1. FLORIDA ANNOUNCES PREMIUM TAX DISTRIBUTION CALCULATIONS:
The Department of Management Services Division of Retirement is pleased to announce the 2017 Insurance Premium Tax distribution calculations for firefighter and police officer pension plans participating under chapters 175 / 185, Florida Statutes.
If you have any questions, please email us or call our office at 850.922.0667 or 877.738.6737.
Bureau of Local Retirement Systems
Municipal Police and Fire Pension Office
Division of Retirement
2. STAKEHOLDERS BEG CONGRESS TO ACT ON SOLVENCY OF MULTIEMPLOYER PENSION PLANS:
Writing for PlanSponsor, John Manganaro says the Joint Select Committee on the Solvency of Multiemployer Pension Plans held its fifth public hearing to gather testimony on the dire financial situation facing the U.S. multiemployer pension system. Opening the hearing, Senators and co-chairmen Orrin Hatch, R-Utah, and Sherrod Brown, D-Ohio, both spoke to the fact that millions of Americans across the country depend on multiemployer pension plans for their retirement, and, if nothing changes, a growing number of workers face severe financial risks. They also spoke of the real and immediate risk posed by a big run of multiemployer pension plan insolvencies to the wider U.S. economy and taxpayers. Senator Brown gave a more lengthy opening statement than his colleagues, warning in passionate terms that there are more than 100 multiemployer pension plans on the brink of failure, impacting more than 1.3 million workers and retirees. “Millions across this country are at risk of losing their retirement security after a lifetime of hard work, and small businesses are in jeopardy of collapsing if they end up on the hook for pension liability they cannot afford to pay,” Brown said. The hearing provided a platform for stakeholders and experts to discuss issues with the current system, as well as possible policy options that aim to improve retirement security for beneficiaries and shore up the shaky multiemployer pension system. While the tone of the meeting was civil and clearly meant to establish an air of bipartisanship around this vexing issue, Democratic lawmakers on the joint select committee did mildly press their Republican colleagues to push harder for passage of the Butch Lewis Act, which they argue would go quite a long way to solving many of the issues discussed. Three of the four speakers were financial gurus, and they offered up detailed, sobering testimony about the truly dire financial state of the multiemployer pension system and the federal multiemployer insurance program run by the Pension Benefit Guaranty Corporation (PBGC). One of the speakers, a skilled and experienced actuary, suggested that he believes less than 1% of multiemployer plans are 100% funded when using reasonable actuarial assumptions. Another speaker pointed out that, when he started working on this issue some 10 years ago, the generally agreed upon figure was that multiemployer pension plans as a whole carried a funding gap of about $200 billion. He said, it is more like a $680 billion shortfall, and growing all the time. While they had different ideas about how to solve this problem, the experts generally agreed that this has been almost a manufactured crisis. For far too long, they argued, multiemployer pension plan trustees have been allowed to make generous promises of pension benefits while asking employers to make nowhere near the necessary level of contributions. It has been a matter of relatively simple math and has been obvious for some time. Decades ago, Congress strengthened the funding requirements in the single employer market, they said, but it failed to do the same for union pensions. In fact, Congress actually eased funding requirements for union pension employers via the Multiemployer Pension Reform Act of 2014 (MPRA), and created an unprecedented pathway for pension to cut promised benefits. According to the expert testimony, many trustees thought they could simply invest their way out of the fact that they had not made substantial enough contributions, by taking on significantly more equity risk than a pension plan typically would. Others thought they could expect the plans to grow steadily in terms of the number of contributing employees and employers, easing the funding challenge, but neither of these wishful solutions has panned out. In sum, all the experts agreed it is probably a good idea for Congress to step in and require these plans to have accurate liability measurements and limits on what is to be considered reasonable investment return expectations that are not left up purely to trustee discretion. One expert went a step further and suggested the PBGC should be granted broad discretion to take over plans or otherwise require changes in struggling plans earlier in their decline process. While the expert testimony was informative, far and away the most powerful testimony came from Kenneth Stribling, a retired Teamster and former truck driver from Milwaukee, Wisconsin, who has dedicated his retirement to fighting for multiemployer pension funding reform. Stribling said that what drove him into advocacy was his pension plan’s application under MPRA to cut benefits by 55%-which came right around the same time that his wife received a terminal stage four pancreatic cancer diagnosis. “I will never forget that day, or that letter, stating my trustees were seeking a 55% cut to the pension that I earned and that my wife and I depend on,” he said. “I was devastated and so was my family. I needed to do something, and so I joined up with this movement. As union workers, we sacrificed wages for better health care and pensions, and now the plans are breaking their end of the bargain. Make no mistake, we can barely afford my wife’s medical bills now, and a 55% cut to my pension would very likely mean I will lose my home. If Congress does not act to help these plans, there are going to be a lot of pensioners like myself knocking at the door and asking for other forms of public assistance. There is not one more day to waste.”
