1.
GAO FINDS SOME PROGRESS ON U.S. GOVERNMENT’S FINANCIAL
STATEMENTS (BUT SIGNIFICANT PROBLEMS REMAIN):
For
the eleventh year in a row, the U.S. Government Accountability
Office
was prevented from expressing an opinion on the consolidated
financial statements of the U.S. Government -- other than
the Statement of Social Insurance -- because of serious
material weaknesses affecting financial systems, fundamental
record keeping and financial reporting. The Comptroller
General of the United States, who heads GAO, did note some
progress in this year’s audit. This year GAO expressed
an unqualified opinion on the fiscal year 2007 Statement
of Social Insurance, which includes Social Security, Medicare,
Railroad Retirement and Black Lung programs. This statement
is significant because it covers some of the largest numbers
in the federal government, tens of trillions of present-value
dollars associated with future Social Insurance expenditures.
Overall, however, the comptroller was not satisfied. In
a recent speech at the National Press Club, he said “if
the federal government was a private corporation and the
same report came out this morning, our stock would be dropping
and there would be talk about whether the company’s
management and directors needed a major shake-up.” Despite
improvements in financial management since the U.S. Government
began preparing consolidated financial statements over
a decade ago, three major impediments prevent the U.S.
Government from attaining a clean opinion: (1) serious
financial management problems at the Department of Defense,
(2) the federal government’s inability adequately
to account for and reconcile intragovernmental activity
and balances between federal agencies and (3) the federal
government’s ineffective process for preparing the
consolidated financial statements. (Yikes.)
2. HOW TO GET AROUND FDIC LIMITS:
With
problems cropping up in so many financial institutions,
investors with large
deposits need to be especially careful, according to TheStreet.com
But what if you have deposits that exceed the Federal Deposit
Insurance Corp.’s standard $100,000 limit? The obvious
solution is to spread your deposits across accounts at
different institutions, but doing so can quickly become
a record-keeping nightmare, not to mention the hassle of
dealing with numerous banks. A relatively new service,
Certificate of Deposit Account Registry Service, or “CDARS,” can
do this for you. The service, provided by Promontory Interfinancial
Network, has been available for about five years. Approximately
1,825 banks and thrifts in all fifty states offer the service,
which allows CD depositors with balances of up to $50 Million
to have their entire balances insured by FDIC. Here’s
how CDARS can work for someone with a $1 Million CD. First,
you go to a participating bank or savings and loan (“lead
bank”), and fill out an account application and a
CDARS agreement. The lead bank acts as account custodian,
and, through CDARS, spreads your deposit over 11 FDIC-insured
institutions, making sure you have less than $100,000 in
each. The lead bank will assign you one account number
and send you a single account statement showing which institutions
are holding the funds. You will receive one 1099 statement
for your taxes or other relevant
tax statements for IRA accounts. Bank of New York acts
as a subcustodian for the CD account, so that the only
institution that has your personal information is the lead
bank. CDs are available through the program for terms ranging
from four weeks to five years. Interest payments can be
made monthly, quarterly, semi-annually, annually or at
maturity. Consumers and businesses are not the only ones
using CDARS; they are also catching on with municipalities.
Promontory Interfinancial Network states that it has hundreds
of municipalities investing billions of dollars through
CDARS. Depositors using CDARS are not charged fees to open
accounts. Participating banks pay a fee to join CDARS,
and pay transaction fees to Promontory Interfinancial Network
depending on size of the deposits. Like most CD deposits,
there are penalties for early withdrawals. For early withdrawals
from CDs with maturities of up to 26 weeks, the depositor’s
penalty is the interest for the entire period of the CD.
For longer-terms CDs, early-withdrawal penalties are generally
the interest for half the CD term. Live and learn.
3. PENSION FUNDS HAD BANNER YEAR:
With
pension funds making significant gains, fewer large companies
face high
degrees of financial risk because of pension liabilities,
according to a Watson Wyatt analysis of FORTUNE 1000 companies
that sponsored defined benefit pension plans in 2006. Despite
recent market volatility and asset values and discount
rates, pension funds are expected again to fair well when
final 2007 numbers are known. Watson Wyatt’s analysis
found that pension plan liabilities posed relatively high
financial risk for only 8% of FORTUNE 1000 companies with
pension plans in 2006, down from 17% in 2003 -- a decline
of about half over four years. Companies with moderate
or high pension risk may face financial challenges from
their pension plan during poor market conditions. About
29% of companies sponsoring pensions have a moderate amount
of risk, while the remaining 63% are exposed to relatively
low risk levels. The latter group includes some firms --
11% of FORTUNE 1000 companies that sponsor pensions --
for which pension plans pose no business risk, a percentage
that has more than doubled since 2005. Let’s keep
up the good work.
4. LOW DC CONTRIBUTION PLAN SAVINGS MAY
POSE CHALLENGES TO RETIREMENT SECURITY:
Over the last 25
years, pension
coverage has shifted primarily from traditional defined
benefit plans, in which workers accrue benefits based on
years of service and earnings, to defined contribution
plans, in which participants accumulate retirement balances
in individual accounts. DC plans provide greater portability
of benefits, but shift responsibility of saving for retirement
from employers to employees. A recent U.S. Government Accountability
Office report addresses the following issues: (1) What
percentage of workers participate in DC plans and how much
have they saved in them? (2) How much are workers likely
to have saved in DC plans over their careers and to what
degree do key individual decisions and plan features affect
plan saving? (3) What options have been recently proposed
to increase DC plan coverage, participation and savings?
