April18th LCPR meeting

The Legislative Commission on Pensions and Retirement (LCPR) met on Tuesday, and Minnesota Management and Budget (MMB) Commissioner Myron Frans testified regarding Gov. Mark Dayton’s recommendations (SF2233/HF2486). These recommendations contain measures endorsed by a Blue Ribbon Panel convened at the governor’s request earlier this year and included in the governor’s biennial budget.

For TRA, the bill calls for a 1 percent retiree cost-of-living adjustment for five years and 1.5 percent thereafter, as well as a 2 percent increase in employer contribution rates.  For MSRS, the bill calls for a reduction in the COLA from 2 percent to 1.5 percent.

Frans said bipartisan support is needed for pension reform. He was questioned about why the employer contribution rate increase for Teachers Retirement Association (TRA) was only funded for two years, and why St. Paul Teachers Retirement Fund Association (SPTRFA) does not receive its requested $5 million direct appropriation in the bill. Frans said MMB believes it cannot commit to these dollar amounts beyond two years.

Sen. Dave Senjem asked about how much the bill is going to cost and what funding ratio trajectory is projected for each of the funds over the next 30 years. With regard to the investment return assumption, Rep. Tim O’Driscoll said that it’s difficult for the State Board of Investment to target one rate for TRA and a different rate for the other systems. TRA has proposed moving to 8 percent while a data-driven study is conducted on best practices for setting the investment assumption. Frans and the blue-ribbon panel recommended 7.5 percent for all systems immediately (July 1, 2017).

Sen. Julie Rosen, commission chair, asked LCPR members whether it would be helpful to get actuarial costing on the governor’s proposal. Members agreed to proceed with a cost study. Separately, Deloitte actuary Michael DeLeon testified on actuarial studies on the retirement systems’ reported actuarial liabilities. Deloitte has only minor recommendations for the system actuaries for the fiscal year 2017 valuation work.

The Pension Commission is expected to meet again next Tuesday, April 25th but no agenda has been set for that meeting

Courtesy of Minnesota TRA Communications


Someone Really Is Coming after You

Don’t let the politically driven terrorist rhetoric distract you as we head into the 2016 Legislative Session. There are mass shootings almost every day in America. One or two are foreign terrorist related at most, and with over 200,000,000 guns in this country, it’s small wonder.

Meanwhile there are people out there who want a little piece of your money, every dollar, every day. They are showing up in person and as lobbyists in St. Paul as you read. Here’s some stuff you need to know to be able to make good choices and smart decisions

Look at this article from the New York Times:

Congress Inches toward Completed Spending Bill
By David M. Herszenhorn
Dec. 14, 2015 New York Times

WASHINGTON — Congressional negotiators worked Monday night to complete a $1.1 trillion spending bill for 2016, and an accompanying package of up to $750 billion in tax breaks for businesses and low-income workers.

Republicans want to block some Obama administration environmental regulations and to stop a new Department of Labor rule tightening rules for financial advisers who manage retirement funds.

Now here’s why it’s important. Financial advisers under the Labor Department budget amendment proposal would require financial advisers to be required in the work “in the best interest” of their clients. Keep in mind that “financial advisers” and investment plan sales people who earn fees, like commissions, on your financial transactions, such as 401b and 403b investments, and you are not their client, you are their customer. Some states require FAs to work in the best interest of their clients, and most probably do. Without the requirement that all do, some may work to provide suitable services; if it suits you to invest in a mutual fund that offers a very high return rate, you might take it, but the adviser who’s selling it to you may take as much as a 3% fee on it.

What should you be telling your Congressional representatives?


Read this Forbes Personal Finance article to see what that means:

The Heavy Toll of Investment Fees
By Rick Ferri
May 27, 2013

The thought of giving up 40% per year in investment return to pay for portfolio management and advice would cause most people to walk away. Yet, this is the price many people pay when they hire an investment adviser to manage a mutual fund portfolio or exchange-traded fund (ETF) portfolio. Cutting this cost by as much as two-thirds is easily done and highly recommended.

The 40% annual cost is simple math. Take the average expense ratio charged by mutual funds and add it to the average advisor fee, then divide this number by the expected portfolio return before fees. The result is your investment cost. I’ll walk you through an example.

