Monthly Archives: September 2015

Why COLAs Matter

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In our most recent issue of LAGERS’ Retiree Newsletter, we announced that this year’s Cost of Living Adjustment, for most retirees, would be around 0.1%. I always enjoy hearing the questions and comments in response to our newsletters, and this issue, I received one response back that I thought was particularly interesting. The single line of the email read:

“Why even bother with such a little increase.”

It’s a perfectly valid question; and there’s no real way to sugar coat it, 0.1% isn’t much. But that doesn’t mean that this year’s increase is any less important than last year’s. I often hear retirees refer to their COLA’s as ‘my LAGERS’ raise,’ and while the annual adjustments, when granted, do mean your LAGERS benefit is going to increase year over year, the point is not to just put more money in our retiree’s pockets. The point is to ensure that over a lifetime, our retirees maintain the same purchasing power with their benefit that they had when they retired.

We give an example at our pre-retirement seminars of a lady who retired from LAGERS in 1993 with an annual benefit of $1,200 a month, or $14,400 each year. Over a twenty year period, she continued to receive her cost of living adjustments. Some years, the adjustment was higher than others and one year there was no adjustment given at all because of deflation. While one percent here, half a percent there may not feel like it’s even worth bothering with, remember that your cost of living adjustments compound over a lifetime and can make a big difference in your standard of living in the long run. Fast forward to 2013, and the retiree from our example is now receiving 163.7% of her original benefit. That’s $1,964 a month, or $23,572 each year! And no, it doesn’t mean that she can drive a nicer car or live in a fancier house. What this example tells us is that things cost a lot more today than they did 20 years ago. For example, a dozen eggs in 1993, on average cost around $.87; today, you’d be lucky to find eggs at double that price.

Another one of the most popular questions regarding COLAs from pre-retirees is ‘what is the average adjustment per year?’ Again, this question is kind of missing the point when it comes to the adjustment, because even though, on average, our retirees have received approximately 2% each year over the past decade, that doesn’t mean that is what the adjustment will be going forward. The point that our members and retirees should instead be focusing on is, “do LAGERS retirees have as must purchasing power with their benefits as they did five, ten, fifteen, twenty years ago?” The answer is yes! All of LAGERS retirees and beneficiaries have 100% of their original purchasing power with their benefit as of October 1, 2015.

Inflation risk is something that all retirees have to manage. Fortunately, with your LAGERS benefit, it’s one less thing you have to worry about. No matter how big or small your COLA increase is from year to year, remember that it is serving an extremely valuable purpose: to protect your benefit over your lifetime from losing purchasing power. This means that LAGERS retirees can continue to enjoy their same standard of living well into a twenty or thirty year retirement, and that’s a pretty awesome benefit!

Elizabeth Althoff Public Relations Specialist

Elizabeth Althoff
Public Relations Specialist

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Can You Make Your Personal Retirement Account More Like LAGERS’ Portfolio?

Brian Collett, LAGERS Chief Investment Officer

Brian Collett, LAGERS Chief Investment Officer

One of the comments we hear often from members is, “I wish I could make my personal retirement investment account more like LAGERS’ portfolio since it has done so well.” This seems to be worth looking into since individuals investing for their retirement should be focused on the long term just as LAGERS does. While there are some key differences between your personal investment account and LAGERS portfolio, there may be some simple things you can do to use some of the same strategies utilized by the professionals who manage LAGERS’ assets.

I recently sat down with LAGERS’ Chief Investment Officer, Brian Collett, to get his take on this topic. Obviously his comments are not intended for personal investment advice. Asset allocation decisions are made by each individual based on many factors. This conversation is more of a discussion to address the question, “Can I make my portfolio more like LAGERS’?”

J: What makes LAGERS’ portfolio different than my personal retirement investment portfolio?

B: I’ll assume LAGERS’ $6.4 billion portfolio is larger than your personal portfolio?

J: That would be a correct assumption.

B: OK. Well, size does help. Let’s talk about fees first. We are able to negotiate fees with every one of our money managers. We do not just go out and invest in a mutual fund and accept whatever fee that is given to us. Part of our manager selection process is deciding if they are charging a fee we want to accept and our goal is to move every one of our managers to a performance-based fee. What I mean by that is, if they don’t out-perform, we don’t pay them. So performance is key for us.

Another aspect where size matters is that LAGERS gets opportunities that the individual might not. For example, if a company needs $100 million for a project, it would rather deal with 20 individuals investing $5 million each than one thousand individuals investing a much smaller amount. So LAGERS is able to entertain those opportunities whereas individuals like yourself and myself just don’t get access to.

J: What can an individual do then, if anything, to create a portfolio that mirrors LAGERS’?

B: I wouldn’t use the word ‘mirror,’ but I do think an individual can ‘track’ what LAGERS does by doing some very simple things. If you look at LAGERS’ portfolio, we are roughly 50% equities (stocks), 25% in fixed income (bonds), and 25% in real assets (real estate, commodities). If you were follow this asset allocation in your personal account, you would track, maybe not perfectly, but you would track LAGERS’ portfolio. If you contribute regularly, in that ratio of 50, 25, and 25, and rebalance to get back to those ratios annually, you would track our portfolio very closely.

