got another news flash for you: they don't; they can't; they never will!</p><p>We'll come back to this, but let's look at some snippets from the analysis of the survey data. And, please note that the survey was done in the December 2021 to January 2022 timeframe. That was before inflation really started spiking, before interest rates started jumping, and before the equity markets visited the narrow whole in the toilet.</p><p>36% of workers earning $100,000 or more per year are living paycheck to paycheck. That's double the percentage just one year earlier. </p><p>Then it gets more shocking. Last year, 26% of the survey respondents took out a 401(k) loan and 36% fell behind on their utility bills, rent, or mortgage. And, for all the people who fell behind on their mortgages who have adjustable rate mortgages, it's getting worse ... much worse.</p><p>What do you think those people will do? They'll have to do something. They'll have to cut back somewhere. While it's not in the survey, you watch. Many of those 36% will or already have cut back on their 401(k) deferrals.</p><p>Which benefit do these people want the most focus on? Drum roll please.</p><p>44% view retirement benefits as a top priority, 39% flexible work, and 33% health. One-third more are focused on retirement than on health during a global pandemic. As the late great Mel Allen would have told you, "How about that?."</p><p>Of the survey respondents who labeled retirement a top priority, 62% want a guaranteed retirement benefit (that is spelled D-E-F-I-N-E-D B-E-N-E-F-I-T for those who are not listening), 58% want more generous retirement benefits and 53% want retiree medical. Nowhere in that do I read making 401(k) plans work like something they are not.</p><p>Nothing that I've commented on here is the least bit surprising. 401(k) plans were never intended to be a primary source of retirement income. They were never intended to provide lifetime income. They were intended as tax-favored retirement savings. The thought is that if you give someone a tax break to do it, when they are able, they will save more for retirement. It's a good concept. Giving insurance companies a windfall with rip-off in-plan annuities is not as good a concept.</p><p>I know, DB plans are bad for employers because they are expensive and the costs are volatile. But, they don't have to be.</p><p>Defined benefit plans can be designed at whatever cost level an employer considers affordable. And, modern designs are such that when properly designed, the costs do not need to be volatile. In fact, they can be far less volatile than the maybe not so treasured (according to the survey data and remember I had nothing to do with the survey) 401(k).</p><p>Get with the program people. Listen to what your employees are saying they want. If your consultants haven't told you how you can do this cost-effectively and cost-consistently, call me. Google me. I'll take your call. Quite happily, in fact.</p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-27010113290781784172022-06-16T11:48:00.001-04:002022-06-16T11:48:08.617-04:00Dear 401(k) Participant -- An Open Letter<p>Dear 401(k) Plan Participant,</p><p>I hope you are doing well. I really do, but I am concerned about you. No, if you are one of those wealthy participants, I'm sure you'll be okay. It's the rest of you I'm worried about.</p><p>You got your statements around the end of last year and the markets were at near record highs. But, the Dow is down somewhere around 20% since then and the NASDAQ nearly double that. The fixed income part of your portfolio that most of you don't understand isn't doing very well either. Have you looked at those statements recently?</p><p>Let's look into the future. Do you plan to retire someday? Do you expect a source of regular lifetime income? You do? How much can that 401(k) buy you? Have you factored in the insurance company margins? How about the fees you're being charged by the recordkeeper for the plan and the fund manager? You haven't? Perhaps you should?</p><p>How about that lifetime income? Social Security is there, but it might not be the same program when you get to retirement age. </p><p>What's that you say: you have a friend with a defined benefit (DB) plan? I know; you told them it was foolish to factor that into their choice of an employer, but they're still not upset with their choice, are they?</p><p>I understand that a year ago, you were contributing 10% of your pay to your 401(k) plan. That's great. But with inflation, you don't seem to be able to do that anymore? Oh, you maxed out your credit cards so that you could contribute to your 401(k) and now you can't pay them down? And, you can't afford to go out, but you can't afford groceries, and you can't handle your credit card debt? Where did you say that lifetime income was coming from?</p><p>How about that friend who took the job you recommended against? You know; that job with a pension. That's a pension her employer pays for. You say your friend has been contributing a steady 5% of pay to their 401(k) and feels absolutely fine about retiring someday? Your friend isn't worried about lifetime income just because they have a good DB plan? </p><p>Amazing!</p><p>And that house you just overpaid for? But, you got a great teaser rate on your Adjustable Rate Mortgage. Oh, what was that? The rate resets after one year and it doesn't look good. But you told me it was okay because you read you can tap into your 401(k). Something that I think you called a hardship withdrawal?</p><p>So, the markets are depleting your 401(k), you're depleting it, and you can't afford to contribute to it anymore? Doesn't that bother you? Why isn't your friend with the DB plan losing sleep at night like you are?</p><p>What's that you said? You're going to be parents? The medical costs for childbirth are going to eat away at your HSA balance? And, then there are diapers and you're afraid you'll have to buy formula? Those are all expensive, aren't they?</p><p>How are you doing with those lifetime income projections?</p><p>Don't you wish you had a DB plan?</p><p>How are you doing with your credit card debt? Your mortgage? Your weekly food bills? Your discretionary income for fun? You mean you had to give up saving for retirement?</p><p>Don't you wish you had a DB plan?</p><p>Regretfully, but I told you so,</p><p>John</p><p><br /></p><p><br /></p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com2tag:blogger.com,1999:blog-2009324187193157520.post-21540759523327233932022-05-26T08:24:00.000-04:002022-05-26T08:24:07.849-04:00Inflation and the Labor Market in Revenue-Controlled Industries<p>For many of us, we're seeing inflation today that we've never experienced before. I'm old enough to not be part of that "many of us," but it's been a long time. In fact, by the time I was in the profession I am in today, inflation was seriously on its way down -- a downward path that has largely remained until just recently. Still, I vividly remember the late 70s and early 80s.</p><p>When inflation spikes, it seems to come upon us somewhat suddenly -- unexpected, yet expected. The 2022 vintage of this phenomenon fits that pattern quite well. There has been rampant government spending and therefore printing of greenbacks for the last couple of years and large amounts of those dollars have gone into the hands of consumers. In the case of most people, when they suddenly have more cash than they are used to, they look for ways to spend it.</p><p>The current period is no exception. With all of the various government programs from which Americans have received compensation for being unemployed, underemployed, low-income, middle-income, high-income if you can cook up the right circumstances, and more, even people deeply in debt having the choice of paying down that debt or spending the hot dollars in their hands on goods have opted more often than not for the goods.</p><p>Let's think about this in economic terms. People want to spend more. Said differently, demand is up. Production of goods, particularly in the US is not up at the same rate with the reasons purported to be largely supply chain-based (not my expertise and I don't want to argue whether these reports are true and not inflated). And, with global tensions, imports of products from many typical supplying countries are way dawn. Translated: supply is down and demand is up.</p><p>Let me repeat: supply is down, demand is up. That means people will pay more for goods and services resulting in inflation. Frankly, I've been expecting it for years as have very likely most of you, but I would argue that the Fed has taken steps to somewhat artificially keep it in check. </p><p>Now let's turn to what I suggested was the core topic of this post. We'll consider the labor market first.</p><p>Employee turnover is at historically high levels. People are taking time off or simply job-hopping. In many cases, they do it for the instant gratification of additional cash in hand. Generally speaking, they do it because there is something better about the employment deal at New Employer than their was at Former Employer. It might be purely pay. It might be a great boss. It might be the ability to work from home whenever you feel like it. </p><p>Whatever the reason, employers are finding that unless they are offering something special -- higher pay, some wonderful benefits, or whatever the fad of May 26 is -- they are losing employees and having to spend money to recruit new ones at higher pay. Said differently, labor costs could easily be 20% higher in 2022 than some Finance executives anticipated (they might not be, but I think it is certainly a possibility).</p><p>How about the employer? Most of us think better in round numbers, so for illustrative purposes, I am going to start with one. Suppose Employer X had budgeted $100 million for total labor costs (whatever that means to them) for 2022, but now finds that in order to run its business, it now finds its labor costs for 2022 up 20% to $120 million. </p><p>The immediate response is simple: they should raise their prices. Since consumers are used to paying more, they'll pay more for these goods or services as well, right?</p><p>They might, but it's not that simple.</p><p>Consider Hospital H. Hospital H is paying more for supplies, more for utilities, and as we noted, 20% more for labor. But in the 2022 environment, H really has no way to bump up its prices. <br /><br />Why? Hospital H gets the very large majority of its revenue by being an "in-network" facility for pretty much every major health plan in its area. It negotiated 2022 reimbursements a while back. And, the health plans/insurers are not about to be charitable and renegotiate them. Hospital H's revenues are largely locked in. It's stuck with its expenses. Whoops!</p><p>This is where the creative minds will win out. How can Hospital H cut its expenses for the second half of 2022 without harming patient outcomes or patient experiences? Are there ways to do that without jeopardizing 2023 and beyond?</p><p>Some organizations will have that flexibility. Others will not. But I think there are solutions ... at least partially.</p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-11653308416919000882022-05-04T09:57:00.001-04:002022-05-04T09:57:18.641-04:00A Tale of Two Businesses<p> It was a thriving business, it was a sinking business. It was a wise idea, it was a foolish idea. It was a time of profit, it was a time of loss. It was the season of growth, it was the season of closure. </p><p>The story is true, or at least almost true. The names have been changed to protect the innocent and the not as innocent.</p><p>As we all know, both London and Paris lived to flourish, but I'm not as sure about the two businesses although time is yet to tell. You see, these were two business in the same industry and in the same geography. They competed with each other. One's market share drew from the others. When one offered a better product or service than the other, it thrived and the other suffered. When one treated its employees better, their customers were also treated better while the one with a less welcoming environment lost customers because they were treated poorly.</p><p>This nearly true story is a tale of two businesses.</p><p>You see, both of these businesses were dealing with the effects of COVID. Both were dealing with the so-called Great Resignation -- a term that I despise just as an aside, but in these days of short catchy names and the 24-hour news cycle, great is a word that goes with lots of things. And, each of the two were viewed as sector leaders in their common geography, but each was struggling to have enough employees to produce what was needed to serve their customers.