Month: December 2015

Retirement Roundup: What’s a Cadillac Tax?

Posted on by planeteria

A digest of timely information and insight about finance, investing and retirement

Congress to delay ACA’s ‘Cadillac’ tax on pricey health plans until 2020 | Washington Post

A decision by Congress to defer a new tax on expensive employer health plans, the first major change that lawmakers have made to the Affordable Care Act since its passage, would cost the government an estimated $9 billion.

The two-year postponement in what has been dubbed the “Cadillac tax,” because it applies to high-priced insurance, is the most significant of three changes to ACA taxes woven into a Congressional budget package.

Readers’ picks in 2015 | Squared Away Blog

Though the Squared Away blog covers everything from student loans to helping low-income people improve their lot, the articles with the most reader traffic over the past year were dominated by one topic: retirement.

The Fed raised interest rates so what happens next? | NPR

The Federal Reserve raised interest rates earlier in December, something it had not done since 2006. The long-awaited action was so well advertised that much of the market reaction actually occurred in advance.

Pushing aside 401(k)s for mandatory savings plans | The New York Times

As most private employers have abandoned traditional pensions and replaced them with self-financed retirement accounts, many Americans are not saving enough to ensure a comfortable retirement.

One solution could be Guaranteed Retirement Accounts. The president of Blackstone, the giant private equity firm, is teaming up with a labor economist and professor at the New School for Social Research to push such a government-sponsored plan that would require participation and contributions from any employer without its own 401(k).

Plan return comparison highlights DB outperformance | PlanSponsor

Defined benefit (DB) plan investment returns outperformed 401(k)s, according to a new study from the Center for Retirement Research at Boston College. Looking at investment returns by plan type from 1990 to 2012, the study found an average difference of 0.70 percent a year, even after controlling for plan size and asset allocation.

One major reason is higher fees. And much of the money accumulated in 401(k)s eventually is rolled over to IRAs, which earn even lower returns.

Poked, Prodded, and Perused: PERA Passes!

Posted on by planeteria

The studies have been completed and the results are in: PERA is the most cost effective, efficient retirement plan available, is on-track to achieve full funding, and has saved $15 billion as a result of the shared sacrifices in SB 1.

As 2015 comes to a close and we prepare for the next legislative session in January, we wanted to summarize the various studies and reports on PERA conducted this year in order to objectively inform the discussion about Colorado PERA. Three independent studies on PERA were released in 2015 as a result of legislation passed in 2014 (SB 14-214), and 2015 marks the five-year anniversary of the passage of the landmark PERA reform bill (SB 10-001), which requires a report to be issued every five years on the impact of the reforms. Let’s review each study in the order of release throughout the year.

SB 14-214

Prior to the start of the 2014 Colorado legislative session, the Governor’s Office included funding in the Governor’s budget to perform an independent analysis of the retirement plan offered to public employees. The General Assembly appropriated $500,000 and unanimously passed SB 14-214 to:

  • Perform a total compensation study for State employees that includes the retirement benefits provided by PERA (released January 2015).
  • Complete a study comparing the cost and effectiveness of the current hybrid defined benefit plan to alternative plan designs in both the public and private sector (released July 2015).
  • Conduct a sensitivity analysis to determine when actuarial model assumptions are meeting targets and achieving sustainability (released October 2015).

The first study in SB 14-214 required the State Personnel Director to contract with a “third party compensation consulting firm with actuarial expertise and national standing to perform a total compensation study that includes the retirement benefits provided by the public employees’ retirement association (PERA).” From the Executive Summary of the report:

This study requires a comparison between the State and similar workforce structures including private companies and other states. For the retirement benefits that we explicitly valued…the State’s total retirement compensation package is equivalent to 15.7% of pay (15.4% defined benefit and 0.3% retiree health care), relative to the market median of 14.7% (combined sources: defined contribution, defined benefit, Social Security, and retiree health care).

