If you found holiday songs or Beatles tunes humming through your head last week, it may have been your subconscious processing world and market events.
Over the river and through the woods/To Grandmother’s house we go… Janet Yellen, current Vice Chairman and nominee to be the next Chairman of the Federal Reserve System, testified at her confirmation hearing before the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs on Thursday. Her comments were widely interpreted as indicating that current stimulus measures will remain in place. This made investors happy and helped push global stock markets higher.
In the United States, the Dow Jones, S&P 500, and NASDAQ, all appear to be headed toward milestones. The Dow is nearing 16,000, the S&P is closing in on 1,800, and the NASDAQ is approaching 4,000.
You say you want a revolution/Well you know/We all want to change the world… China’s third plenum of the 18th Central Committee, which also is being referred to as a blueprint for reform, a reform manifesto, and the Decision on Major Issues Concerning Comprehensively Deepening Reforms, is ambiguously phrased, according to The Economist. However, it appears to encourage:
“…Experimentation in everything from trading rural land to the freeing of controls on interest rates. Barriers to migration will be further broken down and the one-child policy relaxed. A widely resented system of extra-judicial detention, known as laojiao (re-education through labor), will be scrapped.”
China’s leaders also promised to elevate the role of markets in the economy. That news helped push Shanghai Composite Index higher last week.
HAVE YOU BEEN OFFERED A LUMP SUM DISTRIBUTION? Not too many employers offer pension plans anymore. You know, pension plans. The kind of retirement plans that employers used to offer; the type where employees generally didn’t contribute and the benefits they received in retirement were determined by their salaries, length of employment, and other factors.
If you’ve ever worked for a company that had one, it’s possible that the offer of a lump sum distribution may be headed your way. If you accept a lump sum distribution, you’re choosing to receive a pile of cash today instead of monthly or annual pension payments in retirement. Basically, you’re agreeing to take responsibility for investing the money and generating a stream of income during retirement so your employer doesn’t have to do those things.
Why are companies offering lump sum distributions? The Pension Protection Act of 2006 (PPA) established new accounting rules. Companies with pension plans must recognize their plans’ funded status on their balance sheets each year. Since balance sheets are scrutinized by analysts and investors, and lots of pension plans are underfunded, companies decided it was time to take action.
How underfunded are these plans? A Wilshire Associates report cited by Reuters found the difference between the amount that S&P 500 companies will owe to retired workers and the amount those companies have set aside to pay retirees is more than $1.5 trillion. How much is that? Well, if you took one trillion one-dollar bills and strung them end-to-end, the chain would stretch further than the distance from the earth to the sun!
Anyway, having an underfunded plan became a corporate finance headache. Two-thirds of companies that have pension plans are trying to limit the effect of those plans on their financial statements (69 percent) and cash flows (58 percent), as well as reduce the overall cost of their plans (41 percent), according to a recent Towers Watson survey. CFO Research in collaboration with Mercer said employers plan to do this by:
- Adopting more conservative investment strategies
- Transferring pension obligations to insurance companies by purchasing annuities
- Offering lump-sum payouts to retired and current employees
In many cases, accepting a lump sum payout rather than having income from a pension may have a significant impact on your retirement.
Think About It
“The average 401(k) account balance fell 34.8 percent in 2008, then rose from 2009 to 2011. Overall, the average account balance increased at a compound annual average growth rate of 5.4 percent over the 2007-2011 period, to $94,482 at year-end 2011… The median 401(k) account balance (half above, half below) increased at a compound annual average growth rate of 11.5 percent over the period, to $42,082 at year-end 2011.”
— Employee Benefit Research Institute, June 2013