Month: January 2016

Retirement Roundup: DB Plans Earn Higher Returns than DC Plans

Posted on by planeteria

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

Defined benefit plans earn higher returns than defined contribution plans | MarketWatch

A new study compares the returns from private sector defined benefit and defined contribution plans over the period 1990-2012. During that period, defined benefit plans outperformed defined contribution plans by about 0.7 percentage point, with the difference generally larger after 2002. Investment fees, which typically account for 80-90 percent of total expenses, are the most likely explanation.

Catch-up contributions put retirees way ahead | Time-Money

Catch-up contributions to retirement accounts allow workers 50 and older to add extra savings to their retirement accounts. Aimed at helping individuals save enough for retirement, these extra contributions could amount to an additional $1,000 per month once a worker enters retirement. However, most employees do not come close to the regular limit, let alone put in extra.

Measure to curb California public pensions is pulled – for now | The Sacramento Bee

Two former California officials are backing off plans to place a measure on their state’s November ballot intended to curb public pension benefits. Supporters of the ballot measure said they will re-file at least one pension reform measure later this year for a ballot two years down the road. Citing economics, politics and a pending U.S. Supreme Court decision, former San Jose Mayor Chuck Reed said a pension measure would be more likely to pass in two years in November 2018.

Consumer prices in U.S. fall, led by slump in commodities | Bloomberg

The cost of living in the U.S. dropped in December, led by a slump in commodities that’s impacting global markets. The consumer-price index declined 0.1 percent after being little changed in November. For all of 2015, consumer prices climbed 0.7 percent after rising 0.8 percent in 2014. It was the smallest advance since 2008.

Initiatives for private sector retirement moving to states | Pensions & Investments

In November, the Department of Labor proposed a rule that would allow states to set up mandated payroll deduction individual retirement account programs for private-sector employees. But some states are already discussing their own approaches. Washington, California, and Illinois each provide different models. 18 state legislatures discussed proposals to study retirement savings plans in 2015, and hearings or task forces are expected this year in as many as 30 states.

2016’s best and worst states to retire | WalletHub

In addition to when you want to retire, you might want to ask yourself where. Even in the most affordable areas of the U.S., retirees often cannot rely on their Social Security or pension checks alone to cover all of their living expenses. WalletHub’s analysts compared the 50 states and the District of Columbia across 24 key metrics to help identify permanent, affordable places to live after leaving the workforce.

PERA on the Issues Reader Survey

Posted on by planeteria

Updated 2/8/2016

Thank you for your feedback! The survey is now closed. We will be using the results from the survey as we develop content for 2016. In the meantime, here are your favorite posts in 2015, as measured by total views:

2015 Top 10 Articles

Proposed Federal Legislation Could Eliminate Windfall Elimination Provision

What’s the Deal with the WEP and GPO?

Robbing From Ourselves: Why Our Ancestry May Be to Blame

Correcting the Math on the Windfall Elimination Provision

Retirement Roundup: Denver Ranks Third Best for Retirees

More About Social Security Benefit Reductions

Retirement Roundup: What’s a Cadillac Tax?

Ten Things to Know Before You Retire

Independent Report Finds PERA Efficient and Effective

Retirement Roundup: Focus on Retirement Income, Not Investment Return

Now tell us what you want to see more of this year!

Loss Aversion: The Pain of Parting

Posted on by planeteria

When looking for answers about the savings crisis in America, look to loss aversion, the idea that we “hate losing more than [we] even want to win.” Loss aversion has a profound effect on retirement security, and it deserves our attention.

Americans aren’t saving enough, in part because we see a paycheck deduction and think of it as a loss, rather than as a future payoff. According to behavioral finance pioneers, people experience a greater sensitivity to a decrease in wealth than they do to an increase of the same amount. Choosing not to enroll in, or to underfund, one’s retirement plan is a way of avoiding the feeling of having to give up something. Unfortunately, the tradeoff is retirement security. That is, unless an employer makes retirement plan participation mandatory, as is the case with Colorado PERA’s defined benefit plan.

Luckily, the PERA defined benefit plan will comprise participants’ core income in retirement, proportionate to the years spent contributing. However, everyone agrees that individual savings are a key factor in boosting retirement security. When a participant postpones opening or underfunds a supplemental plan, loss aversion is at play. But the effects of loss aversion can be mitigated to some degree with mandatory participation.

The Endowment Effect

A core feature of loss aversion is the endowment effect. Simply put, individuals place greater value on things they already own compared to items they have yet to obtain. Some experiments show that this value placed on things already owned can be as much as twofold.

