Monthly Archives: January 2011

On the right trajectory

Motley Fool takes the glass-half-full view to the most recent pension funding status results:

The pension deficit actually shrunk by $44 billion in December, thanks in part to the stock market’s recent growth. In the last quarter, an 11% increase in the S&P 500 helped prompt a 7% increase in the value of pension funds.

For the full article: “Pension Perils Take a Turn for the Better.”

The Roth question: Should I pay or should I stow?

Timothy Connor

Your employer offers you the opportunity to make contributions to a Roth 401(k). You may even have the choice to convert the current balance in your regular 401(k) into a Roth 401(k). So should you? 

It goes without saying the key questions involve tax implications.  After all, you’re deciding whether to pay taxes now or perhaps pay them later on an investment.  Let’s put aside for a moment estate planning and other special circumstances where Roths are very effective. In a more general use, there exists a common viewpoint that warrants some scrutiny. It goes something like this:  “I think tax rates are going to increase. Therefore, I should go Roth now.” Hmm, is that the right way to go? 

Perhaps not. Rather than just trying to guess which way tax rates will move, you may wish to consider the difference between your “marginal” tax rate today versus your “effective” tax rate in retirement.

Your marginal tax rate today is the tax bracket that would apply to your next dollar of income. A single filer making $200,000 is in the 33% marginal tax bracket, meaning a raise to $200,001 would result in an extra 33 cents of taxes. However, because of our progressive tax system, the effective tax rate we pay is a combination of all the tax brackets that apply to our income (only 25.4% for the single filer making $200,000). When you contribute to a Roth instead of a regular 401(k), you’re effectively adding a slice to the top of your income, which gets taxed at your marginal tax rate. In retirement, your income may be comprised of virtually nothing but annual distributions from your retirement balances. And so the question to consider is this: When you take those retirement distributions, how will the effective tax rate you’ll pay on that income compare to the marginal tax rates you were subject to at the time you were deciding to go Roth or not? Even if you predict tax rates will increase, you may have been better off not going Roth. 

It’s not a simple subject, and certainly not as simple as laid out here, as there are many other factors involved including state taxes, account purposes, and other retirement assets. If you talk to experts, or search for help online, you’ll find arguments for either side. Many individuals in many situations are better off with Roth. Read up as much as you can. Ultimately, it’s a question you should explore with your tax planner and financial advisor.

DISCLAIMER: This post is for informational purposes only. Milliman does not provide tax advice. For more, see our terms of use.

Take this retirement advice from a wise 107-year-old!

Tony DozierRetirees who exited the workplace just before the downturn were probably counting on a different retirement experience. As the economy starts to come back, they have one of two choices according to this article, “Increase Your Odds of Surviving Retirement”: increase their income (by getting a part-time job for example) or cut their expenses.

Or you can take this advice from a 107-year-old who has been retired since 1969. Leonard McCracken lives in Florida and shares the reasons for his success: thrift, minimal use of debt, health, etc. Now that’s what you call a successful retirement.

Pension funding relief elections may require immediate action

Milliman has released a new Client Action Bulletin (CAB) looking at single-employer pension funding relief elections. Plan sponsors have only a brief window to formally make an election for either the 2009 or 2010 plan year.

This new CAB focuses on the IRS’s guidance on electing the relief, the calculation of the reduced contribution, and the notifications. You’ll find the new CAB here.

Comeback for long-term corporate bonds?

The Wall Street Journal looks at the possibility that increased M&A activity (and maybe even an increase in the currently low interest rates) could contribute to an increase in the issuance of long-term corporate bonds. What implications would this have for pensions?

Pension funds may be more motivated to increase their allocations to bonds now because they are better funded thanks to improvements in their stock portfolios. Their funded status, a measure of how well their assets match their liabilities, has risen to 79.8% from a 10-year low of 70.1% in August, according to consulting firm Milliman Inc.’s Pension Funding Index.

Since new 30-year issues have been hard to come by, pension funds and insurance companies that want to own longer assets have been picking them up in the secondary market.

Pension funded status up for month, down for year

Milliman today released the latest update to the Milliman 100 Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans. In December, these plans experienced asset increases of $24 billion and liability decreases of $20 billion, resulting in a $44 billion increase in pension funded status for the month. For the year, these pensions experienced asset increases of $50 billion but a liability increase of $99 billion, increasing the pension funded status deficit by $49 billion.

“The year started strong but then came the massive liability increases of this summer, which took us to a ten-year low in pension funded status,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index. “A market rally and generally positive interest rate performance since August has helped make up for that all-time low but it wasn’t enough to counteract the ballooning pension obligation. Looking to 2011, these 100 plans sponsors face an estimated $4 billion in additional  pension expense.”

You’ll find the full report here. Plan Sponsor’s coverage is available here. UPDATED 1/18: Treasury and Risk is available here.

And here are the ten-year deficit/surplus figures: