1. HELPING NEAR-RETIREES STAY ON TRACK FOR RETIREMENT SECURITY:
The “Late Baby Boomer” generation--which includes those born between 1960 and 1965--was hit hard by the great financial crisis (GFC) and the COVID-19 recession. However, some of that vulnerability could be self-inflicted, Capital Group contends. At the cusp of retirement, a good number of these investors might have over-allocated to equities in a last-ditch attempt to fill the gap in their retirement savings--the exact opposite of what they should have done.
During a session presented by Capital Group, home of American Funds, at the 2021 virtual PLANSPONSOR National Conference (PSNC), Naomi Fink, retirement economist within Capital’s Institutional Analytics Group, noted that Late Boomers had saved less than previous generations at time of the GFC; they had an average defined contribution (DC) account balance of $29,963. “Why they saved less is a great mystery because of concerns about Social Security and the disappearance of DB [defined benefit] plans,” she said.
However, Fink said, the Center for Retirement Research at Boston College (CRR) found the lower savings came about because during the GFC, Late Boomers experienced job losses or had lower earnings.
“Job losses and lower earnings can affect retirement savings. One way the effect can be shifted is through a boost in earnings or by working longer,” she said. Fink calls job and earning status a person’s “human capital” and says instead of just trying to save as much as possible, Late Boomers can focus on boosting their human capital.
But another problem affecting the retirement savings of this generational group is incorrect investment decisions. “Anecdotally, they weren’t contributing during a job loss. Then they went back to work with lower wages, so to make up for lost time, they invested in equities,” Fink said. She said individuals at this age should be shifting from equities to bonds, and that is true even when a job loss has occurred.
“When there is a job separation, it often leads to lower earnings, and this downward motion of human capital doesn’t change,” Fink said. “They need to use effective strategies to make up for that.”
Enhancing Plan Design and Investments
To help improve plan design and investments not only for participants near retirement but for everyone in the plan, Chris Anast, senior retirement strategist with the Institutional Analytics Group at Capital Group, said automatic plan features, such as auto-enrollment and auto-escalation, are a great step. “Thinking of participants who are in similar situations now and those that might be going forward, it’s important to get people in the plan,” he said.
If plan sponsors use auto-enrollment, they should set it at a healthy default deferral rate, Fink said.
It’s also important to prevent money from coming out of the plan, Anast added.
Christina Elliott, executive director of the Ohio Public Employees Deferred Compensation Plan (Ohio DC), said the plan doesn’t include a loan program. However, in light of the pandemic, Ohio DC considered the Coronavirus Aid, Relief and Economic Security (CARES) Act and what it could adopt to help people through the COVID-19 crisis.
“We saw more unexpected emergency withdrawals than we’ve seen in the plan’s history,” she said. “There were not job losses with our employees, but with their families, and also some employees and their families had health issues due to COVID.”
To avoid having participants take money out of the plan, Fink suggested plan sponsors communicate about the potential consequences of loans and withdrawals and educate about the unexpected. She also suggested that plan sponsors implement a holistic financial wellness program.
“One thing that keeps recurring is those without emergency savings are more likely to take a withdrawal, so encouraging emergency savings, either through an employer or not, will help,” Fink said. “Similarly, education and aid with managing student loan and other types of debt will help participants avoid withdrawals [from retirement plans].”
In addition to the temptation to move assets from fixed income to equity investments, pre-retirees may face other investment temptations, Anast noted, citing as an example the GameStop incident in 2020, when the company’s stock price went through the roof after amateur traders in a Reddit forum invested in the stock to drive up the price. “Plan sponsors should educate participants about how to keep from falling for [these short-term spikes],” he said.
Elliott said Ohio DC thought it was important to communicate about the GameStop incident. “People don’t make the best decisions when in crisis,” she said. “We partnered with a company for AI [artificial intelligence], smart, ethical and specific customized messages about financial wellness. Outside investing and outside investing tools are not bad things, but if participants don’t understand the basics of finance, they can get into trouble.”
Financial wellness programs and communications help participants focus on what’s important, Elliott added.
