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Cypen & Cypen
July 25, 2019

Stephen H. Cypen, Esq., Editor

Death is one of those unpleasant certainties in life. With credit card debt, you may have additional anxiety about how debts are handled: Is your family responsible for repaying debt, or are those loans forgiven automatically when somebody dies? The simplest answer is that credit card debt is the borrower’s responsibility--not anybody else’s--especially when borrowing individually. But real-life situations are more complicated. What’s more, lenders can cause confusion and panic when they tell friends and family to use their own money to pay off somebody else’s debts.
Your Estate Pays Debts
Your estate is everything that you own when you die, such as money in bank accounts, real estate, and other assets. After death, your estate will be settled, meaning anybody you owe has the right to get paid from your estate, and then any remaining assets will be transferred to your heirs. Lenders have a limited amount of time to collect on debts. Your personal representative (or executor) should notify creditors of your passing. It can happen through a published announcement and through communication sent directly to lenders. Then, debts are settled until all debts are satisfied or your estate runs out of money.

  • Not Enough Assets? If your estate does not have enough assets to cover all of your debts, your lenders will write off any unpaid balance and take a loss.
  • Property Can Be Sold: Your estate includes things like your home, vehicles, jewelry, and more. Any assets that go to your estate are available to satisfy your creditors. Before distributing assets to heirs (whether following instructions in a will or following state law), your personal representative is supposed to ensure that all creditor claims have been handled. If there’s not enough cash available to pay off bills, the estate may need to sell something to generate cash.
  • Is the House Fair Game? It’s possible that an estate will have to sell the home to pay credit card bills and other debts. However, state law determines what actions are available to creditors. In many cases, local courts decide if the estate needs to sell a home or if liens can be placed on the home.
  • Do the Heirs Pay? The estate pays off debt before a property is passed on to heirs. It can be confusing if somebody expects to inherit a particular asset--the asset has not yet changed hands, and it might never go to the intended recipient if it needs to be sold. Unfortunately, for heirs, it feels like they’re paying off the debt, but technically the estate pays.

Non-Probate Property
Only property in the estate is available for paying off debt. Assets can, and often do, pass to heirs without going through probate or becoming part of the estate.

  • Not Available to Creditors: When assets skip probate, they are not required to be used to pay off debts. Creditors generally cannot go after assets that go directly to heirs, although there are some exceptions.
  • Designated Beneficiary: Certain types of assets have a designated beneficiary or specific instructions on how to handle assets after the account owner’s death. A beneficiary is a person or entity chosen by the owner to receive assets at death. For example, retirement accounts (like an IRA or 401k) and life insurance policies offer the option to use beneficiaries. With a proper beneficiary designation, assets can pass directly to the beneficiary without going through probate. The beneficiary designation overrides any instructions in a will (the will doesn’t matter because the will only applies to assets that are part of the estate, and beneficiary designations allow you to bypass the estate entirely).
  • Joint Tenancy: One of the most common ways that assets avoid probate is a joint tenancy with rights of survivorship. For example, a couple might own an account as joint tenants. When one of them dies, the surviving owner immediately becomes the new 100 percent owner. There are pros and cons to this approach, so evaluate all of the options with an attorney--don’t just do it to avoid paying off debts.
  • Other Options: There are several other ways to keep assets from going through probate (including trusts and other arrangements). Speak with a local estate planning attorney to find out about your options. 

Marriage and Community Property
In some cases, a surviving spouse may have to pay off debts that a deceased spouse took on--even if the surviving spouse never signed a loan agreement or even knew that the debt existed. In community property states, spousal finances are merged, and this can sometimes be problematic. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska residents can choose community property treatment as well. Check with a local attorney if you’re faced with paying a deceased spouse’s bills. Even in community property states, there are opportunities to have some debts wiped out.
Shared Accounts
In some cases, relatives and friends are required to pay off debts for a borrower who has died. It is often the case when multiple borrowers are on an account.

