1. PUBLIC PENSION FUNDING RISES TO 82.6%, HIGHEST LEVEL FOR INDEX:
The overall funding ratio of the 100 largest U.S. public pension plans rose to 82.6% as of June 30 from 79% three months earlier, according to the Milliman 100 Public Pension Funding index.
The funding ratio is the highest recorded since the inception of the index, according to a news release Wednesday. It is also the first time since Milliman began the index that the estimated deficit fell below $1 trillion, to $975 billion as of June 30 from $1.17 trillion as of March 31.
During the quarter ended June 30, Milliman estimates the public pension plans had an aggregate investment return of 4.26%, with an estimated range of 2.54% to 6.75%. For the 12 months ended June 30, the annualized return was 20%.
"This was a banner quarter for public pensions, though the individual plans in our study saw a range of investment returns," said Rebecca A. Sielman, principal and consulting actuary at Milliman and author of the Milliman 100 Public Pension Funding index, in the news release. "In the coming months, plan sponsors will begin to understand the extent to which the pandemic has affected liabilities, including higher death rates and the impact of furloughs on benefit accruals, pay levels and contributions from active members."
As a result of the aggregate investment returns, estimated assets rose to $4.62 trillion from $4.39 trillion as of March 31, while estimated liabilities also rose slightly to $5.597 trillion from $5.555 trillion.
Of the 100 plans measured by the index, 39 plans had funding ratios above 90%, while 17 plans remained below 60% funded. A total of nine plans had ratios between 60% and 70%, 14 plans were between 70% and 80% and 21 plans were between 80% and 90%. Rob Kozlowski, Pension & Investments, www.pionline.com, July 21, 2021.
2. AUDITOR GENERAL WARNS MUNICIPALITIES ABOUT USING RELIEF FUNDS ON PENSIONS:
Auditor General Timothy L. DeFoor said audits show municipalities in 11 counties failed to make required employer contributions to their employee pension plans, prompting him to again warn local governments that they cannot use federal COVID relief funds to catch up on missed payments.
DeFoor said Bristol Borough in Bucks County tops the list of recent audits with such findings. The borough owes more than $757,836 in required contributions, including interest, to its police and employee pension plans for 2019 and 2020.
“My audit team is seeing a troubling rise in the number of municipalities that are failing to fully fund their employee retirement plans as state law requires,” DeFoor said. “I’m again warning municipalities that they cannot use federal COVID relief funds provided under the American Rescue Plan to catch up on past pension debts.”
On June 14, Auditor General DeFoor released audits showing the City of Chester in Delaware County owes more than $34 million in back employer contributions to its three employee pension plans. He shared these audits with the court-appointed receiver that is overseeing the city’s financial recovery.
DeFoor added that municipalities that do not make the employer contributions required by law run the risk of having future state pension aid withheld.
The Department of the Auditor General audits municipal pension plans that receive state aid to ensure the plans are being administered in accordance with state law.
In 2020, the Department of the Auditor General distributed a total of $324.74 million in state pension aid to 1,483 municipalities and regional departments to support pension plans covering police officers, paid firefighters and non-uniformed employees. The funds are generated by a 2 percent tax on fire and casualty insurance policies sold in Pennsylvania by out-of-state companies. Office of the Pennsylvania Auditor General, bctv.org, July 16, 2021.
3. EXTRA PENSION PAYMENTS MEAN BIG SAVINGS FOR CONNECTICUT NOW - AND DOWN THE ROAD:
While Connecticut wiped out $1.25 billion of its massive, long-term pension debt this month, it still has decades to go to cover the remainder -- nearly $40 billion.
But the one benefit will be felt right away. The supplemental payment frees up $110 million Connecticut now can spend annually on something other than its oppressive pension obligations, according to a new analysis.
