1. SOCIAL SECURITY KNOWLEDGE GAP: Research from plansponsor.com indicates that close to 100% of Americans could lack critical information about how to get the most from their Social Security benefits. According to “Social Security Planning in 2015 & Beyond: Perspectives of Future Beneficiaries and Financial Planners” just 9% of consumers consider themselves very knowledgeable about how Social Security benefits are determined and 1% of Certified Financial Planners say their clients are very knowledgeable on the subject. The key takeaway is that education is critical. Even consumers who claimed to be somewhat knowledgeable on the topic comprised just 38% of the responding group. For families and individuals looking to claim their Social Security benefits soon, this survey shows that far too many face a claiming knowledge gap potentially leaving thousands of dollars on the table. Social Security in retirement requires more than just retiring and collecting a monthly check from the government. There are many nuances to Social Security and ways to maximize benefits. Respondents, ages 45 through 64 and unretired, indeed recognized the value of exploiting Social Security: 77% called maximizing benefits very important. However, the reality, was that 83% of consumers overestimate or underestimate how much they would receive if they defer claiming Social Security until they reach 70 -- the maximum age to do so; 67% underestimate and 16% overestimate the hardship they would incur in waiting that long. Additional findings are
- Fewer than four in 10 consumers (39%) believe Social Security will make up at least half of their income even though Americans increasingly rely on Social Security as they age, for upwards of 50% of their income by age 80. In fact, over four in 10 planners (42%) predicted that Social Security will be a major source of income in retirement for their clients.
- Eighty percent of married or formerly married men are unaware that they should claim their own benefits at 70 to maximize survivor (or widow) benefits, should they die first, with 69% incorrectly believing they could maximize survivor benefits by claiming before age 70, and 11% incorrectly believing they could do so by claiming after that.
2. SUMMARY OF THE QUARTERLY SURVEY OF PUBLIC PENSIONS FOR 2015:Q2: The United States Census Bureau has released the Summary of the Quarterly Survey of Public Pensions for the Second Quarter of 2015. For the 100 largest public-employee pension systems in the country, cash and security holdings totaled $3,369.0 billion in the second quarter of 2015, a decrease of 1.0% percent from the first quarter total of $3,401.5 billion. Compared to the same quarter in 2014, assets for these major public pension systems were steady with the previous year’s same-quarter total of $3,369.6 billion. Earnings in the second quarter totaled $32.0 billion, a decrease of 59.2% from $78.3 billion in the previous quarter. Corporate stocks had a quarter-to-quarter decrease of 4.1%, from $1,262.0 billion to $1,211.0 billion in the second quarter of 2015. Corporate stocks experienced a year-to-year increase of 4.0% from $1,163.6 billion in the second quarter of 2014. Corporate stocks comprised about a third (35.9%) of the total cash and security holdings of major public pension systems for the current quarter. Corporate bonds had a quarter-to-quarter decrease of 2.5%, from $430.7 billion to $420.1 billion in the second quarter of 2015. Corporate bonds year-to-year increased 13.2% from $371.0 billion in the second quarter of 2014. Corporate bonds comprised an eighth (12.5%) of the total cash and security holdings of major public pension systems for the current quarter. International securities had a quarter-to-quarter increase of 0.9%, from $612.7 billion to $618.3 billion in the second quarter of 2015. International securities year-to-year decreased 6.7% from $662.4 billion in the second quarter of 2014. International securities comprised less than a fifth (18.4%) of total cash and security holdings of major public pension systems for the current quarter. Federal government securities had a quarter-to-quarter increase of 1.4%, from $257.2 billion to $260.8 billion in the second quarter of 2015. Federal government securities year-to-year decreased 14.1% from $303.7 billion in the second quarter of 2014. Federal government securities comprised 7.7% of the total cash and security holdings of major public pension systems for the current quarter. Government contributions had a quarter-to-quarter increase of 5.8%, from $24.9 billion to $26.3 billion in the second quarter of 2015, and a year-to-year increase of 10.0% from $23.9 billion in the second quarter of 2014. Employee contributions had a quarter-to-quarter increase of 12.3%, from $10.5 billion to $11.8 billion in the second quarter of 2015, and a year-to-year increase of 5.6% from $11.2 billion in the second quarter of 2014. Government contributions to employee contributions had a 2.2 to 1 ratio this quarter -- government contributions comprised 69.0% and employee contributions comprised 31.0% of total contributions. Total payments totaled $68.3 billion, increasing 9.5% from $62.4 billion last quarter, with a year-to-year increase of 7.1% from $63.8 billion in the second quarter of 2014.