</p><p>The leadership team at one of the organization -- let's call them Paris because for them it turned out to be the worst of times -- had some not so innovative ideas. Their strategy was focused on cash and on instant gratification -- something that a leaked internal email said would satisfy the younger generation. So, Paris through cash into the marketplace. Come work for us. Paris is great. If you come work for Paris, we'll give you a big signing bonus. And, what we're not going to tell you or anyone else except when the law forces us to is that we are going to pay for those signing bonuses by reducing other parts of the rewards package. We'll tweak your health benefits in ways that you hopefully won't notice. We'll eliminate your pension because we know you don't care about pensions. We'll reconfigure the matching contribution we give your retirement amount because a match is a match. And, in doing all this, we'll get great new employees and dominate our market.</p><p>Not so fast Paris. What is it they say about loose lips. We're in 2022. Nothing is a secret. Paris forgot that experienced employees would find out about this. They asked where their bonuses were, but were told there was no money left. They asked why their health benefits and their pensions were cut. That was to pay for all these expensive signing bonuses. <br /><br />So, the experienced workers did what any smart yet underappreciated Parisian would do; they left for London.</p><p>London's leadership also had a strategy. Their strategy was to provide a great working environment and to spend money uniformly on their employees both old and new. They kept their generous health benefits. They kept their pension. They benchmarked and looked for tactical opportunities to be above the median where their employees would appreciate it. </p><p>What London has noticed is that their business is thriving. Their turnover is extremely low for their industry and surveys that an external vendor does of their customer base show them that London is best in class. At the same time, Paris seems to be burning.</p><p>Instant gratification is what it is. You can get people in the door with it, but at this point, neither London nor Paris would tell you that you can keep them that way.</p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-19664145109921060702022-02-09T14:01:00.001-05:002022-02-09T14:01:13.562-05:00Revisiting 5 Years Ago -- The Talent Problem Isn't New, But More Apparent<p>I haven't written here for quite a while. There are a number of reasons, some of them probably not so good, but I'm not going to go into them today. But, let's get started.</p><p>It was almost five years ago that I <a href="https://www.blogger.com/blog/post/edit/2009324187193157520/3331181738417062442">wrote about the talent crunch with a focus on hospitals</a>. Little did I know that that was just the beginning. For a while, if you asked a hospital CHRO or VP-HR what their biggest challenge was, they would far more likely than not have told you it was talent -- recruiting and retaining talent. </p><p>Today, however, you don't have to keep it to hospitals or to the Human Resources side of the house. Go to almost any industry and find a <i style="font-weight: bold;">CFO </i>-- that's right, a Finance Chief -- and it's very likely that even that side of the house will tell you that along with cybersecurity and supply chain, recruiting and retention is a top issue.</p><p>If you haven't studied talent management a whole lot, this probably comes as a great surprise. So, let me toss out some data and rather than linking to a whole bunch of sources, let me say that what I am about to state is based on an amalgam of recent studies. The cost to replace unwanted skilled talent (below the level of high management is estimated anywhere from about 1.25 to 2.25 times cash compensation. For top management, up to and including the CEO, those same studies say that the cost varies anywhere from about 2.5 to 4 times cash compensation. </p><p>Impossible? No.</p><p>Those numbers include recruiting costs, transition costs, transition of knowledge costs, potential other turnover, costs of having to hire more than one person when the first one doesn't work out and many more items. In fact, when you lose a well-liked, high-performing CEO without an obvious successor, the disruption caused by that loss might be as big as the numbers cited in even the studies that indicate such loss is more expensive.</p><p>How do you keep these people? Sometimes you just can't. Sometimes somebody throws money or some perquisite at them that you just can't compete with. It could be that the allure of Hawaii is just too much. </p><p>But, let's assume that it wasn't anything like that. Let's assume you just didn't have anything to keep them. Then, we might say the loss was avoidable. But, sometimes proverbial handcuffs work.</p><p>Often times, long-term compensation with long vesting periods is enough to keep people around, but long-term compensation is usually limited to pretty high up people. And, a company that really wants that person might buy out the non-vested portion anyway.</p><p>The trickier part is pensions. Pensions are a form of deferred compensation. The deferral period is often long and the time at which the benefit pays out is often far in the future. In fact, it pays out during the period of time -- retirement -- during which that person might not be able to replace it. </p><p>For a time, that wasn't a big deal. But, in 2022, other surveys indicate that there are a tremendous number of workers who say they will never be able to retire. Of course, those are not workers with pensions. Those are workers who are not sure where their lifetime income is coming from.</p><p>This is not to say that pensions are somehow nirvana. But, they do serve as recruiting and retention device when communicated properly that very little else does. Someone can always pay you more currently. But, are they willing to pay you more after you have left their company? The companies that will certainly seem to be having a little less trouble recruiting and retaining.</p><p><br /></p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-31793592089518165622021-02-12T13:26:00.000-05:002021-02-12T13:26:22.770-05:00Why Would We Ever Create a New Plan to Do Exactly What an Existing Plan Already Does?<p>I think my title is self-explanatory. Suppose you have a perfectly good employee benefit plan, in this case, a retirement plan, why would you seek to change another type of plan to make it look like the perfectly good plan?</p><p>I think that is a great question, but lots of people seem to disagree. Congress. Think tanks. People with something to gain from rejiggering the plan they indirectly benefit from to replace something that solves all the same problems and is already in place.</p><p>I'm sure you're wondering where I am going with this. If you want a deep dive, <a href="https://hrexecutive.com/how-hr-and-finance-can-work-together-to-fix-the-retirement-crisis/">I wrote one for Human Resource Executive.</a> It got a fair amount of good feedback including that from one finance executive who described it as "true thought leadership."</p><p>So, what's the problem? The problem is that participants are worried about their retirement. They are worried about outliving their savings. They are worried about a lack of lifetime income protection. They are worried about the fate of their retirement hinging on their Social Security and their 401(k).</p><p>Of course, Congress has an excellent response. Let's take the 401(k) and twist it and turn it until it looks more like a pretzel or worse yet a Mobius Strip or Klein Bottle. Let's make sure that it gets annual disclosures. And let's make sure that those disclosures estimate (poorly, I might add) the amount of lifetime income that plan can buy for you. And, let's see what we can do to mandate that lifetime income options be available from those plans, albeit ensuring that there is room for insurers and fund managers, and investment managers to profit from it which, of course, means that the lifetime income you are getting as a participant is not really a fair amount. </p><p>This makes no sense. Not to me. And, it shouldn't to you. </p><p>You know we already have a perfectly good plan type that provides lifetime income as a default. It provides security and that is what the public is looking for. It's called a defined benefit (DB) plan and despite what our legislators in Washington seem to think, those people who have them do not want to give them up. Under any circumstances. In fact, I could point you to swaths of people who once they have such a plan will not leave the organization that provides it unless their new organization gives them something similar. Yes, both will offer a 401(k), but only one provides the security of lifetime income. Necessarily, if the participant wants it.</p><p>If you took the 8 minutes (that's what Google tells me it takes) to read my article in the link above, you'll understand that this is workable. It might not be the DB plan that your parents had 30+ years ago, but it's still a DB plan. What makes it better is that your employer will like it too. You can understand it and they can understand it. And, as you noticed, when you retire, you can choose how much you want as a lump sum, within some reasonable limits, and how much you want in the way of lifetime income protection.</p><p>That, my friends, is what the American populace is screaming for. Yet, Congress, having a perfectly wonderful solution staring them in the face, is looking for a way to make the 401(k) plan look like that perfectly good solution, albeit with your money leaking to every constituency out there.</p><p>That makes no sense, does it?</p><p>Create your plan of the future using the tools we already have in that neat little box called DB.</p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com1tag:blogger.com,1999:blog-2009324187193157520.post-76350146487493656262020-09-03T09:57:00.005-04:002020-09-03T10:44:49.793-04:00If CFOs Are Worried About Benefit Costs, Why Are They Leaving Avoidable Pension Costs on the Table?<p>This morning's <a href="https://www.wsj.com/articles/cfos-worry-about-salary-benefit-costs-as-pandemic-drags-on-11599125401?mod=djemCFO">lead article in the Wall Street Journal's CFO Journal says that CFOs are concerned about benefit costs.</a> This was not at all surprising to me. What is surprising though is how much they are leaving on the table relative to defined benefit pension plans, often frozen legacy plans.</p><p>Let's start out with some background. 40 years ago, most large companies in the US provided defined benefit (DB) pensions for large parts of their workforce. This was, of course, before the 401(k) gave us the perhaps misguided self-sufficiency explosion. Over time, many of those employers froze those DB plans (meaning no new participants and those in the plan get no further accruals) and some terminated them. But, there remain a lot of frozen DB plans that remain in what some call hibernation. I call it lingering death.</p><p>That lingering death seems to go on interminably. And, there are reasons that happens. Freeze the plan and it becomes out of sight, out of mind. Not to overdo the cliches, but they go into a set it and forget it mode.</p><p>But, set it and forget it with a legacy pension may not work so well. Research by <a href="http://www.octoberthree.com/">October Three</a> has shown that many of these plans have what might be termed overhead or frictional costs exceeding 1% of plan assets. That means that for a not atypical frozen plan that the long-term cost of that plan -- unless the sponsor is willing to fund it sufficiently to terminate it may be 10-15% higher than if those frictional costs were entirely eliminated. (Understand that it is impossible to eliminate all of those frictional costs, but most can often be eliminated.)</p><p>How does this happen? Nobody is paying attention. There's nobody on staff focused on efficiency in that frozen plan. The last person doing that went away a few months after the plan was frozen. So, now, a typical company with a, for example, $50 million frozen plan may be spending more than half a million dollars per year on that plan unnecessarily. </p><p>Suppose the company assigned one professional to that plan. Suppose they made that plan half of that person's responsibility, at least until the plan is terminated. And, suppose they pay that person $200,000 per year. Let's add in another 25% for additional employment costs and we're up to $250,000. Then, this company is eliminating more costs than it is incurring and in doing so, they are getting rid of perhaps an unnecessary headache.</p><p>The last obstacle is <a href="mailto:jlowell@octoberthree.com">figuring out what this person should focus on</a>. And, since they probably have not been focused on pensions, they may not know. However, there is a good chance that they are paying a lot of money for consulting that is not focused on their needs. Or, the consulting might be excellent, but the company's lack of focus causes them to ignore it.<br /><br />Either way, this is something to consider and if they're not sure, I know someone who can guide them down the right path.</p>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-68457850433593222382020-04-14T06:39:00.000-04:002020-04-14T06:39:38.728-04:00Coronavirus Crisis as Catalyst: Change the Way You Look at Your Rewards StructureI saw these words this morning: "Your brain isn't resistant to change; it is lazy." Can we extend that? Is your corporate rewards program -- the way that you reward your employees for working for you -- resistant to change? Or is that change somehow always on the back burner?<br />