Comparing Colorado to 23 peer organizations (including 18 states and five other private employers like Wells Fargo, IBM, and the University of Denver), the study found the State is just slightly below the prevailing market in total compensation, and the retirement package offered is about 1 percent higher than market peers. As the Milliman report concludes, “The State’s offerings are generally consistent with market trends of survey participants.”

The second study in SB 14-214 required the State Auditor to contract with a “nationally recognized and enrolled actuarial firm” to analyze PERA and compare it to alternative plan designs in the public and private sector. From the Executive Summary of the report conducted by GRS:

This in-depth look at the PERA Hybrid Defined Benefit Plan (PERA Hybrid Plan) illustrates that PERA is within norms for benefits when compared to its non-Social Security state peer group members. PERA benefits are also comparable to the private sector. This study found that the current PERA Hybrid Plan is more efficient and uses dollars more effectively than the other types of plans in use today. Alternative plans implemented for new hires require greater contributions in order to replace the same retirement income than the current PERA Hybrid Plan. If contributions are kept the same, alternative plans will provide a lower retirement benefit/replacement ratio. Alternative plans studied included defined contribution, cash balance, a combination of defined benefit and defined contribution, plus Social Security private sector model plans. PERA’s costs for new hires (future hires) are lower than under any alternative plan.

Bottom line from the 217-page report: The PERA hybrid defined benefit plan is the most cost effective, efficient plan available, and provides more income at retirement than the alternative plan designs for all ages and career paths. If costs are held constant among the alternative plan designs, PERA provides the highest amount of benefits for the given cost. If benefits are held constant among the alternative plan designs, PERA provides those benefits at the lowest cost. The study could find no plan that is more effective and efficient at providing a retirement benefit than the PERA Hybrid Plan.

The third study in SB 14-214 also required the State Auditor to contract with an independent actuarial firm with experience in public sector plans to conduct a sensitivity analysis of PERA’s actuarial assumptions. From the Report Highlights:

The PERA Hybrid Defined Benefit Plan is currently on track to be fully funded by 2052-2053 based on current actuarial assumptions. Prior to the changes in Senate Bill 10-001, insolvency was projected. Investment return has the widest range of variability and has the biggest impact on the full funding date. PERA should utilize the proposed signal light reporting annually to give policymakers an assessment of the current projected full funding dates compared to the objective.

A new signal light tool shows that, prior to reforms passed in SB 1, PERA’s major divisions would have been all red or dark red (projected to be insolvent), but after the impact of SB 1, the signal lights improved and all have been light green or better since that time (projected to be fully funded in less than a 40-year period). In addition, the report validated PERA’s actuarial assumptions and projections (including demographic and economic assumptions like investment return, salary increase, payroll growth, and inflation) and calculated a very high likelihood of all funding objectives to be met in a reasonable period of time.

More information: https://peraontheissues.com/index.php/2015/10/28/independent-studies-offer-expertise-and-insight/

SB 10-001

As part of the changes implemented in SB 1, PERA is required to report to the General Assembly every five years “regarding the economic impact of the 2010 legislative session changes to the annual increase provisions on the retirees and benefit recipients as compared to the actual rate of inflation and the progress made toward eliminating the unfunded liabilities.”

From the Key Findings of the report released December 2015:

  • As a result of the SB 1 reforms, PERA is sustainable.
  • Over the past five years, SB 1 reforms saved PERA approximately $15 billion in unfunded liability.
  • The SB 1 reform with the most significant impact over the last five years is the reduction in Annual Increase provisions which accounts for over 90 percent of the $15 billion in savings to date.
  • Even recognizing the SB 1 reforms which changed the Annual Increase provisions, PERA benefit recipients kept up with U.S. inflation over the last five-year period.
  • The funded ratios of the two largest Divisions of PERA (State and School) are slightly ahead of the original projections developed at the time SB 1 was implemented in 2010.

