June meeting: Understanding Pensions

On June 17 our speaker was Ellen A. Bruce, JD, Director of the Pension Action Center, Gerontology Institute, McCormack Graduate School of Policy Studies at UMass Boston.  She gave us a clear and comprehsive overview of pension rights and benefits.

The Pension Action Center, which Ms. Bruce founded in 1993, serves all of New England, and has helped more than 4,600 people recover over $34 million in retirement benefits.  Services are free, and most issues can be handled by phone.  If you have a pension question, call them at (617) 287-7307 (toll-free: 888-425-6067).

Ms. Bruce first reviewed the different types of pensions:  Social Security, Employer Sponsored (defined benefit and defined contribution), IRAs (including Roth IRAs), and non taxed-deferred savings.

For any pension you (or your spouse) has, follow a “50 year rule” for keeping documents, particularly for employer-sponsored plans:  employment history, pay stubs, summary plan description, individual benefit statements, and statements of vesting status.

ERISA (The Employee Retirement Income Security Act) became effective in 1976; before this pension rules were set by individual companies.  It provides protection for employees in pension plans, as well as disclosure rights.

Defined benefit plans ( or “traditional” pensions) pay a monthly “defined benefit” for life (or a lump sum payout), benefits are determined by a formula, there are spousal protections, and the pension is normally completely funded by the employer.

Defined contribution plans (such as a 401(k)), on the other hand, have a benefit defined by the amount contributed (by the employee or company).  There may be a company match (full or partial) for employee contributions, but not always.  With defined contribution plans, the benefit amount is not guaranteed, but the account is usually portable if you leave the company.

As the number of workers with defined benefit plans has decreased, there has been a massive shift of responsibility to individuals to fund and manage their pensions.

Rules for vesting in plan benefits (your non-forfeitable right to benefits) were set by ERISA beginning in 1976 (before that, look to the plan), and vary by date.  You should pay attention to when you will become vested in an employer-sponsored plan; i.e., be careful about leaving a job if you are close to being vested.

Ms. Bruce also discussed survivor-related issues.  The amount for a joint-and-survivor benefit (one that a spouse continues to receive after the pension-holder dies), must be actuarially equivalent to an individual benefit, but companies sometimes give a subsidy if you choose the joint-and-survivor benefit option.  Be careful before signing a waiver (which requires the spouse’s consent) of a joint-and-survivor benefit (except in some cases, e.g. if the spouse is terminally ill), because people often regret this choice later, and it cannot be changed.

The Pension Protection Act of 2006 set requirements for notifications about pensions (including funding status, for defined benefit plans), and put restrictions on plans that are less than 80% funded.  This is to protect the Pension Benefit Guaranty Corporation (PBGC)–which protects pension benefits–from under-funded plans.  It also set new interest rates for calculating lump-sum payouts, and made permanent the Saver’s tax credit (Retirement Savings Contributions Credit) for those with lower incomes who contribute to IRAs, 401(k)s, 403(b)s, etc.

Ms. Bruce concluded with steps we all should take:

• Save, save, save!
• Work as long as you can
• Marry well
• Notify former pension employers of your address
• Keep retirement documents in one place
• Contribute to employer sponsored plans
• Start an IRA (investigate the Saver’s Credit)
• Calculate your projected retirement income, from both Social Security and any pensions

Readers embrace penny-pinching page turners

So reports the Sunday Boston Herald, which featured the Retirement Planning Club yesterday in its article, “Readers embrace penny-pinching page turners,” which included a sidebar of “free advice” from the Club, as part of their Hard Times/Economic Survival Guide series.

The Retirement Club on NewTV!

During June the Retirement Planning Club for Women is being highlighted on Books and Beyond, the Library’s cable TV show produced for NewTV.   Discussing the Retirement Planning Club on the show are our two volunteers, Irene Harrison and Liz Kirsch, Reference Supervisor Nancy Johnson, and Reference Librarian Susan Caulfield.

For Newton residents, Books and Beyond can be viewed on NewTV’s Red channel on Comcast Ch.9, RCN Ch.13 and Verizon Ch. 33, Monday – Sunday at 5:00 pm.

Each month the program features interesting and informative interviews related to library events and happenings. The show is produced and hosted by Ellen Meyers, the Library’s Director of Programs and Communications.

Take control of your investments!

For more on how to protect yourself when investing, see the article Taking Control, from the Wall Street Journal on June 1.  It has suggestions from regulators, academics and consumer activists on how to be your own financial watchdog.  While the ideas have been mentioned before at our Retirement Planning Club meetings, they certainly bear repeating!