  • Joint Accounts: Are accounts opened by more than one borrower. It is most common with married couples, but it can happen in any partnership (including business-related partnerships). In most cases, each borrower is 100 percent responsible for the debt on a credit card. It doesn’t matter if you never used the card or if you share expenses 50/50.
  • Cosigning: Is a generous act because it’s risky. A cosigner applies for credit with somebody else, and the cosigner’s good credit score and strong income help the borrower get approved. However, cosigners don’t get to borrow--all they do is guarantee that the loan will get repaid. If you cosign and the borrower dies, you’re generally required to repay debt. There might be a few exceptions (for example, the death of a student loan borrower might trigger a discharge--or other complications), but cosigners should always be willing and able to repay a loan.
  • Authorized Users? Additional cardholders are typically not required to pay off credit card debt when the primary borrower dies. These individuals were simply allowed to use the card, but they don’t have a formal agreement with the credit card issuer. As a result, the credit card issuer typically cannot take legal action against an authorized user or damage the user’s credit. That said, if you’re an authorized user and you want to take over the card (or card number) after the primary borrower dies, you can often do so. You’ll need to apply with the card issuer and get approved based on your own credit scores and income.
  • Defrauding Lenders Is an Exception to Everything Above: For example, if it’s obvious that death is imminent and the deceased will not have any assets to repay bills, it may be tempting to go on a shopping spree (or make cash withdrawals) as an authorized user. If the courts decide that this was unethical, an authorized user might have to pay off the debt. 

When Debt Collectors Call
Handling debts after a death can be confusing. In addition to the emotional stress and the endless tasks that need attention, you’ve got a confusing set of debt collection rules to contend with.

  • Collectors Can Often Call Family and Friends of a Deceased Borrower: The rules vary from state to state. Lenders are not supposed to mislead anybody who’s not required to repay a debt. The law only allows this type of contact to enable lenders to get in touch with the person handling the deceased’s estate (the personal representative or executor).
  • Don’t Get Tangled up in Collection Efforts: Request that all communication come in writing, and avoid providing any personal information (especially your Social Security Number) to debt collectors. If collectors come to your house, you can ask them to stop.
  • Collectors Sometimes Mislead Loved Ones: Making them think that they need to repay the debt. Most debt collectors are honest, but there are certainly some bad apples out there. If you’re not responsible for a debt, refer lenders and debt collectors to the personal representative handling the estate. With persistent collectors, request--in writing--that they stop contacting you.
  • If Assets Pass to You, Those Assets Are Probably Not Fair Game for Collectors: Assuming the personal representative and financial institutions handled things properly, your inherited assets should be beyond the reach of creditors. However, check with an attorney when in doubt.
  • Get Legal Help If Somebody Asks You to Pay off Credit Card Debt for Somebody Who Has Died: Collectors are often confused and eager to simply collect. Sometimes they’re even dishonest. Don’t assume that you’re liable just because somebody says you are. 

If you have credit card debt, it’s wise to plan ahead--you can make things easier on everybody at the time of your death.

  • Estate Planning: Is the process of planning for death, and it’s a good idea for everybody (rich or poor). During that process, you’ll cover important topics such as your will, medical directives, final wishes, and more. It’s also possible to get more complex and use trusts to manage assets after you pass away.
  • Life Insurance Can Help Pay off Debt When You Die: Especially if somebody else will be responsible for your debt, life insurance protects your loved ones. It can be used for any purpose, including paying off credit card debt or home loans (including home equity loans).
  • Simplify Your Finances Before You Die: Things will be much easier for your executor. If you have numerous unused accounts open, consider closing them (but beware any consequences to your credit). Loans scattered around can potentially be consolidated into one place, and you might even save money on interest.
  • Watch Your Beneficiaries and Joint Account Holders: When assets pass to a designated beneficiary, they can bypass probate, and they’re not available to creditors. The same may hold true for a joint account with rights of survivorship. However, if you have no living beneficiaries, the assets may wind up going to your estate (check with your retirement account custodian and life insurance company to find out what their rules are--it varies from company to company). Once assets are in your estate, they may have to go towards paying down debt. Review your beneficiary designations periodically to make sure they still make sense. 

If you’re the executor of an estate (or the personal representative or administrator, depending on the situation), it’s important to handle a deceased borrower’s debts correctly.

