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Starting to talk about retirement savings

February 26th, 2014 No comments

Hart-KevinMy friends and family all know that I work on retirement plans for a living. So occasionally they ask me questions about their retirement savings or the state of Social Security or even how much money I think they should contribute to their 401(k) plan. These questions have traditionally been few and far between. However, in light of recent developments I’m being asked these same questions much more frequently than in the past. And that’s a good thing.

On January 28, President Obama introduced his MyRA proposal during his State of the Union address. One day later, Senator Collins and Senator Nelson introduced the Retirement Savings Act of 2014 (RSA-2014). And one day after RSA-2014 was announced, Senator Harkin introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act. Along with these proposals, pundits have recently discussed ways to improve and enhance the current Social Security program. Within a span of a couple days retirement savings became a hot topic of discussion. All of the retirement savings proposals have features that can benefit Americans. And beyond that, there’s the side effect of people discussing retirement savings.

Anything that can stimulate Americans into looking at their own retirement savings and doing something to improve those savings is a step in the right direction. The government appears to be willing to make it easier for Americans to save for retirement. However, there’s only so much that they can do. It’s important that we take the next step, because ultimately it’s up to each and every one of us to do what’s necessary to make sure that our retirement savings are where they need to be. Take a look at your retirement savings. Many retirement plans have websites that allow you to run projections so that you can see estimated benefits based on different scenarios. Go to the Social Security website and learn more about your benefits. Use the tools that are out there and solve your retirement puzzle.

Let’s talk to others about this hot topic. Get the ball rolling on helping friends, family, and colleagues to begin thinking about planning for their retirements. Having retirement savings in the news won’t help any of us save a dime for retirement. But at least we’re talking about it. And that’s a good start.

Rewriting retirement readiness: Will the USA Retirement Funds Act amend your plan?

February 21st, 2014 No comments

Copeland-MiraDuring the State of the Union address on January 28, President Obama announced his directive to create “My Retirement Account” (MyRA), a personal savings vehicle. On January 29, Senators Susan Collins and Bill Nelson introduced the Retirement Security Act of 2014, which includes moderate changes to the existing legislative framework for employer-sponsored plans to entice more small employers to sponsor plans. On January 30, Senator Tom Harkin, chair of the Senate Health, Education, Labor, and Pensions Committee, unveiled the Universal, Secure, and Adaptable (USA) Retirement Funds Act. This act would provide for the creation of a kind of “super” multiple-employer plan and would ensure that almost every worker is covered by a retirement plan with both automatic enrollment and annuitized distribution features.

MyRA provides for a supplement to the current retirement system; the Retirement Security Act would modify it; the USA Retirement Funds Act would profoundly alter it. How?

The USA Retirement Funds Act would have a significant impact because all employers with 10 or more employees would be required to offer a retirement plan with automatic enrollment and a lifetime income option. If Milliman’s recordkeeping clients can be used as a representative sample, a quick look would tell us that only 2% of plans currently offer both features, which indicates the substantial majority of plans would be required to be amended if this core provision is enacted.

It’s possible that some employers would choose to terminate their current plans and participate in a USA Retirement Fund rather than amend their current plans. Though automatic enrollment has been gaining popularity since the Pension Protection Act (PPA) codified it in 2006, with approximately 40% of plans now offering it, plans that have not yet adopted automatic enrollment tend to have good reasons for not doing so—participant populations with especially high turnover, for example. Annuitized payment options, however, have been declining. According to one recent survey, only 6% of plans offer a lifetime income distribution option. Of this group, 82% report that less than 5% of participants elect it.

The USA Retirement Funds Act could indeed dramatically alter retirement preparedness statistics: requiring a retirement plan for companies with 10 or more employees would allow access to a workplace retirement plan for many American workers who currently don’t have one; automatic enrollment for all plans would increase the number of people saving for retirement; and requiring annuitized distribution options would reduce the risk of people outliving their savings.

Senator Harkin has designed some intriguing new tires to get Americans moving toward retirement readiness … but will the rubber hit the road? If it does, plan sponsors would be advised to make sure their ERISA attorney is along for the ride.

MyRA versus USA Retirement Funds

February 13th, 2014 No comments

Bleick-TimDuring the State of the Union address, President Obama said, “Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own.” He then announced plans to create a new government-backed savings account called MyRA, and he asked Congress to offer every American access to an automatic IRA on the job.

Two days later, Senator Tom Harkin, chairman of the Senate Health, Education, Labor, and Pensions Committee, introduced new legislation: the Universal, Secure, and Adaptable (USA) Retirement Funds Act of 2014. Senator Harkin says the legislation would create a new type of privately run retirement plan that combines the advantages of traditional pensions and 401(k)s.

