Month: October 2019

Proxy voting: An obscure term with real implications for PERA

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What rights do you have when you own shares of a company?

That’s the central question at the heart of a recent letter to the Securities and Exchange Commission (SEC) that Colorado PERA Executive Director Ron Baker cosigned as part of a coalition of investors and other organizations.

The tone and subject of the letter—which addresses “proxy adviser interpretation and guidance” and “proxy adviser rulemaking”—is technical and measured. But that buttoned-up surface belies an important debate underneath.

Proxy voting: What it is, and why it matters

When an individual owns a share of a company, he or she owns a piece of that company. Institutional investors, like Colorado PERA, also hold shares—lots of them. For example, at the end of 2018, PERA held millions of shares of Microsoft.

When ownership of a company is divided among multiple investors, important decisions are often made using shareholder ballots. Owning a share means having the right and responsibility to vote in important company decisions. Institutional investors like PERA vote a lot. In 2018, PERA staff cast votes on 63,031 individual proposals for 6,025 companies.

Voting allows investors to hold companies accountable to shareholders and decide on important issues such as executive pay and who sits on a company’s board of directors. “We don’t want to promote excessive risk taking with executive compensation,” said Luz Rodriguez, Colorado PERA’s Senior Corporate Governance Analyst. “We think pay should be aligned with performance. Those decisions ultimately affect profits, which can, in turn, affect PERA’s members.”

PERA takes voting on issues like this seriously. For example, it voted against about 18 percent of management proposals in 2018. Encouraging strong corporate governance is a concrete way to align board decisions with shareholder interests.

Exercising that right to vote is an essential component of owning a company. However, it would take significant resources to research every one of the tens of thousands of votes institutional investors like Colorado PERA make every year. So, for more than three decades, large investors have employed “proxy advisers”—third-party firms that do the research necessary to inform the votes institutional shareholders cast. PERA’s investment staff can disagree with the research and advice they receive from proxy advisers, and, in the end, PERA’s investment staff are the ones who cast the votes in accordance with the PERA Board’s Policy on Proxy Voting. Proxy advisory services simply allow institutional investors to be better-informed voters at a fraction of the cost of performing all of the research in-house. “Being cost conscious protects the assets of the plan,” Rodriguez said.

The SEC issues new guidance

Earlier this year, the SEC issued guidance and interpretation statements that could add administrative layers and regulatory burdens to this process. Many institutional investors are concerned about the effects this potential regulation could have. For example, proxy advisers could be required to share their research with the very companies that are the subject of their research before the research is shared with the institutional investors who paid for the research. “Why should companies have the chance to influence the product we’re buying?” said Rodriguez. “It affects the independence of that research.”

The Council of Institutional Investors (CII) sent a letter to the SEC in response to this guidance (Ron Baker is a member of CII’s board of directors). In the letter, the group expressed disappointment that the SEC did not ask for public comment before issuing its new Proxy Adviser Interpretation and Guidance. They also expressed concern that the SEC issued the Interpretation and Guidance without a demonstrated need to do so. The letter asked the SEC to reconsider its position and the opportunity for CII to provide comment. In addition to cosigning CII’s letter, Baker sent a letter on behalf of Colorado PERA to the SEC. The SEC will address this topic next on November 5.

In an interview with Pensions & Investments, Amy Borrus, Deputy Director of CII, summed up the issue when she said: “Many institutional investors rely on proxy advisory reports to help inform their voting decisions and they have a stake in ensuring these votes are independent and as objective as possible and timely. If rules make it more difficult for proxy advisers to get reports to investors in a timely fashion or make proxy advisers more inclined to tilt more toward companies they review, then that’s a problem.”

Retirement Roundup: Only half of Gen Xers have a retirement account

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Retirement Roundup: A digest of news from publications around the nation about finance, investing, and retirement

Only half of Gen Xers have a retirement account, and that’s a catastrophe in the making | Business Insider

Millennials may bear the brunt of bad press, but Gen X is arguably in worse financial shape. Insider recently teamed up with Morning Consult to survey 2,096 Americans about their financial health, debt, and earnings for its new series, “The State of Our Money.” According to the survey, exactly half of Gen Xers, defined as ages 39 to 54 this year, don’t have a retirement savings account. That’s only slightly less than the 54 percent of millennial respondents who don’t have one, and it’s particularly concerning considering the three-decade span between the youngest millennials and oldest Gen Xers.