3. TEXAS TEACHERS DROPS RETURN RATE 75 BASIS POINTS TO 7.25%:
A report from Christine Williamson says Texas Teacher Retirement System (TRS), lowered the assumed rate of return for the $151.3 billion defined benefit plan to 7.25% from 8%. The vote by the fund's board was 5-4. The measure also includes a decrease in the inflation assumption to 2.3% from 2.5%. The proposal was drafted by the fund's actuary, Joseph Newton, pension practice leader at Gabriel, Roeder, Smith & Co., and was based on an experience study. In preparing the study, TRS and GRS sought input from the board's consultant, Aon Hewitt Investment Consulting, other large pension funds and investment managers about market forecasts over the next 10 to 20 years. Aon's expected annualized rate of return over 30 years, for example, was 7.27%, and its 10-year forecast was 7.21%. Brian Guthrie, TRS executive director, told trustees the consensus among outside parties was that market returns will be significantly lower, and he stressed that "not taking action" to lower the assumed rate of return would not be prudent. Lowering the fund's assumed return rate has been debated by board trustees for a year. It is controversial because lower return rates will require higher contributions from the state, TRS members and school districts. The Texas Legislature has the authority to set contribution rates. TRS will request a contribution rate increase of between 1.5% and 2% in its next budget request. The impact of the drop in the assumed return rate would increase state contributions to the pension fund by 1.83% or about $790 million per year over a 31-year funding period, according to estimates in a news release from the Texas Retired Teachers Association (TRT). Retired educators from Texas American Federation of Teachers (AFT), staged a protest in front of TRS headquarters against the reduction. In a statement, the Texas AFT said: "Any reduction in projected investment income would make it more difficult to provide any increase in benefits without a significantly higher contribution rate from the state (or active employees and school districts)." Texas AFT members were among 17 active and retired educators who spoke in opposition to the lower return during the public comment period, the webcast showed. Timothy Lee, executive director of the TRT, warned TRS trustees during Friday's meeting to expect a "huge effort to change TRS into a defined contribution plan rather than have the Texas Legislature increase contributions," noting that proponents of the shift to a DC plan are "well organized." Separately, the board approved the recommendation of TRS's investment management division to rehire Aon Hewitt Investment Consulting as its investment consultant for five years beginning September 1, 2018 with an option to extend the contract by two years. Albourne America also was rehired for the same five-year period with an optional two-year extension as consultant for private and external public market strategies, including hedge funds, real estate and private equity. Both firms' existing contracts expire August 31, 2018. The contracts of real estate consultant Townsend Group and private equity consultant Hamilton Lane Advisors, which expire August 31, 2018 will not be renewed. Pensions & Investments, July 27, 2018.