  • Get Extra Death Certificates: You’ll need to provide notice to numerous organizations. Requirements for a “copy” of the death certificate will vary, but it’s best to have official documents from your local Vital Statistics Department--get more than you think you’ll need.
  • Notify Creditors That the Borrower Has Passed Away: Check with a local attorney to ensure that you’ve provided sufficient notice (you might not be aware of all creditors, so you’ll need a way to get the information out to unknown lenders). Notifying creditors also prevents somebody from racking up debt in the deceased person’s name.
  • Notify the Social Security Administration of the Death as Well: It can help prevent identity theft and other complications, and it may be helpful for creditors.
  • Get a Credit Report for the Deceased Individual: Use this to identify lenders that may need to be notified of the borrower’s death. Even if the borrower has a zero balance, notify all potential lenders--you don’t want a credit card (or credit card number) out there available to thieves.
  • Work With an Attorney If You Have Any Doubts: The price you pay can help you avoid expensive and time-consuming mistakes.
  • Get a Big Picture View of All Debts of the Deceased: If the estate does not have enough money to pay every creditor with a claim, you’ll have to prioritize debts--using state law as a guide for ordering the list. Wait until you know about all claims before you start making payments. Credit card debt is generally relatively low on the list (while taxes, final expenses, and child support take a higher priority).
  • Don’t Distribute Assets to Heirs Until You’re 100 Percent Certain That Valid Creditor Claims Have Been Paid Off: Nobody wants to make heirs wait, but it’s essential to get all of the details correct. As an executor, you’re not responsible for paying the deceased’s debt out of your own funds, but you can be held personally liable if you make a mistake and fail to pay a valid claim. 

Different Types of Debt
The type of debt you have matters. Again, there’s a priority to which debts get paid off (and how), and credit card debt is relatively low on the list.

  • Personal Loans: Credit card debt is a form of personal loan, and most other personal loans are handled similarly. No collateral is required to secure the loan, so lenders have to hope that the estate will have sufficient assets to repay the debt.
  • Student Loans: Student debt is also unsecured in most cases. However, these loans are sometimes discharged (or forgiven) at the death of the borrower. Especially with federal student loans, which are more consumer-friendly than private loans, there’s a good chance that the debt can be wiped out. Private lenders can set their own policies.
  • Home Loans: When you buy a home with borrowed money, that loan is typically secured with a lien against the property. That debt needs to be paid off, or the lender can take the property through foreclosure, sell it, and take what they are owed. Second mortgages and home equity loans leave you in a similar position. Federal law makes it easier for certain family members and heirs to take over home loans and keep the family house, so don’t expect the lender to foreclose immediately.
  • Auto Loans: Auto loans are also secured loans where the vehicle is used as collateral. If payments stop, the lender can repossess the car. However, most lenders simply want to get paid, and they won’t repossess if somebody takes over the payments. 

