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Cypen & Cypen
July 28, 2016

Stephen H. Cypen, Esq., Editor

1. PLAN PARTICIPANTS STILL NOT CONFIDENT IN THEIR APPROACH TO INVESTING: J.P. Morgan Asset Management released proprietary findings from its fourth research study of plan participants. The resulting white paper, "Guiding Participants from Intent to Action: 2016 Defined Contribution Plan Participant Survey Findings," reveals: many participants are still not confident in their approach to saving and investing; there appears to be a human disconnect between participant intent and action; and a potential misperception about participant support for automatic features and strategies may be holding plan sponsors back from strengthening their defined contribution plans. In addition to looking at results for participants as a whole, the paper examines similarities and differences across investor types -"do it for me" and "do it yourself" investors; and includes high-level findings for two age cohorts - those under 30 years of age and those 30 years of age and older. It also explores key steps plan sponsors can take to help proactively place participants on a path to financially secure retirement. The survey of 1,001 DC plan participants found most are still uncertain that a financially secure retirement awaits them because: more immediate financial demands interfere with their ability to save for the future; many do not have a clear understanding of how to set a retirement savings goal; and most are not confident in their ability to make investment decisions. Plan sponsors, for their part, can and have provided education and tools to help participants size their retirement need, set realistic savings goals and improve their knowledge of investing. However, survey results suggest that focusing on closing the knowledge gap is not enough. When it comes to saving and investing for retirement, another gap exists -- a disconnect between participant intent and action. One key finding was:

  • Many participants know they are not saving enough (68% say their 2015 contributions were below where they should have been). Most participants (81%) say they are interested in doing financial planning for retirement, but almost half (45%) do not have a plan. Nearly half of participants (48%) admit they simply do not spend enough time thinking about and planning for retirement. Many participants may not be fully engaged in managing their 401(k) accounts. For example, 28% have never rebalanced their 401(k) account, 31% have never made a change to their initial choice of investment options, and 18% have never increased their contribution amount.
Since 2007, the surveys have tracked the knowledge, behavior and attitudes of 401(k) participants. While some progress has been made, many DC plan participants still face significant barriers to reaching retirement goals. Plan sponsors have an opportunity to strengthen their plans and help provide the necessary catalysts for transforming intent to action. The most effective way for plan sponsors to help put employees on the path to a more secure retirement is to proactively place them on that path. This can be done through the use of automatic features and strategies such as automatic enrollment, automatic contribution escalation and re-enrollment, in conjunction with a qualified default investment alternatives (QDIA), such as a target date fund. The author urges all plan sponsors to work with their industry partners to consider these features and strategies to help strengthen their DC plans. Based on JP Morgan’s research findings, most participants appear to support plan features and strategies, designed to offer a disciplined approach to saving, simplified investment choices, and improved asset allocation. Key findings include:
  • Roughly three-quarters of participants are in favor of or at least neutral toward automatic enrollment (75%) and automatic contribution escalation (74%).Roughly two-thirds (67%) are in favor of or at least neutral toward a combination of these two features. A large majority (90%) find target date funds appealing. Most (82%) are in favor of or at least neutral toward re-enrollment.
  • Among those automatically enrolled in their plans, only 1% opted out, nearly all are satisfied (96%), and almost a third (31%) say they would not have enrolled otherwise. Among those whose contribution amounts were automatically increased by 1% to 2% each year, almost all are satisfied (97%), and 15% say they were unlikely to have escalated their contributions if not for this automatic feature. Among those who went through a re-enrollment, 73% allowed their assets to be moved to a target date fund, and 99% of those whose funds were moved are satisfied.
Strengthening DC plans will require plan sponsors to carefully consider these features and strategies and establish the appropriate balance between maximizing participant autonomy and proactively placing participants on a path to a financially secure retirement. With the skillful collaboration of all involved, receptivity to practical new developments in plan design features and investment strategies, and awareness of participants' needs and wants, the author believes the fortification of DC plans will continue to advance at a steady pace.

