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Friday Financial Five – April 4th, 2014

Friday, April 04, 2014


High frequency trading gets more exposure

While other problems exist in the financial services industry, high frequency trading should be the priority for the SEC. The practice doesn’t pass the smell test, and the recent 60 Minutes piece with Michael Lewis does a good job of explaining the nuances. An argument exists that high frequency trading hasn’t been a focus because it doesn’t greatly harm any individual investor. Instead, it harms millions of investors in extremely small increments and violates the concept of fair trade. The SEC can put an end to this activity or at least dissuade it, possibly with a minimum time between trades or a trade tax. The goal should not be to stifle technological advancement but to create a level playing field between buyer and seller.

401(k) auto-enrollment helping retirement savings

While participation in the stock market is at a low, it appears those making 401(k) contributions is increasing. Auto-enrollment certainly has played a role, as the number of Merrill Lynch 401(k) sponsors using this practice increased by 16 percent in 2013. Merrill also saw a 25 percent increase in those opting for annual contribution increases. Many retirement plans participants adapt to the “forced” contribution and increase, then budgeting based on the remaining take home pay.

Social Security for public-sector workers

Government employees who have contributed to Social Security should really examine their benefits to ensure proper projected retirement income. WEP (Windfall Elimination Provision) rules and the Government Pension Offset can both reduce estimated benefits. The WEP reduction is maximized at one-half of the pension. The Government Offset factors into spousal and survivor benefits and can amount to two-thirds of the pension. Those in public service must be mindful of these provisions to properly forecast retirement income.

The cost of Alzheimer’s

A recent program by the Alzheimer’s Association highlighted the immediate need to address this not only as an obvious health issue, but to mitigate the overwhelming cost associated with caring for those affected. Alzheimer’s is the most expensive condition in the nation, costing $214 billion in 2014 and expected to climb to over $1 trillion by 2050. It accounts for 20% of all Medicare expense, with a total of $150 billion spent by Medicare and Medicaid combined. Out of pocket spending accounts for over $30 billion. This ailment may single-handedly threaten the sustainability of the entitlement programs, while simultaneously driving up the cost of Long Term Care coverage to prohibitive levels.

Madoff trustee looking for approval on another payout

It’s been over 5 years since Bernie Madoff’s investment firm failed. If approved by a bankruptcy judge, the most recent settlement agreement would bring total payouts to defrauded investors to almost $6 billion. Irving Picard, the trustee, most recently is looking for permission to pay out close to $350 million, the bulk of which comes as a settlement with JP Morgan Chase. Mr Picard’s legal team is not working pro-bono, as their recently submitted request for $39 million in fees would swell the total legal bill for this debacle to over $500 million.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at dforbes@forbesplanning.com .


Related Slideshow: Providence Pension Liability

A new report shows that Providence’s pension fund—even after the recent reform—is still in trouble. The below slides break out the key numbers for the pension fund, including the unfunded liability, the assumed and actual rates of return, the current level of benefits, and how long it will take the city to pay off the unfunded liability. Figures are current as of July 1, 2013 and are taken from the new Jan. 31 actuarial report from Segal Consulting.

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Unfunded Liability in 2013

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Unfunded Liability in 2011

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Percent Funded in 2013

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2013: 31.39%

Percent unfunded in 2013: 68.61%

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Percent Funded in 2011

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2011: 31.94%

Percent unfunded in 2011: 68.06%

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Rate of Return

Former Assumed Rate of Return: 8.5%

New Assumed Rate of Return: 8.25%

What the state’s assumed rate of return is: 7.5%

What Moody’s Investors Service says the assumed rate of return should be: 5.5%

What investor Warren Buffet says the assumed rate of return should be: 6%

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Actual Return on Investment

Actual Market Return in FY 2012: 1.49%

Actual Market Return in FY 2013: 11.35%

Current Assumed Rate of Return: 6.42%

Average Market Rate of Return for FY 12 and FY 13: 8.25%

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Impact of Lower Rates of Return

$72 million:The city unfunded liability increased by this amount when the city lowered its assumed rate of return by a quarter of a percentage point, from 8.5% to 8.25%

$506.2 million: The estimated increase in the unfunded liability were the city to use the 6% assumed rate of return recommended by Moody’s Investors Service.

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Retiree Pay – Fire and Police

Number on Active Duty: 834

Average Annual Pay: $61,325

Number of Retirees: 587

Average Retiree Age: 65.3

Average Retiree Annual Pay: $40,512

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Disability Pensions – Fire and Police

Number on Disability: 418

Average Age: 64.8

Average Annual Pay: $59,028

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Retiree Pay – Other City Workers

Number of City Workers: 2,164

Average Annual Pay: $38,687

Number of Retirees: 1,453

Average Retiree Age: 72

Average Retiree Annual Pay: $18,252

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Disability Pensions – Other City Workers

Number on Disability: 88

Average Age: 66.8

Average Annual Pay: $18,684

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Current Cost of Pension Fund

For 2013

City Contribution: $58.1 million

Employees Contribution: $10.9 million

Net Investment Return: $18.1 million

Cost of Retiree Benefits: $95.4 million

Note: Net investment return is the return on investments after investment and administrative fees have been paid.

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Cost of Pension Fund in 10 Years

Normal Cost: $9.8 million

Additional Cost Because

of Unfunded Liability: $84 million

Total Annual Cost: $94.3 million

Note: Total figure for the year includes a small second payment for the deferred liability.

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Cost of Pension Fund in 20 Years

Normal Cost: $13.9 million

Additional Cost Because

of Unfunded Liability: $118.5 million

Total Cost: $132.4 million

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Paying Off Unfunded Liability

Average annual increase: 3.5%

Number of additional years to pay off: 27

Fiscal year unfunded liability to be paid off by: 2040


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