When in Doubt
Get help if you’re not sure how to handle a situation--there’s nothing wrong with doing so. The deceased chose you based on your judgment, and you can decide that professional assistance is required (and the heirs will just have to deal with that). Settling an estate after death is a complex process. The emotional toll of losing a loved one only makes it harder. Professional help from local attorneys and accountants can guide you through the process and make sure things don’t get worse.
Justin Pritchard, The Balance, June 25, 2019.
California has long struggled with budget problems, which have persisted regardless of who’s in charge of governing the state. But when Gov. Gavin Newsom took over, he promised the Golden State had already been pulled “back from the brink of fiscal insolvency.” Newsom claimed (pdf) the state was “finally tearing down the remaining wall of budgetary debt, paying down pension obligations, and building up the most robust and prudent budget reserve in state history.” The state’s legislative analyst’s office estimated California had a robust $20.6 billion surplus, while cautioning that market volatility could still affect revenue for the governor’s $209 billion state budget. Currently, California has only $100.1 billion in assets to pay $369.9 billion worth of bills, according to a report from non-partisan Truth in Accounting (TIA). When debt related to capital assets are taken into account, the organization explained, the state has $102 billion worth of unfunded pension benefits plus over $107 billion in unfunded retiree health care. Unfortunately, the state “defers recognizing losses incurred when the net pension liability increases,” the report added. This leaves California with $58.4 billion in hidden debt, which was not mentioned by the Newsom administration. With 76 percent of the more than 4.6 million members of pension plans relying on the state of California, according to the Public Policy Institute of California, and Newsom promising to use some of the surplus to pay down pension liabilities, the Golden State may still have to find creative ways to make sure pensions are fully covered.
Accounting Expert: CA Remains Broke
In an interview with The Epoch Times, Sheila A. Weinberg, the founder and CEO of TIA, said that while the organization doesn’t advocate for any tax or spending policy, it is clear that the Golden State is in the red. Currently, California needs “$270 billion to pay its bills, including unfunded pensions and retiree health care promises,” Weinberg said. “While claiming balanced budgets, past governors and legislatures chose to push current costs into the future. Unless pension and retirees’ health care benefits are renegotiated, each taxpayer will be burdened with paying $22,000 in taxes in the future without receiving any services or benefits.” Despite this, Weinberg added, Newsom continues to defend his budget, “while the state is drowning in debt,” she said. “Unfortunately, when elected officials claim their government has a surplus many people believe the government has extra cash available to spend. The reality is, while the state is projecting it will take in more money than it spends this year, the state still has hundreds of billions of dollars of unfunded pension and retiree health care liabilities and state bonds.” “Touting a surplus is similar to me claiming I have a surplus because I think I will earn more than I spend next year, but not mentioning I have huge amounts of credit card debt,” she added. The California Public Employees Retirement System (CalPERS) was under fire recently for cutting back on retirees’ pension checks, according to the Sacramento Bee. After being initially challenged in court, the agency was dropped from the suit, leaving the town of Loyalton to pay the difference. While the case doesn’t necessarily prove the fund is already having trouble paying retirees, it could be just one of many other suits potentially filed against the agency in the future due to unfunded pensions.
Are Bad Investment Strategies to Blame?
According to a June 16 Wall Street Journal report, California could have better prepared for its pension liabilities if the state had made better investment decisions. Currently, the state’s public pension fund relies on investments in socially conscious causes. But because of ongoing budgetary concerns, the fund is facing a crisis, and officials are considering breaking with their restrictive investment strategy. If CalPERS decides to pivot away from current investments, it may be looking at tobacco companies and even gun manufacturers for a better return, prompting progressive advocates to bemoan the state for the decision. If the change depends on board member Jason Perez, then perhaps California taxpayers may get somewhat of a break. Last year, Perez made a pledge to stop limiting the fund’s sources based on politics. However, it’s expected the fund’s investments would have to yield much greater returns if the state is willing to keep its promises to state workers. According to WSJ, the fund, which is worth about $365 billion, is still $139 billion short of meeting its obligations. If CalPERS can’t find a way to cover this gap, the rest of the bill is up to taxpayers. With the state now extending MediCal benefits to illegal immigrants, the already overly-taxed California state is expected to eventually raise taxes even further to cover the debt.
Alice Salles, The Epoch Times, June 24, 2019.
U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton, U.S. Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo, and U.K. Financial Conduct Authority (FCA) Chief Executive Andrew Bailey issued the following joint statement regarding the credit derivatives markets:
“The continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as ‘manufactured credit events,’ may adversely affect the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally. These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns.”
As a result, today the Chairmen and Chief Executive of our respective agencies announce that the agencies will make collaborative efforts to prioritize the exploration of avenues, including industry input which will address these concerns and foster transparency, accountability, integrity, good conduct and investor protection in these markets. These collaborative efforts would not, of course, preclude other appropriate actions by our respective agencies or authority. U. S. Securities and Exchange Commission, 2019-106, June 24, 2019.
It's no time to gamble with your hard-earned money when you're approaching retirement, or even if you've just landed your first job and are starting to think about saving. Investing poorly and without due diligence or paying unnecessary fees and costs can derail your retirement, or at least make it less comfortable than it could be. You can avoid some common mistakes with a little planning, whether you're in your 60s or your 20s.