Implications of the endowment effect come in several forms. If well-intentioned savers set up a savings plan without realizing how high its fees are, the endowment effect leaves them in danger of staying, even when they realize high fees are eating away at their balances. Similarly, the endowment effect also explains why investors may be unwilling to part with underperforming or high-cost investments simply because they already own them.

As a low-cost provider in both its defined benefit plan and defined contribution plans, Colorado PERA helps its members avoid these concerns. PERA’s defined benefit plan operates at $51 per member per year, $9 below the average among its peers. The PERA hybrid defined benefit plan provides more retirement security to its members at a lower cost than other plan designs.

Colorado PERA’s defined contribution plans also offer a low-cost option (and peace of mind about fees) for individuals who wish to manage their own mandatory contribution, or set up a supplemental account in the form of the PERAPlus 401(k) or 457 Plan.

These low-cost defined contribution plans have expert advice tools built in at no additional charge, and are designed to help a participant avoid making bad investment decisions. Participants can set up and follow an asset allocation strategy or choose a target retirement date fund that offers a hedge against mistakes participants might make if they were to pick individual stocks or pay for advice.

Furthermore, Colorado PERA’s defined benefit investment portfolio is guided by an asset allocation strategy set by the Board of Trustees. Investment decisions are informed by that strategy and executed by a team of experts who weigh the risk and return tradeoffs of a diverse universe of investments.

As long as individuals make financial decisions that seek to avoid loss even if it means a future gain, defined benefit plans, where participation is required, will be a successful avenue to retirement security.

PERA Divestment Programs

Posted on by planeteria

Institutional investors like Colorado PERA are mindful of the constant need to balance risk and return. Skillful investment analysis and decision making require rigorous quantitative and qualitative assessment. The former is more clearly defined, while the latter is both broader and potentially more impactful, both positively and negatively.

One factor to consider when making investment decisions is country risk, which incorporates factors like inflation, currency and political risks, among others. Inflation and currency risks are well understood by the public and the investment community; political risk, however, is less clearly defined. Many economies have political risk, but expected investment returns may justify the risk. In other instances, political risks may prove too significant for any investment.

For Colorado PERA, the political risk related to Iran and Sudan is considered. The countries were identified because of their despotic regimes’ particularly egregious actions, and both are subject to sanctions by the United States Department of Treasury’s Office of Foreign Asset Control. These documents on Iran and Sudan may be found on the Department of The Treasury’s website. PERA has restricted investment in public securities of companies active in Sudan since the Colorado General Assembly’s passage of a 2007 law, and those of companies active in Iranian investment are prohibited by a PERA Board policy enacted in 2008.

PERA employs a methodical approach to execute its divestment program. While there are some differences between the Sudan and Iran programs, the broad framework is similar. In the first stage, PERA staff works with outside groups to identify a list of companies that have active business operations in Iran and Sudan. Staff performs research to compare the operations against criteria set forth in the enacting legislation and the Board’s policy. Copies of both documents are available to the public on PERA’s website. Only companies that meet the criteria are included on the list. Once a list is compiled, it is put before the Board of Trustees for adoption. PERA then engages the scrutinized companies in a 90-day information exchange. At the culmination of the engagement period, staff will determine whether or not a company has taken steps to cease operations or has worked toward mitigation. PERA is required to divest from companies that remain active. Procedures for divestment vary by the asset class and investment vehicle, with stocks and bonds held in separate accounts uniformly subject to divestment within the defined benefit plan.

From an investor’s view, the risk profile on any investment in these countries is significant. Nations that isolate themselves from the international community imperil their potential economic growth and potentially destroy investment value. At last count, public retirement funds in 35 states prohibit investment in Iran and 24 restrict investment in Sudan.

Colorado PERA’s divestment programs attempt to avoid investing in companies doing business in these countries – not only to avoid the potential risks associated with the investment, but also to send a broader message surrounding corporate responsibility.

Click here to read a full statement from our Board of Trustees regarding this topic.

Retirement Roundup: Retirement Savings Tips for All Ages

Posted on by planeteria

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

Saving for retirement: Tips for all ages | U.S. News & World Report

Retirement planning requires a life-long commitment. Regardless of how old you are, it’s important to always view your finances through a long-term lens. A few tips to consider at different phases can help you stay on the right track to retirement readiness.

Can the best financial tips fit on an index card? | NPR

The best personal financial advice may fit on an index card – either metaphorically or on an actual 3-by-5 notecard that could be photographed with an iPhone. Now University of Chicago professor Harold Pollack and personal finance writer Helaine Olen, both credited with spreading the original index card idea, have written a book (The Index Card) that goes beyond the basics.