She also said Ohio DC received some questions from participants about annuitizing part of their balances--an option the pandemic has brought to light as something to explore. But, for public employees in Ohio, she said, having pension plans and helping participants understand the benefits of those plans helps with managing investment risk.
Fink said asset allocation funds, such as target-date funds (TDFs), also help participants with investment decisions. “And sometimes they help people ‘do nothing,’ which is sometimes the best thing,” she said. Rebecca Moore, Planadviser, www.planadviser.com, June 25, 2021.
2. US ECONOMY GROWS 6.4% IN Q1, AND IT’S LIKELY JUST THE START:
The U.S. economy grew at a solid 6.4% rate in the first three months of the year, setting the stage for what economists believe may be the strongest year for the economy in about seven decades.
Growth in the gross domestic product, the country’s total output of goods and services, was unchanged from two previous estimates, the Commerce Department said Thursday, an acceleration from the 4.3% pace of the fourth quarter.
Economists believe that economic growth has continued to accelerate in the current quarter, which ends this month, as vaccinations become widespread and Americans eager to get outside are being welcomed by newly re-opened businesses. Surging activity from consumers is being fueled in part by nearly $3 trillion in financial support that the government has approved since December.
Additional economic data that emerged Thursday also points to a nation that has regained its footing quickly after being thwacked by a global pandemic, though jobless claims remain stubbornly above 400,000.
“This summer will be hot for the U.S. economy,” said Lydia Boussour, lead U.S. economist for Oxford Economics. “As the health situation continues to improve, consumers sitting on piles of savings will give into the urge to splurge on services and experiences they felt deprived of during the pandemic.”
Boussour forecast that GDP growth in the current April-June quarter will surge to an annual rate of 12% and growth for the entire year will come in at 7.5%. That would be the best annual performance since 1951.
Even economists whose forecasts for 2021 growth range from 6% to 7% believe growth this year will be the best since a 7.2% gain in 1984, when the U.S. was emerging from an extended and painful recession.
Economists believe growth this quarter will be enough to push GDP output above the previous peak reached at the end of 2019 before the pandemic struck and cut off the longest economic expansion in U.S. history.
The data released Thursday was government’s third and final look at first-quarter GDP, and arrived along side a separate report from the Commerce Department that showed May orders from U.S. factories for big-ticket manufactured goods rose for the 12th time in the last 13 months.
Orders for durable goods -- meant to last at least three years -- climbed 2.3% in May, reversing a 0.8% drop in April. That heated activity is taking place despite a backlogged supply chain and a shortage of workers.
Orders for aircraft shot up 27.4% last month after climbing 31.5% in April, the Commerce Department said. Excluding transportation orders -- which can bounce wildly from month to month -- durable goods orders rose 0.3% last month.
Factories anticipating a return to normalcy or better are ramping up operations to match demand as jobless claims continue to tick lower.
The number of Americans applying for unemployment benefits dropped last week as the job market continues to heal, albeit more slowly than many economists expected at this point in the recovery.
Jobless claims fell just 7,000 from the previous week to 411,000, the Labor Department said Thursday. While that is far from the rush to work that has been anticipated for some time now, weekly claims have fallen steadily this year from about 900,000 in January.
Even if job growth has not met most expectations, Americans are spending money and lots of it as summer kicks off.
Consumer spending, which accounts for more than two-thirds of economic activity, grew at a sizzling annual rate of 11.4% in first three months of the year, the Commerce Department said Thursday. It’s likely that some of that spending is being juiced by a round of $1,400 individual payments that were included in the $1.9 trillion support package Congress passed in March.
The first-quarter spending gain reflected increases in goods purchases, led by auto sales, and gains in spending on services, led by food services and travel accommodations, two areas that have benefited from the re-opening of the economy as vaccinations have increased.
Business investment grew at a strong 11.7% rate, better than the previous estimate of 10.8% growth, while government spending increased at a 5.7% rate, slightly below last month’s estimate of a 5.8% gain.The trade deficit grew in the first quarter, subtracting 1.5 percentage points from growth, as a recovering U.S. economy attracted rising imports while U.S. exporters struggled with weaker overseas demand. Martin Crutsinger, AP News, https://apnews.com, June 24, 2021.