Let’s start with a hypothetical example of an expected portfolio return before fees. A portfolio allocation that’s invested 60% in global stocks and 40% in US investment grade bonds should earn about 5.3% before costs, according to my best estimate. Investment grade bonds are yielding 2.0% based on the Barclays Aggregate Bond Market Index, and this is what you can reasonably expect to earn from intermediate-term bonds going forward. On the equity side, the FTSE Global All Cap Index should earn about 7.5% annualized based on global economic growth and dividend reinvestment.

A 60% stock and 40% bond mix comes to 5.3% before fees; what you earn after fees depends on how much you pay. There are two investment costs in my calculation: mutual fund expenses and an adviser fee. There may be trading costs and taxes to pay as well, but I’ve excluded them in this exercise.

The average expense ratio for actively-managed equity mutual funds is 1.2% and investment grade bond funds have an expense ratio of 0.9%, according to Morningstar. Taken together, a 60% global stock and 40% bond fund portfolio has an average combined expense ratio of 1.1% per year.

The second expense is an adviser fee. The typical investment adviser charges about 1.0% per year on the first $1 million dollars of assets under management. This cost may be higher or lower depending on the amount being managed. Adding mutual fund expenses and adviser fees comes to 2.1% annually.

Your adviser’s fee plus fund fees might be costing you around 4.1% annually; so your rate of return had better be pretty good to make the money you expect.

You absolutely need to be informed. There will be discussion in the Minnesota Commission on Pensions and Retirement about the fees our State Board of Investment pays on our TRA and other public employee pension funds. You need to be able to read the numbers and know what they mean. The truth may sound scary, but you can protect yourself by being informed.

What should you be telling your Legislative representatives?


Jay Ritterson

LCPR concludes October meetings

On Tuesday, the Legislative Commission on Pensions and Retirement (LCPR) met to hear testimony from representatives of commission actuary Deloitte Consulting, the Minnesota State Board of Investment (SBI) and the three statewide retirement systems.

Deloitte provided a review of the retirement plans’ actuarial reports from fiscal year 2014-15, a recommendation of funding policy change, and the implications of changing the investment return assumption. SBI Executive Director Mansco Perry gave an overview of the agency’s governance structure, asset allocation, and long-term investment return performance relative to national peers.

Dave Bergstrom, executive director of the Minnesota State Retirement System (MSRS), Dave DeJonge, interim executive director of the Public Employees Retirement Association (PERA), and Laurie Hacking, executive director of the Teachers Retirement Association (TRA), presented information about the findings of the systems’ recent actuarial experience studies and recommendations for bringing the systems’ economic and demographic assumptions in line with member population experience. The pension plan directors discussed the cost impact of incorporating the new assumptions.

The directors were also asked to provide the commission with estimates of the actuarial impact of lowering the systems’ investment return assumption from 8 percent to 7.75 percent or 7.5 percent .

On Wednesday, the LCPR heard testimony from the principals of Epoch International, a New York firm invited by Sen. Dave Thompson (R-Lakeville) to discuss the idea of injecting a relatively small amount of “free” money into the pension funds by leveraging life insurance policies for MSRS, PERA and TRA retired members. These so-called LIFTs (Life Insurance Finance Trust) are insurance-linked securities that are being touted as a model for providing “funding relief to seriously underfunded pension plans and retiree plans,” according to Epoch.

An outside institutional investor would contribute the capital to pay annual insurance premiums. The insurance company, in turn, underwrites 2,000 “qualified lives” with expectations to invest the premiums profitably. The pension fund provides the 2,000 “qualified lives” and would receive an estimated $25 million up front, but must pay death benefits of between $10,000 and $15,000 to retirees’ survivors or estates. Epoch would receive a 5 percent fee. Epoch’s representatives said that the retirees would participate out of a sense of wanting to help the pension fund remain sustainable.

“By using life insurance on retiree lives the institutional investors, life insurance company and pension fund can all make money for their mutual benefit,” according to Epoch. 

Jill Schurtz, executive director of the St. Paul Teachers Retirement Fund Association (SPTRFA), testified and questioned the Epoch representatives about potential downside risks that would be taken on by the pension systems.

Check here for future LCPR meetings: http://www.commissions.leg.state.mn.us/lcpr/meetings/agendas/2015/101315-101415agenda.htm

Courtesy MN TRA