Numerous studies have shown that Americans are not saving nearly enough for retirement—it’s not even close. So anything that helps in this regard is a good thing. Let’s compare the two proposals.

MyRA is strictly an account balance. An individual contributes after tax dollars to the fund, and the distributions are tax-free at retirement. This is the same concept as a Roth IRA. The fund is backed by U.S. Treasury securities, and the principal is guaranteed not to lose value. When the balance grows to $15,000, the individual must roll the account over to a private Roth IRA. One big stumbling block to MyRA, though, is that employers are not required to set up the mechanism to allow their employees to contribute to the account via payroll deduction. The president does intend to include this provision in his budget for employers who do not offer an employer-sponsored savings plan—a process that would require Congressional approval.

USA Retirement Funds also starts out as an account balance. During working years, it operates just like a 401(k). The principal is not guaranteed, but the funds are pooled and professionally managed. The plan shifts to a traditional pension at retirement, when the fund is converted to a lifetime income distribution with spousal death protection. Employers with more than 10 employees who do not offer a plan with automatic enrollment and a lifetime income option would be required to select a USA Retirement Fund and automatically enroll all employees at a contribution rate of 6% of pay. Employees can opt to increase, decrease, or stop contributions anytime. Employers are allowed to make additional contributions on behalf of their employees. Because it’s an account balance during working years, the plan is completely portable upon a job change.

Could these proposals make a dent in the retirement savings gap of many Americans and increase their confidence level about a secure retirement? MyRA is essentially a new way to set up a Roth IRA, which is currently underutilized. But without requiring employers to automatically enroll their employees, can it make a significant impact? The automatic enrollment feature of USA Retirement Funds can be a powerful mechanism, and some people may like the built-in lifetime income aspect. In addition, USA Retirement Funds could be appealing to small employers who would like to provide a retirement plan but have been reluctant because of the plan administration hurdles.

It’s time to move our retirement savings crisis to the forefront. Maybe MyRA or USA Retirement Funds can get it kick-started.

Establishing financial security under Shariah law

February 7th, 2014 No comments

How does Shariah law affect retirement security among Muslims? Conventional pension fund models are often forbidden under Islam’s divine law. In this article, Milliman’s Danny Quant and Safder Jaffer discuss a framework which may facilitate the financial security of Muslims while adhering to Shariah law.

Here is an excerpt:

The good news is that, even with due attention to the sensitivities behind Shariah prohibitions, there are ways to address many of the challenges. The financial services industry, for example, working in concert with Shariah authorities, has essentially overcome many of the problems associated with riba (interest) by transferring the concept of interest to profits – that is, profits are earned on investments rather than interest. Indeed, a working system compliant with Shariah law is coming into place for the accumulation phase of retirement plans, enabling money saved now to enjoy growth and earnings in the future…

Milliman has proposed that Shariah authorities approve the creation of a special-purpose financial vehicle that can be used to support retirement products of takaful and insurance companies. It addresses all the concerns of Shariah law we have discussed in terms of an annuity: riba, gharar (uncertainty), maysir (gambling), and others as well (including issues related to zakat). This financial instrument would essentially separate out the various components in the whole transaction. In many ways, it looks like a trust arrangement, but there is sufficient legal separation among the various parties to satisfy requirements of Shariah law.

There is still a need for sukuk at longer periods. There is little or no availability for sukuk with tenors longer than 20 years. A possible solution here could be wrapping sukuk around infrastructure projects such as toll roads or airports, whose income streams would then serve as proxy for payments due. In many ways, it is a matter now of what countries will be willing to step up and do it, likely one of the more moderate and stable states such as Malaysia or Indonesia, some countries in north Africa, and possibly Saudi Arabia.

This article was first published in the November 2013 edition of Middle East Insurance Review.

The importance of updating your retirement account beneficiary

December 12th, 2013 No comments

Copeland-MiraFor many retirement plan participants, a beneficiary designation might just sound like another confusing piece of retirement plan jargon, but designating a beneficiary is a relatively simple step of setting up your retirement accounts that should not be overlooked.

What is a beneficiary? Your beneficiary for your retirement account is the institution or person who will inherit your account in the event of your death. Retirement accounts typically allow for a primary beneficiary and a secondary beneficiary. A secondary (or “contingent”) beneficiary would receive the assets if your primary beneficiary has predeceased you.

For married participants, most retirement plans require that accounts be paid to spouses unless written spousal consent is obtained to designate alternates. A common arrangement for families is to designate the spouse as a primary beneficiary and the children as secondary beneficiaries. If you do this, make sure to update the designation upon the arrival of your next bundle of joy. Also, make sure to update your beneficiary designation if you get divorced.

