PANC 2014: Has the Fed Jumped the Shark?

In a time when corporate merger activity is benefiting CEOs and shareholders, but creating few jobs, Bloomberg TV host Trish Regan asks how to make growth benefit more Americans.

Regan, also a USA Today columnist and author, addressed a variety of macroeconomic trends during the keynote address at the 2014 PLANADVISER National Conference, held last week in Orlando, including the Federal Reserve Bank’s leadership in the wake of the global financial crisis. She recalled her astonishment when Lehman Brothers, one of the largest investment banks in the United States that had been around since 1850, declared bankruptcy in 2008. Making a comparison to the situation we are in today, Regan said that we have a tendency to run into bubbles and the Fed plays a large role in that. Regan asked, “Are we running into another asset bubble of a different kind?”

As Regan observed, the U.S. has recently seen some of the weakest annualized growth measured in a post-recession period. Retail sales are down, and we will be lucky to get 3% growth in the second half of this year, she pointed out. These realities are gloomy, but Regan suggests the real danger could be the ongoing attempt to fight the last financial crisis.

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“It is the law of unintentional consequences,” Regan said of the Fed’s lasting stimulus-related efforts. “While the Fed is trying to fight the last crisis, they’re inadvertently creating another one.”

Regan specified several key problems in the U.S. economy. First, corporate mergers result in increased stock prices and are good for productivity; however they do not produce positive benefits from a job-creation standpoint. There are currently 7.51 million Americans working part time that want to work full time, but cannot find jobs, she said. To further complicate things, wages are not keeping up with inflation.

Second, Regan stated that many growing companies are receiving high valuations, sometimes before they are making money. She pointed specifically to high valuations for Uber, Snapchat, and even the Los Angeles Clippers basketball team. Regan said the Fed could be driving up asset prices by making credit relatively easy to obtain. This issue of “cheap money” also affects retirement, she said, because retirees are constantly searching for yield and are getting involved in riskier investments.

The third problem Regan addressed was explicitly related to the housing industry. Although purchases might be up, much of that purchasing is being done by investors, not new home buyers; a lack of confidence persists in the market.

Regan was quick to add that the Fed is not solely to blame for current macroeconomic challenges impacting the largest corporations and individual retirement savers alike. Many problems stem from “regulatory overhang” from Washington. Regan said there is fear in the industry that Washington could eventually engage in tax reform that looks to secure new revenue at the expense of retirement-related tax credits.

However, at this point, neither side of the aisle will agree to a meaningful tax reform, meaning the industry still has breathing room to try to positively impact tax reform decisions, Regan said. “Our current tax inversion laws inadvertently encourage companies to invert now because they may not be able to do so later,” she added. The result is a disproportionate number of companies thinking of relocating overseas now. Regan specifically pointed to Burger King’s acquisition of Canada-based Tim Horton’s.

“This is what happens when we have the highest taxes,” Regan said. “Companies have a responsibility to their shareholders and need to make the best decision for them.”

What’s the solution to all these problems? Regan proposed a need for improved growth, employment, wages, and quality of jobs. “We need to build demand in a slow economy,” she said. Her solution also involves an optimistic view from the Fed in the form of raised interest rates. She explained that people would be incentivized to go out and buy now, before rates move even higher.

“If Americans believed that they could borrow at this rate for only a short period of time, they would be incentivized to borrow now,” she said.

With regard to Washington, Regan discussed a need for fiscal and monetary policy to work together, as the U.S. government impacts the economy with its decision and policy-making. Regan reassured attendees that she does not believe the country’s current situation is as troublesome as it was when Lehman Brothers went under. However, to see improvement, the Fed, in conjunction with other parts of the U.S. government, must work to set standards and make reforms that will benefit the economy as a whole, she concluded.

Treasury Official Discusses Options for Improving DC Plans

The U.S. retirement plan landscape has moved from a defined benefit (DB) to a defined contribution (DC) approach, and now it is moving to an “undefined” contribution system, one Treasury official contends.

Speaking to attendees of the Plan Sponsor Council of America (PSCA)’s 2014 Annual Conference, Mark Iwry, senior advisor to the Secretary of the Treasury, and deputy assistant secretary of Retirement and Health Policy at the U.S. Treasury, explained that, in the age of 401(k)s and 403(b)s, the contribution is actually a big unknown. It is whatever the participant decides to put into the plan, plus whatever is offered by the employer in the form of a matching payment. “We need to restructure the retirement system so that retirement income can be defined,” he said. “There are things that can be done without the government passing more regulations.”

Iwry noted that the DC retirement plan industry is moving toward automation, which is a good first step, but the industry needs to take a few more. He noted that when regulators suggested a 3% default automatic deferral, “we were not thinking that was right, we were thinking that was a good starting point.” Plan sponsors need to use more robust strategies, he recommended: Automatically enroll existing participants that are not contributing, start at a higher default deferral, automatically escalate participants’ deferral rates, and don’t stop at 6% or 10% of salary for deferrals.

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If plan sponsors are worried about bugging participants, who may complain that they keep having to opt out every year, Iwry advised re-enrolling employees every two or three years. In addition, plan sponsors can get a commitment from employees now to enroll at a future time—for example, elect now to begin deferring with the next pay raise.

He also pointed out that offering an employer matching contribution in the plan can help get more participants saving adequately. He recommended stretching the match formula to give participants an incentive to make larger contributions. 

Still, some employees may not be able to defer more. For those, Iwry reminded plan sponsors that they can front load the match—offer extra to a certain group of low-income employees.

Plan sponsors should make it easier for participants to think about the income goal, according to Iwry. “Putting projected retirement income on account statements reframes participants’ thinking,” he said. In addition, participants need to be educated about what Medicare covers and their need for long-term care.

Plan sponsors can think about putting employees’ accrued vacation or sick pay into a retirement plan instead of paying them the balance, Iwry suggested. They should consider whether the waiting period to get into the plan is too long, and perhaps let participants defer but have to wait to get a match, he added. “It depends on what is good for the company.”

Iwry pointed out that the focus on income is not about everyone buying annuities. Yet, he said, he does think individuals are under-annuitized. “It’s something plan sponsors and participants should consider.”

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