Overall, the report highlights how shared sacrifice, fiscal discipline, and legislated reforms provide PERA with the resources it needs to deliver the benefits earned by Colorado’s public workforce, making Colorado stronger for everyone.

More information: https://peraontheissues.com/index.php/2015/12/11/five-years-after-the-great-recession-pera-continues-progress-toward-full-funding/

Colorado PERA Board of Trustees

Posted on by planeteria

The Board of Trustees of Colorado PERA is a group of 16 professionals who are responsible for overseeing PERA’s investment program and the administration of PERA’s benefits. The Colorado General Assembly, with the approval of the Governor, can change PERA benefits or contributions.

State law describes the responsibilities of the Board and the process for Trustees to be selected.

Three Trustees are appointed by the Governor and confirmed by the State Senate, 12 are elected by PERA members and retirees, and the State Treasurer serves as an ex officio Trustee.

Each May, Colorado PERA holds an election for Trustees whose terms of office are expiring. Candidacy packets are available beginning in January.

Details on current Trustees may be viewed here.

Retirement Roundup: PERA on the Path to Full Funding

Posted on by planeteria

A digest of timely information and insight about finance, investing and retirement

PERA: Changes to the state pension plan over 5 years have saved billions | Denver Business Journal

By most accounts, Colorado’s state pension plan is healthy and on track to solvency in the wake of a massive overhaul by lawmakers five years ago.

PERA executive director Greg Smith reported Friday to the Joint Finance Committee that in the past five years, SB 1 reforms have saved PERA about $15 billion in unfunded actuarial accrued liability. Most of the savings, he said, is from decreasing the Annual Increase provisions for current and future retirees – which accounts for 90 percent of the $15 billion in savings.

Fighting inflation in retirement | Morningstar

The news that Social Security beneficiaries won’t receive an inflation adjustment next year has renewed debate about how we measure the cost of living for seniors. A strong case can be made that the current formula driving Social Security’s cost-of-living adjustment (COLA) is out of whack.

The COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which gauges a market basket of goods and services of working people – who tend to be younger and spend less on health care than seniors. What can you do to hedge against the negative effects of future inflation in retirement?

Rethinking retirement income replacement rules | Investment News

Some research suggests that the traditional target for retirement income is too high, based on 80 percent of gross earnings in prime career years before retirement. Others say it is too low, given rising out-of-pocket health care costs. But a new study from the Transamerica Center for Retirement Studies shows that planning to work longer as a way to forestall retirement and minimize savings needs may only be wishful thinking.

The average American is woefully unprepared for retirement | Motley Fool

This year’s results from the annual Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI) are sobering. Only 22 percent of Americans are very confident that they’ll have enough money for a comfortable retirement. And more than a quarter of working Americans have set aside $1,000 or less for their golden years.

Tips for people who will retire in 2016 | U.S. News & World Report

Retirement is a transition into a new phase of life that requires changes to your finances and lifestyle. Taking care of a few preparations in the months leading up to retirement can make that adjustment smoother.

What the looming Fed rate hike means for your retirement | CNBC

An interest rate hike from the Federal Reserve looks to be on the horizon this season. A recent survey found more than half of American investors say the economy is their top financial concern, fueled in part by worries over market volatility and interest rates.

Experts say the first increase in interest rates since 2006 might not have much of an impact, but if interest rates continue to climb seven or eight times in the next three or four years, you’ll start to notice it in your wallet and your investments.

The little guy feels anxious as the Fed is set to lift rates | The New York Times

Around Colorado and across the nation, decisions made by the Federal Reserve in Washington have large consequences. William Harris tapped his retirement savings to open A-Town Pizza, a Neapolitan pizzeria, in Aurora three years ago. On a good Friday, his shops sell 1,200 pies. In such stories, the Fed finds evidence that its seven-year campaign to reboot the American economy is succeeding. But Mr. Harris is not ready.