Discount drug cards promise huge savings on your prescriptions. But is there a catch? | Money

Discount prescription cards promote savings of up to 80 percent off prescriptions by simply waving a free plastic card (or your phone) in front of the cashier at the pharmacy. Completely separate from your health insurance, they are more like convenient online coupons for prescription medications. They are generally free and have no additional fees. But keep in mind that insurance and discount cards cannot be used at the same time for the same purchase. You can use one or the other, deciding which is better on a case-by-case basis.

[Open Enrollment ends on November 7. Learn more about PERACare for Retirees – 2020 here.]

In-home care costs rising faster than any other long-term care setting | Home Health Care News
Home-based care is often lauded as an affordable — and preferable — alternative to skilled nursing care. But that characterization could be changing, as in-home care costs are skyrocketing to become more expensive than ever. That’s according to the latest annual Genworth Cost of Care Survey, which tracks the cost of various forms of long-term care nationwide, including home care, home health, adult day services, assisted living and skilled nursing.

Will you get what Social Security promises? | NerdWallet

The Social Security Administration will happily forecast your future monthly retirement check. Trouble is, it’s often off the mark. Understanding the sometimes-flawed assumptions underlying the estimate can help you make smarter decisions about when to claim your benefit. For people who worked at certain government agencies or were employed abroad and get pensions from jobs that didn’t pay into Social Security, the “windfall elimination provision” could reduce their Social Security checks significantly. Lawmakers intended the provision, and the related “government pension offset,” to keep people who didn’t pay much into Social Security from getting more than those who did. But the reductions aren’t always well publicized or explained, and can come as a shock to affected people who were counting on the amounts Social Security promised.

Opinion: GE freezes its pension plans and offers former employees lump sum buyouts | MarketWatch

In the face of declining profits, General Electric (GE) recently announced that, to help reduce the company’s debts, it will freeze its pension plan for about 20,000 salaried employees and offer lump-sum payments to about 100,000 former employees who have not started receiving benefits. The offer to “un-annuitize,” or provide lump-sum payouts, is concerning to advocates for automatic annuitization of at least some portion of 401(k) balances. Retirees with ongoing monthly pension benefits are much more secure than those who have to decide how to allocate their retirement assets over an uncertain lifespan. With traditional pensions, retirees will not outlive their benefits and do not have to worry about the ups and downs of the stock market.

State Health Care Proposal Could Bring Low-Cost Options

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Two separate announcements from Governor Jared Polis in October provide early, but promising, signs that Coloradans will soon see new health care options, including plans with lower price tags.

On October 7, the Colorado Division of Insurance and Department of Health Care Policy & Financing issued a draft report proposing a new StateOption for Colorado residents who purchase their own individual health insurance.

The State Option, which would become available in 2022 under the plan, would be sold and administered by health insurance companies but designed by the state. This State Option would not be available through group plans, such as those provided by an employer or with PERACare, but Coloradans would have the opportunity to enroll in the State Option plans directly. It is designed to be a more affordable option for health coverage, which in turn could control costs, even for those with different insurance.

The State Option would limit the amount paid to hospitals to between 175 and 225 percent of what Medicare pays, though rural and critical access hospitals would receive special protections. Currently, Colorado hospitals charge an average of 289 percent of what Medicare pays, which is higher than most other states.

Additionally, the State Option would require prescription drug rebates from manufacturers to be used to reduce the price of individual policies, something that PERA already has in place for its comparable plans. Insurance companies would also be required to direct 85 percent of premiums to pay for patient care. Those insurance companies would bear the risk for patient health expenses, just as they do today. The state or taxpayers would bear no financial risk.

A public insurance option for Colorado was one part of the health insurance legislation state lawmakers passed in 2019. Another was the creation of a state reinsurance program to help insurers cover their sickest, most expensive patients. On October 10, Governor Polis announced that individual health insurance premiums for 2020 will go down by an average of 20.2 percent across the state, due in large part to the reinsurance program. Some communities on the Eastern Plains and Western Slope will see savings of close to 30 percent for individuals purchasing these plans.

