April 2016 | Colorado PERA

Retirement Roundup: Why retirement is a flawed concept

Posted on April 19, 2016May 23, 2024 by planeteria

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

Why retirement is a flawed concept | Harvard Business Review

Every day there’s another article about how all of our retirements are doomed. The entire concept of retirement is starting to feel flimsy at best – it’s a Western invention from days gone by that’s based on broken assumptions that we want – and can afford – to do nothing. But we don’t actually want to retire and do nothing. We just want to do something we love.

GAO questions DOL retirement income advice | Forbes

How much income will you need in retirement compared to what you’re earning now? Though typical recommended replacement rates ranged from 70 to 85 percent of income in 52 articles and reports reviewed by the Government Accountability Office, recommendations ranged anywhere from 43 to 476 percent. The GAO looked at the issue because the Department of Labor is supposed to help Americans estimate their retirement savings needs. GAO recommendations that the DOL plans to meet by June 2017 include providing additional examples that affect income needs in retirement and a way to adjust rates.

How to get better returns on savings | The New York Times

Savers were encouraged last year when the Federal Reserve began raising rates. But interest paid on the lowest-risk federally insured accounts remains lackluster. Consumers willing to jump through some hoops, however, can get much better returns on their savings.

The gig economy is powered by old people | Bloomberg View

After barely changing between 1995 and 2005, the share of U.S. workers in alternative work arrangements jumped from 10.1 percent in 2005 to 15.8 percent in 2015. Economists Lawrence F. Katz and Alan B. Krueger argue that all the net employment growth in the U.S. economy over the past ten years appears to have occurred in alternative work arrangements.

The share of older (ages 55 to 75) and better-educated workers in alternative work arrangements has continued to rise at a pace faster than the rest of the workforce. This may mean that the growth of the gig economy is being driven not so much by struggling millennials lining up gigs online as by 60-year-olds working as independent contractors. What’s not clear is whether they’re doing this because they’re semi retired and value freedom and flexibility, or because they’ve been downsized out of a full-time, full-benefit job.

Shopping for Health Care: A Fledgling Craft | The New York Times

Health care operates very differently from anything else we buy. Shopping today, we have endless information. Except in health care. We have very little information about quality and almost none about price. And we find out the cost afterward. This is a problem for patients with high deductibles, and it’s a huge problem for the country.

(Read how PERACare Select provides cost predictability and high quality care for hip and knee replacements to some PERACare participants.)

Keeping drug costs down in retirement | CNBC

Health-care expenses for a couple at age 65 will range between $275,000 and $295,000 – and they’ll spend anywhere from $13,000 to $15,000 out of pocket for prescription medication. But from shopping online at internet pharmacies to maintaining a healthy lifestyle, there may be ways to keep those drug costs down.

Colorado PERA Launches External Manager Portal

Posted on April 18, 2016May 23, 2024 by planeteria

Colorado PERA has launched a new online portal designed to engage with the emerging investment manager community.

PERA staff developed an online application where asset management firms can submit firm and product profiles to the PERA investment department for review.

Investment managers are considered to be “emerging,” rather than traditional, based on their investment track record and the size of the total assets they have under management, or controlling “assets under management” (AUM) under a certain threshold. Emerging managers tend to be from small, boutique asset management firms.

Specifically, emerging managers will meet specific parameters for each of PERA’s asset classes.

For global equities and fixed income, $2 billion or less in assets under management.
For private equity and real estate, a minimum of $50 million and a maximum of $500 million in each of either a first or second fund.
For the opportunity fund, a minimum of $50 million and a maximum of $500 million in each of either a first or second fund or a perpetual investment and not more than five years of operating history.

“Our new portal serves as a centralized, in-house repository of potential investment opportunities. The portal will make it easier for us to include appropriate emerging managers when the right investment opportunities develop,” said PERA Chief Investment Officer Jennifer Paquette.

As a multi-billion dollar institutional investor, PERA looks for innovative ways to increase engagement with investment managers, including emerging managers.

“Colorado PERA is committed to engaging with the investment manager community. We think managers will find that the portal is easy to use and can be completed with data that is easily accessible,” said Amy McGarrity, PERA Deputy Chief Investment Officer. “Although PERA has a long and proven history of internal asset management, we also utilize external managers. There may be areas in which our external capabilities would be enhanced by the use of emerging investment managers. The portal will facilitate increased communication and engagement with both the traditional and emerging manager communities,” McGarrity continued.

Read more about emerging manager trends.