4. THE 401(K) LAWSUITS: WHAT ARE THE CAUSES AND CONSEQUENCES? :
George S. Mellman and Geoffrey T. Sanzenbacher recognize that 401(k)s are now the main type of employer-sponsored retirement plan. However, these plans are still relatively new, having started as a supplement to defined benefit plans in the early 1980s. As a result, many questions remain unanswered about the legal obligations of the plan fiduciaries, who are responsible for administering the plans and their assets. While the law is clear that plans must be administered for the “sole benefit” of participants, it is less specific on many details: for example, how plan fiduciaries should select the type and number of investment options or determine a reasonable level of fees. Indeed, instead of laying out specific regulations or guidance, the Department of Labor’s (DOL) general approach to overseeing 401(k)s has been through its own enforcement actions or through litigation (mostly privately initiated). This brief looks at the broad complaints that motivate the litigation and how the threat of litigation may affect the retirement industry. This brief is organized as follows. Section A introduces the three main reasons why litigation is brought in the first place: 1) inappropriate investment options; 2) excessive fees; and 3) self-dealing. It then explains that, from the courts’ perspective, fiduciaries’ main responsibility is to follow a prudent process in making plan-related decisions. Section A also shows how common each type of litigation is and highlights that recent lawsuits have been more focused on excessive fees than past lawsuits, when investments were more of a focus. Section B turns to the potential effects of this litigation on 401(k) plans. In particular, it points out two major trends that have coincided with the lawsuits: 1) a rise in the use of low-cost index funds, which are perceived as less vulnerable to litigation; and 2) a downward trend in investment and administrative fees. Section B also describes one potential negative consequence of litigation-the fear of plan fiduciaries to offer innovative plan options, such as lifetime income products. Center for Retirement Research at Boston College, Number 18-8, May 2018.
5. SECURITIES LITIGATION 2018 MID-YEAR UPDATE:
As many readers know, 2017 was a record year as it related to newly filed securities class action cases; specifically, the 428 filed in U.S. federal courts. During the first half of 2018, this trend continued with 217 newly filed federal cases. According to NERA Economic Consulting, investor losses increased to $540 billion, up from $334 billion in 2017. Click here to read NERA’s “Recent Trades in Securities Class Action Litigation: H1 2018 Update.” With regard to settlements during the first-half of 2018, the total amount of money being returned to investors already exceeds that for all of 2017. And while this year’s $3 billion Petrobras settlement underlies the vast increase in settlement dollars compared with 2017, a handful of other cases is helping to drive 2018 recoveries, including Allergan (Valiant Pharmaceuticals) at $250 million, comScore at $110 million, Halliburton at $100 million and Marvel Technology at $72.5 million. These collectively round out the top five largest settlements in the first half of 2018. Markets outside of North America are also seeing continued activity related to securities class and group actions, including new cases in Australia such as AMP Limited and BHP Billiton Limited. And, though not during the first half of 2018, on July 13, 2018 the Ageas (f/k/a Fortis) securities case was finally approved by the Amsterdam Court of Appeals. At €1.3 billion, this instantly became Europe’s largest court-approved securities class action settlement. As many affected investors know, the ruling follows seven years of litigation in Dutch courts. This record-breaking settlement resolves all claims in connection with the litigation arising out of the 2007 acquisition of Dutch bank ABN Amro by Fortis, at the time a Dutch-Belgian financial services company.
6. FOR THE FIRST TIME, 90 PERCENT OF AMERICANS COMPLETED HIGH SCHOOL OR MORE:
For the first time, the percentage of the American population age 25 and older who completed high school or higher levels of education reached 90 percent in 2017. The nation has made giant strides in education since 1940, when only 24 percent of people age 25 and older had finished four years of high school or more, according to recently-released educational attainment data from the U.S. Census Bureau’s Current Population Survey. In contrast, 77 years later a high school education is viewed as a prerequisite for many jobs in the modern economy, which helps explain the record 90 percent high school completion rate today. As the educational attainment of the population as a whole increased, so did the high school completion of all race and Hispanic origin groups. The share of non-Hispanic whites who completed four years of high school or more education increased from 86 percent in 1997 to 94 percent in 2017. Over the same period, the percentage of blacks who completed high school or more education increased from 75 percent to 87 percent. Over the 20-year period, Hispanic high school completion increased at a greater rate than white or black completion, up from 55 percent in 1997 to 71 percent in 2017. Now that 90 percent of people have completed high school or more, the question arises: Who are the 10 percent who have not? A figure shows the group that did not complete high school by race, Hispanic origin and nativity status. Native-born non-Hispanic whites and foreign-born Hispanics are the two largest groups of people with educational attainment below high school completion. This, in part, reflects the age distribution of non-Hispanic whites. Because a larger proportion of non-Hispanic whites are age 50 and older compared to other groups, they completed their schooling when a smaller proportion of people finished high school. This also reflects lower rates of high school completion among foreign-born Hispanics. Overall, the foreign-born accounted for 54 percent of people who did not complete high school. Among Hispanics, the proportion is even larger: - 76 percent were foreign-born. Counting both the foreign-born and native-born, 30 percent of Hispanics had less than a high school education. Among native-born Hispanics, 15 percent did not finish high school. Larger percentages of the foreign- born across all race and ethnicity groups have not finished high school or higher levels of education. However, nearly as many have bachelor’s degrees or higher, and more completed advanced degrees than people born in the United States. The difference between the native-born and foreign-born population who have a bachelor’s degree or higher is slight: - 34 percent of the native-born compared to 33 percent of the foreign-born. And, while 13 percent of the native-born have advanced degrees (master’s, professional and doctorate degrees), a slightly greater 14 percent of the foreign-born do. Information about educational attainment can be found in the 2017 educational attainment tables. These data are from the Current Population Survey's Annual Social and Economic Supplement. The Current Population Survey, sponsored jointly by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics, is the primary source of labor force statistics for the population of the United States. The survey also provides a wealth of other demographic, social and economic information. Erik Schmidt, the author, is a survey statistician in the Census Bureau's Social, Economic and Housing Statistics Division.
7. "HIBERNATION" -- THE NEXT STEP FOR DB PLAN INVESTING:
Rebecca Moore reports robust bulk pension buyout activity led to an increase in deal flow of $23.3 billion for 2017, composed mostly of retiree-only buyouts, according to Mercer. The Mercer/ CFO Research 2017 Risk Survey indicated that 55% of defined benefit (DB) plan sponsors are likely or very likely to annuitize some or all of their obligations in the next five years. In a new white paper, Mercer says that due to this activity, it has seen some strains based on current demand. “The insurance market for deferred benefits in particular is feeling pressure, and we see this challenge becoming more widespread in the near future,” Mercer says. According to “Pension Investing for the Long Term: An Alternative to Risk Transfer,” as more marketable obligations-such as those for in-pay retirees-are transferred to insurers, residual DB plans will have unusual and idiosyncratic features that make them more difficult to manage. This latter challenge of steady-state pension management will drive pension investing to a “hibernation” focus for many. Mercer suggests pension sponsors should now focus on the shakeout that lies ahead, with the potential bifurcation between liabilities sold to insurers and the hard stuff kept on pension balance sheets. As more sponsors look to self-insure their obligations, hibernation investing will begin to dominate the pension investment landscape. Mercer explains that hibernation investing involves putting plans in a steady state while winding them down over time or gradually preparing for pension risk transfer over a longer period of time. Although very similar to traditional liability-driven investing (LDI), hibernation investing will not be as simple-it brings its own set of challenges and risk-management opportunities. For a plan entering a hibernation period, four key priorities come to the fore:
- Minimize residual expenses, whether investment, Pension Benefit Guaranty Corporation (PBGC) premiums or other administrative costs;
- Maximize their asset returns in a low-risk state through active management and diversified sources of return where appropriate;
- Minimize residual risk in the end state through a tailored investment strategy by keeping asset and liability returns as closely aligned as possible, while focusing on demographic risks; and
- Ultimately, minimize the capital deployed in excess of pension obligations to keep the plan self-sufficient in a low-volatility state, accounting for the plan’s residual costs and risks.
These priorities involve several tradeoffs that will lead to different outcomes for different sponsors. The higher the net investment return generated, the lower the need for capital. Similarly, the tighter the hedge in the investment strategy, the lower the downside risk and, therefore, the lower the need for excess returns or capital commitments. So the first steps in a successful hibernation strategy are to determine the target parameters around these factors, and then manage to the resulting benchmarks effectively. The white paper discusses strategies and considerations for the four priorities, and may be downloaded from here. Investing, July 10, 2018.