Potential Impacts for PERA Members and Retirees

While these developments only apply to the individual health insurance market and not to group plans such as PERACare, PERA staff are watching closely for signs of potential cost savings that could impact members and retirees.

According to the Division of Insurance, the reason health insurance is so expensive is that health care itself is expensive. “But lowering rates for people with individual insurance plans also helps bring down rates for everyone,” Governor Polis has argued.

One hope is that cheaper premiums will encourage more of the estimated 6.5 percent of Coloradans without insurance to sign up, reducing the amount of uninsured care that hospitals and other providers then pass on to people who do have insurance. The State Option could also publish the prices that it pays to hospitals, increasing transparency and creating even more pressure to hold down prices for everyone.

Colorado PERA, in its work with other employers and providers of group health insurance throughthe Colorado Business Group on Health, is looking closely at how hospitals and providers are paid compared to Medicare payments, similar to one of the key strategies of the State Option from the Polis administration. PERA staff are closely following its progress and considering how Pre-Medicare PERACare enrollees might benefit in the future.

The state agencies that developed the State Option proposal are acceptingwritten comments on the plan until October 25.

Information on 2020 Open Enrollment for PERACare, which runs from October 1 to November 7, is available for both Pre-Medicare and Medicare enrollees.

PERA Continues Streak, Listed Among Most Efficiently Run Pension Systems

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In 2018, Colorado PERA lowered administrative costs while also improving service, according to an annual report issued by CEM Benchmarking, a global pension fund benchmarking and consulting agency.

The cost to run PERA equaled $52 per active, inactive, and retired member, which is 13 percent less than PERA’s peer average of $60 per member, and about half of the $103 average cost for all organizations in the study. PERA’s administration costs actually fell 0.4 percent per year between 2015 and 2018, while peer average costs remained unchanged. Even as PERA reduced administrative costs needed to operate the system, it was also able to improve its customer service scores.

Balancing customer service and administrative costs

Every year, CEM Benchmarking conducts an in-depth analysis of global public pension systems. Colorado PERA has improved or maintained its overall service score—this year 91 out of 100—for the sixth consecutive year and continues to stand out as a leader in the field.

To assess the 62 pensions in the study, CEM Benchmarking looks at two primary factors: Each organization’s administrative costs and the quality of service its members receive. The top-level findings reaffirmed PERA’s place as a top performer in each category when measured against both the 12 organizations in its peer group and also when measured against all organizations in the study.

“The PERA Board of Trustees and staff are committed to providing high-quality service to our members at a low cost,” said Ron Baker, Executive Director of Colorado PERA. “As we look forward, PERA is committed to seeking innovative ways to provide better service to the membership while remaining responsible stewards of their retirement dollars.”

 Delivering top-notch service

CEM Benchmarking defines service from the perspective of members receiving the service, not from the perspective of PERA employees. The report states, “high service means more channels, faster turnaround times, more availability, more choice, better content and higher quality.” To evaluate service, CEM Benchmarking examines hundreds of data points collected from all service divisions in the organization and provides comparative data with pension funds of similar size and assets under management (confirm how peer group is set).

Key to PERA’s industry-leading ranking were factors such as average wait time for the call center and percentage of calls that conclude in desired outcomes. The report also compares the average time needed to process key service requests and the availability of counseling and education sessions, among other factors.

Amid a rapidly changing world, the demand to consistently deliver quality service at a low cost is often easier said than done. When a third-party study shows that PERA has established such a pattern, it demonstrates not only sound stewardship of member dollars, but also a commitment to serving each of PERA’s more than 600,000 members.

Retirement Roundup: Why is it so hard for women to save for retirement?

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Retirement Roundup: A digest of news from publications around the nation about finance, investing, and retirement

Why is it still so hard for women to save for retirement? | marketwatch.com

Working baby boomer men contribute 10 percent to their 401(k) while baby boomer women contribute 7 percent. For millennial men and women, the median rates are 8 percent and 5 percent, respectively. What gives? Pew Research Center shows that more women than men take “significant” time off from a career to care for children. Time out of the workplace can dampen long-term salary. Even when women are in a position equal to a male counterpart, women on average earn less.