3. POST-PANDEMIC US CONSUMER SENTIMENT CONTINUES UPWARD TREND:
The University of Michigan’s Consumer Sentiment Index in June increased to 85.5 from May’s final reading of 82.9, the second-highest level since the COVID-19 pandemic took hold in the U.S. in March 2020, Bloomberg and other news outlets reported on Friday (June 25). The index was below forecasts that predicted an average increase of 86.5, according to a Bloomberg survey of economists.
“When the pandemic first began, consumers were quite uncertain about their job and income prospects, but reported widespread declines in market prices for homes, vehicles and household durables,” Richard Curtin, director of the survey, said in the report. “Those favorable price references have dropped to the most negative in a decade, and job and income prospects have improved, but not quite as favorable as in the last few years of the prior expansion.”
Consumers surveyed also indicated an expectation that inflation would go up 4.2 percent over 2020, which is the second-highest level in 10 years. Long-term prices are expected to increase 2.8 percent over 3 percent in May.
The index for current conditions dropped to 88.6 from 89.4 in May, while the measure for expectations went up to 83.5, according to the survey, per Bloomberg.
“All of the June gains were among households with incomes above $100,000, and mainly in the way they judged the future economic outlook,” Curtin said, per Chain Store Age.
Consumers also indicated that they expected the economy to continue its post-pandemic recovery, and anticipated that unemployment numbers would continue falling off.
Personal income also dropped, aligning with the reduction in federal pandemic relief funding, according to the Friday (June 25) report from the Bureau of Economic Analysis (BEA). The numbers show signs of a rebounding economy and job market post-pandemic. PYMNTS, www.pymnts.com, June 25, 2021.
4. IRS ANNOUNCES ‘DIRTY DOZEN’ TAX SCAMS FOR 2021:
Americans urged to watch out for tax scams during the pandemic. The Internal Revenue Service today began its “Dirty Dozen” list for 2021 with a warning for taxpayers, tax professionals and financial institutions to be on the lookout for these 12 nefarious schemes and scams.
This year’s “Dirty Dozen” will be separated into four separate categories: pandemic-related scams like Economic Impact Payment theft; personal information cons including phishing, ransomware and phone ‘vishing’; ruses focusing on unsuspecting victims like fake charities and senior/immigrant fraud; and schemes that persuade taxpayers into unscrupulous actions such as Offer In Compromise mills and syndicated conservation easements.
The agency compiled the list into these categories based on who perpetuates the schemes and who they impact. In addition to today’s scams the IRS will highlight the other schemes over the next three days.
The IRS urges all taxpayers to be on guard, especially during the pandemic, not only for themselves, but also for other people in their lives.
"We continue to see scam artists use the pandemic to steal money and information from honest taxpayers in a time of crisis," said IRS Commissioner Chuck Rettig. "We provide this list to alert taxpayers about common scams that fraudsters use against their victims. At the IRS, we are dedicated to stopping these criminals, but it’s up to all of us to remain vigilant to protect ourselves and our families."
Taxpayers are encouraged to review the “Dirty Dozen: list in a special section on IRS.gov and should be alert to these scams during tax filing season and throughout the year.
Economic Impact Payment theft
A continuing threat to individuals is from identity thieves who try to steal Economic Impact Payments (EIPs), also known as stimulus payments. Most eligible people will get their payments automatically from the IRS. Taxpayers should watch out for these tell-tale signs of a scam:
- Any text messages, random incoming phone calls or emails inquiring about bank account information or requesting recipients to click a link or verify data should be considered suspicious and deleted without opening.
- Be alert to mailbox theft. Frequently check mail and report suspected mail losses to Postal Inspectors.
- Don’t fall for stimulus check scams. The IRS won’t initiate contact by phone, email, text or social media asking for Social Security numbers or other personal or financial information related to Economic Impact Payments.
Taxpayers should remember that the IRS website, IRS.gov, is the agency’s official website for information on payments, refunds and other tax information.
Unemployment fraud leading to inaccurate taxpayer 1099-Gs
Because of the COVID-19 pandemic, many taxpayers lost their jobs and received unemployment compensation from their state. However, scammers also took advantage of the pandemic by filing fraudulent claims for unemployment compensation using stolen personal information of individuals who had not filed claims. Payments made on these fraudulent claims went to the identity thieves.