J: Talk a little about the contributions going into the individuals accounts.

B: The beautiful thing about contributing regularly is you are moving [your asset allocation] back to the target of 50, 25, and 25. For example, I could contribute every month at those ratios and revisit it every quarter. I might have to move things around and rebalance annually and I say might because there may be years when you don’t have to do any rebalancing. So that regular contribution really helps you buy low and sell high.

J: Let’s talk about that a little bit. A few weeks ago on August 24, 2015, it was reported that trading was seven times higher than normal suggesting that individual investors were freaking out and pulling their money from stocks and putting it into safe investments like bonds. How does LAGERS react to those types of events?

B: One particular day, week, month, year, doesn’t cause us to react. I might watch it on TV, but really, LAGERS isn’t a participant in that way. We are long term investors so we believe over the long haul we are going to get it right. So LAGERS isn’t a day trader, week trader, or even a year trader. We are more cycle traders.

J: What are some of the mistakes that individuals make over and over again when saving for their retirement?

B: I think a lot of people think that some external event should cause you to do something different. No individual should be moving their portfolio based on what’s happening externally. Think about what’s happening in your life and your family and build a portfolio based on that. Now if your personal situation changes, i.e. family, kids, retirement, whatever, then you might need to change your portfolio.

You don’t build a house based on the weather at the time you are building, you build a house that can hold up in any weather. If my house is well-built, I don’t change it as the weather changes. There are people who build poorly, and they may have to change their house based on external events. It’s the same with LAGERS portfolio and your individual portfolio.

Jeff Kempker, Manager of Member Services

Jeff Kempker, Manager of Member Services

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Quick Answers to Your Top Five Member FAQs

photo-1437623889155-075d40e2e59fI spend a lot of time traveling the state and I get to hear a lot of great questions from our members. Some of you love to get into the details of your benefit and probably revel in the thought of reading a 1000 word blog on LAGERS’ funding policy; but I’ve found there are an equal number of you who’d rather skip over all those details for just a basic understanding of how your benefit works. We live in a world of information overload, so I am totally sympathetic to those of you out there who just want a quick answer. So this week, instead of looking at one topic in depth, I thought I’d hit briefly on the top five questions I get from members. Don’t see the question you want a quick answer to on my list? Leave a comment and I’ll be happy to respond! Make sure you stay tuned for parts 2 and 3 of this blog which will address top pre-retiree and retiree questions!

Can I contribute more than 4% to increase my LAGERS benefit?

I love getting this question, because it tells me that our members understand the importance of saving for retirement!! Because your LAGERS benefit is based on how long you work and how much you earn, making extra dollar contributions into LAGERS will not increase your benefit. However, you can (and should) supplement your LAGERS benefit by contributing to your employer-sponsored 457 plan or other individual retirement saving account, like an IRA.

I’m considering taking advantage of a pre-tax flexible spending account for medical expenses.  Will this impact my LAGERS final average salary?

Flexible spending accounts for health and childcare expense can offer some awesome tax advantages. If your employer offers these benefits, you can take full advantage of them without fear of it negatively impacting your LAGERS final average salary. LAGERS uses your gross monthly wages from your employer, which would include any elective pre-tax deferrals into a flex spending account, or even into a pre-tax retirement account; so save away!!

Is there a cap on how much service you can earn in LAGERS?

Did you know the longest tenured active member in LAGERS has over 54 years of service with a single employer? There is no cap on how much service you can accrue in LAGERS, and the more service you have, the larger your monthly benefit will be when you retire! LAGERS benefits were intentionally designed this way to encourage long-tenured employment. There’s no quick way to ‘get rich’ in LAGERS, but by devoting your entire career to public service, you can earn a modest benefit that reflects all your dedicated years of service.

Can I take a hardship withdraw of my accumulated contributions or borrow against my benefit?

LAGERS does not allow an active member to take a withdrawal on your accumulated contributions while still working in the LAGERS system. Remember that the lifetime benefit that you are earning while you work is not based on an account balance, but rather a formula that will pay a future benefit. LAGERS sets your contributions aside in a trust for the sole purpose of helping to fund this future benefit. You are, however, always guaranteed to receive back what you pay into LAGERS either when you terminate employment prior to retirement age or through a monthly retirement benefit at retirement.

I’m an EMT, what is my retirement age?

EMTs are considered general employees for LAGERS purposes and have a normal retirement age of 60. I get the question all the time about why EMTs don’t have the same retirement age as firefighters. Here’s a quick little history lesson on why: LAGERS statutes were created back in the 1960s, long before Ambulance districts and EMTs widely existed. Back then, medical transportation was often provided by a neighbor or funeral home, and since actual districts were not established until after LAGERS was created, EMTs were not specifically addressed in LAGERS’ statutes. There have been several pieces of legislation filed over the last few legislative sessions looking to give employers the option to cover these folks as firefighters, all of which have been met with resistance at the capitol. LAGERS is currently assessing our strategy on how we will to move forward, but certainly remains mindful that this is something our members continue to ask about. All ambulance districts do currently have the option to elect the Rule of 80, which does provide an unreduced early retirement for some.