Photo (cc) by  thomas.merton and republished here under a Creative Commons license. Some rights reserved.

Be Sure to Read the Fine Print

If your retirement portfolio includes guaranteed variable annuities, you may want to look at this June 7th article from the Wall Street Journal, Annuity Fine Print: Guarantees Aren’t Always Guaranteed.  The title pretty much says it all; ”[u]nder some provisions, the insurance company that issued the guarantee can cancel it, or sharply reduce its annual payout.” 

Photo (cc) by  Wade From Oklahoma and republished here under a Creative Commons license. Some rights reserved.

Rethinking Retirement

NPR’s All Things Considered is running a series all this week called Rethinking Retirement: The New Future of Life After Work. Now that so many workers rely on 401(k)s, what will be the future of retirement now that the stock market’s fall has eroded our nest eggs?  Monday’s segment focused on the issue of 401(k)s.

If you miss any of the segments, podcasts, transcripts, and other information are available on the NPR website.

May meeting: The Federal Reserve

On May 20, Deb Bloomberg from the Federal Reserve Bank of Boston returned to give us an timely overview of  “The Federal Reserve and Monetary Policy,” explaining the Fed’s goals, structure, and functions, with an emphasis on recent monetary policy actions.

Deb first outlined the history and structure of the Federal Reserve, which was created in 1913 when–following the panic of 1907–Congress decided we needed a central bank.  Most of the Federal Reserve Banks are in the eastern U.S., reflecting the population and politics of the early 1900’s; if created today, this structure would probably look very different.

The Fed consists of a Board of Governors (7 members, appointed by the President and confirmed by the Senate), the Federal Reserve Banks, and straddling those two, the Fed’s Open Market Committee (12 voting members, including the Board of Governors, the president of the Federal Reserve Bank of New York, and four other Federal Reserve Bank presidents in rotating one-year terms).  The Federal Open Market Committee (FOMC) typically meets eight times a year in Washington, DC, and issues press releases stating the Fed’s target for the Federal Funds Rate (FFR), the rate of interest banks charge each other on overnight loans.  The FFR affects the prime rate, the discount rate (when banks borrow from the Fed), and then gradually filters down through the rest of the nation’s economy.  Meeting minutes, statements and other information about the FOMC is available online.

Deb outlined the major goals of monetary policy:  Long-term price stability (with small annual increases in inflation) and sustainable economic growth.  The Fed uses three main tools:

1. Open Market Operations: buying and selling government securities on the secondary market to “primary dealers” to reach the target Federal Funds Rate (FFR), purchasing securities if the economy is weak, and selling them if inflation is a threat.
2. Reserve requirements for banks: the percentage of deposits banks cannot lend or invest.
3. Loans from the Fed, as a “lender of last resort.”  These loans can be primary (usually overnight, at the discount rate), secondary (short-terms, with a higher interest rate), or seasonal.
   

Deb then discussed some examples of liquidity measures authorized for the Fed, including Term Auction Facility (TAF) (auctioning term funds to depository institutions), Term Securities Lending Facility (TSLF) (banks can borrow U.S. Treasury securities for 28 days and offer mortgage-backed securities and the like as collateral), Term-Asset-Backed Securities Loan Facility (TALF–a new program), and Commercial Paper Funding Facility.  More information about all of these measures is available on the Fed’s Monetary Policy webpage, under “Policy Tools.”

For more on these topics, the Library has many books in its collection about the Federal Reserve and monetary policy.  The websites for the Federal Reserve and the Federal Reserve Bank of New York also have a wealth of information, including a complete book available for download, The Federal Reserve System: Purposes & Functions, and an interactive journey through the Fed called Fed101.

How to Choose a Financial Advisor

If you decide to work with a financial advisor, “how can you guarantee that your expert is reliable?  The short answer is that you can’t. There are no guarantees. But you can be a lot more sure than many investors are today.”

The Wall Street Journal suggests seven points to consider when choosing an advisor.

How Well Do You Know Bond Funds?

Have you been putting more of your money in bond funds these days?  They can be harder to understand.  Test your knowledge with the Wall Street Journal’s Q&A quiz.

Learn more about Morningstar

Morningstar Investment Research Center, available free at the Newton Free Library, provides independent opinion and data on more than 30,000 stocks and mutual funds.

To learn more about the database, attend a free online training session:

WHEN:  Wednesday, April 29th, at 4 p.m. (Eastern Time).

WHERE:  Anywhere with phone and internet access.

HOW:  To register, send an e-mail to librarytraining@morningstar.com, and mention the Newton Free Library.

Morningstar Investment Research Center*
(In Library Only–also via wireless in the Library)