The IRS reminds taxpayers to be on the lookout for receiving a Form 1099-G reporting unemployment compensation that they didn’t receive. For people in this situation, the IRS urges them to contact their appropriate state agency for a corrected form. If a corrected form cannot be obtained so that a taxpayer can file a timely tax return, taxpayers should complete their return claiming only the unemployment compensation and other income they actually received. See Identity Theft and Unemployment Benefits for tax details and DOL.gov/fraud for state-by-state reporting information.
Additional protection to help protect taxpayers
IRS makes IP PINs available to all taxpayers – adding another layer of security
To help taxpayers avoid identity theft, the IRS this year made its Identity Protection PIN (IP PIN) program available to all taxpayers. Previously it was available only to victims of ID theft or taxpayers in certain states. The IP PIN is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayer’s personally identifiable information.
Using an IP PIN is, in essence, a way to lock a tax account. The IP PIN serves as the key to opening that account. Electronic returns that do not contain the correct IP PIN will be rejected and paper returns will go through additional scrutiny for fraud.
The IRS and its Security Summit partners in the states and the private-sector tax community have made changes to help reduce identity theft-related refund fraud that are noticeable to the average person filing a return:
- Tax software providers agreed to strengthen password protocols. This is the first line of defense for these companies to make sure their products are secure.
- State tax agencies began asking for taxpayers’ driver’s license numbers as another way for people to prove their identities.
- The IRS limited the number of tax refunds going to financial accounts or addresses.
- The IRS masked personal information from tax transcripts.
Multi-factor authentication can help
It is important for taxpayers filing in 2021 to know that online tax software products available to both taxpayers and tax professionals will contain options for multi-factor authentication. Multi-factor authentication allows users to better protect online accounts. One way this is accomplished is by requiring a security code sent to a mobile phone in addition to the username and password used to access the account.
The IRS and its Security Summit partners have formed an information sharing center that allows them to quickly identify emerging scams and react to protect taxpayers. The Identity Theft Tax Refund Fraud Information Sharing and Analysis Center is now operational.
Also, check out our recent A Closer Look column for more on how to be vigilant about tax scams. Visit Identity Theft Central and Tax Fraud Alerts for more information on how to protect against or report identity theft or fraud. IRS Newswire, IR-2021-135, www.irs.gov, June 28, 2021.
5. PSNC 2021; HEALTH VS. FINANCIAL DECISIONMAKING:
“As health care costs rise, there is more overlap between health decisions and financial decisions,” said Stan Dorsey, director of health solutions thought leadership at Fidelity Investments, during a session presented by Fidelity at the 2021 virtual PLANSPONSOR National Conference (PSNC).
Tamara Sims, director of behavioral science health solutions thought leadership at Fidelity, said that when looking at a person’s total well-being, one can’t just look at the person’s financial situation to know how to help them maintain stability over their lifetime. There are other factors to consider, such as health care.
“There are lots of good rules of thumb when making financial decisions, but when it comes to health care, it’s personal and becomes more complicated,” Sims said. “We’ve seen a rise in health care consumerism as individuals are not just letting health treatment decisions rest in the hands of physicians.”
She added that Fidelity research shows most individuals score low on health care literacy, so there’s an opportunity for employers to provide employees with decision support tools and to educate them about how to plan for health care and choose high-quality care.
“Knowledge helps people make the right choices, and confidence motivates them to make any choice at all,” Dorsey said.
Fidelity research also looked at preferences in health care and financial decisionmaking. Dorsey said the most engaged decisionmakers like to have control of the situation (i.e., take charge of decisions), prefer high-quality versus low cost, and trust employer financial and health information. They are also willing to take financial risks and take and adhere to high-quality advice.
“Trust in information sources, willingness to adhere to advice and [high] risk tolerance all lead to more confidence and better decisionmaking,” Dorsey said. “If employers know this, they can use it to help employees.”
He suggested that education and communication about benefits should promote increased knowledge, be consistent and encourage the use of benefits provided. In addition, employers should share representative employee experiences of challenges and successes when making health care and financial decisions and enlist managers to promote benefits. “Management is the most effective tool when it comes to affecting employee behavior,” Dorsey said.