How should you manage your money? And keep it short. | The New York Times

Managing your money should be straightforward, but that doesn’t make it easy. There must be a reason why so many people fail to follow the basic advice, which isn’t new. A handful of financial writers weigh in with reasons why even the most agreed-upon advice is hard to follow, and with a few suggestions of their own.

Workers saving more for retirement, led by Millenials | Associated Press

Workers are saving more for retirement, and the youngest are boosting their savings rates faster than any other age group. They are still not saving enough, but at the least the trend is getting better.

6 steps for investors when the stock market tumbles | The New York Times

The impulse when the stock market falls hard for a few days in a row is to do something. But stocks are most useful for long-term goals. Unless those goals have changed in the last few days, it doesn’t make much sense to overhaul an investment strategy based on a blip of market activity.

Many can retire later but money plays a part | PlanSponsor

As longevity rises, many policy experts contend that people’s working lives will also lengthen. But this argument assumes all workers have experienced the same increase in life expectancy – without factoring in socioeconomic status. A research brief from the Center for Retirement Research at Boston College examines data on mortality and income, finding that life expectancies for low socioeconomic status individuals have been improving more slowly than for individuals in a higher socioeconomic bracket in recent decades.

2016 Legislative Session Begins – Will PERA Be Discussed?

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The Second Regular Session of the Seventieth Colorado General Assembly will convene on January 13, 2016.

Democracy is the foundation of our republican form of government. The input of citizens doesn’t stop at the ballot box, though. Understanding who your legislators are and how to contact them effectively can make you a truly active participant in the civic process.

PERA can help you become involved in the legislative process. Your voice matters to your elected officials, so don’t be afraid to speak out when they are considering bills that might help or harm retirement security for public employees. PERA’s new advocacy center makes it easy to find who your legislators are, and send them an email, call them, or even tweet at them.

Simple rules for contacting legislators

When contacting elected officials, always remember these simple rules for effective advocacy:

  1. Be civil. Even when you don’t agree with your legislator, it’s important to voice those disagreements in a friendly, courteous manner. Elected officials are people, too.
  2. Mention that you are a constituent. Legislators do care what people from all over the state think about an issue, but they pay closest attention to messages from people who live in their district.
  3. Be original. Don’t cut and paste or use talking points. Legislators get thousands of emails every session, and when they get the same form email over and over again it can water down the message. Tell your own unique story. Where do you – or did you – work? For how long? What would happen to you if this bill became a law?
  4. Thank them for their time. Whether you are meeting directly with a legislator, or just tweeting out a message to vote yes or no on a bill, it’s good practice to thank the legislator for listening to your concerns. Because the General Assembly is in session for just 120 days, legislators are often swamped with messages about dozens of bills, so thank your Senator or Representative for taking the time to listen to you.

The legislative process

The Colorado General Assembly meets from January until May to consider proposed legislation. Each introduced bill is assigned to a committee by either the Speaker of the House or the President of the Senate, and given a date to be heard. At a committee hearing, members can propose amendments to a bill to be voted on by their fellow committee members. Each bill is then put to a vote, and either passes on to another committee or the full legislative body, or is postponed indefinitely—meaning the bill is officially dead for the session.

Bills that pass through committees go to the full chamber. Members of the House or Senate are given the opportunity to debate the merits of the legislation, and offer any amendments. If a majority of members in the original chamber vote to support a bill, it starts all over again in the other chamber. Any disagreements between the two chambers on a bill are resolved in a conference committee. Once a bill passes both chambers of the General Assembly, it is then sent to the Governor to be signed, vetoed, or passed into law without a signature.

Visit the Colorado General Assembly website to search for current legislation.

When it comes to contacting your elected officials about a particular piece of legislation, it’s important to remember that the timing of your message is almost as important as its content. Committee hearings are the first opportunity citizens have to weigh-in on legislation. Before, during (and even after) a bill is heard, citizens can provide their input via phone calls, email, or testimony during the committee hearing. Citizens can also make a difference before bills are voted on in the full chamber. Finally, citizens have the opportunity to reach out to the Governor to give their say on whether a bill should be signed or vetoed.

Become an Ambassador

If you want to get even more involved, consider becoming a PERA Ambassador. Ambassadors are PERA’s volunteer advocates who form a statewide network of dedicated individuals communicating the value of PERA to the people in their communities. Find out more about the Ambassador program, and be sure to subscribe to the PERA on the Issues newsletter.