New Fiduciary Rule from Department of Labor Could Save Retirees Billions

Posted on April 15, 2016May 23, 2024 by planeteria

The Labor Department on April 6 introduced a rule to address conflicts of interest in retirement advice. The rule is intended to protect investors by requiring professionals who provide investment advice about retirement plans and IRAs to abide by a “fiduciary” standard – putting their clients’ best interest before their own profits.

Prior to the finalization of the rule, Colorado PERA submitted a comment letter expressing support for a rule that would change fiduciary standards for investment advisers. In the letter, PERA wrote in “support for rules that raise the bar for investment advice to help individual investors achieve retirement security” and urged the Department of Labor to “adopt the proposed rules that require a fiduciary level of advice by investment advisers.”

Today, Americans hold more of their retirement savings in IRAs than in either 401(k)-type plans or traditional pensions like PERA’s defined benefit plan which are subject to fiduciary duties by law. At PERA, every employee and each trustee is a fiduciary for all PERA members and retirees. The new rules will expand that fiduciary standard to far more professionals offering advice about retirement, requiring a group that encompasses those working with IRAs to adhere to the same legal fiduciary standard.

According to the New York Times, those rules – six years in the making – will restrict these new fiduciaries from accepting compensation or payments that would create a conflict unless they qualify for an exemption to ensure the customer is protected.

The decision to finalize the rule does not come without some controversy. As USA Today explains, critics fear the cost of advice will rise and that there will be fewer advisers serving an ever-growing number of people who need help with their investments and retirement plans.

Business Insider reports that the regulation could “level the playing field” for investors holding $12 trillion in retirement accounts like IRAs and 401(k) plans, while Forbes says that “some $40 billion” could be saved over the next decade by everyday individuals looking to save for retirement.

Below, we provide a recent digest of news articles about the new fiduciary rule as well as links to information from the Department of Labor.

How to run out of money successfully: Conduct a retirement pre-mortem

Posted on April 12, 2016April 10, 2024 by planeteria

Maybe you’re an executive involved in a major business deal; the director of high-profile agency facing a public crisis; the surgeon staring down at a critical patient. But what if the deal goes bust? What if there’s a public outcry over your performance? What if the patient has already died?

Take a step back from that hypothetical worst-case scenario and figure out what went wrong – and why. That’s what’s called the “pre-mortem.”

The pre-mortem is a powerful tool for ensuring a project succeeds by identifying ahead of time possible pitfalls. Whether it’s imagining how an emergency surgery could go wrong, playing out where a department merger could encounter obstacles, or anticipating when a retirement account could no longer meet expenses, thinking through the challenges that any future plans might face can help to avert them – or at least create preparation if they come true.

According to cognitive psychologist and pre-mortem inventor Gary Klein, a pre-mortem can take the pressure off of anyone worried about seeming disloyal to a group by voicing concerns, and generate spirited competition to find new reasons for a project’s potential failure.

Business has been quick to adopt the practice of a pre-mortem for new projects, but performing a pre-mortem also has application as a retirement planning tool. Retirement planning can stir a range of emotions, from anxiety to anger to paralysis. In a successful pre-mortem, we take our heads out of the sand and go right into the belly of the beast as we face head-on our fears related to retirement.

It takes just three easy steps to perform a pre-mortem. Begin the exercise with critical stakeholders such as your spouse in the room. List everything that can go wrong in retirement. Be exhaustive and catastrophic. No possibility is too horrifying. At a minimum, start the exercise by considering a state of advanced age, poverty, and ill health. Scenarios might include income not covering current expenses. Your emergency fund has been depleted. You are living with your children, in a state of failing health. Just get ideas on the table, no matter how absurd. At this stage when everyone is brainstorming, there should be no moving on to problem solving.

Next step: pick the 10 worst outcomes. Focus on problems that, if not solved, will mean true catastrophe. Discard events over which you have no control. Instead, pick events most likely to happen. If you are on track to pay off your mortgage by retirement, a foreclosure on your home shouldn’t make the list, but you’ll still need income to pay property taxes, insurance, utilities, and maintenance.

Finally, devote time to thinking up solutions. Insufficient income can be checked by saving more today, or retiring later with a larger amount from Social Security or a pension. Health concerns can be addressed now with preventive screenings, diet, and exercise. A life insurance policy may be in order for burial expenses or for a surviving spouse or children. Also outline plan B if plan A can’t be obtained. Because the exercise involves all stakeholders, hold each other accountable for the action items identified. Break items into smaller steps, assign tasks, and stick to agreed upon deadlines. The exercise is useless if inertia carries the day.