GAO analyzed data from the Federal Reserve Board’s
2004 Survey of Consumer Finances, the latest available,
utilized a computer simulation model to project DC plan
balances at retirement, reviewed academic studies and interviewed
experts. GAO’s analysis found that only 36% of workers
participated in a current DC plan. For all workers with
a current or former DC plan, including rolled-over retirement
funds, the total median account balance was $22,800. Among
workers aged 55 to 64, the median account balance was $50,000,
and those aged 60 to 64 had $60,600. Low-income workers
had less opportunity to participate in DC plans than the
average worker, and when offered an opportunity to participate
in a plan, were less likely to do so. Modest balances might
be expected, given the relatively recent prominence of
401(k) plans. Projections of DC plan savings over a career
for workers born in 1990 indicate that DC plans could,
on average, replace about 22% of annualized career earnings
at retirement for all workers, but projected “replacement
rates” vary widely across income groups and with
changes and assumptions. Projections show almost 37% of
workers reaching retirement with zero plan savings! Projections
also show that workers in the lowest income quartile have
projected replacement rates of 10.3% on average, with 63%
of these workers having no plan savings at retirement,
while highest-income workers have average replacement rates
of 34%. An assumption that workers offered a plan always
participate raises projected overall savings and reduces
the number of workers with zero savings substantially,
particularly among lower-income workers. GAO’s findings
indicate that DC plans can provide a meaningful contribution
to retirement security for some workers, but may not ensure
retirement security of lower-income workers. GAO-08-8 (November
2007).
5. CERTAIN PAYMENTS TO DISABLED VETERANS
RULED TAX-FREE:
Payments under the Department of Veterans
Affairs Compensated Work Therapy (CWT) program are no longer
taxable, and disabled
veterans who paid tax on these benefits in the past three
years can now claim refunds, according to Internal Revenue
Service. Recipients of CWT payments will no longer receive
a Form 1099 from VA. Disabled veterans who paid tax on
these benefits in tax-years 2004, 2005 or 2006 can claim
a refund by filing an amended return using IRS Form 1040X.
According to the VA, more than 19,000 veterans received
CWT in fiscal year 2007. IRS agreed with a U.S. Tax Court
decision issued earlier this year, which held that CWT
payments are tax-free veterans’ benefits. In so doing,
IRS reversed a 1965 ruling, which held that these payments
were taxable, and required VA to issue 1099 forms to payment
recipients. IR-2007-198 (December 12, 2007).
6. WHY HAVE DEFINED BENEFIT PLANS SURVIVED
IN THE PUBLIC SECTOR?:
A new Brief from Center for Retirement
Research
of Boston College poses that very question. While 401(k)s
now dominate the private sector, defined benefit plans
remain the norm among state and local governments. Why
have public sector employers not shifted from defined benefit
plans to 401(k)s like their private sector counterparts?
The Brief examines the unique factors affecting the two
sectors that may explain their very different patterns
of pension coverage. State and local governments have an
older, less mobile and more risk-averse workforce, with
a higher degree of unionization to press for benefits that
satisfy the needs of these workers. The nature of the employer
is also fundamentally different. Unlike private sector
firms, state and local governments are perpetual entities.
They do not disappear -- like many of the large manufacturing
firms -- taking their plans with them, and they are much
less concerned about financial volatility associated with
defined benefit plans. States and localities can also increase
required employee contributions to keep the plan’s
finances under control. Finally, the public sector has
not had comprehensive pension regulations like the Employee
Retirement Income Security Act of 2004; the absence of
such regulation lowers administrative costs and enables
later vesting. All is not quiet in the public sector, however.
In the last ten years, states have explored defined contribution
plans. A couple of states (Alaska and Michigan) and the
District of Colombia now have a defined contribution plan
as their basic pension, and a number of others (eight,
including Florida) offer employees the option of a defined
contribution plan. A future CRR Brief will explore where
and why this activity is occurring.
7. CORPORATE PENSION PLANS ARE HEALTHY:
A
vast majority of large corporate pension plans are financially
healthy,
according to a newly-released survey conducted by the Committee
on Investment of Employee Benefit Assets, as reported by
PR Newswire Association. After three years of consistent
contributions and substantial investment gains, the average
funded status of plans participating in the 2006 survey
was 103%, based on accumulated benefit obligations. CIEBA
represents many of the nation’s largest private sector
retirement funds, and its members manage more than $1.5
Trillion in retirement assets. The survey covers 112 corporate
plan sponsors responsible for management of $966 Billion
in defined benefit plan assets and $573 Billion in defined
contribution assets. Plans in the survey cover 11.5 million
DB plan participants and 5.6 million DC plan participants.
Assets in both DB and DC plans increased during 2006 by
9% and 11%, respectively. Plan increases were generally
due to strong investment returns. However, 71% of DB plan
sponsors in the survey contributed over $27 Billion to
their plans. In the DC plan arena, employer and employee
contributions per active employee continued to increase.
The combined contribution total per employee was $8,150,
with employers contributing 29% of the total. Additional
survey findings include:
- Benefit payments totaled $119 Billion in 2006, of
which $72 Billion was paid out of DB plans and $47 Billion
was
paid out of DC plans.
- DB plan assets were invested as follows: 36% in U.S.
equity, 21% in international equity, 29% in fixed income/cash
and 14% in other investments.
- DC plan assets were invested as follows: 39% in diversified
(U.S. and international) equity portfolios, 25% in
employer stock, 23% in fixed income, 9% in balanced/lifestyle
funds
and 4% in loans/other options.
- Eighty six percent of DB assets were actively managed,
compared to 52% of DC assets.
8. DAFFY-NITIONS:
Diplomat: A person who tells you to go
to hell in such a way that you actually look forward to
the trip. 9. QUOTE OF THE WEEK:
“Never give a party if you
will be the most interesting person there.” Mickey
Friedman |
