Retirement Roundup: What’s next for the 401(k)?

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

What’s next for the 401(k)? Early boosters criticize what it’s become | Denver Business Journal

Early advocates of the 401(k) now have qualms about what they unleashed in the U.S. as workers in even the highest income brackets aren’t saving enough for retirement.

Former Johnson & Johnson human-resources executive Herbert Whitehouse was one of the first in the U.S. to advocate for 401(k) accounts back in 1981, according to The Wall Street Journal. What Whitehouse didn’t foresee was that major employers would replace pensions with the tax-deferred savings tool as a way to slash expenses.

The American retirement dream is not dead…yet | CNBC

A message has been sent that American retirees are screwed. The 401(k) experiment has failed and Social Security is going bust. For many, this is indeed the way it feels, but how do the facts play out?

Pensions, 401(k)s and Social Security all have well documented flaws. So where’s the hope? Our penchant for romanticizing the past has painted a picture that retirees are worse off today than they were “then.” But with flexibility and a simple willingness to sacrifice through saving and investing well, a comfortable retirement is still within our grasp.

How to become a ‘superager’ | The New York Times

Why do some older people remain mentally nimble while others decline? “Superagers” are those whose memory and attention isn’t merely above average for their age, but is actually on par with healthy, active 25-year-olds. The big question is: How do you become a superager? Our best answer at the moment is: work hard at something.

Growing number of Americans are retiring outside the U.S. | USA Today

A growing number of Americans are retiring outside the United States. The number grew 17 percent between 2010 and 2015 and is expected to increase over the next 10 years as more baby boomers retire. Just under 400,000 American retirees are now living abroad, according to the Social Security Administration. The countries they have chosen most often: Canada, Japan, Mexico, Germany and the United Kingdom. Retirees most often cite the cost of living as the reason for moving elsewhere.

Prognosis for Rx in 2017: more painful drug-price hikes | CBS News

If there’s a remedy for rising drug costs, it’s not likely to be available to many Americans in 2017. Drug prices continue to rise faster than either wages or the cost of living, putting a crimp in many household budgets.

Prescription drug costs for Americans under 65 years old are projected to jump 11.6 percent in 2017, or at a quicker pace than the 11.3 percent price increase in 2016, according to consulting firm Segal Consulting. Older Americans won’t get much of a break: Their drug costs are projected to rise 9.9 percent next year, compared with 10.9 percent in 2016. By comparison, wages are expected to rise just 2.5 percent in 2017.

CalPERS votes to lower expected investment return rate to 7 percent by 2020  Reuters

The California Public Employees’ Retirement System board voted on Wednesday to lower the pension plan’s expected rate of return from investments to 7 percent by 2020, a decision that comes after the fund failed to meet its 7.5 percent target the past two years.

The move by the country’s largest public pension fund will place a greater financial burden on the state’s cities, counties and other local government agencies across California that rely on CalPERS pensions.

2017 Legislative Session Preview

On January 11, the Colorado General Assembly will convene to begin a new legislative session. This will be the 141st time the state House and state Senate will meet in the state’s history, but as an old Capitol adage says: Legislative sessions are like snowflakes because no two are exactly the same. One hundred legislators—35 senators and 65 representatives—will meet for 120 days to introduce, debate, and vote on hundreds of bills.

As with any pending session, legislators and special interest groups have already outlined many of their goals. Unlike the gridlock we sometimes see in the halls of Congress, Colorado’s legislators will likely find significant common ground on the majority of the bills they will introduce. Here are a few of the issues legislators, media, and other stakeholders have identified as key going into the session:

The Budget

Colorado’s roughly $28.5 billion budget won’t be debated until later in the session, but the budget bill, known as the Long Bill, has already begun its process. Late last year, Governor Hickenlooper presented his office’s budget goals to members of the Legislature. This proposal is often seen as a starting point for the six members of the Joint Budget Committee (JBC) to consider when they begin to craft their own version of the budget—the one lawmakers will consider, debate, amend, and ultimately vote on during the session.