“This is real relief that will both spare future generations from a legacy of pension debt and give short-term budget relief to taxpayers,” said Comptroller Kevin P. Lembo, citing new projections for the state employees’ pension system from Cavanaugh Macdonald Consulting of Kennesaw, Georgia, the fund’s actuaries.
Lembo pressed legislators for several years starting in 2015 to increase savings toward the huge debts Connecticut amassed over more than 70 years in its separate pension systems for state employees and for municipal teachers.
The legislature, led by Sen. John Fonfara, D-Hartford, responded in 2017 by creating the “volatility adjustment,” which prohibits the state from spending a portion of its income tax receipts tied to capital gains and other investment earnings -- a source that often fluctuates greatly from year to year.
The stock markets generally have performed well since 2018, resulting in a big savings.
Since then, Connecticut has amassed a rainy day fund that has reached its legal maximum at 15% of annual General Fund spending, or just over $3 billion.
Any surplus beyond that level must, according to the system adopted in 2017, be deposited into either the two major pension funds.
Connecticut entered the 2020-21 fiscal year -- which wrapped on June 30 -- with almost $41 billion in total pension debt.
The just-completed budget year included more than $2.6 billion in required payments into the two pensions. Many of those dollars, however, will go into benefits for retirees, rather than reducing the debt.
But when it comes to the $1.25 billion left over from the just-ended fiscal year -- most of that surplus stems from the volatility adjustment -- it will all go toward reducing pension debt.
New projections from Cavanaugh Macdonald project this $1.25 billion -- which state Treasurer Shawn Wooden deposited into the state employees’ pension fund -- will add $2.75 billion in value to that system over the next 25 years. [The pensions’ assets are invested in stocks, bonds and other securities and add value that way.]
That translates into $110 million in added value per year, according to the analysis.
“It was a big, difficult change, but now we’re seeing the reward of coming together to do hard things,” Lembo said. “There’s a lesson to be learned from that.”
“It now remains our job as state leaders to stay the course and pave the way towards a sustainable economic recovery that reaches everyone across our state, especially those who continue to hurt as we recover from the effects of the pandemic,” Wooden said.
State officials and private policy groups long have noted the annual payments on those obligations gradually have consumed resources previously earmarked for education, health care, municipal aid, transportation and other priorities.
About 40% of the state’s budget in 1992 -- the first fiscal year after the state income tax was enacted -- was dedicated to education, health care and other programs that affect children, according to Connecticut Voices for Children, a New Haven-based public policy and research group. Now the ratio now is closer to 30%.
Sen. Cathy Osten, D-Sprague, who co-chairs the Appropriations Committee, said recently that legislators hope to be able to shift more than $110 million per year in future budgets away from pension debt and into other programs.
For example, if the new $46.4 billion budget that Gov. Ned Lamont and the General Assembly enacted for the next two fiscal years runs as projected by nonpartisan analysts, Connecticut could be poised to make another $2.3 billion in supplemental pension fund payments by mid-2023.
The impact of those potential contributions hasn’t been calculated yet. But Osten has estimated this could create another $100 million to $200 million in annual savings on pension contributions -- depending on how the stock markets fare over the next two years. Keith M. Phaneuf, The Connecticut Mirror, http://www.ctmirror.org, July 16, 2021.
4. GIVING EMPLOYEES THE FINANCIAL WELLNESS HELP THEY WANT:
Employees are expressing a need for financial wellness help.
A Franklin Templeton survey found that while workers today place nearly equal importance on mental (81%), physical (80%) and financial (76%) health, they feel least in control of their financial health (55%) as compared to physical (62%) and mental (58%) health.
Nathan Black, vice president of consumer-driven health at Voya Financial, notes that the coronavirus pandemic has exacerbated financial insecurities among the employed and the unemployed. “The pandemic has overall heightened that focus, where people are realizing that having financial security is really critical in terms of insulating them over the shocks we’ve seen in the past 18 months,” he explains.