Older Americans Are Increasingly Unwilling — Or Unable — To Retire | npr.org

About one in four adults age 65 and older still work, a number that experts expect to rise. Multiple factors are behind this trend. First, fewer private-sector jobs offer defined benefit pension plans. If a retiree relies solely on a 401(k), which is driven by market returns, a recession or down period near a person’s ideal retirement date could force them to work longer. Second, about half of older Americans use retirement savings to financially support grown children. Third, the median savings for baby boomers is about $150,000. Finally, nearly half of private sector employers don’t offer employees any type of retirement plan.

What Rate of Return Should I Expect on My 401(k)? | investopedia.com

When planning for the future, we all must make educated guesses. If you have a 401(k) or 457, a tough but crucial question to ask is “how will my investments do in the next 10, 15, 20 years?” If the sum of all your investments breaks down to about 60 percent stocks and about 40 percent bonds, the average long-term return people often use often lands in the range of 5 to 8 percent. Of course, in any single year, your returns might be significantly above or below that range.

4 Best Practices to Address the Pension Crisis | governing.com

As people live longer and as pension systems adopt more conservative investment assumptions, unfunded liabilities have grown in more than 4,000 public sector pensions. This article suggests that while each pension system requires a unique plan to move forward, the best plans share some common traits: Using a “shared sacrifice” model is often most effective, rigorously stress testing the pension’s portfolio to see how it would perform, and phasing in changes over time.

Charles Schwab Just Made Stock Trading Free. Here’s Why That Might Be Bad News for Investors | Money.com

Citing its large user base and advances in technology that make trading more efficient, Charles Schwab announced it will no longer charge to buy or sell stocks and exchange-traded funds online. Other companies have since followed suit. Lower costs are a win for consumers. However, for investors, commission-free trades might incentivize overtrading, adversely affecting long-term returns. While sophisticated traders have the time and tools to trade at a high frequency, many investors are better off buying and holding a diversified set of funds, or a single target-date retirement fund, for the long term.

Colorado PERA provides roadmap for sustainable public retirement plans

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Innovative strategies for responding to changing demographics and market conditions are keeping public retirement plans sustainable, and Colorado PERA is a leading example, according to a new report from the Center for State and Local Government Excellence (SLGE) and AARP.

Since the recession in 2008, many retirement systems have struggled with changing demographics and reduced expectations for their investment returns, resulting in lower funded ratios for their pension plans. In many cases, making changes to address these challenges and maintain plan stability required legislative action.

In response, some plans have created formulas that give plans the flexibility to make adjustments to their benefits and/or contributions to maintain long-term stability that do not require unpredictable or time-consuming legislative changes.

The report notes that such formulas “enable all stakeholders to understand how, when, and to what extent contributions or benefits might be subject to formula-based changes, and as a result, enable them to plan for the long term.”

Legislation passed in 2018 included this type of provision for PERA, called the automaticadjustment. Every June, PERA reviews progress toward its funding goal. If PERA is behind schedule, member and employer contributions will increase, and the annual increase decreases. If PERA is ahead of schedule, the annual increase will rise and contributions will decrease.

Prior to that legislation, making any changes to PERA’s contributions or benefits required legislation. Over the previous 15 years, annual contribution deficiencies resulted in a fundingdeficit of $4.6 billion.

The report highlighted PERA’s lengthy research and stakeholderengagement process. The resulting legislation, Senate Bill 18-200 affected employers, employees and retirees. Together with adjustable contributions and rate of annual increase, “PERA may be better able to meet its fiduciary responsibility to ensure all members will receive their earned pension benefit both in the short and long term.”

The report notes that while the economy has stabilized since the 2008 recession and many public pension plans have maintained or improved their funding rates, “relatively stable economic conditions are not guaranteed to prevail.” However, these variable funding structures may help pension plans in responding to shifting conditions.

SLGE does not recommend a particular pension funding structure, according to an article from PlanSponsor.

Retirement Roundup: How to wean your children off the bank of mom and dad

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A digest of news from publications around the nation about finance, investing, and retirement

How to wean your children off the bank of mom and dad | Money

If you’ve been lending a financial hand to your adult kids – from covering their car insurance or cell phone bills all the way to paying for their rent or down payment on a home – you have plenty of company. But financial planners caution that your generosity may be unwittingly jeopardizing your retirement.