<br />
You've looked at the survey data. You've heard the cries for help from employees. But, your rewards program remains right down the middle.<br />
<br />
Perhaps you've tried some innovative ways to become an employer of choice. You put the ping pong table and beer keg in the break room. Alas, it didn't reduce turnover. It didn't make your employees happier (except when they hit the beer keg too often). It didn't reduce their real stresses even if it did mask them for a few minutes.<br />
<br />
But, the crisis caused by the coronavirus pandemic has forced you to change the entire compact between you and your employees. They've forgotten their office space. The fancy espresso maker you provided them sits idly as they become reaccustomed to the coffee they make quickly in their own home. At the same time, they've likely created their own custom background for their Zoom calls. All of this, they have managed. In fact, if you've kept them employed and had to cut their pay a little bit, most of them have probably managed how to live on a little less.<br />
<br />
What they haven't learned though is how to feel secure. They haven't figured out how they are going to deal with a health catastrophe or disability, but maybe the federal government will come to the rescue. Where the federal government has not promised to come to the resuce, even in the most grandiose of campaign speeches is in helping your employees to retire.<br />
<br />
You remember retirement. It's what your parents did. Either or both of them worked for a company for a long time. They retired with a pension. Supplemented by Social Security and perhaps some savings, somewhere in their early to mid-60s, they stopped the daily grind and pursued all the hobbies that had been given short shrift while they were working. It was part of the "American Dream."<br />
<br />
Not for you? You can't even dream of it?<br />
<br />
Look back at what I said a few paragraphs ago. Most of them have probably managed to live on a little less.<br />
<br />
Let's do some oversimplified math to figure out how we are going to use this to become an employer of choice again. Consider Taylor, a good employee.<br />
<br />
Pre-coronavirus, your basic costs for Taylor included:<br />
<br />
<ul>
<li>Base pay: 100,000</li>
<li>Health benefits: 25,000</li>
<li>Other non-retirement benefits: 5,000</li>
<li>Retirement benefits: 4,000</li>
<li>Total: 134,000</li>
</ul>
<div>
With coronavirus, you've had to cut Taylor's pay by $10,000. So, the equation now looks like this:</div>
<div>
</div>
<br />
<ul>
<li>Base pay: 90,000</li>
<li>Health benefits: 25,000</li>
<li>Other non-retirement benefits: 4,800 (a couple of benefits had a pay-related component)</li>
<li>Retirement benefits: 3,600</li>
<li>Total: 123,400</li>
</ul>
<div>
At some point, this crisis will end. And, during the crisis, Taylor may have learned to live on $90,000 instead of $100,000. She would love to get that full $10,000 back, but since she has learned to live on it, that's not what's keeping her up at night. </div>
<div>
<br /></div>
<div>
During her new social distancing life, Taylor has taken to ever family search website she can find: 23 and Me, Ancestry, MyHeritage, and more. She's learned that going back four generations, the women in her family are long-lived. That's great news for Taylor, right?</div>
<div>
<br /></div>
<div>
Not really. As the she saw the stock market fall and her bank decrease the interest rate on her savings account to 0.01%, Taylor wondered how she can ever afford to retire. After all, she guesses, based on her genealogical research that she will probably live to be about 95. And, after she retires at age 62 (she learned she can start collecting Social Security then), that leaves her with a 33-year retirement. She's going to have to pay for it somehow.</div>
<div>
<br /></div>
<div>
As her employer, you can be the solution to her problem and be an employer of choice. After all, you don't want to lose a great employee like Taylor. And, you've committed that you are willing to spend $134,000 on her total rewards.</div>
<div>
<br /></div>
<div>
Before we do that, let's think about what Taylor is not good at. Like many in her age group and yours and mine and everybody else's, she's not good at financial planning. What you can do to help is to create a nest egg for her. And, don't do it so that some day, she gets a pot of cash from the company, give her lifetime income.</div>
<div>
<br /></div>
<div>
So, let's reconfigure the $134,000.</div>
<div>
<ul>
<li>Base pay: 95,000 (she learned to live on 90,000)</li>
<li>Health benfits: 25,000</li>
<li>Other non-retirement benefits: 4,900</li>
<li>401(k): 3,800</li>
<li>Subtotal: 128,700</li>
</ul>
<div>
You have $5,300 left to spend. That's 5.5% of pay. </div>
</div>
<div>
<br /></div>
<div>
I don't care what you call it, but now is the time to call it something. Take that 5.5% of pay and allocate it to Taylor's lifetime income. Sell it to your employees until you can't sell it anymore. Tell them you are giving them this plan because you want them for their careers. And, tell them you are giving it to them because some day, you want them to be able to gracefully exit their careers and to do so without fear of outliving that little 401(k) nest egg that isn't worth what it was before coronavirus hit.<br /><br />Once they get that benefit, your best employees won't leave.</div>
<div>
<br /></div>
<div>
Make the best of the coronavirus crisis. Let it be a catalyst for a great change.</div>
<div>
<br /></div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-82896645042915526482020-03-31T07:13:00.002-04:002020-03-31T07:16:18.062-04:00Coronavirus and Your Retirement ProspectsIf you're like most Americans, you probably plan to retire one of these days. If you're not in that category, you may be retired already. Assuming that you fall into that first group, I want to talk to you a little bit about how this pandemic is affecting you.<br />
<br />
If you're like 10-20% of the workforce, you have lost your job, been furloughed, or had your work hours cut back. Even among the rest of the population, many of you will have trouble meeting your performance goals for the year. In any case, this is not shaping up to be a good year for retirement savings.<br />
<br />
Despite the great performance in the last week or so, equity markets are down nearly 25% for the year. At the same time, prevailing interest rates are at or near historic lows. What that means to someone who had planned to retire in 2020 is that your ability to purchase lifetime income protection has declined.<br />
<br />
How does that work? The higher the prevailing interest rates, the more money you or an insurer can earn on investments and therefore, the larger your lifetime income protection. So, while bond returns (investments in bonds) have been good in 2020, your falling portfolio balances combined with no place to get good and safe returns is a point of pain for people considering retirement.<br />
<br />
How about those of you whose jobs have disappeared whether that be temporary or permanent? Your 401(k) deferrals have ceased. That means that you're not getting matching contributions either. And, you may be taking advantage of the relaxed rules in the CARES Act on hardship withdrawals or plan loans. But, where are those amounts coming from? Your retirement nest egg is being eaten up by the effects of the pandemic. Wasn't it intended for retirement? Oops, something got in the way.<br />
<br />
As a consultant, I am hearing from real-world companies that they are looking for ways to cut back, at least for 2020, their expenditures on retirement benefits. Who does that decrease in expenditure affect? You, of course, and not in a good way.<br />
<br />
Yes, this is filled with bad news. I can't sugar coat it. If your future retirement is dependent on a 401(k) plan (plus Social Security), you've been hit hard. And, you may be hearing it here first, but if your employer temporarily reduces the amount it is spending on your retirement benefits, that reduction may not be temporary.<br />
<br />
Surely, not everyone is being hit that hard. Surely, there are employees who are faring just fine with respect to their retirement prospects as this pandemic wreaks havoc on the rest of them. But, is there a way we can label them?<br />
<br />
There is. They are all participants in defined benefit plans. That means that their employers have made a commitment to them to provide lifetime income in the form of a pension. For those people, if they remain employed, they have that securiry. For them, their 401(k) is supplemental savings. Most of them are going to be just fine.<br />
<br />
Yes, I know all of the stigma around pension plans. They're expensive ... well, they're only as expensive as the benefit they provide. They're volatile ... they don't have to be. They're a dinosaur ... only because people say they are.<br />
<br />
But, employees in defined benefit plans have one giant reason to sleep better at night than those relying on their 401(k) only. They will get a pension.<br />
<br />
So, when the dust settles from the pandemic, and it will, many companies will be looking to hire as people scramble to either return to their old jobs or to find new ones, where will you be?<br />
<br />
Here's my little nugget: take the time now whether you are employed or looking. See which companies are providing ongoing pension plans. Check them out. They are likely employers of choice.<br />
<br />
And, to companies trying to figure out how they will restock their workforces when the time comes, be that employer of choice. Be better thant the rest and offer a pension.John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-41184543056237381532019-12-17T11:26:00.000-05:002019-12-17T11:43:59.685-05:00Fixing Retirement InequalityJust last week, <a href="https://johnhlowell.blogspot.com/2019/12/if-income-inequality-is-crisis.html">I suggested that retirement inequality is nearing an apocalypse.</a> It's an awfully strong statement to make as both the US and the world have plenty of problems to deal with. Since this one is US-centric (I have nowhere near sufficient expertise nor do I have the requisite data to offer an informed opinion outside the US), I thought I would step up and make some suggestions.<br />
<br />
First, the problem: according to the most optimistic data points I have seen, somewhere between 60 and 70 percent of working Americans are "on track" to retire. And, these studies, when they are nice enough to disclose their assumptions use pretty aggressive assumptions, e.g., 7 to 8 percent annual returns on assets (the same people who tout that these are achievable condemn pension plans that make the same assumptions) as well as no leakage (the adverse effects of job loss, plan loans, hardship withdrawals, and deferral or match reductions). The optimists don't make it easy for you by telling you that even their optimistic studies result in 30 to 40 percent of working Americans not being on track to retire (a horrible result). They also tend to pick and choose data to suit their arguments using means when they are advantageous, but medians when they are more so.<br />
<br />
Yes, we do have a retirement crisis and as the <a href="https://www.epi.org/publication/the-state-of-american-retirement-savings/#chart1">Economic Policy Institute (EPI) study</a> was good enough to make clear, it is severely biased against the average worker.<br />
<br />
The EPI study presented data on account balances and similar issues. It did not get into interviewing actual workers (if it did, I missed that part and apologize to EPI). But, I did. I surveyed 25 people at random in the airline club at the largest hub airport of a major US-based airline. People who wait in those clubs at rush hour are not your typical American worker; they tend to be far better off. I asked them two questions (the second only if they answered yes to the first):<br />
<br />
<br />
<ul>
<li>Are you worried about being able to retire some day? 19 answered yes.</li>
<li>Would you be more productive at work if you felt that you could retire comfortably? All 19 who answered yes to the first question answered yes to the second as well.</li>
</ul>
<div>
While I didn't ask further questions, many groused about fear of outliving their wealth. Some talked about issues that fall under leakage. A few, completely unprompted remarked that if they only had a pension ...</div>
<div>
<br /></div>
<div>
For at least the last 13 years and probably more than that, retirement policy inside the Beltway has been focused on improving 401(k) plans with the thought that pensions are or should be dead. Even the Pension Protection Act of 2006 (PPA) was more about making 401(k)s more attractive than about protecting pensions. Yet, 13 years later with an entire decade of booming equity markets, even the optimists say that one-third of American workers are <b>not on track to retire.</b></div>