“Employees who are savvy with both health and savings behaviors have better HSA [health savings account] behaviors--they contribute more and invest their HSA dollars,” Sims said. Rebecca Moore, PLANSPONSOR, www.plansponsor.com, June 25, 2021.
6. IRS AGAIN EXTENDS TEMPORARY RELIEF FROM ‘PHYSICAL PRESENCE’ REQUIREMENT FOR CERTAIN RETIREMENT PLAN ELECTIONS:
The IRS issued Notice 2021-40 (the Notice) on June 24 that provides a 12-month extension (until June 30, 2022) of the temporary relief from the requirement that certain retirement plan elections be witnessed – in person – by a plan representative or a notary public. The IRS originally issued this temporary relief in the early days of the COVID-19 pandemic lockdown with such relief extending through the end of 2020. The IRS then extended the temporary relief through June 30, 2021. The Notice again extends this temporary relief through June 30, 2022.
As described in more detail in an earlier blog post, the Internal Revenue Code and accompanying regulations provide that certain retirement plan elections (and, in particular, elections that require the consent of a participant’s spouse) must be witnessed in the physical presence of a plan representative or notary public. For obvious reasons, this physical presence requirement was extremely difficult to satisfy during the COVID-19 pandemic lockdown, and the relief issued by the IRS temporarily waived the physical presence requirement if certain requirements were met. For example, the temporary relief permitted live audiovisual notarizations undertaken in accordance with the requirements of applicable state remote notary laws.
Although COVID-19 pandemic restrictions are being relaxed across the country, this most recent extension of the temporary relief in the Notice allows plans and participants to continue to utilize remote notarizations in lieu of physically appearing before a plan representative or notary public. In addition, the Notice includes a request for comments from potential stakeholders (by September 30, 2021) on whether the temporary relief should be made permanent or whether other changes may be appropriate, so the Notice also provides the IRS with more time to consider permanent changes to the physical presence requirement. Matthew H. Hawes, R. Randall Tracht and Hengyang Ding, Morgan Lewis, www.morganlewis.com, June 25, 2021.
7. STATE, LOCAL GOVERNMENTS MAY HAVE TO PAY MORE FOR PUBLIC PENSION PLAN:
The board that oversees the Mississippi Public Employee Retirement System is pondering whether to increase the amount paid into the pension plan by state agencies, local governments and education entities.
The issue of whether to increase what is known as the employer contribution rate to ensure the long-term financial viability of the public pension plan was discussed recently by the Administrative Committee of the Board of Trustees of PERS, but no action was taken.
But Shelley Powers, a spokesperson for PERS, said the issue “most likely will be revisited” during the Aug. 23-24 meeting or during a special-called July meeting.
The increase in the contribution rate could cost state and local governments an additional ten of millions of dollars annually.
A recent report by the Legislature’s Performance Evaluation and Expenditure Review Committee highlighted the possibility of the employer contribution being increased. The report pointed out that because of multiple factors some warning indicators were “flashing red.”
The system had a full-funding ratio of 58.8% last June, down from 61.3% the previous June. That means that it has almost 59% percent of the assets needed to pay the benefits of all the people in the system, ranging from the newest hires to those already retired. Theoretically it is recommended that a system has a funding ratio of about 80%.
Most state, city and county employees and public educators are in the system that currently has about 325,000 members, including current employees, retirees and others who used to work in the public sector but no longer do. In total, about 10% of the state’s population is in the system to some extent.
Under the state Constitution, the Legislature cannot block a decision of the Board of Trustees to increase the amount paid by state agencies, local governments and education entities into the pension plan. If the Legislature opted not to provide the extra money to pay for any increase, it would just come out of the amount the Legislature budgeted for the agency, taking money from other programs.
In 2018, the board increased the contributions from employers from 15.75% of payroll for each employee to 17.4%. That small increase cost state and local governments, including education entities, an additional $100 million annually.
Traditionally, the state does not help local governments funds their share of the retirement system.
Funding the increase, minus the local government’s share, cost about $76 million in 2018 -- $18.1 million for state agencies, $15.9 million for universities, $37.4 million for kindergarten through 12th grade and $4.9 million for community colleges.
