Archive

Posts Tagged ‘Bart Pushaw’

Cash balance plans: Why they may be a good opportunity for business owners, professionals, and executives

September 27th, 2013 No comments

Pushaw-BartNew opportunities for owners and key staff to save for retirement on a tax-favored basis bring with them popularity and value. For this reason, a cash balance plan may be worth considering.

Owners and professionals
Cash balance plans have the potential to substantially provide for solid retirement security and shelter greater income from taxation to increase retirement wealth. These programs will not fit each and every owner’s situation, but a range of programs has been used to meet significant needs and concerns.

The typical case is one where the organization already contributes to an all-employee profit sharing or 401(k) plan. Oftentimes the program can be modified with a cash balance plan, extending it for owners who can then annually contribute amounts in excess of the profit-sharing-only maximum of $51,000. Additional annual tax-deferring contributions can range up toward $250,000.

The details of the programs can be worked out with advisors to custom fit most financial situations.

Executives at large corporations
The opportunities mentioned above are even better for corporate executives wishing to enhance their retirement wealth and financial security as well. Large corporations often sponsor nonqualified Supplemental Executive Retirements Plans (SERPs) for key management. Cash balance programs allow vastly stronger security arrangements, moving these benefits from the nonqualified arena to qualified status.

Adopting a cash balance plan could further strengthen the retirement promise, allowing monies to be put into trust for the sole benefit of the executives. No insurance contracts or long-term commitment would be needed. Investments would be controlled by management and allow access to institutional pricing of funds.

Again, every situation is different, but for executives, owners, and professionals the incorporation of a cash balance plan may be a great asset in the ongoing effort to secure a well-funded retirement.

Pension accounting conjectures

February 28th, 2012 No comments

From far away, we conjectured that the headline-grabbing stories about companies moving to “mark to market” pension accounting that occurred in the past 18 months were woefully incomplete in key details. At that time, the stories talked about changes companies made to their Financial Accounting Standards Board (FASB) financial reporting under Accounting Standards Codification (ASC) Topic 715. These changes, for the most part, meant that the annual gains and losses that plans experienced because of interest rate declines and poor equity returns would hit earnings immediately rather than be deferred. This was resulting in some pretty big numbers. Part of our conjecture was that these companies were first-movers in adopting what some believed were going to be mandates once international accounting standards became the rule.

Furthermore, our numero uno on the conjecture list of why they were doing this was that they would implement an investment approach based on liability-driven investing (LDI) to protect against those nasty interest rate and market declines, with their resulting losses. When we saw repeat headlines about some of those same companies again taking massive hits to earnings because of their pension accounting, I was dumbfounded. I hate being wrong but admit I was.

Read more…

The question of portability (part 2)

August 22nd, 2011 No comments

I recently wrote, in The question of portability (part 1), about how portable defined contribution (DC) retirement plans, such as the 401(k), aren’t always the best option for employees. Now let’s look at how the urge to create a portable benefit by converting to a 401(k) may not necessarily always be working in the best interests of employers.

The chicken or the portable nest egg

Since the idea of portability entered the retirement plan arena, academics have looked closely at the question of employee mobility. One study stated the question very directly: Which came first—mobile employees or plans that encouraged employee mobility? Did the plans altruistically provide a solution to a changing demographic, or did the mobility solution actually open a door to problematic mobile employees?

The research indicated that employee mobility picked up only after 401(k) plans became widespread. Aside from the business reasons for retaining good employees, the portable 401(k) also raises questions about unintended consequences for the plan itself.

Spreading the wealth

More monies tend to be accumulated by the young and recently hired employees in 401(k) plans than in pension plans. This is balanced out in later careers as long-service employees eventually tend to receive more annually from pension plans compared to 401(k) plans.

The irony for some employers is that even if a career-average structure is adopted for portability’s sake, the benefit often could have been delivered much less expensively in a defined benefit (DB) pension plan than via a DC plan. Even if benefit levels established under the benefit policy are kept constant in order to maintain competitive and adequate income levels, a DB plan could cost the company less and increase shareholder returns.