<div>
<b><br /></b></div>
<div>
We've given every break that Congress can come up with to make 401(k)s the be all and end all of US retirement policy. They've not succeeded. </div>
<div>
<br /></div>
<div>
Think back though to when the cornerstone of the US retirement system was the pension plan. The people who had them are often the ones who are on track to retire. </div>
<div>
<br /></div>
<div>
Yes, I know all the arguments against them and here are a few:</div>
<div>
<br /></div>
<div>
<ul>
<li>Workers don't spend their careers at one company, so they need something account-based and or portable.</li>
<li>Companies can't stand volatility in accounting charges and in cash contribution requirements.</li>
<li>Nobody understands them.</li>
<li>They are difficult to administer.</li>
</ul>
<div>
PPA took a step toward solving all of those problems, but by the time we had regulations to interpret those changes, the "Great Recession" had happened and the world had already changed. Despite now having <a href="https://johnhlowell.blogspot.com/search?q=MRCB">new pension designs available</a> that address not just one, but all four of the bullet points above, companies have been slow to adopt these solutions. To do so, they need perhaps as many as three pushes:</div>
</div>
<div>
<br /></div>
<div>
<ul>
<li>A cry from employees that they want a modern pension in order to provide them with usable lifetime income solutions.</li>
<li>A recognition from Congress and from the regulating agencies that such plans will be inherently appropriately funded and therefore (so long as companies do make required contributions on a timely basis) do not pose undue risk to companies, to the government, to employees, or to the Pension Benefit Guaranty Corporation (PBGC) (the governmental corporation that insures corporate pensions) and therefore should be encouraged not discouraged.</li>
<li>Recognition from the accounting profession in the form of the Financial Accounting Standards Board (FASB) that plans that have an appropriate match between benefit obligations and plan assets do not need to be subjected to volatile swings in profit and loss.</li>
</ul>
<div>
<br /></div>
</div>
<div>
Give us those three things and the pensions sanctioned by the Pension <b>Protection </b>Act can fix retirement for the future. As the <a href="https://www.epi.org/publication/the-state-of-american-retirement-savings/#chart1">EPI study</a> points out, we'll make a huge dent in the retirement crisis and we'll do in a way that makes the problem far less unequal.</div>
<div>
<br /></div>
<div>
It's the right thing to do. It's right for all working Americans.</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com1tag:blogger.com,1999:blog-2009324187193157520.post-15080798324557656252019-12-13T08:47:00.000-05:002019-12-13T08:47:07.574-05:00If Income Inequality is a Crisis, Retirement Inequality is Nearing an ApocalypseI've likely inflamed just with my title. So be it.<br />
<br />
The <a href="https://www.epi.org/">Economic Policy Institute</a> (EPI) earlier this week released an <a href="https://www.epi.org/publication/the-state-of-american-retirement-savings">article</a> by Monique Morrissey on the State of American Retirement Savings. It's subtitle is "<span style="background-color: white; color: #333333;"><span style="font-family: inherit;">How the shift to 401(k)s has increased gaps in retirement preparedness based on income, race, ethnicity, education, and marital status." It is stunning.</span></span><br />
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;">I've been saying for at least this decade that we have a retirement crisis. Despite protestations from those who favor self-sufficiency over employer and government-provided programs, the crisis looms larger. I <a href="https://johnhlowell.blogspot.com/2019/06/do-we-have-retirement-crisis.html">wrote</a> about this summer. But, as a full-time consultant working with clients who require that I place their needs first, I simply don't have time to do the research that the think tanks do. So, I often rely on the work that they have done. Regardless of the source, my considered opinion is that all of the data are sound whether the think tanks are right-leaning, left-leaning, or centrist. </span></span><br />
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;">What I quibble with are the conclusions. </span></span><br />
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;">More than half of Americans being on track to retire is not a favorable prognosis. It's especially not favorable when the modeling underlying that statement assumes constant, and perhaps unachievable, returns on investments and constant rates of deferral to 401(k) plans. We're asking a populace that is largely under-educated about financial and investment matters to instantly become great investors. We're also asking them to save for their retirement (including retiree health and long-term care) above all else -- no blips allowed. You lose your job? Keep saving. You pay for a child's wedding? Keep saving. You pay for an unexpected medical expense? Keep saving.</span></span><br />
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;">Is that practical? Of course it's not.</span></span><br />
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;">The EPI study has presented us with 20 charts. Each has a headline which, in my opinion (understanding that yours may be different) fairly depicts the data it shows. Here are a few of the more eye-catching ones (indented notes after the headlines are mine and should not be attributed to or blamed on EPI)::</span></span><br />
<span style="background-color: white; color: #333333;"><span style="font-family: inherit;"><br /></span></span>
<br />
<ul>
<li><span style="background-color: white; color: #333333;"><span style="font-family: inherit;">Retirement plan participation declined even as baby boomers approached retirement</span></span></li>
<ul>
<li><span style="color: #333333;"><span style="background-color: white;">A smaller percentage of workers are now participating in employer-sponsored retirement plans than were 10 years ago. With the rise of the gig economy, this rates to get worse.</span></span></li>
</ul>
<li><span style="color: #333333;">The share of families with retirement savings grew in the 1990s but declined after the Great Recession</span></li>
<ul>
<li><span style="color: #333333;">Fewer than 60% have retirement savings. Period. How are the rest to ever retire?</span></li>
</ul>
<li><span style="color: #333333;">Retirement savings have stagnated in the new millennium</span></li>
<ul>
<li><span style="color: #333333;">Despite that savings of those above the age of 55 have increased fairly dramatically, those for the entire working population have barely moved suggesting that the runup in equity markets over the last decade has done little for most of America.</span></li>
</ul>
<li><span style="color: #333333;">Most families—even those approaching retirement—have little or no retirement savings</span></li>
<ul>
<li><span style="color: #333333;">This is frightening. In any age range, median (meaning half are better off and half are worse off) retirement savings are well beneath $50,000 ... in total.</span></li>
</ul>
<li><span style="color: #333333;">More people have 401(k)s, but participation in traditional pensions is more equal</span></li>
<ul>
<li><span style="color: #333333;">We'll return to this later, but this suggests that poorer people and minorities are less likely to make use of 401(k)s. Identifying the root cause is a highly charged issue and cannot be done with certainty, but identifying this as a sign of a problem is clear.</span></li>
</ul>
<li><span style="color: #333333;">High-income families are seven times as likely to have retirement account savings as low-income families</span></li>
<li><span style="color: #333333;">Most black and Hispanic families have no retirement account savings</span></li>
<li><span style="color: #333333;">Single people have less, but retirement savings are too low across the board</span></li>
<ul>
<li><span style="color: #333333;">The data show that single women, in particular, lack retirement savings. But, even among married couples, levels of retirement savings are abysmal.</span></li>
</ul>
<li><span style="color: #333333;">401(k)s magnify inequality</span></li>
<ul>
<li><span style="color: #333333;">Those out of the top 20% when stratified by income represent a disproportionately low level of savings account balances.</span></li>
</ul>
</ul>
<div>
<span style="color: #333333;">I said I would return to the statement that participation in traditional pensions is more equal. It seems clear that this is because in most cases, an employee becomes a participant in a pension not through an affirmative decision to do so, but as part of his or her employment. It doesn't require an income disruption. It's not more difficult to participate when you have an unexpected expense.It's not easier for the wealthy to participate, nor for men nor ethnic or racial majorities. </span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Yes, pensions have a horrible stigma attached to them right now. Many public pensions are horrifically underfunded and potentially place their sponsors (cities, states, etc.) in grave financial danger. The same could be said about some of what are known as multiemployer plans (that's a story for another day) except that their sponsors are, generally speaking, employers that employ very specific types of employees. </span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">For the rest of the populace and potential plan sponsors (employers), sponsorship of traditional pensions has waned considerably. About 18 months ago, <a href="https://johnhlowell.blogspot.com/2018/02/are-you-better-off-than-you-were-20.html">I explained why.</a> </span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Before we write them off completely, however, let's look at what pensions do. According to the EPI study, participation is somewhat equal. They provide lifetime income protection, the single greatest fear of people nearing retirement. They can be part of the employment covenant.</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;"><a href="https://johnhlowell.blogspot.com/2015/12/a-less-expensive-way-to-provide-better.html">And, thanks to the Pension Protection Act of 2006, they need not bring with them the cost volatility that has maddened CFOs across the country.</a></span></div>
<div>
<br /></div>
<div>
The data in the EPI study and not simply their interpretations absolutely scream that more than income inequality, retirement inequality is the looming personal financial crisis. Congress will bat this around and try to make it a partisan issue. But, it shouldn't be. It's a people crisis. It's a dire crisis. It needs a fix and the fix is available, but it needs to get started.</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-29747749882913264142019-09-20T10:25:00.000-04:002019-09-20T10:25:39.152-04:00When Your Deal Involves a PensionCorporate deals abound perhaps like never before. Mergers, acquisitions, consolidations -- call them what you will. They're still deals and they involve pensions, sometimes frozen, more often than you think. If you are the acquirer in any of these transactions, it would not be at all surprising to find that your team is giving these pensions were getting shorter shrift than they deserve.<br />
<br />
Why?<br />
<br />
More than most other elements of a corporate transaction, the costs of sponsoring a pension plan (single-employer) or being a participating employer in one (multiemployer) are both volatile and perhaps a bit out of your control. On the surface, that's bad. And, a significant problem is that traditional due diligence does not address this.<br />
<br />
What do I mean by that? There are plenty of firms out there that perform due diligence in deals. On the financial side of this, the work is typically done by large accounting firms and their consulting arms or by the larger, traditional, multi-service consulting firms. What I have seen, and I have by no means seen everything, tends to be a fairly standard report with numbers filled in. It often relies a lot on the past and tends to assume that the past will be reflective of the future.
For many of those future costs, that's probably not a horrible assumption. For pensions, unfortunately, it often is.<br />
<br />
You see, whether you are focused on cash or on financial accounting, the amount of your future costs is dependent on rules. The rules are complex and they do not lend themselves to cost stability. Today, estimating what those costs will be is not easy. Doing so under a variety of economic scenarios is more complex and likely more expensive. Developing strategies to control those future costs adds even more difficulty and even more cost. It also takes a long time. And, of course, you are never able to work with current or perfect data.
In the future, it will be much simpler. At least that sounds nice, but our predictions about the future are often wrong.<br />
<br />
<a href="mailto:jlowell@octoberthree.com">The future is here.</a> <a href="mailto:johnhlowell@gmail.com">It's here today.</a><br />
<br />
Everything I said above that was difficult and expensive and more difficult and more expensive and takes a long time -- it doesn't have to.<br />
<br />
We don't need great data. We don't need to bother your staff. We can move at the speed of deals. And it won't break the bank.<br />
<br />
<a href="mailto:jlowell@octoberthree.com">That future you were hoping for -- it's here now.</a>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-75366956812474230042019-07-24T09:08:00.000-04:002019-07-24T09:12:18.755-04:00S&P Implies Hospital Pensions Are Not a Problem -- I'll Be the JudgeI read two excellent articles on the same topic recently. Both <a href="https://www.plansponsor.com/sp-finds-not-profit-hospitals-manage-pensions-well/">Rebecca Moore for Plan Sponsor</a> and <a href="https://www.healthleadersmedia.com/finance/nonprofit-provider-pensions-remain-solidly-funded">Jack O'Brien for Health Leaders Media</a> wrote about an S&P study that implied that pensions are not a problem for not-for-profit hospitals in the US. I found the different perspectives interesting as Rebecca is a retirement plan journalist who was covering a <i>hospital </i>retirement issue while Jack is a hospital journalist who was covering a <i>retirement </i>issue with regard to hospitals.<br />
<br />
In summary, here is what I learned:<br />
<br />
<ul>
<li><span style="background-color: color: #333333;"><span style="font-family: inherit;">The U.S. not-for-profit health care sector has benefited from an increase in the median funded status of its pension plans in fiscal 2018—increasing from 80.6% to 85%, according to S&P Global Ratings;</span></span></li>
<li><span style="background-color: color: #333333;"><span style="font-family: inherit;">S&P measures the underlying pension liabilities using a "conservative municipal bond rate;"</span></span></li>
<li><span style="background-color: color: #333333;"><span style="font-family: inherit;">S&P applauded that many hospitals have focused on de-risking liabilities;</span></span></li>
<li><span style="background-color: color: #333333;"><span style="font-family: inherit;">S&P views the following as positive with respect to hospital pensions:</span></span></li>
<ul>
<li><span style="background-color: color: #333333;"><span style="font-family: inherit;">Full funded status;</span></span></li>
<li><span style="color: #333333;"><span style="background-color: ">Any sort of de-risking; and </span></span></li>
<li><span style="color: #333333;"><span style="background-color: ">No pension plan at all.</span></span></li>
</ul>
</ul>
<div>
<span style="color: #333333;">I'm not going to spend a lot of time dissecting what S&P thinks is good. As a firm, they employ many excellent economists while my formal economic training is quite sparse. But, I'd be remiss if I did not comment on the use of municipal bond rates. While they are not far from the measures typically used for corporate pension plans, I'm not sure how movement in yields on municipal bonds should affect the measurement of obligations in hospital pensions.</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Let's return to the initial premise that being that hospital pensions are well-managed (I said not a problem in my title, but the words that were actually used were well-managed). Are they? Is 85% a good funded status? Are the hospitals managing frictional overhead costs? Is de-risking the right approach for a plan that is 85% funded? If so, which type(s) of de-risking should they be using?</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">While it's not the case for all of them, the majority of hospital pension plans are either [hard] frozen or they are soft frozen (no new entrants). This implies that the goal is to eventually terminate those plans. A plan that is 85% funded cannot be terminated. In fact, generally speaking, a plan that is 100% funded on the basis that S&P uses cannot be terminated (annuities have some level of built-in costs as compared to a traditional actuarial measurement of pension obligations). </span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Getting from 85% funded to just a bit more than 100% funded is a tall task. There are a number of ways to make progress on this, some passive and some active. They include watching discount rates increase, investing more aggressively (and hoping that produces better returns), contributing more money to the plan, and cutting the overhead costs of the plan.</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Let's attack those in order.</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Unless a hospital has more control over the economy than I think it does, it cannot affect the yields on municipal bonds.</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Investing more aggressively works well when it works well meaning that if you can beat your bogie, you improve your funded status and get closer to being able to terminate the plan.</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Contributing more money to a plan is an easy concept. All it requires is having money to contribute. In 2019, hospitals, generally speaking, don't seem to have that kind of money laying around. On the other hand, hospitals do have lots of assets many of them not pulling as much weight as they might were they re-deployed into the hospital pension plan. I have some ideas in this vein, and would be <a href="mailto:jlowell@octoberthree.com">happy to tell you</a> <a href="mailto:johnhlowell@gmail.com">about them</a>.</span></div>
<div>
<span style="color: #333333;"><br /></span></div>
<div>
<span style="color: #333333;">Finally, for the last three years, <a href="http://www.octoberthree.com/">October Three</a> has published a report on PBGC premiums. The report has found that hospitals, compared to any other industry, are consistently paying more in needless PBGC premiums than any other industry. In other words, there are techniques available to them to lower those premiums that as a group, they are not using.<br /><br />So, with all due respect to S&P, the judge has ruled. Hospital pension are a problem and generally speaking, hospitals are not managing those pensions well. The <a href="mailto:johnhlowell@gmail.com">judge</a> thinks those hospitals should <a href="mailto:jlowell@octoberthree.com">contact him.</a></span></div>
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<span style="color: #333333;"><br /></span></div>
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<span style="color: #333333;"><br /></span></div>
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<span style="color: #333333;"><br /></span></div>
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<span style="color: #333333;"><br /></span></div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-16298324170603711022019-06-13T09:01:00.001-04:002019-06-13T13:24:02.129-04:00Do We Have A Retirement Crisis? Of Course We Do.Do we have retirement crisis in the US? Showing my age and with apologies to Messrs. Rowan and Martin, you bet your sweet bippy we do. Despite all the pundits citing data and telling us that we don't have that problem, I'm telling you we do.<br />
<br />
I was inspired to write this by an <a href="https://www.investmentnews.com/article/20190612/FREE/190619968/401-k-savings-rates-have-stagnated?utm_source=Morning-20190613&utm_medium=email&utm_campaign=investmentnews&utm_visit=767490&itx[email]=874e32e23a18af86c90703eef60f7f09958240b3c9133f3f500de8d02faf7de9%40investmentnews">excellent piece</a> that I read in Investment News this morning. The theme was that Vanguard's data shows that the average <b>combined</b> savings rate (employee plus employer) has increased since 2004 from 10.4% of pay to 10.6% of pay. To understand this better, let's look at what else has happened during this period.<br />
<br />
The Pension Protection Act (PPA) of 2006 became law. Many defined benefit (DB) pension plans were frozen and or terminated. The new in vogue terms in the 401(k) world all suddenly started with auto: auto-enrollment, auto-escalation, auto-pilot. At the same time, the new fear became that of outliving your savings.<br />
<br />
That's right, people are living longer. People know that people are living longer. This frightens many. From a retirement perspective, they don't know how to deal with this. So, the old normal (2019) cannot continue to be the new normal (beyond 2019).<br />
<br />
Why do I say that? What's wrong with the analysis from pundits?<br />
<br />
Suppose I told you that 55% of Americans are "on track to retire," whatever that means (every recordkeeping firm who puts out data like that has their own basis for what that does mean). Is that good news or bad news? Most who think that the 401(k)-only system is as close to nirvana as one can get would tell you it's great news. They say so on social media. They go out of their way to bash those who disagree.<br />
<br />
Well, I disagree and here is why. I'm going to reword what they are saying taking what they say as factual. Suppose I told you that 45% of Americans are <b>not</b> on track to retire. How would you react to that? My intuition says that you would think that is a horrible thing. Yet, it is <b>exactly</b> the same thing as 55% of Americans being on track to retire.<br />
<br />
Further, the data being used often assumes that Americans will take their 401(k) balances and draw them down ratably and prudently. Which Americans are those? They're not the Americans of 2019. They're not the ones who want the latest gadget. They're not the ones that love their Amazon Prime accounts. They're not the ones from the instant gratification world of today.<br />
<br />
For most Americans, being able to guarantee a level of lifetime income protection is of nearly paramount importance. It's not easy in a 401(k) world. In-plan annuity options are rare and expensive. Taking a distribution to buy an annuity is even more expensive and requires an education in an industry that few Americans have access to.<br />
<br />
Look at the generation that retired over the 25 years or so from roughly 1980 to 2005. They often have lifetime income. They may also have account-based savings. They, because they did not live in a 401(k)-only world, were able to get it right.<br />
<br />
DB plans of the past had problems. Smart people designed better solutions, but the<a href="https://johnhlowell.blogspot.com/2015/11/who-put-dagger-in-heart-of-defined.html"> really [not so] smart people conspired</a> to make us think that 401(k) only is the best solution.<br />
<br />
It's time to <a href="mailto:johnhlowell@gmail.com">visit</a> <a href="mailto:jlowell@octoberthree.com">those better solutions</a>.<br />
<br />
<br />
<ul>
<li>Cost stability and predictable cost for plan sponsors.</li>
<li>Lifetime income availability at actuarially fair prices for participants.</li>
<li>Account growth through professionally managed assets, but with a guaranteed return of principal.</li>
<li>The ability to take your account with you.</li>
</ul>
<div>
And, you can still have your 401(k) on the side to supplement it.</div>
<div>
<br /></div>
<div>
Doesn't this feel closer to nirvana. Isn't this a way to truly move the needle and get us out of the retirement crisis?</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-26154387455237232952019-04-17T07:19:00.000-04:002019-04-17T07:49:37.252-04:004 Problems at the Intersection of Finance and HRThey are two of the most visible departments in corporations even though neither directly produces revenue, but does require expenditures -- Finance and HR. Historically, they have been at odds neither particularly caring about the worries of the other despite being inextricably linked. This occurs in many ways, but I'm going to focus on four in the order that they seem to arise:<br />
<br />
<ol>
<li>Recruiting</li>
<li>Cost control and stability</li>
<li>Retention</li>
<li>Workforce transition</li>
</ol>
<div>
Of course there are many more, but I have some thoughts that link all four of these together. In 2019, that's not always easy as there are constant pushes in Congress to tell employers how much they must pay, which benefits they must provide, and at what costs. How then does one company differentiate itself from another?</div>
<div>
<br /></div>
<div>
To the extent possible, every employer today seems to offer teleworking, flexible work hours, and paid time off banks. While they once were, those are no longer differentiators. After the Affordable Care Act took effect, the health plans at Company X started to look a lot like the health plans at Company Y.</div>
<div>
<br /></div>
<div>
I have a different idea and while I am probably biased by my consulting focus, I am also biased by research that I read. Employees are worried about retiring someday. They are worried about whether they will have enough money or even if they have any way of knowing if they will have enough money. They are worried about outliving their wealth (or lack thereof). They are worried about having the means to support their health in retirement.</div>