This year’s budget is already going to be a challenge for the General Assembly. Due to revenue forecasts and constitutional requirements, legislators are faced with a roughly $500 million shortfall for the 2017-2018 fiscal year. Where the money will come from in order to close the expected gap will be the subject of a great deal of discussion and creative thinking. Last year, JBC members were able to close a smaller gap and the budget was passed into law with support from both sides of the aisle.

Will the budget issue brought up for the past few years—the reclassification of the Hospital Provider Fee into an enterprise in order to free up roughly $750 million from limits mandated by the Taxpayers’ Bill of Rights—come up again? Senate Minority Leader Lucia Guzmán (D-Denver) has indicated she would like to revisit the issue, but the incoming Senate President Kevin Grantham (R-Cañon City) has said the move is “off the table.”

Transportation

An area where legislators from the two parties are hoping to find common ground is increasing funding for roads, bridges, and transit. One of the possible solutions being proposed is the potential for more than $3 billion in bonds to be sold, with the proceeds being used to fund several currently unfunded transportation projects. The so-called “TRANs bonds” bill was introduced in the 2015 legislative session, but lawmakers were unable to find consensus on the proposal and the bill died in the session’s final weeks. The bill was considered again in 2016 and met the same fate. Late last year, an interim transportation committee gave its initial support for the proposal, but it was unable to gain enough support from leadership in both parties for a bill to coalesce prior to the start of the session.

Another transportation funding proposal that seems to have gained some initial bipartisan support is a referred measure to raise the state sales tax with the proceeds directed toward projects like widening Interstate 25 between Monument and Castle Rock. A Colorado State Trooper’s tragic death on that stretch of highway last year brought renewed focus to the project.

Education

Some of the most contentious and complicated policy areas legislators will debate in 2017 will be education funding and compliance with a new federal education law passed in 2016.

School finance became one of the most thoroughly debated issues in the state in 2010, when the Great Recession forced lawmakers to make changes to the school funding formula in order to keep Colorado’s budget balanced. The so-called “negative factor,” which allowed lawmakers to fund schools at a level below the amount mandated by Amendment 23 (a constitutional provision passed by voters in 2000 that mandated the state to increase per-pupil funding for schools every year) has grown to roughly $800 million, and will likely grow more in 2017 according to legislators. Whether 2017 will be the year when this issue finally breaks through is unclear; although an informal group of lawmakers from both parties, led by JBC members Rep. Bob Rankin (R-Carbondale) and Rep. Millie Hamner (D-Dillon), have been working together over the last year to find a framework for a future solution.

Another important education issue will be how to comply with the Every Student Succeeds Act passed by Congress and signed into law by President Obama last year. The new law replaces the Bush Administration-era No Child Left Behind legislation that was set to expire. A bipartisan interim committee met last year to come up with a plan, and both education committees will be working to finalize their plans during the session.

Health Care

One of the biggest unknowns going into this session is how health care law will be changed by President-elect Trump’s incoming Administration and the GOP majority in Congress. With the likelihood of major changes or repeal of the Affordable Care Act (ACA), Colorado legislators will be tasked with implementing any changes or overhauls of the law. That includes the expansion of Medicaid authorized by the ACA, which Colorado lawmakers approved in 2013. Roughly 1.2 million Coloradans were beneficiaries of Medicaid in 2015, so there will be lots of attention paid to any changes made federally and at the state level.

Construction Defects Reform

The issue of reforming the laws governing liabilities for homebuilders and legal recourse for homebuyers is once again headed for debate at the Capitol. Although leaders in both parties have identified the issue as a top priority for several sessions, the actual solutions have fizzled—either in committee or during negotiations prior to the bill’s introduction.

Incoming House Speaker Rep. Crisanta Duran (D-Denver) has been working closely with Sen. Grantham on the issue, and both have indicated the measure has legs this year. Duran specifically told audience members at a legislative preview event sponsored by the Denver Metro Chamber of Commerce that she looks forward to a “collaborative and productive” relationship with the Senate majority on a number of issues, including construction defects.

