Expert Discusses Effect of Standard and Poor's Downgrade On Public and Private Pension Plans
PLAINVIEW, NY (MMD Newswire) August 8, 2011 -- The U.S. is no longer rated Triple-A by Standard and Poor's. Many people are speculating that Public and Private Pension Plans will have to sell their U.S. Bonds causing a selloff in the markets. However most pension funds have an Investment Policy Statement which allows for the new AA+ rating on U.S. Bonds.
Public and some private pension plans have an Investment Policy Statement. The Investment Policy Statement defines what types of investments a pension plan can and can't invest in. When it comes to bonds, the Investment Policy Statement gives a minimum credit rating and all bonds must be rated higher than the minimum.
Brett Goldstein, a Plainview, New York-based pension administrator and President of The Pension Department, states, "There is much mis-information out there. Many people are talking about pension funds and how they are now required to sell their U.S. Bonds because they're no longer Triple-A."
Not all pension plans have an Investment Policy Statement. The Employment Retirement Income Security Act of 1974 (ERISA) does not explicitly require an Investment Policy Statement. Some plans don't have an Investment Policy Statement as it might make them an easy target for employees who might be quick to point out when the plan fails to comply with their own written policies.
Goldstein, states, "ERISA does not require that public and private pension plans hold U.S. Bonds or Triple -A rated bonds, although many do. If the stock market continues to respond negatively to the downgrade, public and private pension plans may have to buy U.S. Bonds to avoid losing money and causing underfunding.
Employees who are concerned about the effects the downgrade will have on their pension, should call their human resources department. Public employees can go to their states website and look for the audited financial reports. Employees of large companies can also ask for the audited financial reports. The audited financial reports should have a credit risk section detailing the minimum credit ratings for bonds. Employees in smaller private pension plans should ask for a copy of the Investment Policy Statement.
About Brett Goldstein:
Brett Goldstein is a Pension Administrator and President of The Pension Department, a consultancy based in Plainview, New York. He is a speaker and media personality who specializes in providing businesses and individuals with affordable retirement planning solutions. Goldstein's timely advice and tips have been featured on Fox Business Network, Kiplinger's, Wall Street Journal Radio, MarketWatch.com, New York Daily News, The Chicago Tribune, and many others. Investment services are offered exclusively through: Cadaret, Grant & Co., Inc. Member FINRA/SIPC.
Entries in Government Bonds (4)
Expert Discusses Effect of Standard and Poor's Downgrade On Public and Private Pension Plans
"This is just another way for states and local governments to avoid making the severe cuts that are necessary to really balance budgets. Taxpayers should not continue to be held responsible for the reckless decisions of politicians."—ALG President Bill Wilson.
November 29th, 2010, Fairfax, VA—Americans for Limited Government (ALG) President Bill Wilson today urged Congress not to reinstate a federally-subsidized bond program for states and local governments, which he said were being used to "bail out bankrupt states like New York and California."
"The so-called 'Build America' bonds purport to ease the borrowing costs of insolvent states via a federal subsidy of interest payments. These are governments that otherwise cannot finance their spending habits," Wilson explained, adding, "It's really a mechanism to nationalize the unsustainable spending of insolvent states and local governments."
Wilson said the federal subsidy would be directed from taxpayers across state lines. "This is making taxpayers in more responsible states like Virginia, Mississippi, and Texas pay for the wasteful union contracts and social policy programs of California, Illinois, and New York. The states bailout program should be ended as once," Wilson declared.
According to the Washington Post, under the program, "Treasury pays a 35 percent subsidy on the interest rate of the bonds directly to the city, state or other government entity that issues them. The arrangement dramatically lowers the borrowing cost for local governments while providing lower costs for investors, including pension funds and other major funds that do not usually dabble in the municipal market."
The Obama Administration wants to make the program permanent. Under the final program, taxpayers would subsidize 28 percent of interest owed on the bonds and certain non-profit universities and hospitals would now be allowed to participate by borrowing money through the program, as reported by Reuters.
Wilson said, "This is a states bailout, because the government agreed to cover 35 percent of the interest costs for the last round of bond purchases. Now, to meet their budget obligations, the states need to borrow yet more money."
Wilson continued, "Why don't these states and local governments try to refinance these debts on their own? Because they can't. The 'expansion' of this program really is so that states and localities can refinance the debt they accrued last year. That means that, minus the federal subsidy, municipal bonds are not really a good investment at this point."