<div>
<br /></div>
<div>
I know -- you think I have veered horribly from my original thesis. We're coming back.</div>
<div>
<br /></div>
<div>
Today, most good-sized companies have 401(k) plans and in an awful lot of those cases, they are safe harbor plans. They are an expectation, so having one does not help you the employer in recruiting. While once they had pizzazz, today they are routine. </div>
<div>
<br /></div>
<div>
Cost stability seems a given, but it's not. Common benchmarks for the success of a 401(k) plan including the percentage of employees that participate at various levels. You score better if your employees do participate and at higher levels. But, that costs more money.</div>
<div>
<br /></div>
<div>
If there's nothing about that program that sets you apart, it doesn't help you to retain your employees. And, as we all have learned, the cost of unwanted turnover is massive often exceeding a year's salary. In other words, if you lose a desirable employee earning $100,000 per year, it is estimated that the total true cost of replacing her is about $100,000. That would have paid for a lot of years of retirement plan costs for her.</div>
<div>
<br /></div>
<div>
There will come a time, however, that our desirable employee thinks it's time to retire. But, she's not certain if she is able. And, even if she works out that she is able, retirement is so sudden. One day, she's getting up and working all nine to five and the next, she has to fill that void. Wouldn't it be great to be able to transition her into retirement gradually while she transitions her skills and knowledge to her replacement?</div>
<div>
<br /></div>
<div>
You need a differentiator. You need something different, exciting, and better. You need to be the kid on the block that everyone else envies. </div>
<div>
<br /></div>
<div>
You would be the envy of all the others if you won at recruiting, kept your costs level (as a percentage of payroll) and on budget, retained key employees, and had a vehicle that allows for that smooth transition.</div>
<div>
<br /></div>
<div>
I had a conversation with a key hiring executive earlier this month. He said he cannot get mid-career people to come to his organization from [and he mentioned another peer organization]. He was exasperated. He said, "We're better and everyone knows it, but their best people won't come over." I asked him why. He said, "It's that pension and I can't get one put in here." I asked him to tell me more and he explained it as one of those new-fangled cash balance plans with guaranteed return of principal -- i.e., no investment risk for participants, professionally managed assets, the ability to receive 401(k) rollovers, and the option to take a lump sum or various annuity options at retirement. He said that it's the "talk of the town over there" and that even though it seems mundane when you first hear about it, it's their differentiator and it wins for them.</div>
<div>
<br /></div>
<div>
We talked for a while. He wants one. He wants one for himself and he wants one to be as special as his competitor. He wants to be envied too. We talked more.</div>
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<br /></div>
<div>
Stay tuned for their new market-based cash balance plan ... maybe. He and I hope that maybe becomes reality.</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-78052880329068137432019-03-07T07:38:00.001-05:002019-03-07T07:38:51.130-05:00Hospitals and a Sky is Falling Economic PredictionThe headline from today's <a href="https://www.wsj.com/articles/sour-economic-outlook-weighs-on-cfo-spending-expansion-plans-survey-finds-11551953208?mod=djemCFO"><i>CFO Journal </i>published by the <i>Wall Street Journal</i></a> was stark: "Sour Economic Outlook Weighs on CFO Spending, Expansion Plans. Let's leave off the lack of expansion plans, but focus on spending.<br />
<br />
Consider a low-margin industry that employs highly-skilled workers in short supply -- hospitals -- in particular. Talk to heads of HR in the hospital sector. Most have nearly identical top concerns: <a href="http://www.octoberthree.com/the-hr-problem-confounding-hospital-systems-recruiting-and-retaining-physicians/">how do I attract and retain skilled professionals</a>? What they are obviously referring to are physicians, nurse practitioners, nurses, technologists, and technicians. These are all careers that require very specific, often extensive, education. They are all in short supply and feeling burnout. What is there to keep them around?<br />
<br />
Direct cash is not a good option. First, as the <a href="https://www.wsj.com/articles/sour-economic-outlook-weighs-on-cfo-spending-expansion-plans-survey-finds-11551953208?mod=djemCFO">WSJ piece</a> suggests, CFOs just won't part with the levels of cash necessary to attract and retain. Second, and while data demonstrating this phenomenon are difficult to find, people live to their levels of income. In other words, if you have a doctor earning $200,000 per year with annual savings in his 401(k) only, if you give him a $50,000 pay increase, his savings in many cases will remain 401(k) only.<br />
<br />
This is not good. Some day that physician is going to burn out. He may tire of a profession that has changed from being highly personal to largely impersonal. He may tire of insurers telling him how to practice medicine. He may tire of government intervention.<br />
<br />
In any event, if he tires, he is going to do so without being prepared for retirement.<br />
<br />
Therein may lie the key.<br />
<br />
Prepare your skilled staff for retirement. Do it not by increasing your costs, but by reallocating your labor costs.<br />
<br />
Most people live to (or above regardless of pay or nearly to) their paychecks. And, <a href="https://johnhlowell.blogspot.com/2018/11/surprise-employees-want-pensions.html">they want pensions.</a><br />
<br />
Give them what they want. Give them a <a href="http://www.octoberthree.com/services/plan-design/">pension</a> that checks all the boxes:<br />
<br />
<br />
<ul>
<li>Secure</li>
<li>Lifetime Income Options Without Subsidizing the Profits of Large Insurers</li>
<li>Portability</li>
<li>Easy to Understand</li>
<li>Professionally Managed Investments</li>
<li>Stable, Predictable, and Manageable Costs</li>
</ul>
<div>
The time is now. Act while the economy is still strong and prepare yourselves and your employees for when it's not.</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-25257649359170527742019-02-19T07:50:00.000-05:002019-02-19T07:50:04.063-05:00More Evidence Supporting the Value of Second OpinionsI was reading this morning's Wall Street Journal "CFO Journal" newsletter. One headline jumped out at me -- "Finance Professionals Lack Confidence They Can Spot Errors."<br />
<br />
Here were some of my key takeaways:<br />
<br />
<ul>
<li>Nearly 70% of finance professionals believe their company has made <i>significant</i> business decisions based on <i>bad financial data</i>.</li>
<li>The survey found that ... <i>55% </i>of professionals <i>lack confidence </i> in their ability to spot financial errors before reporting results.</li>
<li>Roughly one-fourth said they were concerned about errors <i>they know to exist</i>, but hadn't identified.</li>
</ul>
<div>
What does that tell me? It tells me that in-house financial professionals don't trust their own numbers. It also implies that they may not trust externally-produced numbers, but they are not doing anything about it.</div>
<div>
<br /></div>
<div>
Doesn't that scream that you need a second opinion? Thinking about this as an actuary, it tells me that companies that sponsor pension plans whether they are traditional or cash balance, ongoing or frozen, well-funded or not, could really benefit from an actuarial second opinion.</div>
<div>
<br /></div>
<div>
With required contributions annually in the millions or even hundreds of millions or billions of dollars for many longer-term plans, the cost-value trade-off of a second opinion seems clear. If a plan sponsor got meaningful value one year in ten from such a second opinion, they will have paid for all ten of them many times over.</div>
<div>
<br /></div>
<div>
Are you in a long-term relationship with your actuary? If so, has the relationship gotten complacent to the point that they are going through the motions. Think of your desire for a second opinion like a seven-year itch.</div>
<div>
<br /></div>
<div>
Has the actuarial firm that you use recently changed or significantly modified its team that serves you? Did they come back to you with findings from when they reviewed the work that has been done recently? If not, might they have found something they don't want to tell you about? Perhaps not ... maybe so?</div>
<div>
<br /></div>
<div>
Does the actuarial firm that is serving your plan do periodic reviews where national leaders come in and audit the work of the team? Have they done such an audit recently? Did the team tell you about the results of the audit.</div>
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<br /></div>
<div>
And, returning to the theme of the WSJ tidbit, do you want to be one of those seven in ten companies that makes significant business decisions on bad financial data? Isn't it time to think about an actuarial second opinion?</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-17012773604540677612019-02-05T08:09:00.001-05:002019-02-05T08:09:04.666-05:00Eliminating the Phone-A-Friend Retirement PlanI read an <a href="https://www.plansponsor.com/average-americans-really-dont-understand-401ks-financial-terminology/">article</a> earlier this morning informing me that employees don't really understand 401(k) plans. News Flash: that's not news. In fact, looking at behavior of employees and overhearing casual conversations between otherwise intelligent 401(k) participants about the value of their 401 plans, their 201k (when they are underperforming expectations), their 501k (when they are overperforming expectations), and the ways that they choose investment options, this sounds like a statement from Captain Obvious.<br />
<br />
How did 401(k) plans get this way? In their earlier incarnations, typical 401(k) plans gave employees an option to defer. In most plans, employees that did choose to defer got a match from their employers. Employees could then invest those assets within the plan in usually about five to eight options.<br />
<br />
I recall a conversation back in the early 1990s with an individual who is now on every list of the great minds of the 401(k) world and the great innovators in the 401(k) world. This individual told me that no defined contribution plan needs more than six investment options ... ever .. and that any plan sponsor with more than six should be lined up with their adviser before a firing squad (the words are not precise, so no quotation marks, but they are pretty darned close). The same individual later became one of the leading proponents of a 'full menu' of options with at least one and often more than one from each asset class and each investment style within that asset class.<br />
<br />
How exactly do employees benefit from such choices? They don't.<br />
<br />
Suppose I choose three highly rated large cap funds from US News's report:<br />
<br />
<ul>
<li>T Rowe Price Institutional Large Cap Core Growth Fund</li>
<li>Fidelity Blue Chip Growth Fund</li>
<li>JP Morgan Intrepid Growth Fund</li>
</ul>
<div>
Let's imagine that they are all in my fund's lineup. How do I choose?</div>
<div>
<br /></div>
<div>
Intrepid sounds like a cool name. Maybe I should pick that. Blue Chip? My grandfather told me to invest in blue chips. I wonder if that's still true today. And, that long name? If it does all those things, it must be really good, too.</div>
<div>
<br /></div>
<div>
I could read the prospectuses. I could do research on performance history. I could look at investment styles and drift whatever all that means. I could phone a friend.</div>
<div>
<br /></div>
<div>
The simple fact is that for most of us, it's a crap shoot ... plain and simple. </div>
<div>
<br /></div>
<div>
Because of that, despite all the forecasts in the world from 401(k) lovers, this should not ever be a primary plan for employees. As it was intended back in the late 70s and early 80s, this should be a supplemental savings plan -- an addition to what you get in your primary plan.</div>
<div>
<br /></div>
<div>
Your primary plan should be just that. It should be employer-provided. It should not be confusing. There should be no need for a phone a friend option. </div>
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<br /></div>
<div>
I don't care what kind it is although I have my biases. My bias is that the plan should provide for the ability for participants to take distributions in lump sums or wholesale-priced annuities (my term for annuities on a fair actuarial basis without middle men making profits at your expense). My bias is that the determination of your benefits in the plan should be simple. My bias is that assets should be professionally managed. </div>