PERA

As of the writing of this blog post, there have not been any bills introduced related to PERA. But stay tuned because we have heard rumors of PERA-related bills for 2017. In the meantime, be sure to know who represents you in the Colorado General Assembly.

More on the Impact of Assumption Changes

PERA addresses new economic and demographic realities.

The PERA Board of Trustees met on Friday, January 20, and received updated information from their actuaries regarding the trust funds’ amortization period, or the amount of time it will take for each division trust to become fully funded. This action follows the regular and rigorous review process started late last year when the Board adopted new mortality tables to reflect longer life expectancies, and lowered the expected rate of return to better reflect anticipated market conditions.

The new amortization periods increased between 14 years to 31 years, depending on the Division. This increase is on top of the approximately 40-year amortization periods that existed at the end of 2015. The new projections show that PERA is able to pay benefits over the extended time period, but may not be able to withstand a significant market downturn (like in 2008-2009). Changes in demographics (people are living longer) and economics (expected market returns) have extended the period until PERA reaches full-funded status, increasing the risk facing members, taxpayers, and Colorado.

All major Divisions are stable, solvent, and able to pay all benefits in perpetuity. While economic and demographic conditions have changed, this is not 2009 and PERA is not running out of money.

The amortization period of the Judicial Division is much longer than other divisions. It is expected legislation will be introduced this year to address the Judicial Division’s funded status. The Judicial Division is PERA’s smallest member division with 700 active, inactive, and retired members.

The continued health of PERA is vital for the security of our members and the economic stability of communities throughout Colorado. To ensure PERA’s sustainability, the PERA Board has directed staff to embark on an effort to educate and engage a range of stakeholders on the topic of PERA’s funded status and what might be done to improve it. This effort will take place during the course of the year and there will be ample opportunities for members, policy makers, taxpayers and others to participate. More information will be forthcoming.

Important terms for understanding PERA’s amortization period:

  • Amortization period – the time it will take to achieve 100 percent funded status.
  • Solvent – the trusts have enough money to pay benefits throughout the amortization period.
  • Insolvent – the trusts are projected to be depleted in the future.
  • Exhaustion – same as insolvent; the trusts are projected to be depleted in the future.

PERA on the Issues posts are written and compiled by the staff of Colorado PERA under the direction of Executive Director Greg Smith and the PERA Board of Trustees. We encourage you to comment with your thoughts and feedback.

Retirement Roundup: 2.8 million seniors have college debt

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

2.8 million seniors have college debt | Squared Away Blog

The number of Americans over age 60 who are paying back federal or private student loans has reached a critical mass, quadrupling to 2.8 million over the past decade, a new report finds.

These older borrowers owe $23,500 on average, and two-thirds of them also have mortgages and credit card bills at a time their medical expenses are typically increasing, according to the report issued this by the Consumer Financial Protection Bureau (CFPB).

More than 2 million of the 2.8 million older borrowers took out loans to pay for their children’s or grandchildren’s educations, CFPB said. Relatively few owe money for their own or a spouse’s education, which was typically obtained when college was still affordable for a middle-class family.

Small companies have a big retirement problem | Bloomberg

At companies with fewer than 50 workers, not even half the employees have access to a 401(k) or pension, according to the Bureau of Labor Statistics. At companies with 500 workers or more, 90 percent of employees have access to a retirement plan. This gives large corporations a huge advantage in hiring talented people, and it leaves millions of Americans without an easy way to save for their futures.

Companies with fewer than 100 workers employ 36 percent of the U.S. workforce, or about 42 million people. And when small companies do have a retirement plan, it is likely to be astronomically more expensive than those offered by large companies. These high fees eat away at returns, making saving for retirement far more difficult than it needs to be.