  • Investing in Things You Don't Know About: Steer clear of new investment schemes with which you're unfamiliar. This includes that free seminar with a dinner thrown in, which could be a fraud or a Ponzi scheme. Don't trust anyone who tries to pressure you into handing over your retirement money. Any reputable financial adviser understands hesitancy and reluctance. Take the time to learn as much as you can first, then invest in new areas in small steps, a little money at a time.
  • Betting on Stocks: Don't invest a large portion of your valuable retirement holdings in a stock that's supposed be a can't-miss opportunity or the next big thing. It's too easy to lose your shirt and your retirement future, or to not realize the full potential of your investment dollars. A lot more people would be billionaires if beating the market were that easy. Myriad smart people place trades every day, and for each trade, only half can be right. Just because you're talented in your own chosen field, that doesn't translate into market timing skill. Investing is a process, and that process has a name: asset allocation. The process only works if you use it. As exciting as the thought of big gains can be, think of such an approach as going to Vegas and betting your retirement money on red or black. Again, do it with small amounts of money if you like the thrill, not with the bulk of your retirement funds. Moderation is key.
  • Neglecting to Take Full Advantage of Your Employer's Savings Plan: That 401(k) your employer offers is made up at least partially of "free" money. It might seem tame to your way of thinking, particularly if you prefer playing the market, and you might think you can earn more on your own. But consider all you'd be giving up. Contributions to your 401(k) are a tax-free was to invest in your future. That's not the case if you take a portion of your after-tax income and invest in stocks. Yes, you'll be taxed when you later take distributions, but presumably you'll be in a lower tax bracket then. It's especially foolhardy to ignore the potential of that 401(k) if your employer is matching your contributions. Those contributions are the equivalent of income. Passing them up is like telling your employer you'll work for less money. With limits to how much you can contribute each year, a 401(k) should not be your only retirement plan.
  • Making Risky Loans With Too Much of Your Net Worth: Private loans can pay 10 percent-plus yields, but they also come with serious risk. Don't put all your retirement eggs in one basket if you're going to venture into this volatile field. The company making the loans could go bankrupt, and you could lose more--if not all--of your hard-earned retirement dollars. Many types of investments offer high yields. Private loans are just one of them. Diversify if you're going to go with a high-yield strategy. Don't put all your retirement money in one strategy. Risky investments should compose only small portions of your retirement money. By the same token, don't overload on safe investments, either. "Safe" can translate to "risky" over the long haul because safe investments typically don't earn as much. You could end up shortchanging yourself if you lean too far in this direction as well--for example, if inflation completely eats away at your interest-rate return.
  • Putting Too Much Money Into Real Estate Deals: Some real estate deals promise high-percentage returns, but they're not liquid. If a real estate project goes south, you can do little but ride it out until the property hopefully sells and you get some money back. You could end up with almost no income and an asset that remains frozen until the real estate market recovers or the land is sold or developed. Real estate can be a good addition to a retirement portfolio when you're smart about it, but it's not so smart to put a lot of money in a nonliquid investment over which you have so little control. Consider investing in a real estate investment trust (REIT) instead, or purchasing an investment property with a modest operating account that can take care of problems when they arise.
  • Overlooking Fees and Costs: The fees and costs associated with maintaining your investments might not seem like such a big deal when you're in your 30s, especially if they're just a minuscule percentage. But they can really add up over the course of three or four decades. Compare fees at the beginning and keep an eye on them as your investments grow. That 1 percent will be a lot more in terms of dollars and cents several years from now, particularly when you consider interest and dividends compounding on a lesser balance. Depending on your investment vehicle, it might make sense to change plans if your fees and costs skyrocket or if you realize they're higher than you thought. But it's always better to have a firm idea of costs right out of the starting gate. Brokerages don't always advertise their fees, so be careful. You might have to ask repeatedly to get the answers you need, but your persistence can actually save you tens of thousands of dollars down the road.
  • Being Unrealistic About Your Financial Needs: Individuals frequently err when it comes to guesstimating how much they'll need annually in retirement. Underestimating isn't always the problem; many folks think they'll need more than they actually will. You might be just making ends meet on $4,200 a month now, but odds are that you won't need that much once you retire. Look at your current budget and cross out the items you won't be spending money on when you stop working. Commuting costs and lunches on the go come to mind, not to mention the portion of that $4,200 that you've been funneling to retirement savings. Moreover, you'll likely fall into a lower tax bracket. That's fewer dollars that you'll have to give to Uncle Sam. For more and more people, retirement doesn't mean completely stopping working. Many retirees are bored when they leave the workforce. You may not want to continue that 50- to 60-hour grind in your 70s, but you might decide to pick up a part-time job just to get out of the house for a few hours a week. Whatever income you earn means using your savings a little less. Having more saved than you need is always better, but for a variety of reasons you might not need as much as you think you will.

The Bottom Line
Your retirement money isn't for gambling. Those funds must provide you with a reliable and consistent income stream. Take the time to lay out an investment plan and be serious about it before you invest in something new. Otherwise, you'll have no one but yourself to blame for your losses--and the loss of your retirement future.
Dana Anspach, The Balance, June 25, 2019.

