Might as Well Face It, You’re Addicted to
By: Jim Scheinberg – February 12, 2013
One can’t help but note that there seems to be a theme of the Obama era, seemingly high stakes drama. The months following his reelection have not started any different than those of the prior 48. Once again, we face cracking our sovereign heads on a fast approaching debt ceiling. Again, the expiring tax code of the last decade is being dealt with in a political/economic game of chicken… just like two years ago. And similarly, the solution continues to be cobbled together with stop gaps and half fixes instead of comprehensive solutions. It’s not necessary to assign blame to the President or Congress for being the cause of this cycle of eleventh hour MacGyvering of our national economic policy. For purposes of this commentary, it makes little difference. One thing is for certain however, the media loves it…and they play the cords of the public’s emotions around these crises-du-jour like a master conductor. When they do, market volatility follows suit.
Even the decisive re-election of Barack Obama on November 6th was met with a dramatic Wall Street hissy-fit. During the six trading sessions following the election, the S&P 500 dropped over 5%. Rank speculation of higher taxes and a fully implemented Obamacare had some right-leaning investors in a panic. As with many of the emotional outbursts of the last four years, reality turned out to be much more muted than worst fears had assumed. And so, by the end of the year, the market has rallied back nearly to the place it was before the election (unchanged for the 4th Quarter and up 16% for the year).
It was a good year for stocks in general across the globe. Developed and emerging market international equities, not burdened with our dramatics, rallied around 6% during the 4th Quarter, to finish the year with gains in line with those of their U.S. peers. Value stocks across the globe started to outperform in Q4, leading growth names by a touch for the year. This is a potential indication that the cyclical economic recovery we forecasted in Q3 may finally be at hand.
Again in 2012, traditionally perceived risk arenas were the place to be in the debt markets. The 10-Year Treasury finished off a quiet year just an 1/8 of a point away from where it started, closing with a yield near 1¾%. That meant that high quality bonds had to settle for near coupon returns, which were already at historic lows. High Yield enjoyed another meteoric rise, posting gains equal to the equity markets. But it turns out that the best place to be in 2012 was in Emerging Market debt. As the world woke up to this asset class and money flowed in, yield spreads tightened and combined with attractive coupon rates to post percentage returns in the low 20s.
Buildings on a Solid Foundation
So if this crises turns out to be overblown (like most crises seem to be), what should we be paying attention to? Again, I refer back to my main guidance of last quarter. It’s the real estate market stupid. So how is the real estate market doing? So far, so good. The S&P Case Schiller Index continues to show strong gains in the national home market. During the 4th quarter, the August through October data was announced, showing 2%, 3% and then 4.3% improvement in prices nationally. Existing homes sales continue to show strength, with monthly sales eclipsing the five million units a month level for the first time since the recent bear market in residential real estate began. With the continued improvement in sales volume, and the number of homes available on the market still low, inventory now stands as just 6.1 months, with units available down over 20% from a year ago. (Source NAR, 1/22/13)
It’s beginning to look
a lot somewhat like Christmas
Last quarter, we theorized that consumer behavior would follow the housing market’s improvement closely. And up until December, all indications were that it was. Both the Conference Board and the Michigan Sentiment Index showed much larger readings than expected in September (released in October) and continued to climb through November. However, as the media and politicians began to fan the emotional flames surrounding the looming “Fiscal Cliff,” the December reading showed a sharp pull back in sentiment.
I have commented before during similar media-hyped crises, like the debt ceiling showdown in August 2011, consumer behavior does not fully follow the short-lived drops in sentiment. In 2011, back-to-school buying didn’t disappoint, as the drops in sentiment would have indicated. This year, Christmas sales also showed that the consumer was alive and well. Retail sales for the season improved 3% year-over-year. Though a healthy advance, 3% was a slight disappointment to more lofty expectations of 4.1% growth. This shocked many observers, since the beginning of the holiday shopping season, which began around Thanksgiving, had shown much stronger improvements. Perhaps all the propaganda around the fiscal cliff did manage to talk some consumers out of their holiday cheer a bit after all.
May I(SM) Be of Service to the Economy?
Consumers may not be the only ones who bought into mania. The Institute of Supply Management, which had shown some firming in their manufacturing sentiment data, could not gain any momentum in Q4 as readings hovered in the slow growth range. The services side of their studies, however, showed stronger growth conditions, which actually accelerated into the end of the year. The non-manufacturing RoB for December came in at 56.1, which is approaching its post-crisis highs.