Half of retirees afraid to use savings | Squared Away Blog

For most retirees, figuring out how much money to withdraw from savings every year is a difficult-to-impossible math problem. But the issue goes much deeper: fears about what the future might bring make this decision overwhelming. Extreme caution is a popular solution. Vanguard recently reported that retirees with very modest savings turn around and reinvest a third of the money they’re required to withdraw under IRS rules after age 70½. People saved all of their lives to make sure they will enjoy retirement. So why are they so reluctant to spend the money for the purpose it was intended?

4 Costly scams targeting older people that you should know about — but probably don’t | MarketWatch

While it’s hard to put an exact figure on how much elder financial abuse costs older Americans – in part because much of it goes unreported – estimates range widely from $2.9 billion to $36.5 billion annually. What’s more, large numbers of older people are unaware of some of the common scams that swindlers use on them, according to data fromAIG Life & Retirement.

Think time isn’t on your side? These late savers are all on track to hit financial independence | CNBC

Click on any story about someone who started saving in a 401(k) plan on her first job. Or read about a guy who opened a Roth IRA with his first high school summer job earnings. Fast forward 15 years to your own age, and these people are now sitting on a tidy sum that’s many times what you’ve managed to set aside. But take heart. It’s true that the earlier you start, the less you have to save each month. Yet getting started late is better than never starting at all. A few examples of successful savers, age 50 and over, could be the inspiration you need.

Why indexed annuities may promise more than they deliver | Consumer Reports

Financial planners and regulators are increasingly warning consumers to think twice about buying a popular annuity that promises better-than-average returns but carries high fees. Sales of indexed annuities, as they are known, have soared in recent years. But they are extremely complex, carry high fees and surrender charges, and often fall short of their promised returns.

The 3 big financial pain points of Americans | NextAvenue

If you look only at the nation’s low, 3.7 percent unemployment rate, it would be easy to assume that the economy is humming and that Americans are feeling great about their finances. But data from recent surveys suggests that many people are actually feeling three big financial pain points: caregiving and family assistance; health costs; and not enough savings but too much debt.

Senators Try to Revive Retirement Bill

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More than 87,000 PERA members have retirement savings in a PERAPlus 401(k) or 457 account. Rules that govern those accounts could soon change. If the bill becomes law, a person could keep money invested longer and take out up to $5,000 upon the arrival of a new child, among other changes.

In May, the SettingEvery Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was approved by the U.S. House with 99 percent of the vote—an overwhelmingly bipartisan tally. Colorado Rep. Ed Perlmutter was a bill cosponsor, and all seven members of the Colorado congressional delegation—four Democrats and three Republicans—voted in favor of the bill.

After the SECURE Act passed the House, it moved to the Senate. While some expected a quick passage by unanimous consent, opposition from three senators has slowed the bill’s momentum. Sens. Cruz, R-Texas, Toomey, R-Pa., and Lee, R-Utah, all reportedly have concerns about components of the bill. The bill could still pass with a majority vote, but it would require a lengthier process.

In October, seven Republican Senators, including Colorado Sen. Cory Gardner, wrote a letter to McConnell, in which they urged passage of the bill.

What the SECURE Act does

Increase access to retirement plans

About one third of U.S. workers do not have access to workplace retirement plans, like a 401(k) or defined benefit (pension) plan. The SECURE Act seeks to expand access to retirement accounts, making it easier and more affordable for businesses, particularly small businesses, to offer retirement plans. Every Colorado PERA member already has the opportunity to have both a defined benefit plan and a 401(k).

Raise the Required Minimum Distribution age to 72

The advantage to saving money in a qualified retirement plan, like a 401(k), boils down to two tax benefits: Contributions made to these accounts are made with pretax deductions from a person’s paycheck, and profits from the sale of investments in these accounts are not subject to the capital gains tax. Distributions from these accounts in retirement are taxed as ordinary income. Currently, retirees are required to begin taking distributions from these account no later than age 70.5, a rule known as Required Minimum Distribution (RMD). The SECURE Act would raise the RMD age to 72, giving retirees a few more years of tax-free growth. (You can find RMD calculators like this online).