Five Years After the Great Recession, PERA Continues Progress Toward Full Funding

Posted on by planeteria

After five years of shared sacrifice, PERA is making progress toward becoming fully funded. That’s according to a new report PERA released  as required by Senate Bill 10-001.

Known as SB 1, this landmark legislation was a response to the Great Recession that required sacrifice from members, retirees, and employers alike in order to return PERA to long-term sustainability.

The report shows that PERA has saved about $15 billion to date in unfunded liability as a result of SB 1 changes. Over 90 percent of that savings is a result of the reduction of the Annual Increase. But even with the reduction, PERA benefit recipients have kept up with inflation over the last five years.

For PERA’s two largest member divisions, the State and School Divisions, the actuarial funded ratios, or the ratios between PERA’s assets and promised benefits, are slightly ahead of the original projections made when SB 1 went into effect five years ago.

Take a look at a brief fact sheet explaining how SB 1 has allowed PERA to continue delivering the benefits earned by Colorado’s public workforce, making Colorado stronger for everyone.

Public Pension Plan Educators Get Educated

Posted on by planeteria

Though many members of Colorado PERA are professional educators, teaching in schools across the state, PERA has its own team of educators. Many PERA employees work with employers, members, and retirees to help them understand the ins and outs of PERA’s retirement plan.

Each year, the National Pension Education Association holds a conference for exactly these kinds of educators – representatives from public retirement plans across the country who work to inform and educate public employees and their employers about retirement plan benefits.

The conference provides participants, including Colorado PERA, the opportunity to identify common challenges, share information and best practices, and collectively build off their strengths to improve retirement security for public workers across the country.

Public retirement systems attending the conference also have an opportunity to highlight their own strategic initiatives or recent changes within their systems. This roll call sparks networking and informal learning among plans that reinforces how different public pension plans face similar challenges. Often what can seem like an outlying issue for one system may impact other plans in future years.

Additionally, the conference provides more formal learning opportunities, such as concurrent sessions led by different retirement systems. Topics this year included:

Each session offered strategies adaptable to other systems for communicating broadly to members, retirees, and affiliated employers.

Executive Director Diane Oakley of the National Institute for Retirement Security also presented to the full conference about rethinking retirement security for Americans. She noted that private sector retirement plans have shifted away from defined benefit structures for a number of reasons. A few examples are profitability goals and stricter funding requirements to changes to risk profiles and increasing life expectancy.

However, she also explained that defined benefit plans such as PERA’s hybrid plan provide a number of benefits. These include:

  • Pooling the longevity risks of large numbers of individuals to provide lifetime financial security, eliminating the risk of outliving retirement savings.
  • Perpetually maintaining optimally balanced investment portfolios rather than having to down-shift to lower risk/return asset allocations as retirement nears.
  • Achieving higher investment returns compared to individual investors because of professional asset management and lower fees.

Oakley pointed to the critical need for public plans to demonstrate their positive economic impact. For example, Colorado PERA paid nearly $4 billion in 2014 alone to benefit recipients living in the state. PERA retirees spent those dollars at businesses such as pharmacies, grocery stores, restaurants, and gas stations. In turn, that spending resulted in wages earned, tax revenue generated, and businesses supported in local communities across Colorado.

Conferences like the one held by the National Pension Education Association allow retirement plan educators to learn from each other, but also to remember the importance of supporting public employees as they plan for financial security in retirement. Whether it’s a highway maintenance driver, a human resources administrator, or a retired prison guard, the PERA benefits team works with members, their employers, and retirees to educate them about the PERA retirement plan.