Why is it important to take the time to designate a beneficiary for your retirement account? Because your will won’t cover it. Employer-sponsored retirement accounts, individual retirement accounts (IRAs), and life insurance proceeds are generally exempted from your will. Instead, those accounts will automatically pass to the beneficiaries you’ve named for them, even if you no longer want those individuals (i.e., a former spouse) to receive the funds. And if you forgot to update your beneficiaries after you had Shiloh, then little Vivienne and Knox won’t receive their shares of your 401(k).

If you don’t designate a beneficiary, upon your death your 401(k) account would be assigned as specified in the plan document—typically to your spouse, children, or closest surviving immediate family member—or to your estate if no qualifying relations exist. The legal process of determining who receives the funds can be time-consuming, laborious, and costly for the potential recipients and the plan administrator, and may overlook a needy dependent in an unconventional family structure. If you have a beneficiary on record, however, your account can be passed directly to that beneficiary, who may be able to access it quickly in a time of need.

Designating a beneficiary typically requires a submitted form (it may need to be notarized if you’re designating someone other than your spouse). Many plans also allow you to designate your beneficiaries online; participants in a plan whose recordkeeping is handled by Milliman, for example, can typically complete their beneficiary designations online at Millimanbenefits.com.

Retirement savings: Don’t confuse past performance and future expectations

November 26th, 2013 No comments

Regli-JinnieThe Wall Street Journal recently published an article (subscription required) that indicated individual investors are returning to investing in stocks, but that this could have negative implications for Ma and Pa’s retirement savings accounts.

Optimistic figures about the stock market, such as a 29.32% increase (as of November 26, 2013) of broad market indexes and potential for the Dow Jones to hit 20,000 this year, have been tossed around like rice at a wedding. While these numbers have encouraged the average investor to return to stock investment it’s important for retirement plan participants to keep a few things in mind.

RearViewMirror

Source: Carl Richards, The Behavior Gap.

While the short-term returns on stocks may have looked incredible on your third-quarter statements, you absolutely cannot invest based solely on short-term returns. Investors in 2008 likely saw the same incredibly high returns right before the market took a downward turn. All too often I overhear people saying, “Wow, did you see returns are up to 20% on Fund XXX, I need to sell out of Fund YYY and buy in.” Because the prices are being driven up, your hard-earned money actually buys fewer shares than if the prices were lower.

I’m not saying that our economy is building up for a fall but it’s important to keep in mind that, even while the market is doing well, you need to protect the nest egg that you’ve worked so hard to build.

Regardless of the market, the key to investing your retirement assets is diversification. Financial advisors tell us that, by spreading the investments in a retirement account across different asset categories, investment risk can be greatly reduced. By investing in a mix of stocks and bonds you are creating your own small “cushion” of protection against losses in case of market fluctuation. It’s important to remember that you’re investing for the long term, and more than likely those incredible returns will only last for a short period of time.

Can R-Bonds help you save for retirement?

November 22nd, 2013 No comments

The U.S. Department of the Treasury will begin rolling out retirement bonds (R-Bonds) starting in January 2014. These government-issued savings bonds are aimed at employees working for companies that do not offer retirement programs. In this MarketWatch article, Noel Abkemeier discusses several issues related to R-Bonds:

Noel Abkemeier, a principal and consulting actuary with Milliman, an independent actuarial and consulting firm based in Seattle, had a laundry list of questions and suggestions. Among them:

What would R-Bonds provide that couldn’t already be done with an IRA? If this is taxed the same way as a traditional IRA, does it limit deductibility of the contribution inversely to income, and with the same limits? Or is it possible to have a Roth IRA version of the bonds?

What is the advantage of qualifying for rollover? That seems to fit somewhere between no-advantage and no-big-deal.

Where are the bonds held? Are they in an electronic notional account at the Treasury Department? Are they in your desk drawer at home? Are they at a brokerage account? If at the Treasury Department, there is the ultimate in portability, although that would not mean much.

If the bonds could be purchased with the filing of your tax return, it might add a little convenience to the transaction.

Are the R-Bonds inflation adjusted? Probably not, but that could be a potential advantage, if offered.

Will contributions be limited so it doesn’t benefit the wealthy disproportionately, as usually happens? This is an issue of both tax brackets and quantity of purchases.

What maturity will these have? Will yields vary depending upon maturity chosen?

Are there any reinvestment guarantees?

Will the bonds mature for a lump-sum payout? Or will they have a coupon payout for a fixed income at some point?