The pre-mortem should generate actionable items today that, if implemented, prevent the worst from happening. Placing yourself in a future catastrophic financial situation also combats the tendency to discount the importance of future events for more immediate ones. Go ahead. If the glass isn’t at least half empty, the exercise won’t be a success.

Controlling Your Health Care Costs

Posted on April 5, 2016May 23, 2024 by planeteria

How much would you pay for a loaf of bread at a local bakery? What about from a large grocery store a few miles away?

What if, instead, you were buying a new hip? How much would you pay? Or how much should your insurance company pay?

If you were buying a loaf of bread, or most any other consumer product, you would probably expect a price to be within a pretty small range, regardless of where you made the purchase. Otherwise, you might walk away, or put off buying bread until your next shopping trip.

But when it comes to health care, you might be surprised to learn that not only is it difficult to find out how much a procedure will cost in advance, there is also a huge variance in price.

Few decisions in life are more important than those having to do with health care, and yet they are often the most complicated – especially when facing a significant treatment or procedure. So Colorado PERA set out to explore what can be done to provide reliable health care at a fair and predictable cost without sacrificing quality. In conjunction with the South Metro Denver Chamber, PERA recently hosted an Executive Roundtable discussion on Health Care: Lowering Costs, Improving Results with members of the business community, non-profit sector, and public employers.

Colorado PERA Executive Director Greg Smith reported that the rising cost of health care is one of the biggest issues facing individuals and employers today. According to annual averages compiled each year by the Milliman Medical Index, the total employee cost (premiums and copays) increased by 43 percent between 2010 and 2015, and employer costs increased 32 percent during this time frame, which translates to employees shouldering an increasing percentage of health care costs.

Annual Medical Cost for Family of Four

Source: Milliman Medical Index (MMI)

Smith discussed PERA’s support of the “Triple Aim:” improving the patient experience of care (including quality and satisfaction), improving the health of populations, and reducing the per capita cost of health care. He also reviewed PERA’s effort to address these challenges by creating a new bundled payment option for hip and knee replacements called PERACare Select.

With more than seven million Americans living with hip or knee replacements – and that number expected to grow – focusing on this procedure provides a good case study for lowering costs and improving results. In Colorado, the cost of a hip or knee replacement surgery can vary by up to $80,000, and there is often very little correlation between cost and quality – a higher cost doesn’t always mean a better outcome.

Key attributes of the PERACare Select program include:

A predictable cost: PERACare enrollees provided with pricing information up-front to make informed decisions. For many members, there will be no out-of-pocket cost at all.
Access to high quality health care: procedures from qualified and experienced physicians at high quality facilities that together have a proven track record of healthy patient outcomes.

(Read more about PERACare Select from PERA on the Issues.)

By creating this new benefit for PERACare enrollees, PERA hopes to help crack the code on cost confusion and help members live healthier, more mobile lives, according to Smith.

Colorado PERA is also an active participant in several health care organizations focused on improving outcomes while controlling costs, including two that participated in the Roundtable discussion: the Colorado Business Group on Health (CBGH) and Center for Improving Value in Health Care (CIVHC).

CBGH is an innovative non-profit organization dedicated to changing the way that employers buy health care. CBGH provides practical tools, pioneering programs, and informative, insightful reports designed to support Colorado employers with market-based, employer-driven approaches to lowering costs and improving quality.

CIVHC is a non-profit, non-partisan organization that helps Colorado drive, deliver, and buy value in health care by leveraging health-care-cost data and analytics. Its mission is to cultivate and advance strategic initiatives that improve the health of Coloradans, contain costs, and ensure maximum value for health care received.

Colorado PERA Deputy Chief Investment Officer Named to National Investor Advisory Group

Posted on April 4, 2016May 23, 2024 by planeteria

Amy McGarrity, PERA’s Deputy Chief Investment Officer, has been appointed to the Public Company Accounting Oversight Board (PCAOB) Investor Advisory Group for the 2015-2018 term. McGarrity joins 21 other national leaders to provide views and advice on broad policy issues and other matters that impact investors.

The PCAOB aims to improve audit quality, reduce the risks of auditing failures in the U.S. public securities market, and promote public trust in both the financial reporting process and auditing profession.

What is the PCAOB?

The PCAOB oversees the audits of public companies, working to protect the interests of investors by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of broker-dealers to promote investor protection.

Created by the Sarbanes-Oxley Act of 2002 (which was amended by Dodd-Frank in 2010), the PCAOB is a nonprofit corporation established by Congress. Prior to Sarbanes-Oxley, the auditing profession had been self-regulated. For the first time, the law required oversight of external and independent auditors of U.S. public companies.