Navigating Civil Union and Same Sex Marriage Differences That Affect Colorado PERA

Posted on by planeteria

Different PERA benefit payment options for civil unions are restricted by federal laws

Same-sex marriage is now the law of the land. However, it took a winding route before it was a surety in Colorado. In 2006, a majority of Colorado voters amended the Colorado Constitution to declare that marriage is between a man and a woman. Until 2013, same-sex couples were not allowed to have the same benefits as a married couple. For instance, same-sex partners did not have the spousal right to inherit property under Colorado probate laws, or join in health insurance policies as dependents. For PERA purposes, a same-sex partner would not qualify as a spouse who automatically takes a monthly benefit upon the death of his or her PERA member partner.

In 2013, the Colorado Legislature passed a law allowing any couple to enter into a civil union, which attempted to provide civil union spouses most of the benefits enjoyed by married couples. A civil union spouse is a “spouse” when the term is used in the Colorado state laws. However, a civil union does not satisfy federal laws using the term “spouse” or “marriage.” For example, a civil union couple cannot file taxes jointly. Even when the U.S. Supreme Court struck down the Defense of Marriage Act (DOMA) in the U.S. v. Windsor case and declared that the term “spouse” in federal law includes same-sex spouses, it did not make the same declaration for civil union spouses. In fact, the U.S. Department of the Treasury issued a revenue ruling specifically excluding civil union spouses from the term “spouses” under tax laws if the civil union was entered into in states in which same-sex marriage is banned.

Colorado county clerks started issuing same-sex marriage licenses in June 2014 when the 10th Circuit Court in Kitchen v. Herbert invalidated a Utah ban on such marriages. Because Colorado is in the 10th Circuit, the Colorado Attorney General and most legal scholars agreed that the case invalidated Colorado’s ban on same-sex marriage. When the Supreme Court made its decision in the Obergefell v. Hodges case in June of 2015, Colorado already had adopted the legality of same-sex marriages.

For all purposes, when a “spouse” is mentioned in the Colorado statutes that govern PERA, a same-sex married spouse will be treated exactly the same as opposite-sex marriage spouses have been treated under the law. No distinction is necessary.

While same-sex married spouses now have all of the benefits of federal and state law, civil union spouses still face some challenges. Because the U.S. Department of the Treasury issued its revenue ruling excluding civil union spouses from the benefit of the tax laws, the status of civil union spouses under federal law and state law is unclear. An example of such a challenge comes under PERA law, in which case a surviving spouse may not be entitled to a monthly survivor benefit for many years. The commencement of benefits mirrors what the couple would have expected if the member lived to retirement. The federal Internal Revenue Code allows this type of delay for surviving spouses – the federal government is willing to forgo immediate taxation when a spouse is the beneficiary. On the other hand, this delay is not allowed with non-spouse beneficiaries, and such beneficiaries must take a periodic payment starting immediately upon the death of their partner or take the whole balance within five years. PERA’s law does not provide for such immediate payments to a non-spouse beneficiary and does not provide a mechanism to distribute the account in five years. (Exceptions are for qualified children and dependent parents in certain situations.)

Another challenge is that under Colorado law, civil union spouses must go through the divorce process to officially settle their property when they separate. However, if a PERAPlus 401(k) or 457 Plan account is to be divided between the spouses upon divorce, PERA cannot release the ex-spouse’s funds while the PERA member is still working. Federal law does not allow pulling your funds from these retirement funds until you terminate from employment, but exceptions are allowed when divorce is involved. “Alternate payees” who are ex-spouses of members can take their portion of funds during a member’s employment. Not so for civil unions. Since they are not “spouses” under federal law, ex-spouses from a civil union cannot be “alternate payees.” Even if PERA is ordered to pay that portion when a member ultimately terminates employment, PERA would have to tax the member, not the ex-spouse, and it might be considered a gift subject to a gift tax.

Due to these challenges, PERA will have to make determinations on a case-by-case basis on how to treat civil union spouses under Colorado law pending an action by the state or federal government to clear up the inconsistencies. In the meantime, if you are in a civil union under Colorado law, but convert your legal status to a marriage, you would get all of the same benefits from PERA that an opposite-sex married couple gets under federal law.