Millennials may need to double how much they save for retirement | Washington Post

Wall Street analysts have pretty low expectations for how the stock market will perform this year.  And while it’s impossible to predict exactly what the stock market will do, investing pros over the past several months have been reducing their expectations for what they think the stock market will return, not only in the next year, but potentially over the next couple of decades.

If those gloomier outlooks hold true, workers saving for retirement today may not get as much from their portfolios in the long term as previous generations did. Advisers say that millennials, who are decades away from retirement, will need to save more – in some cases twice as much as they were saving before – to make up the difference.

Increases in interest rates on savings accounts remain slow to materialize | The New York Times

Savers hoping for higher interest rates on deposit accounts are probably going to have to wait awhile longer for yields on their savings to move upward. While the Federal Reserve decided in December to increase short-term interest rates, that hasn’t yet translated into significant increases in deposit rates paid out by banks on safe, federally insured deposits – the kind of accounts consumers might want to use for parking cash they expect to use in the next month or two.

5 practical steps to creating a retirement backup | CBS Money Watch

You’ve likely been planning your retirement for years and know exactly when you’ll retire and what you’ll do. But many people find themselves retiring sooner than they’d expected, due to a job loss, employment issues or poor health. Almost half of current retirees recently surveyed report that they retired before they’d planned. The Transamerica Center for Retirement Studies (TCRS) 2016 survey of workers found that just 25 percent of workers have a backup plan for retirement income if they’re unable to work sooner than their planned retirement.

Best and worst states to retire | CNBC

With more and more retirees responsible for their own financial security, almost half of Americans said they were “very concerned” or “terrified” that the rising cost of living will affect their retirement plans, according to a survey by insurance provider Allianz Life.

To stretch your savings, choosing the right destination once you’ve stopped working can make or break those lazy-day fantasies. Wallet Hub compared the retirement-friendliness of all 50 states and the District of Columbia. The top five states for those golden years include Florida, Wyoming, South Dakota, Iowa and Colorado.

2017 Proposed Legislation Status

A summary of proposed legislation affecting Colorado PERA. Check back often for new bills and updated status reports. Last updated: May 3, 2017.

Board of Trustees Votes on Proposed Legislation


Active Bills


House Bill 17-1176

PERA Retirees Employed By Rural School Districts

Concerning an extension of the employment after retirement limitations for retirees of the public employees’ retirement association employed by a rural school district after retirement.

Summary: The bill modifies the current PERA employment after retirement provisions for certain retirees hired by an employer in the school division if:

  • The employer that hires the service retiree is a rural school district as determined by the department of education based on certain criteria and the school district enrolls 6,500 students or fewer in kindergarten through 12th grade;
  • The school district hires the service retiree for the purpose of providing classroom instruction or school bus transportation to students enrolled by the district or for the purpose of being a school food services cook; and
  • The school district determines that there is a critical shortage of qualified teachers, school bus drivers, or school food services cooks, as applicable, and that the service retiree has specific experience, skills, or qualifications that would benefit the district.

Sponsors: Rep. Jon Becker (R-Fort Morgan) and Rep. Barbara McLachlan (D-Durango) | Sen. Jerry Sonnenberg (R-Sterling)

Status: Sent to Governor

PERA Board position: Oppose


House Bill 17-1265

PERA Judicial Division Total Employer Contribution

Concerning an increase in the total employer contribution for employers in the Judicial Division of the Public Employees’ Retirement Association.

Summary: The Judicial Division Amortization Equalization Disbursement (AED) was capped at 2.20% in 2010. The Supplemental Amortization Equalization Disbursement (SAED) was capped at 1.50% in 2010. This bill would increase the AED and SAED to 3.4% each beginning in 2019 and increase each disbursement rate by .4% every year thereafter until they cap at 5% in 2023.