This steady and building confidence from the business sector bodes well for the labor market. Though not fully robust yet, gains in the job market have been steadily whittling away the unemployment rate, which ended the year at 7.8%. The number of employed people rose from 140.9 million in December 2012 to 143.3 million this December, for a gain of 2.4 million. Those who are classified as unemployed fell from 13 million last December to 12.2 million last month, an improvement of over 800,000. Though not close to robust, the improvement in the domestic jobs situation in 2012 is a good base for acceleration in 2013. (source bls.gov)
All of this leads right back into one thing: Confidence. If the consumer is growing confident about housing and their jobs, they will continue to increase their participation in the economy. If business and housing continue to improve, then business managers will continue to invest and hire. If sales and hiring improves, then the consumer will grow more and more confident. Get the picture? When was the last time we could use the word confident? It’s been well over five years. Guess what also happens if/when the above scenario starts to play out… Tax receipts climb, easing budget concerns at the Federal, state and local levels. Trade with our overseas partners also increases, leading to further gains in the emerging economies of the world. Improvements like these generally help the economies of our more developed international brothers in Europe and Asia, all of which roles back to improving sales for U.S. multinationals. Can you imagine what it will look like once the economic engine of the globe is firing on all cylinders? Pretty bright PIERspective, isn’t it?
By: Brant Griffin – February 4, 2013
Bankrupt City Takes on a Public Pension Behemoth
Pension heavyweight CalPERS (California Public Employees’ Retirement System) is squaring off against San Bernardino, a bankrupt California city of 210,000, in pursuit of delinquent pension payments. The world’s sixth largest pension fund with assets of nearly $250 billion is frequently cited as throwing its weight around in pursuit of its interests. The circumstances of this epic battle may send it all the way to the U.S. Supreme Court.
CalPERS manages the pension assets of 450 California cities, all of which make regular contributions on behalf of their employees. Rarely have member cities shrugged-off these funding obligations, even when faced with extreme fiscal duress. Case in point, during the recent recession, the city of Vallejo chose to stiff its bondholders rather than fall short on its payments to the pension fund. When municipalities have tried to renege on their pension obligations, CalPERS has dealt with them swiftly and aggressively through the courts.
San Bernardino has chosen to stand up to the CalPERS. After filing Chapter 9 municipal bankruptcy in August, the city discontinued its $1.7 million monthly retirement plan contribution. Due to its financial quandary, San Bernardino stated that it could not further restrict municipal services without risking public safety. San Bernardino proposed an emergency budget in November, where $13 million worth of payments to CalPERS would be deferred and “… negotiated with the creditor” at some point in the future. Soon after, CalPERS announced it would sue the city to reclaim the missed payments. They also filed a motion to remove the protection from lawsuits that cities entering bankruptcy normally retain. CalPERS also stated that it “reserves the option” of ending its contract with the city, leaving workers in an uncertain position.
In the lawsuit, the US Bankruptcy Judge ruled against CalPERS in its attempt to force the city to continue making its pension payments. The judge’s ruling stated that requiring San Bernardino to pay CalPERS would be a “death knell” to its efforts to rebound from their financial difficulties. Even though the hit to the pension fund is a mere sliver of its portfolio, CalPERS maintains that any settlement favoring San Bernardino will set a negative precedent that could eventually threaten its solvency and retirement benefits for millions of California’s workers and retirees. The fund indicated that Vallejo and Stockton, two other California cities that recently declared bankruptcy, continued making payments to their employees’ retirement fund and that allowing San Bernardino this leniency would undermine its position as a priority creditor for the municipalities of California. To make matters worse, municipal investors, including bond holders and insurers, challenge the idea that CalPERS should be paid back ahead of them. Bondholders have pursued a ruling that places CalPERS at the level of other unsecured creditors.
The legal issue is whether the pensions of government workers take precedence over other creditors in a municipal bankruptcy. CalPERS maintains that under California law, it has priority as a creditor and must continue to be paid in full, even in a bankruptcy. Bond investors and other stake holders disagree, arguing that federal bankruptcy law trumps state authority and puts them on a level playing field with CalPERS in court. CalPERS fear is that, as San Bernardino goes, so goes the state.
IBM Changes 401(k) Match
IBM, a longtime innovator in pension and 401(k) plans, recently announced some controversial changes to its 401(k) plan that could cut its retirement plan expenses. Although the formula will not change, the technology giant will no longer be making 401(k) matching contributions every pay period. Instead, IBM will make a lump-sum contribution on December 31 of each year. To be eligible for the new company match, a participant must be employed by the company on December 15.