Employees in the system pay 9% of their salary toward their retirement. It was increased from 7.25% in the late 2000s. The average yearly benefit from the plan is about $24,400.
In June 2020, according to PERS’ actuary, the plan’s funding ratio was projected to be at 67.6% by 2047 compared to a projection of 83.2% by 2047 made the previous year. The decline in the funding ratio was attributable to multiple factors, including “less than expected revenue gains.” The system has total assets of $28.2 billion. Bobby Harrison, Mississippi Today, https://mississippitoday.org, June 25, 2021.
8. NEW JERSEY PENSION PLAN TO GET $6.9 BILLION UNDER BUDGET BILL:
New Jersey's General Assembly and Senate approved a $46.4 billion budget for the fiscal year starting July 1, including just over $6.9 billion for the state's pension system.
The budget bill, passed Thursday, now goes to Gov. Phil Murphy, who had requested a $6.4 state pension contribution -- a combination of general revenue funds and proceeds from the state lottery -- for the upcoming fiscal year. The state constitution requires enactment of a new fiscal year budget by July 1. The current fiscal year ends June 30.
Legislators voted for an additional $505 million for the pension system in a proposed fiscal 2022 budget that was helped by higher than expected tax receipts and federal aid for COVID-19 relief. The $46.4 billion budget bill is 3.6% higher than Mr. Murphy's original $44.8 billion budget proposal.
In February, the governor proposed the $6.4 billion state contribution, the first time since 1996 that the state would make its full annual actuarial determination. In recent years, the state has been making annual payments to the pension system through increasing increments of 10 percentage points to eventually meet the goal of 100% annual actuarially determined contributions.
For the fiscal year ending June 30, the anticipated $4.7 billion contribution represents 80% of the actuarially determined contribution. For the upcoming fiscal year, Mr. Murphy said in February that he wanted to accelerate the state's contribution to 100% vs. the expected 90% of actuarially determined contribution.
For several years, the state's contribution has relied on lottery receipts, with the state counting on about $1 billion annually.
For the fiscal year ended June 30, 2020, lottery receipts were $937 million, reflecting the impact of the coronavirus pandemic. However, for the 10 months ended April 30, lottery proceeds were $905.6 million, up 17.8% for the same period in the previous fiscal year.
The New Jersey Pension Fund, Trenton, had assets of $90.7 billion as of April 30, according to the latest available data. Robert Steyer, Pension & Investments, www.pionline.com, June 25, 2021.
9. ALASKA INCREASES TARGETS TO PRIVATE EQUITY, REAL ASSETS TO 14%:
Alaska Retirement Management Board, Juneau, increased its target allocations to private equity and real assets to 14% each for the three defined benefit plans it oversees.
The board approved the staff's recommendation to increase the targets to private equity to 14% from 12% and real assets to 14% from 13% at its June 18 meeting, board liaison officer Alysia D. Jones confirmed in an email.
The staff recommended upping the targets to provide additional real returns, board meeting materials show.
The target changes were funded by dropping the targets to domestic equities to 27% from 28%, fixed income to 21% from 22%, and international equities to 18% from 19%.
The target to opportunistic strategies remains unchanged at 6%. No managers will be terminated as a result of the target changes.
The changes affect the Public Employees' Retirement System's $20.7 billion pension plan, the Teachers' Retirement System's $10 billion pension plan and the $272 million Judicial Retirement System.
The board oversees a total of $41 billion in state defined benefit and defined contribution assets. Rob Kozlowski, Pension & Investments, www.pionline.com, June 28, 2021.
10. FOR THOSE WHO LOVE WORDS - “A LOT” vs. “ALOT” vs. “ALLOT”: ARE ALL OF THESE CORRECT?:
There is plenty to say about the difference between "a lot" and "allot," and where "alot" comes in as well. Learn about their differences and uses here.
11. QUOTE OF THE WEEK:
“Don’t count the days, make the days count.” -Muhammad Ali
12. TODAY IN HISTORY:
On this day in 1908, "SOS" (· · · – – – · · ·) distress signal becomes the worldwide standard for help.
13. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.