3. IRS ANNOUNCES SPECIAL PER DIEM RATES FOR TRAVEL AWAY FROM HOME ON OR AFTER OCTOBER 1, 2015: EBIA.com writes that the Internal Revenue Service has announced the special per diem rates that can be used to substantiate the amount of business expenses incurred for travel away from home on or after October 1, 2015. Employers using these rates to set per diem allowances can treat the amount of certain categories of travel expenses as substantiated without requiring that employees prove the actual amount they spent. (Employees must still substantiate the time, place, and business purpose of their travel expenses.) The amount deemed substantiated, however, will only be the lesser of the allowance actually paid or the applicable per diem rate for the same set of expenses. This notice announces rates for use under the optional high-low substantiation method, special rates for transportation industry employers, and the rate for taxpayers taking a deduction only for incidental expenses. General guidance issued in 2011 regarding the use of per diems remains in effect. For travel within the continental United States, the optional high-low method designates one per diem rate for all high-cost locations and another for all other locations. Employers can use the high-low method for substantiating lodging, meals, and incidental expenses, or for substantiating meal and incidental expenses only. Beginning October 1, 2015, the high-low per diem rates that can be used for lodging, meals, and incidental expenses will increase to $275 for travel to high-cost locations and $185 for travel to other locations. The high-low rates have increased to $68 for travel to high-cost locations and $57 for travel to other locations. Six locations have been added to the list of high-cost locations, eleven have been removed, and several that remain on the list are now considered high-cost for a different portion of the calendar year. While they cannot use the high-low method, self-employed persons and employees who are not reimbursed can use other per diem rates to compute the amount of their business expense deduction for business meals and incidental expenses (but not lodging), or for incidental expenses alone. The special rate for the incidental expenses deduction that applies beginning October 1, 2015 is unchanged at $5 per day.
4. UNBELIEVABLE THINGS JOB CANDIDATES HAVE DONE:When interviewing for a new job, tension can be high. Typical ways candidates show their nerves are through averted eye contact or fidgeting with jewelry. Careerbuilder surveyed close to 2,200 hiring managers, and created a list of the most bizarre behavior they have seen during job interviews:
- Someone brought 50 pens to the interview and spread them out on the table.
- A candidate brought a duffel bag with him and kept fidgeting and repositioning it. There was a dog inside the bag.
- “You can call me Tigger," a candidate said after offering his real name. "That is the nickname I gave myself.”
- Asked about diversity, a candidate mentioned something about "off the boat."
- The husband of an employee was interviewing for a job at the same company. He asked if his wife was cheating on him.
- Would you ask how much money everyone else made? One person did.
- A candidate sat in a yoga pose throughout the interview.
- When asked a question, one person tried to Google the answer.
- A candidate asked if it was necessary to like children -- to work in a pediatrician's office.
- Having spit a wad of gum into his hand and not seeing a place to throw it away, this man returned the gum to his mouth and chewed it throughout the interview.
5. RETIREMENT PLAN LIMITS PROBABLY WILL NOT INCREASE FOR 2016: Tax law places limits on the dollar amount of contributions to retirement plans and IRAs. IRC Section 415 requires these limits to be adjusted annually for cost-of-living increases. IRS generally announces any CPI increase around the third week of October. Based on current CPI information, 401khelpcenter.com does not expect any increase in the 2016 contribution limits.
6. WOULD YOU DEFER RETIREMENT TO PAY FOR COLLEGE?:Nearly one-third of Americans would be willing to put off their retirements to help their children or grandchildren pay for college educations, according to LIMRA Secure Retirement Institute. College is so important, one third of consumers say they have reduced or would be willing to reduce the amount they are saving for retirement in order to help pay for their children’s or grandchildren’s college educations. The percentage of Americans who say they would be willing to do so decreases as people get older, with Millennials most likely to agree. Four in 10 consumers (with children or grandchildren) feel an obligation to foot the college bill, which has consequences in other areas of their lives where money is concerned. In addition to eroding retirement confidence, these loans are causing Americans to reduce their discretionary spending. The report also confirmed what previous research has found: those saving for retirement are also the most likely to save for purposes other than retirement.