Many respondents in the Franklin Templeton study said they struggle to find a holistic view of their financial picture, with 61% indicating they need to consult many sources to get an overall view of their finances, and 51% stating it is too complicated to integrate all their financial information and goals into a single picture. Additionally, 70% say they would like a “Fitbit-like program for their finances” to easily track everything in one place.
As a result, more employees than ever are asking their employers for financial well-being benefits, including incentives. Three out of four employees in the study said they want their workplace to provide more resources to help them with their overall financial well-being, and 79% said they believe their employer should provide incentives for good financial habits, with 78% saying the same about incentives for good health habits.
“As the Franklin Templeton survey shows, employees want their employers to provide more resources that tie mental, physical and financial well-being together to help them improve their overall well-being,” says Christian Mango, president of Financial Fitness for Life. “They acknowledge that financial well-being is not just about money, but is also about their health and lifestyle. Employees want help visualizing their long- and short-term goals throughout each phase of the employee lifecycle.”
Technology and Guidance to Increase Personalization
Mango encourages employers to consider hiring a financial coach that suits employee needs and to use a single technology platform for all benefits. “If you are looking for an approach that truly engages a large percentage of the employee base rather than simply checking the box, then we know that the only effective way to do that is through a combination of a well-being/financial benefits coupled with the right technology,” he says.
As technology evolves, more participants are demanding access to personalization features on a web or mobile platform, especially when it comes to dealing with their finances. The Franklin Templeton study found 73% of employees expect financial management apps and programs to use their information to suggest appropriate resources, while 62% say that unless they are receiving personalized recommendations, financial education is not helpful to them.
Mango says curated messaging, content and action steps are vital to expanding financial wellness among employees. Using a well-being or financial coach will also build participants’ relationships and trust, as well as offer an accountability partner throughout their financial journey, he says.
Jordan Feldman, co-founder and CEO of Rightway, says he believes providing access to benefits without any guidance fails employees.
“This is where technology in addition to expert, human support comes in,” he says. “By providing real-time responses at the touch of a button, care navigators streamline the process for employees, making the end result much smoother, aligning with their expectations as consumers.”
Financial Freedom Over Retirement
Concerns about a lack of financial resources and emergency savings accountsintensified throughout the pandemic. Now, according to Franklin Templeton, employees are learning from their experiences and prioritizing financial freedom over retirement. Eighty percent of respondents in the study described the traditional idea of retirement as “no longer accurate” for most people’s expectations or experiences. Three-quarters also signified a large difference between their future financial goals and plans now compared with five years ago.
Employees are shifting their interests to financial freedom not because they don’t care about their retirement anymore, but because financial freedom is more empowering, Mango says. “It allows employees to make choices about their long- and short-term goals,” he notes.
However, a Voya study found employees are focusing on their retirement more because of the pandemic. That study found six in 10 Americans noted the pandemic has encouraged them to plan for retirement.
“There is an understanding that there are multiple ways to optimize spending,” says Black. “There is more of an emphasis now on all of the things you should be doing in order to improve financial wellness.”
Instead of offering siloed approaches, Black encourages employers to provide holistic benefits that emphasize personalization and financial limits. “The push that we’ve been focused on is providing really broad-based support that takes into account financial constraints that the individual has.”
Instead of pinpointing one benefit such as retirement or health care, Black foresees a move that will encourage interaction between all benefit offerings. Case in point--using a health savings account (HSA) for expenses in retirement. “As we think about changing a health insurance election, oftentimes we see people free up several hundreds of dollars, and often it’s better for them to reallocate that into an HSA or into a retirement plan,” Black says.
Feldman expresses a similar viewpoint, saying more employers are using health care to encourage retirement savings and spending reductions among participants, as health costs go hand-in-hand with financial freedom.