The Houston Firefighters' Relief and Retirement Fund has suffered a setback in its legal battle with the city of Houston over legislation it claims hurts the $4.2 billion fund. The Texas Court of Appeals affirmed Thursday a district court ruling that sided with the city in its use of its own actuarial assumptions to determine how much it should contribute to the fund. The Houston firefighters claimed that a bill that the Texas Legislature passed in 2017 allowing the city to use actuarial assumptions different from the fund actuary's assumptions was unconstitutional. "We are disappointed," Brett Besselman, the chairman of the Houston Firefighters' Relief and Retirement Fund board of trustees, said in a news release. "This ruling, if upheld, would set the stage for perpetual shortchanging of firefighters' retirement benefits." While the fund's board of trustees assumed a 7.25% rate of return on the fund's assets for its actuarial valuation report in May 2017, the city council passed a budget that used the Senate bill's assumed 7% rate of return, a discrepancy that caused the fund to sue the city, Mayor Sylvester Turner and other city officials. The fund faulted the city for allocating less than half of the amount that should have been contributed to fund its pension obligations. In addition to punitively cutting firefighter benefits and altering the fund's funding mechanism, the bill breached the Texas Constitution by taking away the HFRRF board's right to select the actuarial assumptions to be used by the fund, it claimed in the lawsuit. "We will continue our legal challenges because Senate Bill 2190 violates the constitutional requirement that pension boards set actuarial assumptions to avoid local political tampering," Mr. Besselman said. The fund has sought to compel the city to allocate the funding it stipulated in its actuarial valuation report as well as a temporary and permanent injunction prohibiting the city and its officials from acting in reliance on the bill. Margarida Correia, Pensions & Investments, June 21, 2019.
Key Internal Revenue Code (IRC) limits for qualified retirement plans will increase modestly in 2020, Mercer projects. However, the 415(c) maximum annual addition and the 401(a)(17) limit on retirement plan compensation are so close to the rounding breakpoint that significant inflation during the next few months could send the limits higher. These estimates are determined using the Code’s cost-of-living adjustment and rounding methods, the Consumer Price Index for All Urban Consumers (CPI-U) through May, and estimated CPI-U values for June–September. Qualified plan limits are based on the year-to-year increase in the third-quarter CPI-U, so figures can’t be finalized until after September CPI-U values are published in October. The IRS is expected to announce official 2020 limits for retirement and other benefit-related purposes in late October. Margaret Berger, Principal, Mercer’s Law & Policy Group, June 20, 2019.
Total US retirement assets were $29.1 trillion as of March 31, 2019, up 7.4 percent from December 2018. Retirement assets accounted for 33 percent of all household financial assets in the United States at the end of March 2019. Assets in individual retirement accounts (IRAs) totaled $9.4 trillion at the end of the first quarter of 2019, an increase of 8.3 percent from year-end 2018. Defined contribution (DC) plan assets were $8.2 trillion at the end of the first quarter of 2019, up 8.2 percent from year-end 2018. Government defined benefit (DB) plans--including federal, state, and local government plans--held $6.3 trillion in assets as of the end of March 2019, a 6.2 percent increase from the end of December 2018. Private-sector DB plans held $3.2 trillion in assets at the end of the first quarter of 2019, and annuity reserves outside of retirement accounts accounted for another $2.1 trillion.
Defined Contribution Plans
Americans held $8.2 trillion in all employer-sponsored DC retirement plans on March 31, 2019, of which $5.7 trillion was held in 401(k) plans. In addition to 401(k) plans, at the end of the first quarter, $535 billion was held in other private-sector DC plans, $1.0 trillion in 403(b) plans, $333 billion in 457 plans, and $606 billion in the Federal Employees Retirement System’s Thrift Savings Plan (TSP). Mutual funds managed $3.7 trillion, or 65 percent, of assets held in 401(k) plans at the end of March 2019. With $2.2 trillion, equity funds were the most common type of funds held in 401(k) plans, followed by $1.0 trillion in hybrid funds, which include target date funds.
Individual Retirement Accounts
IRAs held $9.4 trillion in assets at the end of the first quarter of 2019. Forty-six percent of IRA assets, or $4.4 trillion, was invested in mutual funds. With $2.4 trillion, equity funds were the most common type of funds held in IRAs, followed by $929 billion in hybrid funds.
Other Developments
As of March 31, 2019, target date mutual fund assets totaled $1.2 trillion, up 11.6 percent from the end of December 2018. Retirement accounts held the bulk (87 percent) of target date mutual fund assets, with 68 percent held through DC plans and 19 percent held through IRAs.
Technical Notes
The Investment Company Institute’s total retirement market estimates reflect revisions to previously published data. The latest estimates incorporate newly available data on IRA assets and flows for 2016 from the Internal Revenue Service Statistics of Income Division, resulting in slight downward revisions to IRA assets beginning in the first quarter of 2016. In addition, the tables reflect revisions to the Federal Reserve Board’s Financial Accounts of the United States.
Investment Company Institute, June 19, 2019.