7. FEDERAL ACTION COULD HELP STATE EFFORTS TO EXPAND PRIVATE SECTOR COVERAGE: About half of private sector workers in the United States -- especially those who are low-income or employed by small firms -- lack coverage from a workplace retirement savings program primarily because they do not have access. According to GAO’s analysis of 2012 Survey of Income and Program Participation data, about 45% of private sector U.S. workers participated in a workplace retirement savings program -- an estimate that is consistent with prior GAO work and other research. Using tax data to correct for under-reporting raised the share of workers participating to 54%, but still indicates many workers lack coverage. Among those not participating, the vast majority – 84% lacked access because they either worked for employers that did not offer programs or were not eligible for the programs that were offered, for example, because they were new employees or in specific jobs that were excluded from the program. In particular, lower-income workers and those employed by smaller firms were much less likely to have access to programs. However, among those who had access, the majority of these workers participated. Key strategies to expand private sector coverage identified in the states and countries GAO reviewed include encouraging or requiring workplace access, automatic enrollment, financial incentives, and program simplification. For example, pending implementation, programs in two of the states GAO studied -- California and Illinois -- would require certain employers to automatically enroll workers in a state-run program, though workers could choose to opt-out. In the countries GAO studied, combining workplace access with automatic enrollment and financial incentives -- tax preferences or employer contributions -- has helped increase participation. Moreover, states and countries have tried to simplify program designs to (1) limit the responsibility and cost for employers and (2) reduce complexity, cost, and risk for workers. For example, some states intend to not only reduce burdens for employers by selecting and monitoring providers, but also reduce complexity for workers by limiting the number of investment options. State and national stakeholders reported potential challenges with uncertainty created by the Employee Retirement Income Security Act of 1974 and agency regulations that could delay or deter state efforts to expand coverage. Generally, ERISA preempts, or invalidates, any state law relating to “employee benefit plans” for private sector workers, but different areas of uncertainty arise based on the details of each state effort. For example, four of the six states GAO reviewed intend to create payroll deduction individual retirement account programs that would not be considered employee benefit plans. However, due to uncertainty created by ERISA, it is unclear whether a state can offer such programs or whether some of the program features would lead a court to find that they are, or relate to, employee benefit plans. Stakeholders also noted uncertainty caused by regulations from the Departments of Labor and the Treasury meant to assist workers and employers. For example, DOL’s regulation on payroll deduction IRAs was written before these state efforts were proposed and omits detail that, if included, could help reduce uncertainty. Given these uncertainties, states may face litigation and stakeholders noted that state programs could lose tax preferences if they were ruled preempted by ERISA.
8. R.I.P. DETERMINATION LETTER PROGRAM: Seyfarth Shaw discusses the end of the determination letter program, as we know it. With Announcement 2015-19, the Internal Revenue Service has effectively ended the determination letter program for individually designed qualified plans as of January 1, 2017 (See C & C Newsletter for July 23, 2015, Item 1). Individually designed plans can still obtain determination letters for the current cycle, ending January 31, 2016, for Cycle A, which begins February 1, 2016 and ends in January 2017. As a result, all individually designed plans should be able to receive at least a Pension Protection Act determination letter if they choose. However, except in the case of a plan’s initial qualification or termination, the IRS will no longer issue determination letters to individually designed plans. Keep in mind that an amendment to a plan adopted now, or even adopted in the last few years that was not part of the plan’s last determination letter filing, will not fall within the protection of a determination letter for a plan in cycles B, C and D. Accordingly, the five-year cycle program that plan sponsors and their advisors have come to know and love is over. IRS has stated that the program needed to end because it could not devote sufficient resources to reviewing the plans and was accordingly providing letters to plans without proper review. The IRS will continue to issue opinion letters and advisory letters to prototype and volume submitter plans. Hate to say I told you so.