“Surrounding plan members with the right resources and support to make better care choices--high-quality and cost-effective providers--lowers their yearly health care spend,” he says. “Many times, employees have little understanding of what a service will cost or why they are being charged, [but] education and advocacy can be provided by an expert who understands the ins and outs of the health care system.” Amanda Umpierrez, PLANSPONSOR, www.plansponsor.com, July 21, 2021.
5. WHY CLIMATE CHANGE THREATENS YOUR RETIREMENT SAVINGS:
As climate change worsens extreme weather events like the record-breaking heat in the Pacific Northwest last month, another concern looms -- that the impact on companies from global warming could incinerate people's retirement savings.
Pensions and 401(k) plans are "vulnerable," along with the rest of the global economy, to climate risks, the Government Accountability Office told Congress in a recent report that looked at the potential threat to federal employees. And costs from disasters such as drought, wildfires, flooding -- as well as the long-term expense of shifting from fossil fuel to renewable energy -- can boost corporate and broader economic losses, the agency warned.
People are starting to "really make the link to saying, 'As I think about this, is my retirement portfolio at risk?'" Emily Kreps, global director of capital markets for CDP, a nonprofit group that tracks climate information for investors, told CBS MoneyWatch.
Roughly two-thirds of major global companies owned buildings, plants or other assets "at high risk of physical climate change impacts," according to a 2020 analysis from Trucost, an affiliate of S&P Global Market Intelligence. The greatest risks come from wildfires, water shortages, heatwaves and hurricanes, according to the research firm.
Some sectors, like fossil fuel companies, are at "heightened risk," according to GAO. Annual investment returns from the coal, oil and gas industry could each drop about 9% every year through 2050 under one scenario, the agency notes, citing a 2019 report led by advisory firm Mercer. And that assumes global temperatures don't rise by more than 2 degrees Celsius, as some scientists fear it might.
Utility companies' annual investment returns may decline 3%, according to the report, while renewable energy, like solar, could see a rise of up to 3%. Big players that sell consumer staples, such as food, beverages and household products are also vulnerable to extreme weather given rising concerns about access to water and risks to crops.
Climate Change - Mother of all risks
Investors increasingly focusing on climate change not only because of the heightened risks, but also because of the opportunity to market new products. Large private money managers like BlackRock are adding "Environmental, Social and Governance" (ESG) funds to their portfolio lineups to meet surging investor demand. ESG mutual fund and ETF investments rose to $51 billion in 2020, up almost tenfold since 2018, according to Morningstar.
Concern over climate change is now growing in a way that wasn't as common even five years ago, Jon Hale, director of ESG strategy at Morningstar, told CBS MoneyWatch.
"You see it both in terms of actual events that people can relate to, whether you're a worker with a retirement plan or whether you're an asset manager that runs a fund. That's one thing," Hale said. "The other is just the growing, growing momentum for regulation of carbon emissions."
In the U.S., professional money managers in 2019 used sustainable investing strategies, including those tied to climate, to manage one of every three dollars -- some $17 trillion in assets like mutual funds and ETFs, according to a U.S. SIF Foundation report.
By contrast, accurately estimating the potential impact of climate on retirement portfolios in dollars and cents is hard. That's because it involves making complicated assumptions about potential environmental regulations, consequences like sea level rise and the effects of extreme weather on physical infrastructure.
"It's an enormously complex issue," Hale said. "There's just no way you could say that ... professional investors have a handle on it or that it's priced into the market."
A need for better disclosure
Another impediment: Despite growing awareness of the potential climate impact on companies, for now there are no standards about exactly how businesses should quantify that threat and to what extent they need to disclose such "material risks" to the U.S. Securities and Exchange Commission. The agency is now considering adding a rule mandating climate risk disclosure for companies.
Unlike private money managers, the government board overseeing federal employee portfolios, called the Thrift Savings Plan, uses a "passive" investment strategy -- mostly putting people's money in index funds rather than actively seeking out specialized funds like ESG mutual funds or ETFs. The TSP is expected to allow individual investors to access a "mutual fund window" starting in 2022 that lets employees make some choices, including ESG funds.