2. SHOULD YOU KEEP YOUR HOME WHEN YOU RETIRE? It can be hard leaving memories behind, but downsizing could be the best retirement decision you make. As the baby boomer generation enters its golden years, tens of thousands of Americans reach retirement age every single week. For many of these new retirees, their home is their greatest financial asset. According to Boston College Center for Retirement Research, more than 80% of Americans over 65 owned their homes in 2010. If you are about to retire, there are some things you need to know about housing first. Not only could they help you start retirement on the right foot, but they could also keep you from making a mistake in retirement that you do not even know you are making.
  • Homeowners tend to have more wealth than non-homeowners, even excluding home equity. The median net wealth for households aged 50 and over was significantly higher among homeowners than among renters. Note that the homeowners' wealth came primarily from sources other than home equity; homeownership correlates to a higher net worth, but it is not the cause. Homeownership is also associated with other benefits besides sheer wealth.
  • Lower housing costs mean other wealth can last longer.According to the study, homeowners are far less likely than renters to be burdened by high housing costs. This is especially true for homeowners without mortgages, but it is also the case, though to a lesser extent, for homeowners who have mortgages and are near retirement age. Even when factoring in maintenance, upkeep, and property tax costs, homeowners almost always come out ahead in retirement compared to renters. While homeowners still paying a mortgage do not see as much of a benefit as those who have paid off their homes, there is still a correlation between homeownership and lower housing-related cost burdens. In other words, statistically speaking, you are probably more prepared for retirement if you own a home, as your lower housing costs will allow you to retain more of your wealth as you age.
  • Home equity can be a financial lifeline in retirement.According to the study, the median 50-and-over household had $111,000 in home equity in 2010. This home equity can be particularly important for retirees, especially late in life. Not only are people far more likely to face higher health-related costs later in life, but savings balances tend to be much lower among retirees in their late 70s and up. Being able to tap your home equity can make a major difference in your ability to pay for care and other retirement expenses. There are two main ways to tap home equity: (1) use a reverse mortgage; and (2)     sell your home and downsize.  If you want to remain in your home, then a reverse mortgage could be ideal. However, this option comes at the cost of interest and fees, which eat into the equity that could be available to you. You may also find that your current home is not ideal for an aging retiree. It could be bigger than necessary, it may prove unfit for an elderly person, or it may cost a lot to maintain, heat, and cool. If this describes your situation, then downsizing into a smaller home will not only let you cash out your equity -- up to $500,000 in tax-free income in many cases -- but also reduce your property taxes, energy bills, and maintenance costs. It could also lower the cost of any accessibility upgrades you may need as you get older.
  • Your home could be a liability, too. Although homeownership can raise your quality of life and your household wealth, older Americans' housing debt is rising rapidly. Over 70% of households aged 50-plus still had a mortgage in 2010, compared to 62% in 1992. Even more concerning, twice as many 65-plus households were still paying a mortgage in 2010 versus 1992. There is no getting around it: carrying more debt into retirement will mean having less income left for other expenses. It could mean faster depletion of other assets, which could leave you more vulnerable later in life when you need those assets to pay for care. There are also health risks associated with living in an older, bigger home. As mentioned above, the house you raised your family in may be less than ideal to retire in, especially if it has stairs, doorways too narrow for a wheelchair, or other aspects that could make it harder to navigate as you age. Considering that falls are the number one cause of injury to seniors in the U.S., it is important to consider whether your current house is really suited for your retirement.  Here are a few statistics on falls among the 65-and-up population:
  • The average fall costs $35,000 in hospitalization expenses.
  • Fall injuries such as hip fractures can be hard to recover from and vastly reduce quality of life.
  • Falls are the leading cause of traumatic brain injury for seniors.
  • Furthermore, if a fall leaves you in need of non-skilled care such as help with daily activities at home, Medicare will not cover these costs.
  • Make sure your home is an asset, not an albatross. Whether you seek a stronger financial situation, better quality of life, or some combination of both, it is important that you take a hard look at your housing situation before you retire. Not only can the cost of housing today have a big impact on your ability to afford a quality retirement later, but making sure you are in the right home can help you enjoy the happy, active retirement you desire.
3. PUBLIC PENSIONS' UNDERFUNDING IS MUCH WORSE THAN IT SEEMS: When financial markets slumped in 2008, the assets in government-worker pension funds plunged and public sector retirement debt soared. Although pension officials rushed to assure the public that their funds would recover as soon as stocks rebounded, the long bull market that began the following year did not do much to cut states steep retirement debt according to Investor’s Business Daily. Now, 18 months of mediocre investment returns have sent the unfunded liabilities of state and local pension funds soaring to unprecedented levels and have raised new questions about whether some of these traditional retirement plans supported by tax dollars are sustainable. Most state and local pension funds closed the books on their latest fiscal year on June 30, and during that 12-month period the bellwether Standard & Poor's 500 increased by less than half a percentage point. While many funds have yet to report their results for the year, early returns suggest that the industry fell well short of its lofty investment goals. CalPERS earned a mere 0.6% in the last year, significantly below its 7.5% target. Its sister fund, the CalSTRS, which also aimed for a 7.5% annual return, instead notched a 1.4% gain for the year. The New York State and Local Retirement System, which ended its fiscal year on March 31, reported a gain of just 0.2% versus an investment goal of 7%. It is likely that other pension funds have similarly failed by a wide margin to hit their investment targets given that most government pension funds rarely perform significantly better than the broader market. These disappointing numbers come on top of a substandard fiscal 2015, when pensions systems earned on average 3.2%, well below their average projections of 7.6% annually. In an earlier report this year, Moody's Investors Service estimated that the 2015 investing shortfall increased unfunded liabilities at government pension plans by 17%. Given that most funds likely performed even worse in the fiscal year that just ended, it is probable that debt increased again by at least 2015 levels, if not more. To gain some perspective on what that means, it was estimated that public pension fund debt was approaching $1.7 trillion and that the poor performance of funds since the middle of 2015 had wiped out most gains from double- digit investment increases in 2013 and 2014 (Estimates based on more conservative variables place state and local pension debt potentially as high as $4.8 trillion). It was not supposed to be this way. Many pension officials downplayed the steep decline in their assets after the financial turmoil of 2008. A spokesperson for the nation's largest pension fund, the California State Employees Retirement System, reflected the common sentiment when she told the Los Angeles Daily News in October of 2008 that the fund had "experienced heavy losses before, only to recover fairly quickly." Although early 2009 marked the beginning of the third longest bull market in U.S. history, pension debt did not fall substantially. A 2015 study by Pew Charitable Trusts estimated total debt at $750 billion in 2009. The debt kept rising through 2013 to more than $1 trillion, including the obligations of municipal systems, even though the Standard & Poor's 500 grew at an average annualized rate of 18%. The news got a little better in 2014 when another strong market year boosted funds' performance; but all that did, according to a March 2016 report by Moody's Investor Services, was stop new debt from accumulating. Between 2010 and 2014, according to Moody's data, just eight states managed to cut the level of their unfunded liabilities. Although some of these disappointing results could be attributed to the fact that pension funds average their assets over several years (which means that the impact of the 2008 slump lingered on balance sheets for some time), the substandard investment returns of the last two years have created new financial pressures. Recent market gains in July, which have seen the S&P rise by about 3.5%, will make little difference. The news illustrates a fundamental problem with these systems: recovering from market turmoil is more difficult than pension officials concede. That is because their models often do not account for the volatility of financial investments, where steep declines can rob a system of so much money that subsequent market rebounds take place from a much smaller base of investments. A recent study estimates that a pension plan which is currently 75% funded actually has a one-in-six chance of seeing its funding level plunge over the next 30 years to just 40% of what it needs to pay retirees, even if the plan hits its investment goals. That is because pension systems rarely achieve their investment targets precisely each year, but rather experience extreme variations that can make a system financially unstable even when it appears to be achieving its long-term plans. Although some state plans remain well funded, the number of retirement systems that now have low levels of funding is worrying, since the failure of even a few of them would likely shake our financial system. At the end of 2014, for instance, 20 states had funding levels at or below 70% of what they need to pay retirees. Most of them made virtually no progress toward fixing their underfunding during the bull market. Now many are in even worse shape, potentially caught in a downward spiral because they simply lack enough assets to invest their way out of their problems. Some owe so much that asking taxpayers to foot the rest of the bill would be an enormous burden. Annual contributions by governments into pension funds have already increased by $54 billion, or 77%, since 2007, and those extra dollars have made little difference. Still, some pension fund officials continue to peddle the notion that the market will bail them out. The chief investment officer of CalSTRS downplayed the fund's recent poor performance, telling Wall Street Journal that, "we look at performance in terms of decades, not years." However, the debt of CalSTRS and its sister fund, CalPERS, rose from $60 billion in 2008 to $180 billion today despite a string of years when both funds far exceeded their investment goals.