The SECURE Act also would alter the following:

  • Parents could withdraw up to $5,000 from retirement accounts within the first year of giving birth or adopting a child.
  • Currently, a person can make contributions to an IRA until they reach the age of 70.5. The Act would remove this age cap.
  • Say you retire with a 401(k) balance of $175,000. Understanding how much you can expect to be able to spend per month without depleting the account can be difficult. The Act would require providers of defined contribution accounts to demonstrate how an account balance might translate to monthly lifetime income through the purchase of an annuity or similar product.
  • An IRA accountholder can designate a beneficiary—a person who receives the IRA upon the accountholder’s death. Currently, the beneficiary is able to spread out tax-free distributions over his or her lifetime while taking advantage of continued tax-free growth. The bill would limit the amount of time a beneficiary has to withdraw all funds from the IRA to 10 years. A beneficiary who is the spouse of the original IRA accountholder would be exempt from this rule.

WEP/GPO: The Case for Reform

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We frequently hear from our readers wanting an update on the latest efforts to repeal or reform Social Security’s WEP/GPO. This update is current as of October 2019 and includes PERA’s efforts to advocate on behalf of its members on this important issue.

Most Colorado PERA members do not contribute to Social Security, but many of them expect to receive Social Security benefits from their non-PERA employment or through benefits earned by a spouse. Unfortunately, two provisions in federal laws might reduce those Social Security benefits for PERA members: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).

These provisions reduce regular Social Security benefits for workers or their eligible family members if a worker receives a pension (e.g., PERA) that is based on non-Social Security covered employment.

Many PERA members rely on Social Security benefits, and WEP/GPO reductions can have a real financial impact on their retirement income. For that reason, PERA advocates on behalf of its members for reform to the WEP and GPO.

History

The GPO was enacted in 1977 and reduces Social Security benefits paid to spouses and widow(er)s of insured workers if that person also receives a pension. In 1983, Congress enacted the WEP as part of major amendments designed to shore up the financing of Social Security and provide a different benefit formula to “remove an unintended advantage that the regular Social Security benefit formula provided.” According toinformation from the Social Security Administration (SSA), as of December 2018, about 2.3 million Social Security beneficiaries nationwide—including 78,780 Coloradans—had their benefits reduced by the WEP or the GPO.

Prior Repeal Efforts

Proposals to repeal these provisions have been steadily introduced in Congress without success for over 20 years. In some years, more than half the U.S. House of Representatives signed on as co-sponsors, yet a bill never made it out of committee. The cost of repeal, which the Social Security Administration estimated in 2016 would increase the long-term cost of the program by 0.13 percent of payroll, and general uncertainty surrounding Social Security’s financial future, have been roadblocks in Congress.

The latest projections included in the Social Security Board of Trustees 2019 annual report show that Social Security will be unable to pay scheduled benefits in full and on time starting in 2035. Specific program changes will likely involve intense debate in Congress, but at the same time comprehensive Social Security reform is likely to include meaningful discussion of WEP/GPO. Nancy A. Berryhill, Acting Commissioner of Social Security, recommends lawmakers “address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.”

Current Reform Efforts

WEP reform efforts have gained momentum recently, including two proposals from members of the House Ways and Means Committee: Chair Rep. Richard Neal (D-Massachusetts) just introduced HR 4540, Public Servants Protection and Fairness Act (overview), and ranking member Rep. Kevin Brady (R-Texas), reintroduced HR3934, Equal Treatment of Public Servants Act (overview), in July.

These bipartisan proposals would cost substantially less than full repeal by replacing the WEP with a new formula designed to offer relief to affected workers. Combined with the lower cost, focusing on the inequitable application of the offsets, rather than outright repeal, likely increases the chance of a successful outcome when Congress takes action on the issue.

PERA’s Congressional Outreach

PERA, other public pension plans across the country, state legislators, and various retiree organizations continue to educate Congress about the impact of these rules on pension recipients. PERA staff are in the process of meeting with members of Colorado’s congressional delegation to emphasize the way in which these provisions reduce retirement income that would otherwise be available through Social Security.