Under current law, the TSP is not allowed to direct investments to specific companies or exercise voting rights to voice an opinion. Yet it operates the largest planned benefit plan in the U.S. with more than $700 billion assets for 6 million participants.
"With appropriate education, individuals in that plan could potentially redirect their investments to [account for] climate risks, but again that's throwing it all on the shoulders of individual workers who aren't necessarily investment experts," Hale said.
The wide array of what companies report -- or don't report -- can make evaluating risk confusing even for professionals, he added.
Planning for disaster
Climate change doesn't post a threat only to investment funds meant to safeguard and grow retiree savings. The value of real estate -- typically the single biggest investment Americans make-- is also affected by flooding, drought and other extreme weather exacerbated by global warming.
Homeowners can expect to pay out $20 billion this year tied to flooding alone, while insurance premiums are expected to rise along with sea levels, the nonprofit First Street Foundation found.
Residents affected by a natural disaster often see a decline in credit scores, are more liable to fall behind on bills and can experience a cascade of financial consequences, including bankruptcy and homelessness, an Urban Institute analysis found.
Financial experts advise retirees and those nearing retirement to consider whether they live in a flood plain, tornado or hurricane alley, or drought-prone area. That could involve taking actions to shore up a property, like putting a house on stilts or rebuilding a roof, or even moving to a safer area, said economist Olivia S. Mitchell, director of the Boettner Center for Pensions and Retirement Security at the University of Pennsylvania's Wharton School.
"This is a highly disruptive set of events to plan for," Mitchell told CBS MoneyWatch. Rachel Layne, MoneyWatch, www.cbsnews.com, July 15, 2021.
6. THE PROS, CONS OF EARLY RETIREMENT PLAN ROLLOVERS:
Should you withdraw and reinvest your retirement plan money while you are still on the job?
Did you know you may be able to take your 401(k), 403(b) or 457 plan and roll it into another type of retirement account while you are still working? Let’s look at how these rollovers can happen and the pros and cons of making them.
To start, some basics. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before age 59½, a 10% federal income tax penalty commonly applies. In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach age 72, you must begin taking required minimum distributions.
Now, the fine print. You may be able to take a distribution from your qualified, employer-sponsored retirement plan while still working, via an in-service non-hardship withdrawal. This is done by arranging a direct rollover of these assets to an Individual Retirement Account (IRA) in order to potentially avoid both the 10% penalty and the 20% tax withholding in the process. It’s important to note that this option is only available if allowed by your employer.
It may be smart to speak to your financial professional before making any changes.
Generally, distributions from traditional IRAs must begin once you reach age 72. The money distributed to you is taxed as ordinary income. When such distributions are taken before age 59½, they may be subject to a 10% federal income tax penalty.
The criteria for making in-service non-hardship withdrawals can vary. Some workplace retirement plans simply prohibit them. Others permit them when you have been on the job for at least five years or when assets in your plan have accumulated for at least two years or you are 100% vested in your account.
Weigh the pros and cons. Who knows if your reinvested assets will perform better in an IRA than they did in your company’s retirement plan? Only time will tell. Right now, you can put up to $7,000 into an IRA annually, if you are age 50 or older. The limit on annual additions, however, is much more impressive at $58,000 for 2021. Lastly, if your employer matches your retirement plan contributions, getting out of the plan may mean losing future matches.
This information should not be construed by any client or prospective client as the rendering of personalized investment advice. All investments and investment strategies have the potential for profit or loss, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed in this material, will be profitable or equal any historical performance levels. Investment strategies such as asset allocation, diversification or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Any target referenced is not a prediction or projection of actual investment results and there can be no assurance that any target will be achieved. Stacy Bush, Valdosta Daily Times, www.valdostadailytimes.com, July 18, 2021.
