NewsDash – August 4, 2014

August 4th, 2014

Webcast Event

Exchange-traded funds can offer retail investors low operating expenses, access to diverse asset classes and transparency—with the ability to respond to market conditions during the day. Now, retirement plan participants can access the benefits exchange-traded funds provide within a framework built specifically for retirement plans. Join us as Schwab Retirement Plan Services shares a new approach, one that supports exchange-traded funds as core investment options in 401(k)s and addresses common questions from the industry.

Benefit Briefs

An alternative plan design, such as a cash balance plan that would allow participants to earn future benefits gradually throughout their careers, could generate larger pensions for many Illinois teachers, the Urban Institute suggests. In a report, the institute says relatively few teachers gain much from Illinois’ existing pension plan because benefits are accrued late into the career. Among teachers hired at relatively young ages, members of the tier-1 plan must work at least 30 years to receive pensions worth substantially more than their own required contributions, and tier-2 members must work at least 40 years.

A Surprise Benefit of Bundling Retirement Plan Services

According to the 2013 PLANSPONSOR Defined Contribution (DC) Survey, plan sponsors generally seek improved convenience and lower costs when electing to bundle defined benefit (DB) and defined contribution plans with the same provider. Employers that do bundle may experience additional and surprising benefits to their plans, though, in the form of higher participation rates and improved satisfaction with their provider.

Retirement plan sponsors should recognize that different age groups have different financial priorities and investment outlooks, according to Cogent Reports, a division of Market Strategies International. Cogent’s “Emerging Investor Trends” study looked at affluent (having at least $100,000 in investable assets) Generation Y/Millennial and Generation X investors. Linda York, vice president of Cogent Reports, tells PLANSPONSOR, “More Millennials feel optimistic about the investing environment (47%) than their Gen X counterparts (26%). In terms of overall financial priorities, for the Gen Xers it’s saving up for and funding their retirement. For Millennials, their priorities are saving to make a major purchase or just saving in general, though not with a specific aim of retirement.”

Industry Voices

Industry Voices: Target-Date Funds May Need Warning Label

While there is logic in the idea that younger participants’ stock allocations should be higher than their older counterparts, the correlation between age and risk tolerance is far from perfect. Studies, and our own experience, have shown that large numbers of the Millennial generation are quite risk intolerant. But, the typical 2055 or 2060 target-date retirement fund may have a 90% or higher allocation to stocks. There is potential danger in the “we know what’s good for them” approach. The danger is that a mismatch between risk and tolerance for risk can lead to emotionally-driven decision errors.

Economic Events

Total nonfarm payroll employment increased by 209,000 in July, and the unemployment rate was little changed at 6.2%, according to the Bureau of Labor Statistics. Job gains occurred in professional and business services, manufacturing, retail trade, and construction. THE ECONOMIC WEEK AHEAD: Tomorrow, the Census Bureau will report about factory orders for June. Thursday, the Labor Department will issue its initial claims report. Friday, the Census Bureau will report about wholesale inventories for June.

Market Mirror

Friday, the Dow closed 69.93 points (0.42%) lower at 16,493.37, the NASDAQ was down 17.13 points (0.39%) at 4,352.64, and the S&P 500 decreased 5.52 points (0.29%) to 1,925.15. The Russell 2000 fell 5.21 points (0.47%) to 1,114.86, and the Wilshire 5000 lost 64.80 points (0.32%) to finish at 20,346.01. On the NYSE, 3.2 billion shares traded, with 1.7 declining issues for every advancing issue. On the NASDAQ, 2.8 billion shares changed hands, with a 1.8 to 1 ratio of decliners to advancers. The price of the 10-year Treasury note increased 18/32, decreasing its yield to 2.496%. The price of the 30-year Treasury bond was up 22/32, bringing its yield down to 3.283%. WEEK’S WORTH: For the week ending August 1, 2014, the Dow dropped 2.75%, the NASDAQ closed 2.18% lower, and the S&P 500 fell 2.69%. The Russell 2000 decreased 2.61%, and the Wilshire 5000 lost 2.68%.