There’s no doubt that the 401(k) plan has a place in tomorrow’s retirement landscape, as long as people understand the real intrinsic differences of DC and DB plans. It’s fair to say that portability is not actually one of those differences. Plan sponsors are in a position to reverse this misconception, and should not be swayed from pursuing an effective DB strategy only in the name of portability.

The question of portability (part 1)

August 17th, 2011 No comments

In the late 1980s defined benefit (DB) pension plans were firmly entrenched as the foundation for an employee’s retirement security planning. But 401(k) plans had just been awarded long-overdue IRS regulations and were gaining in popularity as a differentiator for companies in their quest for talent.

Among the key selling points for employers reviewing 401(k) plans was that employees were more likely to change jobs than they had been previously and because of this they were served well by benefit portability. It was a feature most pension plans were not positioned to provide as well.

You can take it with you

The portable 401(k) plan looked, to some, to be the best solution. Yet, in some cases, it may be a mistake to assume that portability in and of itself is necessarily the best option for employees or employers.

Read more…

How DB plans became DC plans: An introduction

May 18th, 2011 No comments

Bart Pushaw

At some point the popularity of defined benefit (DB) pension plans gave way to defined contribution (DC) plans. This is perhaps best exemplified by the numbers of 401(k) plans, which so many employees are now (or should be) contributing to on a regular basis. We looked into some of the factors behind this shift.

Q: What were the main reasons the landscape of retirement plans changed during the 1980s and 1990s?

A: For very small plans, those set up mainly as temporary tax shelters by small business owners such as doctors and dentists, the Tax Reform Act of 1986 changed rules sufficiently to cause them to get out of the game. For larger plans, there was a mantra emanating from performance-oriented compensation strategies about portability and paternalism: both uprooting pension plans in favor of DCplans such as the 401(k).

Q: What is it about portability or paternalism that made DB plans so ill fitting?

A: Many consultants were decrying how the workforce had become more mobile over the years. Mobile workers, it was said, couldn’t take their DB plan benefits with them when they left; they were not easily portable to the next employer. The mantra was so quick to pick up steam and repeated so often that I’m afraid there were reactions to it that clearly indicated misunderstanding or confusion.

Q: What kind of confusion could that have caused?

A: Once you look at it, portability was all about being able to cash out a prior employer benefit and roll it over to the next employer. The notion that DB plans could not accommodate this is nonsense. There is no reason why a DB plan could not allow it—and there can even be DC plans that do not. As a matter of sponsor choice, you deal with it that way. It was not and is not a matter of plan type, DB better than DC. And because people really didn’t stop and think about it, the main problem with portability (i.e., job-hopping employees) was not that the money could or could not follow you around (so what if it couldn’t?) it was because of how career benefits can be radically affected by job-hopping. If five companies have the same retirement plan, DB or DC, and I take my turn at employment at each over my career, then my benefit can be significantly less than if I stay with the first employer my entire career.

Read more…

Basic questions and answers about lump-sum distributions

April 29th, 2011 No comments

Bart Pushaw

The ins and outs of lump sum distributions, and whether to take them or not, are among the most common conundrums facing new retirees. Here are a few questions about the basics that I hear frequently and the answers I offer to them.

Q: Shouldn’t I take a lump sum distribution when I retire?

A: In general, people and their spouses should review what’s best for them. If a retiree has sufficient income to live without using their savings immediately, the lump sum can provide flexibility in spending and a potential estate. Or if a monthly income is most advantageous, then an annuity makes more sense.  Everyone needs to think what’s best for them and their family. From a purely mortality-neutral point of view, the answer for most of us is NO.

Q: But I’m told I can beat the returns and have more flexibility if I take a lump sum. What’s that about?

A: If you take a lump sum, you still need to earn monthly income from it. How to go about getting that monthly income is the problem. You can buy an annuity, self-annuitize by withdrawing some amount each year, or hire a financial planner and work out a plan. More often than not, these are suboptimal alternatives that can sometimes lead directly to personal financial crises.

Read more…

LDI and mark-to-market

March 30th, 2011 No comments

Bart Pushaw

Susan Mangiero recently responded to our post of last week on a new reporting trend in retirement plans, one that calls for a more accurate reflection of liabilities and surpluses in a single year rather than “smoothing” gains and losses over longer periods. The back-and-forth has us thinking it may be useful to provide more clarification on liability-driven investing (LDI) and mark-to-market accounting.