9. DOES AGE-RELATED DECLINE IN ABILITY CORRESPOND WITH RETIREMENT AGE?: Center for Retirement Research at Boston College writes that while declines in physical and mental performance are inevitable as workers age, they are not uniform across the various systems of the body -- some physical and cognitive abilities decline much earlier than others. The variance implies that workers in occupations that rely on skills that decline early may be unable to work until late ages, even as policy changes like increases in the Full Retirement Age encourage them to. Researchers often estimate models of early retirement that include a control for whether a worker in a blue-collar job, basically assuming that less physical white-collar work allows longer careers. But this assumption ignores the fact that even workers in white-collar occupations may find themselves relying on skills that have declined. A paper from CRRC, instead, reviews the literature on aging, and constructs a Susceptibility Index meant to reflect how susceptible an occupation is to declines in ability, regardless of whether the occupation relies on physical abilities (as blue-collar occupations do) or cognitive ones. Other findings are that:
- A variety of white-collar occupations, such as police detective and designer, are just as susceptible to declines in the abilities required for work as are blue-collar occupations.
- The Susceptibility Index is a significant predictor of early retirement; for example, workers in occupations in the 90th percentile of the Index are 5.7 percentage points more likely to retire by age 65 than workers in the 10th percentile.
- When controlling for the Susceptibility Index, the commonly used categorization of blue-or white-collar has no additional explanatory power in a model of early retirement.
The policy implications are that blue-collar occupations are especially susceptible to early ability declines, so workers in these occupations are less likely to be able to work to the full retirement age as it increases to 67. In addition, some workers in white-collar occupations may have similar difficulty responding to full retirement age increases, a possibility that has been largely ignored to date.
10. FIRE COMPANY CHARGED WITH AGE DISCRIMINATION: The U.S. Equal Employment Opportunity Commission alleges that the Glenwood Fire Company, along with several towns and villages in Long Island, New York, have discriminated against older firefighters from accruing credits toward a pension-like plan. Plansponsor.com reports that the length of service award program (LOSAP), similar to a retirement pension, was created by the towns of North Hempstead and Oyster Bay and the villages of Old Brookville and Roslyn Harbor. The plan unlawfully prohibits volunteer firefighters from accruing service credits after they turn 55. EEOC argues that the Glenwood LOSAP violates the Age Discrimination in Employment Act, a federal law that protects workers ages 40 or older from age discrimination. EEOC filed suit after first attempting to reach a pre-litigation settlement through its conciliation process with the municipalities and the fire company. The suit seeks to fix the LOSAP, award all service credit earned regardless of age, and pay the affected firefighters or their beneficiaries all retroactive and future benefits earned. Other fire districts in New York have previously settled similar charges with the EEOC.
11. AMENDMENTS TO FLORIDA MUNICIPAL PENSION TRUST FUND DEFINED BENEFIT PLAN DOCUMENT: Amendments to the FMPTF Defined Benefit Document was approved by the FMPTF Board of Trustees, and is effective October 1, 2015. Links to the amended FMPTF Defined Benefit Plan document as well as the redlined revisions are: http://goo.gl/AHcZLW and http://goo.gl/nUOhuU
State law now requires each Chapter 175 (fire) or 185 (police), Florida Statutes, pension plan to include a “defined contribution plan component” (referred to as a “share” plan). Share plan operates to provide retirement benefits in addition to defined benefit pension benefits. Under state law, if the plan sponsor (city) and plan members’ representative (either union or plan members themselves) fail to mutually consent on the use of insurance premium tax revenues for retirement purposes, various funds could flow to the share plan under operation of law. The amendment provides for a share plan unless a different share plan has been created and is operational through an Adoption Agreement, in which case the provisions of the share plan under the Adoption Agreement prevail.
The next amendment clarifies that if a plan provides for a “Deferred Retirement Option Program” or DROP, employees in the DROP cannot self-direct the investment of DROP proceeds. Tax counsel has advised the IRS has raised concerns with employees self-directing the investment of DROP proceeds, and recommended removing this provision from the plan. No FMPTF member has authorized employee self-directed investment of DROP proceeds.