Rules & Regulators

It Is Difficult to Factor Social Security into Retirement Planning

The complexity of Social Security benefit formulas and insecurity about the program’s solvency make it difficult for individuals to factor it into their retirement income planning. In testimony for a House Ways and Means Subcommittee on Social Security hearing titled “What Workers Need to Know About Social Security as They Plan for Their Retirement,” Laurence J. Kotlikoff, Ph.D., William Fairfield Warren Professor at Boston University in Boston, Massachusetts, pointed out that Social Security’s Handbook has 2,728 rules and its Program Operating Manual has tens of thousands of rules to explain these rules. “The rules and the rules to explain the rules are written in a language that no one can remotely understand unless they have spent years immersed in the system’s provisions,” he said. What most people are doing is relying on Social Security’s calculators and staff in making their collection decisions, Kotlikoff contends, but Social Security’s calculators do not inform individuals about the benefits they can collect based on their current, former, or deceased spouse.

The Internal Revenue Service (IRS) will host a defined benefit plan termination webinar on August 14 at 2 p.m. Eastern Standard Time. IRS representatives will discuss how to define and enact a pension plan’s “date of termination,” and what steps are required to prepare a plan for termination.

Financial Sense

SBS Offers Checklist for Investment Policy Statements

While the Employee Retirement Income Security Act (ERISA) does not require retirement plan sponsors to have an investment policy statement (IPS) for their plans, it is a highly recommended best practice. Strategic Benefit Services (SBS) notes that for 401(k) and ERISA-governed 403(b) plans, an IPS documents there is a defined process by which the plans are being managed, helps prevent fiduciaries from making unsteady investment decisions when markets are turbulent, and provides evidence that a clear process and methodology exist for selecting and monitoring plan investments, among other things.

The World at Large

The UK government should introduce new incentives for savings designated for care in old age, according to its new older workers’ champion. Ros Altmann told PLANSPONSOR government urgently need to address the looming social care crisis.

Small Talk

ON THIS DATE: In 1735, freedom of the press was established with an acquittal of John Peter Zenger. The writer of the New York Weekly Journal had been charged with seditious libel by the royal governor of New York. The jury said that “the truth is not libelous.” In 1821, “The Saturday Evening Post” was published for the first time as a weekly. In 1944, acting on tip from a Dutch informer, the Nazi Gestapo captured 15-year-old Jewish diarist Anne Frank and her family in a sealed-off area of an Amsterdam warehouse. The Franks had taken shelter there in 1942 out of fear of deportation to a Nazi concentration camp. In 1957, Florence Chadwick set a world record by swimming the English Channel in 6 hours and 7 minutes. In 1958, Billboard Magazine introduced its “Hot 100” chart, which was part popularity and a barometer of the movement of potential hits. The first number one song was Ricky Nelson’s “Poor Little Fool.” In 1977, U.S. President Carter signed the measure that established the Department of Energy. In 1987, the Fairness Doctrine was rescinded by the Federal Communications Commission. The doctrine had required that radio and TV stations present controversial issues in a balanced fashion.

SURVEY SAYS: If You Had an Extra Hour

Last week, we covered a survey that found 88% of respondents work more than 40 hours per week. I asked NewsDash readers if they are among that 88%, and what they would do with an extra hour of time each day? More than two-thirds (67.6%) of responding readers indicated they do spend more than 40 hours per week on work-related activities, while 8.5% reported they do not. The remaining 23.9% said they work more than 40 hours in some weeks, but not all. Pursuing a hobby (i.e., cooking, painting, gardening, biking) was the most popular (18.3%) response for how respondents would MOST like to spend their time if they had an extra hour daily. The same percentage of respondents selected “other,” listing such things as reading and spending time with pets. Spending time with family (16.9%) was the second most selected activity on the list, followed by exercising (15.5%), sleeping/just relaxing (12.7%), and cleaning house/yard (9.9%). In verbatim comments, readers shared more about how they would spend an extra hour each day. Some lamented that extra hours working is hard to get away from, while others advised that people should rethink giving so much time to work. One commenter’s words rang so true to me, “Time is like money. People tend to spend as much as they have.” But, Editor’s Choice goes to the reader who said: “If I consistently ‘worked’ more than 40 hours a week and I had an extra hour a day I would likely spend it on finding a new job.” Thanks to everyone who participated in the survey!

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