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<br /></div>
<div>
I don't care what label you give to such a plan. I don't even care what label ERISA or the Internal Revenue Code gives to such a plan. What I do care about is that you not lose sleep over whether Intrepid is better than Blue Chip or conversely. What I do care about is that if you choose to annuitize your account balance that you get an annuity that is 100% of what you deserve not some number closer to 80%. </div>
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<br /></div>
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And, for your supplemental savings, you can have your Phone-A-Friend ... oops, I meant 401(k) plan.</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-47619621467965494032018-11-29T08:09:00.000-05:002018-11-29T08:09:23.954-05:00Surprise -- Employees Want PensionsI read an <a href="https://www.plansponsor.com/benefits-important-americans-raise/?email=t">article</a> yesterday highlighting, as the author pointed out, that employees value benefits more than a raise. Some of the findings were predictable -- the two most important were health insurance and a 401(k) match and they were followed by paid time off. But, just barely trailing those were pension benefits with flexible work hours and the ability to work remotely far behind.<br />
<br />
Let's put some numbers behind the ordering:<br />
<br />
<ul>
<li>Health insurance -- 56%</li>
<li>401(k) match -- 56%</li>
<li>Paid time off -- 33%</li>
<li>Pension -- 31%</li>
<li>Flexible work hours -- 21%</li>
<li>Working remotely -- 15%</li>
</ul>
<div>
What I found remarkable about this is that five of those six get constant attention. In today's workplace, however, as compared to one generation ago, pensions get little, if any, attention yet nearly one-third of workers would rather have pensions than a raise.</div>
<div>
<br /></div>
<div>
Why is this the case? Neither the survey nor the article got into any analysis as to the reasons, so I get to way in here entirely unencumbered by nasty things like facts. I get to express my opinions.</div>
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<br /></div>
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Ask a worker what they fear. I think they will tell you that two of their biggest fears are losing their health and outliving their savings. The second, of course, can be mitigated by guaranteed lifetime income.</div>
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<br /></div>
<div>
Workers are beginning to realize that 401(k) plans are exactly what Congress intended them to be -- supplemental tax-favored savings plans. In fact, generating lifetime income from those 401(k)s is beyond what a typical worker is able to do. Their options for doing so, generally speaking, are to self-annuitize (when you run out of money, however, the guarantee goes away) or to purchase an annuity in the free market. </div>
<div>
<br /></div>
<div>
That, too, comes with a problem. While that purchase is easy to do and does come with a lifetime income guarantee, it also comes with overhead costs (insurance company risk mitigation and profits plus the earnings of a broker). Roughly speaking, a retiree may be paying 20% of their savings to others in order to annuitize. That's a high price. Is it worth it? Is that why workers want pensions despite often not really knowing what they are?</div>
<div>
<br /></div>
<div>
Pensions are not for everybody; they're also not for every company. But, this survey strongly suggests that companies that provide pensions may become employers of choice. In the battle for talent, that's really important.</div>
<div>
<br /></div>
<div>
Many companies exited the pension world because the rules made those pensions too cumbersome. But, the rules have gotten better. They've put in writing the legality of plans that many employers wanted to adopt 15 to 20 years ago, but feared doing something largely untried. And, there is bipartisan language floating around in Congress that would make such plans more accessible for more employers.</div>
<div>
<br /></div>
<div>
Designed properly, those plans will check all the boxes for both the employer and the employees. It seems time to take another look.</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-63087741905942901962018-11-08T08:09:00.000-05:002018-11-08T08:09:02.734-05:00When the American Academy of Actuaries has no Clothes<div class="separator" style="clear: both; text-align: center;">
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<span style="font-size: large;">We're all familiar with the Hans Christian Andersen tale, "The Emperor's New Clothes," about two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent – while in reality, they make no clothes at all, making <em style="background: 0px 0px; border: 0px; box-sizing: inherit; font-family: Georgia, "Source Serif Pro", serif; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;">everyone</em> believe the clothes are invisible to them. When the emperor parades before his subjects in his new "clothes", no one dares to say that they do not see any suit of clothes on him for fear that they will be seen as stupid. Finally, a child cries out, "But he isn't wearing anything at all!" </span></div>
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<span style="font-size: large;">Such appears to be the current position of the American Academy of Actuaries. They have opened voting on two amendments to their bylaws which voting will close November 9 just before midnight. Amendment 1 would take away most rights of Members not on the Board of Directors while Amendment 2 would ensure transparency to the processes of the Actuarial Standards Board (paralleling what we see in other professions such as accounting).</span></div>
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<span style="font-size: large;">Tuesday, a group of 9 Presidents of the Academy (current, future, and 7 former) sent an email to all members of the Academy urging Members to vote in favor of Amendment 1 and against Amendment 2. They preached transparency and independence. They offer neither.</span></div>
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<span style="font-size: large;">In fact, were Amendment 1 to pass, in order for a member-driven bylaws amendment to have even a chance to be brought to a vote, it would take a petition of 15% of the membership. Think about that for a moment. 15%. Since no member has a distribution list of contact information for Academy members, gathering signatures of 15% of members would be a herculean task, nigh impossible. And, even if 15% were gathered, the Academy Board could by 2/3 vote of Board members refuse to bring such bylaws amendment to a vote of members.</span></div>
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<span style="font-size: large;">On the other hand, Amendment 2, the supposedly uppity, disruptive Amendment 2, would have its greatest effect by making meetings of the Actuarial Standards Board -- the professional standards setting organization for US actuaries -- open.</span></div>
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<em style="background: 0px 0px; border: 0px; box-sizing: inherit; font-family: Georgia, "Source Serif Pro", serif; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;"><span style="font-size: large;">Quel dommage.</span></em></div>
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<span style="font-size: large;">Meetings of the ASB should be open. They should be open because we are now at the point where members of the Actuarial Standards Board are chosen in significant part by the Academy's Board (actually, they are chosen by a Selection Committee chaired by the Academy President and having 1/3 of its votes from the Academy, but if the proposed SOA-CAS merger takes effect, that 1/3 will increase to 1/2).</span></div>
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<span style="font-size: large;">The 9 presidents tell us how important this is for the Academy and for the profession. They talk about the independence of the Academy. They talk about the transparency of the Academy. They expect that the masses -- the sheeple -- to chant in agreement.</span></div>
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<span style="font-size: large;">So, I urge you to vote <span style="background: 0px 0px; border: 0px; box-sizing: inherit; font-weight: 600; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;">NO </span>on Amendment 1 and to vote <span style="background: 0px 0px; border: 0px; box-sizing: inherit; font-weight: 600; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;">YES </span>on Amendment 2.</span></div>
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<span style="font-size: large;">Be like the little boy. Tell the 9 presidents. Tell the Academy. Tell them that the Academy wears no clothes.</span></div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-86619771288016134282018-10-11T15:39:00.000-04:002018-10-11T15:39:09.733-04:00The Big Surprise Gotcha in the Million Dollar Pay CapEven those of us who have been hiding under rocks know that late last year, the President signed into law the Tax Cuts and Jobs Act. And, as part of that Act, there was language that amended Code Section 162(m) also known as the million dollar pay cap. After Treasury gave us guidance on those changes in <a href="https://www.irs.gov/pub/irs-drop/n-18-68.pdf">Notice 2018-68</a>, some observers were surprised by a few of the interpretations that the regulators took. One in particular, however, that they didn't quite spell out, meets my criteria for a big surprise gotcha.<br />
<br />
I'll come back to that and consider how an employer might get around it, but first some background. Under the old 162(m), deductions for reasonable compensation under Section 162 were limited to $1,000,000 per year for the CEO and the four other highest compensated employees of, generally speaking, publicly traded companies. However, most performance-based compensation was exempt from that calculation and was deductible as it would have been before the cap came into being.<br />
<br />
Under the new 162(m), the definition of covered employee has been changed to be the CEO, CFO, and the three other highest paid employees. But, once you become a covered employee, you remain a covered employee. So, by 2030, for example, a company could easily have 25 covered employees. [Hats off to the cynics who know this is a silly example because no law stays in place unchanged for 13 years anymore.] Further, performance-based compensation is no longer exempt.<br />
<br />
Like most law changes that affect compensation and benefits, this one, too, has a grandfather provision. Here, the new rules are not to apply to remuneration paid pursuant to a binding contract that was in effect on November 2, 2017, and which has not been materially modified after that date. The keys then relate to what is compensation for these purposes, what sort of modifications might be material, and what constitutes a binding contract.<br />
<br />
Compensation is essentially any compensation that would be deductible were it not for the million dollar pay cap. Whether a modification is material remains a bit subjective, but the guidance does specify that cost-of-living increases in compensation are not material, but that those that meaningfully exceed cost-of-living are.<br />
<br />
The binding contract issue is the really sneaky one. Your read and your counsel's read may be different, but my read is that if the employer has the ability to unilaterally change the contract, it's not binding. That is problematic.<br />
<br />
Consider a nonqualified retirement plan be it a defined benefit (DB) SERP or a traditional nonqualified deferred compensation (NQDC) plan. In my experience, it's fairly common (completely undefined term) to see language that gives an employer the unilateral right to amend said plan, subject to any employment agreements that may overrule. Well, if the company can amend the plan, there would seem to be no binding agreement. And, that means that when that nonqualified plan is paid out to the employee, perhaps none of a large payout will be deductible for the employer. I'm aware of some payouts well into nine figures.<br />
<br />
When it's a nine-figure payout, there really aren't great solutions. But, for the typical nonqualified plan, whether it's DB or DC, qualifying some of the benefits changes the treatment. If the benefits can be qualified in a DB plan using a <a href="https://johnhlowell.blogspot.com/search?q=QSERP">QSERP device</a>, employer funding will be deductible if it is deductible under Section 404. That's far more forgiving and, in fact, it is not at all unlikely that the deductions will already have been taken before the covered employee retires.<br />
<br />
Yes, it's still a big surprise gotcha, but don't you prefer a surprise <a href="mailto:johnhlowell@gmail.com">gotcha</a> when it has a <a href="mailto:jlowell@octoberthree.com">surprise solution.</a>John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-5742975629331486572018-10-09T06:51:00.001-04:002018-10-09T06:51:33.803-04:00Time to Revisit the Work RelationshipI read an <a href="https://www.plansponsor.com/employees-struggle-allocating-money-hsas-retirement-plans/?utm_source=newsletter&utm_medium=email&utm_campaign=Newsdash">article</a> the other day highlighting some findings from a Willis Towers Watson survey. Quoting from the article:<br />