12. HOW STATE PENSIONS SHORTCHANGE TEACHERS: Urban Institute has released “Negative Returns: How State Pensions Shortchange Teachers.” Teachers count on their pensions for a stable, secure retirement. They contribute to a plan during their time in the classroom, the state takes care of the investments, and the end result is a generous, guaranteed stream of income throughout their retirement years. Or, at least, that is the story most often told about pensions. What is left unsaid is that most teachers either will not qualify for a pension at all, or will qualify for one so meager that it will be worth less than their own contributions. Although the debate on public pensions concentrates on employees with 30 years of service, most public school teachers have much shorter careers. According to the latest national data, three in 10 new teachers leave within five years. Other teachers cross state lines to teach elsewhere in subsequent years, splitting their careers across multiple state pension plans. Those who leave subsidize benefits for teachers who stay in one state or school district for an entire career. State pension plans provide little retirement income security to most teachers with shorter tenures, even many who spend as long as 20 or 25 years teaching in one state. Virtually every plan requires participants to contribute toward the cost of their retirement benefits, and employees must work many years before their future benefits exceed the value of their required contributions. Those who leave before reaching that milestone do not receive any employer-financed retirement benefits, despite their often-lengthy careers. The brief calculates, for each state, how long teachers hired at age 25 must remain teaching in the same state to earn any employer-financed pension benefits from their state’s pension plan. The analysis identifies the break-even point in each state plan, the time when teachers could leave public employment with promised future pension payments worth more than their own contributions. The findings identify two problems that systematically disadvantage teachers:
- First, in the median state, teachers must serve at least 25 years to receive a pension worth more than their own contributions. Teachers with shorter careers get no school-financed retirement benefit despite their many years of service. They may be better off taking back their own contributions when they quit rather than waiting to collect a pension.
- Second, the authors estimate that more than three-quarters of new teachers will earn less in pension benefits than they contributed to the plan. Instead of benefiting from their pension plans, most teachers are net contributors. Recent pension reforms, focused mainly on cutting costs, generally make this situation worse and force new teachers to work even longer before they benefit from their pension plans.
In Florida, for teachers hired on or after July 1, 2011, the break-even point is 24 years. The percentage of teachers who will break even is 15 and the percent of teachers who will not break even is 85. Is this a great country or what?
13. QUESTIONABLE BUSINESS PRACTICES AND THE FEDERAL RESPONSE: In a June 2014 report, GAO identified at least 38 companies that offered individuals lump-sum payments or “advances” in exchange for receiving part or all of their pension payment streams. The 38 companies used multistep pension advance processes that included various other parties. At least 21 of the 38 companies were affiliated with each other in ways that were not apparent to consumers. Some companies targeted financially vulnerable consumers with poor or bad credit nationwide. Parties Involved in the Multistep Pension Advance Processes That GAO Reviewed GAO undercover investigators received offers from 6 out of 19 pension advance companies. These offers did not compare favorably with other financial products or offerings, such as loans and lump-sum options through pension plans. For example, the effective interest rates on pension advances offered to GAO’s investigators typically ranged from approximately 27% to 46%, which were at times close to two to three times higher than the legal limits set by the related states on the interest rates assessed for various types of personal credit. GAO identified questionable elements of pension advance transactions, including lack of disclosure of some rates or fees, and certain unfavorable terms of agreements. GAO recommended that the Bureau of Consumer Financial Protection and Federal Trade Commission -- the two agencies with oversight responsibility over certain acts and practices that may harm consumers -- provide consumer education about these products, and that CFPB take appropriate action regarding identified questionable practices. Since the time of GAO’s review, CFPB has investigated pension advance companies that GAO referred to the agency and disseminated additional consumer-education materials on pension advances. Similarly, FTC posted consumer education on pension advances on its website, and FTC officials report that they have reviewed consumer complaints related to pension advances, pension advance advertising, and the pension advance industry overall. CFPB’s and FTC’s actions are a positive step toward strengthening federal oversight or enforcement of pension advance products.
14. FPPTA FALL TRUSTEES SCHOOL: The Florida Public Pension Trustees Association’s Fall Trustee School will take place on October 4 through October 7, 2015 at the Naples Grande Beach Resort, Naples. A link on FPPTA’s web site, www.fppta.org, will take you to the Naples Grande Beach Resort site to make your room reservations. You may access information and updates about the Conference at FPPTA’s website. All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of Chapters 175 and 185 pension plans should take advantage of this conference.
15. ON SECOND THOUGHT...MAYBE THEY WERE WRONG?:Televisions will not last because people will get tired of staring at a plywood box every night. Darryl Zanuck, movie producer, 20thCentury Fox, 1946.
16. TODAY IN HISTORY: In 1926, an oil field accident cost aviator Wiley Post his left eye, but he used the settlement money to buy his first aircraft.
17. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.
18. PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm.
19. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.