The retirement planning challenges facing workers today are by no means new or novel, nor are the many different types of solutions being debated by academics and policymakers. The Brookings Institution hosted a thought leadership conference dedicated to the topic of retirement income, featuring such prominent speakers as Professor Richard Thaler, of the University of Chicago Booth School of Business, and Phyllis Borzi, former Assistant Secretary for Employee Benefits Security at the U.S. Department of Labor. The day kicked off with a panel of experts who explored the history of retirement income, highlighting the fact that the challenges facing retiring workers today are by no means new or novel. And, as the panel pointed out, neither are the types of solutions being debated by academics and policymakers. David John, a nonresident senior Brookings fellow and senior strategic policy adviser for the AARP Public Policy Institute, said the retirement income planning challenge has literally for centuries been the most complex financial decision an individual faces in a capitalistic society. “The simple fact is that this topic is difficult,” John said. “In 2019, the data shows more than seven in 10 Americans don’t know how to implement a retirement income plan--and that’s just the proportion who will admit it. When you test their skill sets, most of those who say they can make a plan aren’t going to always make optimal decisions. So this begs the question, can we automate the same way we did with accumulation? That’s something a lot of people are asking themselves right now.” John observed that this is not a U.S.-only issue. Every country with a developed retirement savings system is focusing on this problem of converting savings into income. “The Australians have the same worry about running out of money despite the fact that they are required to save for retirement,” John said. “As a result, they are requiring all plans in their national system to offer income options by 2024. In the United Kingdom, the House of Commons has recommended a similar solution. In Canada, we have seven major pension stakeholders calling for longevity risk pooling at a massive scale. In New Zealand, they have a triennial review of the KiwiSaver system, and retirement income solutions are on their agenda for the next meeting.” According to John, there is growing global interest in retirement income solutions built around managed payout funds. “Shell Oil has this kind of a mechanism for their employees in the Netherlands,” he observed. “It is basically an active investment fund with a high proportion of equities, but it also has a significant amount of countercyclical hedging investments to limit great losses during market downturns. Retail funds in the U.S. offer some of these features already.” John recommended U.S. policymakers consider promoting a three-pronged approach to retirement income. Workers could enter a managed payout fund starting at age 55 or 58. This would form the basis of their nondiscretionary retirement spending, and supplemental investment accounts could be used by those with sufficient means and with an interest in taking more investment risk. Finally, individuals would purchase a longevity annuity kicking in later in life. This could be structured as a qualified longevity annuity contract, or an individual could choose to delay annuitization, perhaps purchasing the annuity at age 75 with payments set to start at age 85. Another speaker on the panel, Moshe Milevsky, professor at the Schulich School of Business, York University, zoomed into the interesting topic of “tontines,” which are a type of historical annuity structure that was first put into well-documented practice as far back as the 1600s. Commonly, tontines were used by governments to fund wars or other foreign exploits, especially in France and the United Kingdom. “In these income schemes, the individual would give, say, 100 pounds to the government, and in return he would essentially get installment payments for life, with interest,” Milevsky explained. “The approach resembled an indexed annuity, fascinatingly. So, there has been a really deep history of all this and that shows how complex the problem is. Centuries ago, people had already developed very sophisticated systems of budgeting mortality and longevity risk against annuity payments, and systems to divide up shares of any profits or interests.” One unique feature of early tontines was that they were often structured as closed “syndicates,” meaning that once a tontine money pool started paying out income streams, the size of the income stream going to the individuals grew each time one member of the syndicate died. By the same token, payments stopped when the last syndicate member died. The practical effect of this was that the income streams from tontines tended to start out modest and then grow to be quite large for the select few people who survived longest among the syndicate membership. “The system basically had a sum of income that would stay the same each year, but it was being paid out to a shrinking group of people over time,” Milevsky said. “The winner at the very end got a huge income. At the end the principal is gone, importantly. It’s basically amortized.” This system would not be practical in the modern context, Milevsky said, because of the back-loaded nature of the payouts for any given individual in the tontine. However, modern “tontine theorists” have developed models that would address these issues and deliver smoother income streams for members. “We can contrast this approach against a standard lifetime income annuity. As more people pass away over time, the sum of the total payments for a group lifetime annuity actually goes down, but the payments are stable for individuals,” Milevsky said. “On the tontine side, it’s basically the opposite. I also like to point out that, in the 18th century, Adam Smith was writing in favor of tontines. Alexander Hamilton was another big fan of these.” On Milevsky’s analysis, “tontine thinking is more important than actually using them.” What he means is that tontines very clearly demonstrate that “mortality credits are to be thought of as an asset class.” “When we are pooling people’s longevity risk, mortality credits are an alpha. Not everyone likes to think about it this way, but it’s true,” he said. “What this means in practice is that, if you’re willing to put your money in the insurance pool and accept the risk that you’ll die early, you will get a much greater return should you