4. MORE THAN 35,000 AMERICANS REVEAL THEIR BIGGEST FINANCIAL WEAKNESS: American workers share the same financial Achilles Heel, according to Most employees have experienced some financial stress over the last year, although at 60% of the working population, it is still unchanged from last year, according to a “Financial Stress Research” study. Money continues to keep American workers up at night, it concluded. And their top financial vulnerability? Not saving enough for retirement (58%), followed by no emergency fund (51%), living beyond their means (34%) and serious debt (33%). Some 25% say they have overwhelming financial stress, up from 24% who said the same last year. Women are more likely than men to report unmanageable financial stress. Even accounting for age, income and taking care of minor children, gender played a major role in the level of stress reported by users. That said, mothers with minor children living in households with income below $60,000 a year are the most financially stressed: 26% of adult women earning less than $60,000 (versus 24% of men in the same income group) reporting having high financial stress. Some 20% of all women earning $60,000 to $100,000 per year (versus 17% of men in the same income group) agreed, and 14% of women earning over $100,000 per year (versus 11% of men). Why do so many Americans feel so much financial stress? Real wages grew at around 3% in 2015, according to Mercer. Concern over market volatility remains high, and the S&P 500 Index SPX, -0.07% ended the year in negative territory (2,043.94), but has risen since January. What is more, some 40 million Americans are grappling with $1.3 trillion in student debt, plus medical bills and, increasingly, credit card debt. In fact, U.S. households will accumulate $1 trillion in outstanding debt by the end of 2016, the most ever. Of course, having some financial stress can be frustrating, but often manageable. Unmanageable stress levels reflect a sense that one’s finances are out of control, and that there is little hope for turning things around. Generally these are the employees who are living paycheck to paycheck, with expenses exceeding their incomes and with large debt balances and no emergency savings. In fact, 63% of Americans had no emergency savings in 2015 for a $1,000 emergency room visit or a $500 car repair, up slightly from 62% the year before.

5. SIGNS TO GET YOU THROUGH THE DAY: Went to the air and space museum and there was nothing there.

6. AGING GRACEFULLY: I am going to retire and live off of my savings. Not sure what I will do the second week.

7. TODAY IN HISTORY: In 1896, City of Miami incorporated.

8. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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