The five members of the PCAOB Board are appointed by the Securities and Exchange Commission (SEC) after consultation with the Chairman of the Board of Governors of the Federal Reserve System and the Secretary of the Treasury.

The SEC has oversight authority over the PCAOB, including the approval of the Board’s rules, standards, and budget.

“Colorado PERA has a strong history with the PCAOB, and I am pleased to be the second representative from Colorado PERA to serve on a PCAOB advisory committee,” said McGarrity. “We look forward to our continued participation in the discussion surrounding audit standards and their relevancy to investors.”

McGarrity oversees the risk, compliance, performance and investment operations functions for Colorado PERA, in addition to the Opportunity Fund asset class. She also serves as a global equity analyst and co-portfolio manager for Colorado PERA’s $1.3 billion internally-managed active global portfolio. Previously, McGarrity was the Chief Investment Officer for the Denver Public Schools Retirement System. She has also held prior investment positions at Buck Consultants, Prima Capital Holding, William M. Mercer Investment Consulting, and Caxton Corporation. McGarrity is a CFA charterholder and a member of the CFA Institute and the CFA Society of Colorado.

Previously, Colorado PERA Chief Investment Officer Jennifer Paquette served on the PCAOB Standing Advisory Committee.

Read the news release.

Retirement Roundup: Should Retirees Rent or Own?

Posted on April 5, 2016May 23, 2024 by planeteria

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

Should retirees rent or own? | The Wall Street Journal

Home-sales data suggest that more baby boomers are putting for-sale signs on their homes this year, seeking to unlock the equity they have regained since the housing downturn. For baby boomers – especially those with oversize houses and inadequate savings – it is a decision that could have a major impact on how they fare financially in retirement, some experts say. But it is important for older consumers to consider their needs not just for the next few decades, but for the final one-third of retirement. Those who opt to rent must be careful not to fritter away the cash they unlock through a home sale and instead try to preserve it for future income or medical costs.

Why I don’t make financial decisions on my smartphone | The New York Times

According to a recent survey by the Federal Reserve, 52 percent of adult smartphone owners use mobile banking services, and many financial apps now allow us to perform a breathtaking range of actions, all without interacting with another person.

But a large amount of evidence outlines the potential decision-making hazards posed by digital technology. One study found that people ordering their pizzas online chose those with 33 percent more toppings, 20 percent more bacon and 6 percent more calories. Selling stocks on a phone when markets sneeze might temporarily ease our panic, but is it good for our financial future?

Can your student loans hurt your retirement? Yes. | The Dime

Student loans take a bite out of monthly income and restrict the ability to save for retirement. Everyone with student loans faces the dilemma of deciding whether to make extra loan payments now to reduce their debt burden or make contributions into their retirement savings plans to build a better nest-egg for retirement. The Center for Retirement Research recently released a report projecting that 56.2 percent of households will face insufficient income levels in retirement when the effects of student loan repayments are considered.

Dealing with uncertainty in retirement calculations | Time-Money

When it comes to retirement planning, seemingly small differences in input can compound into gigantic differences in output. It’s a serious problem, both in retirement and planning for it. But eliminating some of the variables, accessing knowledge and coupling planning with flexibility can make retirement, if not entirely predictable, at least more enjoyable.

Forget these retirement essentials at your peril | MarketWatch

Do-it-yourself retirement planners often forget some of the most important things when determining annual savings amounts or future spending budgets. Emergency provisions, replacement funds, survivor’s benefits, long-term care, taxes, investment costs, and the need for annual replanning are all important to consider.

Getting workers to save more for retirement | The New York Times

Saving for retirement should be simple arithmetic — the longer your money has to grow, the more money you should have when you stop working. But saving today for a distant tomorrow isn’t so simple, and has a great deal to do with how people think about money. Changing how people think about the money they save for retirement is one of the central tenets of a movement that is based on behavioral finance, the approach to economics that aims to understand how average people, not rational economists, make financial decisions. After all, it’s the way people behave around money that tends to derail their plans, not a lack of knowledge about what they need to do if they want to retire comfortably.

Soaring rents could ruin your retirement plan | Forbes

As if Americans nearing retirement didn’t have enough to worry about, you can now add this: soaring rents and rental shortages. That combination could disrupt retirement plans in a big way. A Wall Street Journal article said that in Denver, one landlord of a complex with many older tenants last year increased monthly rents from $764 a unit to $1,185 so he could upgrade its apartments. But there may be some hope ahead for retirees and people planning to retire in the next few years. And in the meantime, a few tips may help.