This change could be a move to combat pressure from competitors with significantly lower benefit costs. The technology company makes generous plan contributions ranging from 6% to as much as 10% of an employee’s salary, or about $10,000 a year for the more than 200,000 eligible employees. This transition to an annual contribution will likely save the company tens of millions of dollars because it would not be making contributions to those employees who leave during the year (other than retirees). IBM stated that many of its tenured employees who will retire with the company would not be affected by the new policy. Further, the change is consistent with its commitment to invest in its 401(k) plans while maintaining its plan’s competitiveness.
This plan design shift is a continuation of the trend to examine the suitability of traditional plan match allocations. Many organizations are questioning the wisdom of these designs in the face of today’s challenging financial environment characterized by elevated competition and rising benefits (primarily heath care) costs. In recent years, many companies have chosen to jettison traditional match provisions in favor of elongating the formula to encourage additional savings (or one governed by profits to alleviate funding pressure on the plan sponsor during lean years).
Currently, end-of-year matches are only utilized by approximately 7% of 401(k) sponsors, according to benefits consulting firm Mercer. The savings attained through this design adoption would vary significantly depending on the organization’s turnover. A company may find it beneficial to allocate its cash to operations throughout the year, rather than funding a payroll-based matching arrangement. Ultimately, a plan sponsor must balance any benefits from expense savings and cash management with the costs and indirect consequences of such a move (namely, a potential drop in employee morale).
The American Taxpayer Relief Act Expands In-Plan Roth Conversions
To avoid the pending fiscal cliff, President Obama signed into law The American Taxpayer Relief Act of 2012. Included in this legislation is a provision to permit in-plan Roth conversions allowing plan participants to pay taxes on retirement savings now, and avoiding paying them later. According to the Joint Committee on Taxation, this legislation will pull forward an estimated $12.2 billion in tax revenues (putting additional pressure on future budgets) over a 10-year period to help defray the costs of a 2-month sequestration.
The rule change is a permanent amendment to the tax code. This new provision offers a broader route for employees who are considering Roth conversions in comparison to the previous opportunity provided by The Small Business Jobs and Credit Act of 2010. The prior law permitted the conversion only from those funds eligible for distribution from the plan (such as from terminating employment). However, the new amendment does not offer the same tax relief as the old rule, where conversion taxes were paid over a 2-year period. This law makes the Roth conversions taxable in the year that the funds are converted. For this reason, participants will want to carefully consider their tax strategy when considering an in-plan conversion. Some may want to convert a portion of their assets each year to minimize tax liability and avoid drifting into a higher tax bracket for that year. If this route is taken, participants are advised that the five-year tax rules prevent access to the converted money during that period.
Prudent and Practical Steps for Evaluating, Benchmarking and Ensuring Value
Within the human resource profession, it is an understanding that selecting the right person for any job is crucial. This webinar will hope to show that selecting the right Advisor for your company’s retirement plan is deemed just as important. Especially since making a prudent selection is mandated by Federal law (ERISA).
Retirement plan fiduciaries (and others with plan oversight responsibility) have an elevated responsibility when tasked with selecting or evaluating an Advisor. This session will provide you with a background and tools so you and your organization can make educated decisions when involved in an Advisor search or evaluating an existing Advisory relationship.
The session begins by delving into the basics of fiduciary responsibility and the importance of understanding the unique differences of Advisory firms. To provide a historical context to the discussion, North Pier will review the evolution of the qualified plan advice market and provide a frame of reference for the remainder of the webinar. We will touch on how you can assess your organization’s advisory needs before we investigate the distinct cultures and business models that exist among Advisory firms and the resulting trade-offs. We will also discuss and provide the necessary tools to identify and recognize business practices of Advisory firms that are conflicts and that may affect the advice provided to you and your employees.
Finally, we will review plan sponsor best practices your organization may employ in evaluating your plan’s Advisory relationship to ensure that you are receiving the optimal set of Advisory services for your plan at a competitive price.
Understanding the Differences Among Retirement Plan Recordkeepers and Finding the Best Fit for Your OrganizationPosted: February 5, 2013
Learn how to differentiate among the distinct cultures and business models of recordkeepers and the trade-offs that exist. What are their profit and revenue expectations? Do they maintain divisions within their organization where potential conflicts exist? Is there parity between their fees and the services you and your employees receive? Our presentation will answer these questions and explain how to benchmark your plan in comparison to the marketplace to ensure that you are paying a fair price for the services received.