live to your hoped-for point of longevity. The lesson is that we need to stop mixing up annuities as a topic with mortality credits as a topic. I’ve noticed that explaining the tontine first makes annuities shine in a new life. Annuities are tamer; the income stream is stable and you don’t have to worry about people knocking each other off to increase their own payments.” The final panelist on this topic was Michael Davis, head of defined contribution plan specialists for T. Rowe Price and a former deputy to Phyllis Borzi during her time at the head of the Employee Benefits Security Administration. “Annuities can play a meaningful role for many people, and it’s critical to explain there is a variety of vehicles that can be used,” Davis said. “Given the documented heterogeneity in retirement spending patterns, Americans should have the right to choose how they structure and spend their retirement income.” Offering a history lesson of his own, Davis pointed out that, until just the last five or 10 years, retirement plan sponsors were not very interested in keeping participant assets in their plans post-retirement. But this has evolved significantly and sponsors and participants are highly interested in in-plan income solutions. “We already see a clear trend that more and more dollars are being left in the plan,” Davis observed. “I think part of that is the conversation about fiduciary protections, and the interest among plan sponsors to achieve and maintain scale for positive pricing benefits. Given all this, the behavior of retirees is becoming an important point of focus for providers like us and for our clients. Some have argued that, because of Social Security, U.S. retirees are over-annuitized. We find this is true for only the very lowest earners. For the great many working Americans that is simply not true. A single solve for these different needs is not the right way to go, I should add.” Davis expects the retirement system will rapidly evolve to give greater access to systematic withdrawal programs, bond ladders, tontines, deferred and immediate annuities, and managed payout funds. “Our firm is focused a lot on managed payout funds and we are going to launch a retirement 2020 income fund this year,” Davis noted. “This will be a target-date product but it’s not a qualified default product. Participants will have to select into this fund within five years of retirement.” John Manganaro, Planadviser, April 18, 2019.
Many state and local pension plans have lowered their long-term investment return assumptions in the wake of the financial crisis. Such a change is generally viewed as a positive development for pension funding discipline, bringing assumptions more in line with market expectations and forcing plan sponsors to increase annual required contributions. In this case, however, the decline is actually due to lower assumed inflation, not a lower real return (that is, the return net of inflation). In a fully-indexed system where benefits fully adjust with inflation, a lower inflation assumption should actually have no impact on costs. At the same time, plans have changed their asset allocation, resulting in a higher expected real return, which – all else equal – lowers costs. Therefore, a quick assessment of these underlying assumption changes suggests that plans may have actually lowered their costs with the decline in the assumed return. But, public plan benefits are not fully indexed, so the real value of benefits increases as the inflation expectation drops, which increases plan costs. This brief explains the overall impact of these opposing dynamics and compares the net effect on costs with that produced by a lower real return assumption. The brief proceeds as follows. The first section documents the impact of declining inflation on assumed returns and explains why lower inflation has no impact on costs if benefits are fully linked to inflation. The second section shows that public plan benefits are not fully linked to inflation, so that a lower inflation assumption leads to higher real benefits and plan costs. The third section describes the increase in plans’ expected real rate of return, which lowers costs. The fourth section puts the pieces together – finding that plan costs have increased because the lack of full indexing dwarfs the impact of the higher real return. The increase, however, is substantially less than if plans had lowered their real return assumption. The final section concludes that it is important to identify the source of a decline in assumed returns because lower inflation and lower real returns have different effects on costs. The investment return expectations of public plans have steadily declined since 2001. Generally, a lower assumed return means greater contributions are needed to fund benefit promises. However, the decline in public pension return assumptions is due completely to lower expectations for general inflation, with the expected real return increasing slightly. Because public pension benefits are not fully indexed, lower inflation produces higher costs. At the same time, higher expected real returns lower costs. It is important to identify the source of a change in the assumed returns because changes to inflation and changes to real returns have very different effects on costs. While, on balance, lower inflation and a higher real return increased costs, the increase was much smaller than if the decline in the assumed return was due to a lower real return. Jean-Pierre Aubry, Alicia H. Munnell, and Kevin Wandrei, State and Local Pensions, Number 66, Center for Retirement Research at Boston College, June 2019.
He that rises late must trot all day.
Why is a pear called a pear when there is only one?
Don't judge each day by the harvest you reap but by the seeds that you plant. - Robert Louis Stevenson
On this day in 1997, Scientists announce the first human stem cells to be cultured in a laboratory using tissue taken from aborted human embryos.


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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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