Wilson concluded, "This is just another way for states and local governments to avoid making the severe cuts that are necessary to really balance budgets. Taxpayers should not continue to be held responsible for the reckless decisions of politicians. The states bailout bonds tend to undermine states with balanced budget constitutional provisions by giving a federal mechanism to finance the unsustainable budgets of states that refuse to balance their budgets."
"If Americans are forced to buy government bonds as retirement savings, the nation could be forced into a situation where it will become impossible to reduce or retire the national debt without liquidating the retirement savings of millions of Americans."—ALG President Bill Wilson.
Legislation could force investment in U.S. treasuries to finance debt-strapped government.
September 7th, 2010, Fairfax, VA—A new bill proposed by Senators Jeff Bingaman and John Kerry would force enrollment in "automatic Investment Retirement Accounts", prompting Americans for Limited Government (ALG) President Bill Wilson to urge the Congress to reject it.
"This legislation will force Americans into a government-mandated, 'one size fits all' retirement account," Wilson said, adding that it would "disproportionately impact younger and lower-income workers, who will now have less ability to save for new home purchases or pay off college expenses and debt, all of which occurs earlier in a worker's career."
"This is another attempt by government to tell individuals what they have to do with their own money, stripping them of the right to make their own personal investment and life decisions," Wilson added.
Wilson noted that the "investment 'options' that are offered will be defined arbitrarily by the Department of Labor in regulation."
Those options may include government bonds, writes Jerome Corsi for World Net Daily: "The U.S. Department of Labor released yesterday an agenda for an upcoming joint hearing with the Department of the Treasury scheduled for Sept. 14 and 15 on whether government life-time annuity options funded by U.S. Treasury debt should be required for private retirement accounts, including IRAs [Investment Retirement Accounts] and 401(k) plans."
The Corsi report describes the potential that the "government-mandated workplace retirement account would require by law employers and employees to contribute into a retirement account for every employee and demand that a portion of that contribution go into a federal-government created annuity that would be funded by purchasing Treasury debt."
"Under the law, the Department of Labor could indeed force individuals to buy treasuries, if that's what the bureaucracy wants," Wilson said, pointing to the broad options defined in a newly proposed Section 439 of the Internal Revenue Code:
"(c) INVESTMENT OPTIONS.—
"(1) IN GENERAL.—The Secretary of Labor and the Secretary, in consultation with the Chair
man of the Securities and Exchange Commission, shall, not later than 18 months after the date of the enactment of this section, prescribe regulations which set forth the requirements for each of the classes of investments described in paragraph (2) and procedures for determining which assets meet the requirements for each of such classes.
"(2) INVESTMENT CLASSES.—The regulations under paragraph (1) shall provide that an automatic IRA shall allow the individual on whose behalf the individual retirement plan is established to invest contributions to, and earnings of, the plan only in the following investment options:
"(A) PRINCIPAL PRESERVATION.—A class of assets or fund that is designed to protect the principal of the individual on an ongoing basis, including passbook savings, certificates of deposit, insurance contracts, mutual funds, United States savings bonds (which may be indexed for inflation), or similar classes of assets.
"(B) BLENDED INVESTMENT OPTION.—A broadly diversified class of assets or fund, as specified in such regulations, that is substantially similar to target date, life cycle, balanced or similar funds, as so specified.
"(C) THIRD OPTION.—A broadly diversified class of assets or fund providing a somewhat higher investment in equities than the investment options under subparagraph (B), as specified in such regulations."
"These 'options' are so broadly defined that the Department of Labor can force investment into almost anything, leaving the future solvency of the retirement savings of millions of Americans to the wisdom of faceless government bureaucrats," Wilson said.
Such legislation could create some 60 million potential new IRAs, according Mark Gutrich, president of Denver -based ePlan Services. Wilson said that if accurate, and if the average income investing in the IRA's was $50,000, "if just 1 percent of income for these new IRAs was devoted to government bonds, that would expand government's ability to borrow by $30 billion annually, or by $300 billion over ten years."
Wilson said "that's no small chunk of change." He predicted that after the legislation was enacted, the number of new plans would grow beyond the 60 million, and warned that the investment in treasuries would also grow "should the sovereign debt crisis worsen in the U.S."
"If Americans are forced to buy government bonds as retirement savings, the nation could be forced into a situation where it will become impossible to reduce or retire the national debt without liquidating the retirement savings of millions of Americans. That may be what the government has in mind to protect its bloated budget," Wilson said.
"By increasing the American people's stake in the government debt, the incentive will always be to expand the national debt to finance retirement benefits," Wilson concluded.