7. IRS IMPROVES SERVICES TO TAXPAYERS WITH DIGITAL AUTHORIZATIONS AND LAUNCH OF NEW TAX PRO ACCOUNT:
The Internal Revenue Service today launched a new feature that will give taxpayers digital control over who can represent them or view their tax records, a groundbreaking step in the agency's expansion of electronic options for taxpayers and tax professionals.
The new feature, one of many recent enhancements to the Online Account for individuals, will allow individual taxpayers to authorize their tax practitioner to represent them before the IRS with a Power of Attorney (POA) and to view their tax accounts with a Tax Information Authorizations (TIA).
"The ability for taxpayers to connect online with their tax professional is a groundbreaking step for the IRS," said Chuck Rettig, IRS Commissioner. "This is the first, basic step toward a more fully integrated digital tax system that will benefit taxpayers, tax professionals and the IRS."
As of today, tax professionals may go to the new Tax Pro Account on IRS.gov to digitally initiate POAs and TIAs. These digital authorization requests are simpler versions of Forms 2848 and 8821.
Once completed and submitted by the tax professional, the authorization requests will appear in the taxpayers' Online Account for their review, approval or rejection and electronic signature. Because the taxpayers' identities already are verified at the time of login, they simply check a box as their signature and submit the authorization request to the IRS.
A key benefit is the completed digital authorization, if accurate, will go directly to the Centralized Authorization File (CAF) database and will not require manual processing. Most requests will be immediately recorded and appear on the list of approved authorizations in the taxpayer's Online Account and the tax professional's Tax Pro Account. Some authorizations may take up to 48 hours. Tax professionals may then go to e-Services Transcript Delivery Service to see the taxpayer's records.
This new digital authorization option will be a much faster process. It will allow the IRS to reduce its current CAF inventory and to focus on authorization requests received through fax, mail or the Submit Forms 2848 and 8821 Online – all of which require IRS personnel to handle.
To connect with their tax professionals, taxpayers either login to their Online Account using their IRS username and password or they must create an account after passing a one-time identity verification process. Taxpayers who cannot validate their identities cannot use this option, and their tax professional must use the fax, mail or online submission process. However, the IRS will be announcing a new process for this application later this year.
Tax professionals should use their IRS usernames and passwords to access the Tax Pro Account or create an account after verifying their identities.
This initial launch of the Tax Pro Account represents the first release of the tool. Over time, additional functionality will be added for taxpayers and tax professionals that will increase the options for electronic interactions.
Currently, the digital authorization process is available only to individual taxpayers, not businesses or other entities. Also, tax professionals must be in good standing with the IRS and already have a CAF number prior to making requests through Tax Pro Account. To initiate the authorizations, tax professionals must enter their personal information and their clients' personal information exactly as it appears on IRS tax records. Also, the feature is available only to those with addresses in the United States. Tax Pro Account is a separate tool from e-Services.
To help tax professionals educate their clients about this new process, the IRS has created two e-Posters that practitioners may share. These are:
There are additional features available to individual taxpayers from their Online Account. Taxpayers can view:
- The amount they owe, updated for the current calendar day
- Their balance details by year
- Their payment history and any scheduled or pending payments
- Key information from their most recent tax return
- Payment plan details
- Digital copies of select notices from the IRS
- Their Economic Impact Payments, if any
- Their address on file
Taxpayers can also:
- Make a payment online
- See payment plan options and request a plan via Online Payment Agreement
- Access their tax records via Get Transcript
IRS Newswire, IR-2021-154, www.irs.gov, July 19, 2021.
8. QUOTE OF THE WEEK:
"Yesterday is not ours to recover, but tomorrow is ours to win or lose." – Lyndon B. Johnson
9. TODAY IN HISTORY:
On this day in 1796 Cleveland, Ohio, was founded by General Moses Cleaveland. Originally called 'Cleaveland', the public adopted the current name after a newspaper editor noticed the name was too long to fit on the page.
10. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.