<blockquote class="tr_bq">
Yet only 25% rank contributing to a health savings account (HSA) as a top current financial priority, falling below saving for retirement in a 401(k), paying for essential day-to-day expenses and paying off debt. The survey found the majority of employees (69%) who didn't enroll in an HSA said they chose not to because they didn't see the benefit, understand HSAs, or take the time to understand them.</blockquote>
Let's think about the hidden part of what is being said there. The relationship between employers and employees has changed. As two factions battle for dominance in what that relationship should look like -- those who preach self-reliance think that employers should provide availability of savings options only and those who preach mandated pay and benefits think that the only differentiators should be things like office gyms and juice bars -- we are left in a world where creativity is encouraged, but not in any determination of how employees are rewarded.<br />
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If you were to take a survey of which benefits employees find the most important (many have, but I can't put my hands on one right now), I suspect that numbers one and two would be their health benefits and their 401(k). Why? The data that I cite above shows that most don't understand their health benefits and having worked in the retirement space for more than half my life, I can tell you that the large majority don't understand their 401(k) either. Many understand what it is, but relatively few understand what it's not.<br /><br />So much for the people who preach self-reliance as in 2018, those are two benefit types that are the epitome of self-reliance.<br />
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Let's turn for a moment to another side of the equation -- pay. The other side of the spectrum would have us believe that as an employer, you are not particularly entitled to differentiate between employees based on much of anything because if the data suggests that any two employees are paid any differently from each other and it is even remotely possible that maybe someone in their wildest dreams could divine that those differences in pay are based on something that the law doesn't or shouldn't, in their opinion, allow, the company is in trouble.<br />
<br />
Suppose we were to scrap the current system. Suppose different companies offered different benefits that their employees could understand. Suppose they paid employees based on the value they brought to those companies (yes, I know that value is nigh impossible to measure).<br />
<br />
In the thought to be antiquated employer-employee relationship that existed 30-35 years ago, consider what we had:<br />
<br />
<br />
<ul>
<li>Companies were generally nicely profitable;</li>
<li>Employees tended to stay with the companies that they worked for at age 35 until they retired;</li>
<li>Those employees, generally speaking, lived as well as or better in retirement than they did while they were working;</li>
<li>Health benefits were such that employees didn't go into debt to pay their share of them from every paychecks; and </li>
<li>Neither the country nor its citizens were reeling in debt.</li>
</ul>
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I also see data that tells me that more than half (usually about 55%) are on track to retire. Translated, that means that nearly half are woefully behind. That's not a success. That is an utter failure.</div>
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The experiments of employee self-reliance and of paying everyone the same because you're not allowed to pay them differently have been failures. More likely than not, they will remain failures. </div>
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Perhaps it's time to see what was right about the employer-employee relationship in the 80s and bring it back. Let's aim for 100% of employees being on track to retire. Let's aim for benefits that employees use because they do understand them. Let's pay people that deliver value in the workplace. It is time to revisit the work relationship.</div>
John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-35175963653952331832018-09-11T07:58:00.001-04:002018-09-11T07:58:34.835-04:00As President of the Conference of Consulting ActuariesI have had the honor and privilege to serve my profession and the members of the Conference of Consulting Actuaries (CCA) for almost a year now. My term will come to an end at the close of our Annual Meeting on October 24.<br />
<br />
Last Thursday, I received a phone call and later an emailed <a href="http://actuary.org/files/imce/CCA_Letter.pdf">letter</a> from the President of the American Academy of Actuaries. The Academy later notified its membership with a similar <a href="http://www.actuary.org/content/message-president-about-composition-academys-selection-committee">communication</a>.<br />
<br />
Here is a paragraph from the Academy's communication to its members:<br />
<br />
<blockquote class="tr_bq">
<ul style="background-color: white; color: #58585a;">
<li style="line-height: 22px;"><span style="font-family: inherit;">The Board believes that ACOPA and CCA perform important functions for their members. Those functions, which include advocating for the commercial interests of their members and their members’ clients, are highly valued by many in the profession. They are, however, incompatible with maintaining the independence and objectivity of the ASB and ABCD. Preserving this independence is vital to the public’s confidence in the U.S. actuarial profession’s ability to regulate itself.</span></li>
</ul>
</blockquote>
None of the functions of the CCA is advocating for the commercial interests of our members and our members' clients. In fact, the CCA is not a lobbying organization. We do not currently and to my knowledge, never have had a presence on Capitol Hill.<br /><br />The Academy does.<br />
<br />
Of the five major US-based actuarial organizations, the CCA was the first to impose upon its members formal standards for continuing professional education. Later, the Academy and others adopted ours.<br /><br />In 2006, in response to a crisis within the actuarial profession in the UK, a specially appointed task force of the US-based actuarial organizations released the final <a href="https://www.actuary.org/files/crusapfinalreport.pdf">CRUSAP report </a>(Critical Review of the US Actuarial Profession) outlining a series of recommendations to keep the independence of the US actuarial profession intact. To my knowledge, the last remaining remnant of CRUSAP had been the Joint Discipline Council (JDC), a group and function whose role was to jointly recommend discipline for violations of the <a href="https://www.ccactuaries.org/governance/code-of-professional-conduct">Code of Professional Conduct</a>. Leadership of the CCA took perhaps the largest role in seeing that the JDC came to fruition. All five major US-based actuarial organizations were signatories to it. Last fall, the Academy withdrew causing the JDC to be disbanded.<br /><br />It's not up to me to be the arbiter of right and wrong.<br /><br />I've laid out facts.<br /><br />You decide.John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0tag:blogger.com,1999:blog-2009324187193157520.post-1428487993419267612018-08-01T07:35:00.001-04:002018-08-01T07:39:32.525-04:00Using Cash Balance to Improve Outcomes for Sponsors and Participants<br />
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In a recent Cash Balance <a href="http://www.octoberthree.com/cash-balance-plans-2018-survey-and-trends/">survey from October Three</a>, the focus to a large
extent was on interest crediting rates used by plan sponsors in corporate cash
balance plans. In large part, the study shows that those methods are mostly unchanged over the past 20 years or so, this, despite the passage of the
Pension Protection Act of 2006 (PPA) that gave statutory blessing to a new and
more innovative design. I look briefly at what that design is and why it
is preferable for plan sponsors.<o:p></o:p></div>
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Prior to the passage of PPA, some practitioners and plan
sponsors had looked at the idea of using market-based interest crediting rates
to cash balance plans. But, while it seemed legal, most shied away, one would think,
due to both statutory and regulatory uncertainty as to whether such designs could
be used in qualified plans.<o:p></o:p></div>
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With the passage of PPA, however, we now know that such
designs, within fairly broad limits, are, in fact allowed by both statute and
regulation. That said, very few corporate plan sponsors have adopted them
despite extremely compelling arguments as to why they should be preferable.<o:p></o:p></div>
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<a href="mailto:jlowell@octoberthree.com">Why are they preferable</a>?<o:p></o:p></div>
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<br /></div>
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For roughly 20 years, the holy grail for defined benefit
plan, including cash balance plan, sponsors has been reducing volatility and
therefore risk. As a result, many have adopted what are known as liability
driven investment (LDI) strategies. In a nutshell, as many readers will know,
these strategies seek to match the duration of the investment portfolio to the
duration of the underlying assets. Frankly, this is a tail wagging the dog type
strategy. It forces the plan sponsor into conservative investments to match
those liabilities. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
Better is the strategy where liabilities match assets. We
sometimes refer to that as investment driven liabilities (IDL). In such a
strategy, if assets are invested aggressively, liabilities will track those
aggressive investments. It’s derisking while availing the plan of opportunities
for excellent investment returns.<o:p></o:p></div>
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<a href="mailto:johnhlowell@gmail.com">How exactly does this work</a>?<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
I alluded to the new design that was blessed by PPA. It is usually referred to as market-return cash balance (MRCB). In an MRCB design, with only
minor adjustments necessitated by the law, the interest crediting rates are
equal to the returns on plan assets (or the returns with a minor downward
tweak). That means that liabilities <i style="mso-bidi-font-style: normal;">track
assets</i>. However the assets move, the liabilities move with them meaning
that volatility is negligible, and, in turn, risk to the plan sponsor is
negligible. Yet, because this is a defined benefit plan, participants retain
the option for lifetime income that so many complain is not there in today’s
ubiquitous defined contribution world. (We realize that some DC plans do offer
lifetime income options, but only after paying profits and administrative
expenses to insurers (a retail solution) as compared to a wholesale solution in
DB plans.)<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
When asked, many CFOs will tell you that their companies
exited the defined benefit market because of the inherent volatility of the
plans. While they loved them in the early 90s when required contributions were
mostly zero, falling interest rates and several very significant bear markets
led to those same sponsors having to make contributions they had not budgeted
for. The obvious response was to freeze those plans and to terminate them if
they could although more than not remain frozen, but not yet terminated.<o:p></o:p></div>
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<div class="MsoNormal">
Would those sponsors consider reopening them if the
volatility were gone? What would be all of the boxes that would need to be
checked before they would do so?<o:p></o:p></div>
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<br /></div>
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Plan sponsors and, because of the IDL strategies,
participants now can get the benefits of professionally and potentially
aggressively invested asset portfolios. So, what we have is a win-win scenario:
very limited volatility for sponsors with participants having upside return
potential, portability, and wholesale priced lifetime income options.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
The survey, as well as others that I have seen that focus
on participant outcomes and desires, tells us that this strategy checks all the
boxes. Now is the time to<a href="mailto:jlowell@octoberthree.com"> learn how 2018’s designs are winnersfor plans sponsors and participants alike.</a><o:p></o:p></div>
<br />John Lowellhttp://www.blogger.com/profile/00264893397248519558noreply@blogger.com0