Elizabeth Althoff Public Relations Specialist

Elizabeth Althoff
Public Relations Specialist

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Auditors: Skunks at the Garden Party?

Pair of baby skunks, standing side by side on a fallen log.

 

Auditors are those wonderful people you wait anxiously to see every year, and when they appear it’s just like Christmas morning.  Okay, maybe it isn’t exactly that way.  You may look at audits as a necessary evil, but they really do serve an important role for your organization.

Here at LAGERS, we have lots of audits.  Lots.  We have an internal auditor (me), and we have multiple external audits as well.  In addition to our regular external financial audit (which many, if not all, LAGERS employers also have), our auditors are now performing an additional audit of internal controls over member data and employer financial data. This is called a Service Organization Control Report, or SOC Report.  This additional review is due to a recent pronouncement by the Governmental Accounting Standards Board (GASB).  Then for the first time in many years, Missouri’s State Auditor conducted a performance audit of LAGERS and issued a report in August 2015.

Why are we telling you this?  Not so you’ll feel sorry for us, really.  The fact is that while an audit can be a bit intrusive, it really can be an important part of the oversight of your organization.  At LAGERS we are fiduciaries for the trust fund on behalf of all participants, and our ultimate duty is to maintain that trust for the exclusive benefit of members and beneficiaries.  As a public entity, we want to be transparent to all stakeholders, including the taxpayers, that help fund the benefits provided.  Having independent audits of our finances and operations can help us provide assurance to all parties that we take this responsibility very seriously and are accomplishing our mission.  Internal audit reports directly to the Audit and Finance Committee of the Board of Trustees in order to maintain this crucial independence and objectivity. You may have heard us say “LAGERS is getting it right,” and the results of the multiple audits mentioned support that statement.

Generally speaking, auditors aren’t always “skunks at the garden party,” but they can and will be if necessary.  Depending on the type of audit though, it shouldn’t be only about finding problems, but hopefully offering ideas for ways to improve.  Someone who doesn’t do your job every day but who can objectively observe may be in a good position to offer suggestions.  I like to think of the goal as “better,” and auditors can be just the people to help make that happen.

To view the most recent available external financial audit, visit our website. The SOC Report mentioned above will be available when complete (fall 2015) to all LAGERS employers on the Employer Web Portal of ECLIPSE.

 

Pam Hopkins, Compliance Officer/Internal Auditor

Pam Hopkins, Compliance Officer/Internal Auditor

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LAGERS Funding Level Speaks to Something More

photo-1433838552652-f9a46b332c40The numbers are in. LAGERS updated funded level for the year has risen to 94.4% pre-funded, on an actuarial basis. That’s great news for members and employers, but what does that really tell us?

If you are a weekly subscriber to this blog, you may remember a post I wrote last year explaining funded statuses. I wrote about how funded status represents the measurement of LAGERS’ assets versus liabilities, and how the closer to 100% pre-funded, the better off the financial position of the plan.   That’s all well and good, we certainly hear enough in the media about pension funding, and it’s great to know that LAGERS is in such great shape; but as LAGERS’ funding has continued to rise for five straight years since the 2008-2009 market downturn, maybe there’s an even more important take away about the LAGERS system.

If we look back prior to the market downturns of the last decade, LAGERS was historically 100% pre-funded. (Let’s be honest, the 90’s were pretty good to most investors.) And while it is great to be at 100%, I think what happened in ’08-09 speaks to a very important underlying philosophy of defined benefit plans: we are stronger as a whole.

As an individual investor in ’08, I watched my 401(k) balance dwindle. I can’t even imagine how I would have felt had I been on the verge of retirement age with nothing but my 401(k), but I’m guessing some degree of panic would have ensued. The downturn was hard on everyone, LAGERS included. The once 100% pre-funded levels we had so long enjoyed dropped, quickly, from 100% to 81%. But did LAGERS panic? There was no need. Because employers had diligently been making their required contributions each month, and benefits were funded, LAGERS was well positioned to weather the storm. Employees kept on retiring, benefits continued to be paid on time as usual, and LAGERS great plan design took care of the rest.  Even at the lowest point, LAGERS’ funding never dropped below 80%, which is generally considered the benchmark for a healthy plan.   Fast forward almost 6 years, and LAGERS is diligently working back to 100%, from 86.5% in 2013 to 91.7% in 2014, now up to 94.4% today.

The markets can be a wild ride (last week, case in point), but that doesn’t mean retirement security should be. Great plan design built on the philosophy of diligent funding and pooled risk helps today’s public servants know that they can continue to work hard without fear of the future. As LAGERS funding continues to rise, members and retirees can feel confident about their retirement security, and can take comfort that even with market turbulence in the future, their hard-earned benefit will always be there.

Elizabeth Althoff Public Relations Specialist

Elizabeth Althoff
Public Relations Specialist

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