It would be better if they offered “lifetime income bonds,” which effectively would be deferred income annuities. They could have a cash-refund design so the purchasers would be trading lost interest for a lifetime income guarantee, while there was no fear of losing principal. This would send a strong message on priorities by merging the accumulation and decumulation challenges of retirement planning.

What will be the yield on the bonds? Will these have low Treasury yields, which is not the best investment for a complete retirement portfolio? Or will it be higher, which means that taxpayers will be funding government debt at a higher rate than is justified? How would the yield compare with a corporate bond no-load mutual fund?

Google+ Hangout: PlanAhead for Retirement®

October 22nd, 2013 No comments

Milliman’s retirement planning tool PlanAhead for Retirement can help defined contribution plan participants better understand how their account balances translate to retirement income. The tool helps individuals learn what they need to do on their own to adequately prepare for retirement.

In this Google+ Hangout, Jinnie Regli demonstrates how PlanAhead functions.

To learn more about PlanAhead, click here.

Surviving the longevity “Sharknado”

October 21st, 2013 No comments

Matterson-WadeYou’re probably well aware of the Sharknado phenomenon—a straight-to-television disaster movie, where a water spout lifts sharks out of the ocean and deposits them in downtown Los Angeles. The heroes deal admirably with this inexplicable influx of predators and after much bloodshed, emerge victorious.

While the movie was distinctly B grade, the media hype that accompanied it was simply astonishing. It got me thinking about what makes a good/bad disaster movie, given the formulaic approach they tend to adopt:

1. Think of some absurd concept—the crazier the better.
2. Identify with an individual or group fighting to survive.
3. Against all odds, and with much bloodshed, the hero overcomes all.

This is all well and good, but what does this have to do with financial planning? Well, it seems that as an industry we are potentially in the midst of our very own, slow-moving disaster movie—that is, the onslaught of the aging population and the impact of longevity. Now while seeing a great white pointer coming out of a tornado may seem slightly more daunting than a geriatric surfing a tidal wave, the impact of the latter is much more profound, predictable, and likely.

The statistics themselves are simply staggering. By 2050, almost a quarter of the population will be over 65 compared to 14% now. Given that almost 65% of all superannuation assets are held by people between the age of 45 and 54, the amount of money in motion as this group retires will be too large to ignore. As our “Politics of Pensions” thought piece highlights, the implications are broad and will impact on all corners of the Australian community, from business owners and taxpayers through to government policy makers.

When observed through this lens, the impending pressure of longevity has much in common with our traditional disaster movie. It’s no surprise that much of the language adopted by the media and those in the industry attempting to highlight the issues is very similar to what you might find on a movie poster—the “Longevity Tsunami” paper written by the Actuaries Institute (available here) is a good example.

Combine this with the impact of the sweeping reform that the industry has been subjected to, together with rapid technological advances, and the industry is facing a perfect storm (another great disaster epic). The ramifications for the advice industry are immense. Faced with increased demand, regulation, and complexity, there is both a risk and opportunity that presents itself to those up to the challenge.

Fortunately, we’re already seeing potential heroes step up to take on these issues head on. Successful advisers and early movers in this space appear to be taking similar paths, by:

• Retooling their advice proposition to become more strategic in nature, with increasing focus on client objectives
• Developing a hunger for understanding the complexity of the issues and becoming subject matter experts
• Leveraging the latest analytical tools to offer greater insight and value add

From the perspective of this website, both Lonsec and Milliman have set out to accompany you on this mission. As your partners, we intend to provide you with the necessary advice, research, and tools—all in a single and convenient location. We understand that there is not a silver bullet to solve these issues and that ultimately it will be a joint effort.

To this end, this site intends to provide relevant information across the following areas, including:

• Thought leadership
• Research
• Portfolio construction guidance and advice

There are also some exciting plans for the future, including the development of discussion forums and a variety of tools to assist advisers in their implementation of objectives-based advice.

Most importantly, we believe that the subscriber community has plenty to add in this space and that we will all benefit from the sharing of experience. You’re invited to participate in the conversation and we look forward to your comments.

With all this at your fingertips, we’ll help you navigate the challenges and avoid becoming shark bait.

This article first appeared at LonsecRetire.com.au.

A pathway to retirement plan allocations

August 5th, 2013 No comments

Milliman’s InvestMap™ gives companies the ability to create a custom target date allocation strategy for the defined contribution plans they manage. The sophisticated tool can help boost 401(k) plan participation by allowing employees to personalize their investment approaches, and also provides a high level of fiduciary protection for the plan sponsor. Consultants Randy Mitchell and Gerald Erickson, along with several Milliman clients, discuss the benefits of InvestMap in the following video.

For more perspective on InvestMap, click here.