First off, let’s be clear: When we refer to mark-to-market liabilities, it’s not necessarily accounting requirements that are of central concern. Financial Accounting Standards have been instrumental on the financial reporting side of things, but it’s really the Pension Protection Act that is central here, both because it introduced mark-to-market on pension funding and also because it makes LDI viable. The market crashes in 2008 and, previously, in 2001-02 verify the primacy of LDI. Without mark-to-market–which entails valuing liabilities based on current market interest rates/yields–LDI cannot exist. In this sense, mark-to-market enables LDI to work. Whle not a perfect congruence, reducing funding volatilities will also reduce accounting volatilities. Since funded and accounting rules require mark-to-market, LDI can be implemented with either as the primary cost metric.

Backing up even further, a primer may be helpful. For retirement plan sponsors, mark-to-market accounting tends to introduce risks, chiefly related to interest rates. It’s a factor many of them have never had to deal with before. In the simplest terms, the goal of LDI is to address those risks. The strategy is simple enough, calling for as close a match as possible between asset and liability returns over the course of a year. If asset returns match liability returns, then the funded level at the end of the year will be the same as at the beginning of the year, all things being equal. By operating on such an even keel, funded status volatility and thus contribution requirements are kept as manageable and predictable as possible.

Read more…

New reporting trend may ultimately put pain in rearview mirror

March 23rd, 2011 No comments

Bart Pushaw

A new trend for reporting retirement plan numbers may be on the horizon, according to a Pension Risk Matters post by Susan Mangiero, based on a recent report in the Wall Street Journal, “Rewriting Pension History”.

It’s simple enough in concept, calling for earnings reports each year to reflect more accurately the full extent of liabilities and surpluses for that year, rather than “smoothing” sizeable gains and losses from retirement plan assets across longer periods.

Mangiero writes:

Cynics might describe this strategy as a “big bath” approach. Report pain all at once and therefore be able to report higher earnings the following year. On a more benign note, companies may simply want to provide more transparency to their investors, especially at a time when lots of questions are being asked about the costs associated with providing retirement benefits to current and past employees.

Read more…

Categories: Defined benefit Tags:

The state of pension plans today

March 16th, 2011 No comments

Bart PushawConventional wisdom today has it that defined benefit (DB) plans, or pension plans, have all but withered up and blown away. In fact, it’s arguable that the very opposite is true. With a few modifications, they may prove to be more viable than ever. Here are some frequent questions I hear about them and my answers.

Q: Seems that everyone is talking about how good pension plans are. If so, why have they gone the way of the dinosaur?

A: I’m not sure they’re that far gone, but I note the point. Pension plans are indeed good for employees and retirees—very good, in fact. That’s not to minimize, however, that they have come a long way over the years, steadily improving and getting better.

Q: If they’re that good, then why have they gone away?

A: One too many straws, perhaps. Memories tend to hang on to past difficulties and unfulfilled promises, so that, even as past problems are fixed, one more straw added to the list of woes can and probably has pushed decision-makers over the edge, and they’ve begun to pull plugs. Issues that have been fixed include outsourced administration, communication and modeling tools, and simpler benefit formula formats, e.g., cash balance plans, fewer primary insurance amount (PIA) offset plans, etc.

Read more…

Categories: Defined benefit Tags:

Liability-driven investing: Are we there yet?

March 4th, 2011 No comments

Bart PushawFor a while there, liability-driven investing (LDI) was a hot item in employee benefit circles. You don’t hear as much about it these days, but the need is still there. Here are five frequently-asked questions I’m hearing from clients.

Q: There was a flurry of publicity surrounding LDI. Has that fad passed?

A: There certainly has been quite a lot of activity surrounding LDI. Much of the early wave of material varied in content and focus and much misinformation exists. I dare not refer to it as a fad, however. The nexus of LDI began with financial reporting rules requiring liability values be marked-to-market and it slowly grew important; the big change came with the Pension Protection Act of 2006, which also requires that liability values reflect market pricing in some way. Without any mark-to-market, there can be no LDI, and because it seems our lives will be tied to market values, we expect LDI to be around for the long haul.

Read more…