8. IRS OFFERS GUIDANCE ON RECENT 529 EDUCATION SAVINGS PLAN CHANGES:
The Internal Revenue Service and Department of the Treasury today announced their intent to issue regulations on three recent tax law changes affecting popular 529 education savings plans. Notice 2018-58, addresses a change included in the 2015 Protecting Americans From Tax Hikes (PATH) Act, and two changes included in the 2017 Tax Cuts and Jobs Act (TCJA). Taxpayers, beneficiaries, and administrators of 529 and Achieving a Better Life Experience (ABLE) programs can rely on the rules described in this notice until the Treasury Department and IRS issue regulations clarifying these three changes. The PATH Act change added a special rule for a beneficiary of a 529 plan, usually a student, who receives a refund of tuition or other qualified education expenses. This can occur when a student drops a class mid-semester. If the beneficiary recontributes the refund to any of his or her 529 plans within 60 days, the refund is tax-free. The Treasury Department and the IRS intend to issue future regulations simplifying the tax treatment of these transactions. Re-contributions would not count against the plan’s contribution limit. One of the TCJA changes allows distributions from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (k-12) public, private or religious school of the beneficiary’s choosing. The second TCJA change allows funds to be rolled over from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. ABLE accounts are tax-favored accounts for certain people who become disabled before age 26, designed to enable these people and their families to save and pay for disability-related expenses. The regulations would provide that rollovers from 529 plans, together with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit -- $15,000 for 2018. For more information about other TCJA provisions, visit IRS.gov/taxreform. IRS Newswire, July 30, 2018, Issue Number: IR-2018-156.
9. WHAT TAXPAYERS SHOULD KNOW ABOUT AMENDING A TAX RETURN:
Taxpayers who discover they made a mistake on their tax returns after filing can file an amended tax return to correct it. This includes things like changing the filing status, and correcting income, credits or deductions.
Here are some tips for taxpayers who need to amend a tax return:
- Complete and mail the paper Form 1040X, Amended U.S. Individual Income Tax Return. Taxpayers must file an amended return on paper whether they filed the original return on paper or electronically. Filers should mail the Form 1040X to the address listed in the form’s instructions. However, taxpayers filing Form 1040X in response to a notice received from the IRS, should mail it to the address shown on the notice.
- If taxpayers used other IRS forms or schedules to make changes, they should attach those schedules to their Form 1040X.
- Taxpayers should not amend a tax return to correct math errors; the IRS will make the math corrections for the taxpayers.
- Taxpayers should also not amend if they forgot to include a required form or schedule. The IRS will mail a request about the missing item.
- Anyone amending tax returns for more than one year will need a separate 1040X for each tax year. They should mail each tax year’s Form 1040X in separate envelopes.
- Taxpayers should wait for the refund from their original tax return before filing an amended return. They can cash the refund check from the original return before receiving any additional refund.
- Taxpayers filing an amended return because they owe more tax should file Form 1040X and pay the tax as soon as possible. This will limit interest and penalty charges.
- Generally, to claim a refund, taxpayers must file a Form 1040X within three years from the date they timely filed their original tax return or within two years from the date the person pays the tax - usually April 15 - whichever is later.
- Taxpayers can track the status of an amended return three weeks after mailing using “Where’s My Amended Return?” Processing can take up to 16 weeks.
IRS Tax Tips, August 1, 2018, Issue Number: Tax Tip 2018-118.
10. NEW OFFICE ADDRESS:
Please note that Cypen & Cypen has a new office address: Cypen & Cypen, 975 Arthur Godfrey Road, Suite 500, Miami Beach, Florida 33140. All other contact information remains the same.
11. PUN TIME:
How do they figure out the price of hammers? Per pound.
12. INSPIRATIONAL QUOTES:
Change your thoughts and you change your world. - Norman Vincent Peale
13. TODAY IN HISTORY:
On this day in 2012 Wikileaks founder, Julian Assange is granted political asylum by Ecuador.
14. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.