Sponsors: Rep. KC Becker (D-Boulder) and Rep. Dan Nordberg (R-Colorado Springs) | Sen. Andy Kerr (D-Lakewood) and Sen. Kevin Priola (R-Henderson)

Status: Sent to Governor

PERA Board position: Support


Inactive Bills


House Bill 17-1114

State Treasurer’s Authority To Access PERA Information

Concerning the authority of the State Treasurer to access information kept by the Public Employees’ Retirement Association in the Treasurer’s capacity as a member of the Board of Trustees of the Association.

Summary: The bill requires the PERA Board and its Executive Director to provide to the Treasurer of the State of Colorado the ability to review all records and information retained by PERA upon request. The request can’t be denied for any reason. The State Treasurer is responsible for any reasonable costs, beyond de Minimis expenses, and the information or records shall not be used for personal reasons by the Treasurer.

Sponsors: Rep. Justin Everett (R-Littleton) and Sen. Jack Tate (R-Centennial)

Status: Postponed Indefinitely (State, Veterans, & Military Affairs 3/1/17)

PERA Board position: Oppose


Senate Bill 17-113

Cap Employer Contribution Rates For PERA

Concerning a requirement that the total employer contribution rates for Public Employees’ Retirement Association employers in the 2018 calendar year are the maximum total employer contribution rates for future calendar years.

Summary: The bill requires that for the calendar year beginning January 1, 2018, and for each calendar year thereafter, the total of the employer contribution, the AED, and the SAED for any employer will not exceed the total contribution rates for the 2018 calendar year pursuant to current law.

Sponsors: Sen. Tim Neville (R-Littleton) and Rep. Justin Everett (R-Littleton)

Status: Postponed Indefinitely (State, Veterans, & Military Affairs 3/1/17)

PERA Board position: Oppose


Senate Bill 17-158

Modify Composition Of PERA Board Of Trustees

Concerning modifications to the composition of the Board of Trustees of the Public Employees’ Retirement Association.

Summary: The bill modifies the composition of the board by:

  • Eliminating one elected member trustee position from the state division;
  • Eliminating 2 elected member trustee positions from the school division;
  • Requiring at least one elected member from both the state division and the school division to be at least 20 years from retirement eligibility; and
  • Adding 3 more trustees appointed by the governor and confirmed by the senate who are not PERA members or retirees and who are experts in certain fields to replace the eliminated elected member trustee positions.

Sponsors: Sen. Jack Tate (R-Centennial) and Rep. Dan Nordberg (R-Colorado Springs)

Status: Postponed Indefinitely (State, Veterans, & Military Affairs 3/15/17)

PERA Board position: Oppose


Senate Bill 17-185

District Attorney Salary Compensation And PERA

Concerning the compensation of attorneys working in the office of a district attorney.

Summary: The bill allows the boards of county commissioners of the counties within a judicial district, in consultation with the district attorney, to make a one-time irrevocable election to require an assistant district attorney to become a member of the Public Employees’ Retirement Association’s defined benefit plan. In such case, the state would pay 80% and the counties would pay 20% of the employer contribution for an assistant district attorney.

Sponsors: Sen. Bob Gardner (R-Colorado Springs) and Rep. Matt Gray (D-Broomfield)

Status: Postponed Indefinitely (Finance 3/16/17)

PERA Board position: not yet reviewed


Previous legislative session summaries:

2016 Legislative Session

2015 Legislative Session

2014 Legislative Session

Share your stories with PERA on the Issues

From time to time, we like to learn more about our readers and give you an opportunity to tell us what you’re interested in reading from PERA on the Issues. (You can see how readers responded to a survey we conducted in 2016 and the Health Care section we launched as a result.)

With the 2017 Colorado legislative session kicking off, this year we are interested in learning more about who you – our readers – are. Are you an active member of PERA, a retiree, or just someone interested in learning more about retirement issues? Are you employed full- or part-time? Do you volunteer regularly in your community? Do you have an interesting story about your own retirement experience, or that of others, that you would like to share?

You can complete our 2017 survey here. We’ll review the results and may be in touch to see if we can learn more about your own perspective on the issues.

Share Your Story