GE freezes pension and offers buyouts

2 Minute Read

The conglomerate GE took steps earlier this month to shore up their retirement program by freezing the pensions of 20,000 existing employees and offering buyouts to 100,000 former employees who have yet to start collecting their benefit.

This has become a common trend over the past couple of decades as companies shift away from pensions, and to 401(k) plans.

I wanted to take the opportunity to explain exactly what it means when a pension is frozen.  How a pension freeze affects both existing employees and those who are retired, receiving their pension benefits.

What exactly is a pension and what is a 401(k)?
A pension is considered a “Defined Benefit Plan” where the employer funds a pooled investment account each year, and the employee receives a monthly payment for life, at retirement, based on their years of service and salary (generally speaking).

A 401(k) is a “Defined Contribution Plan” in the employee’s name, funded by both the employee and employer.  The employee has control of the investments, and essentially has full control of the account during their career and in retirement.

Why is GE freezing the pension for existing employees and offering a buyout to former employees?
The pension is underfunded by over $27 billion.  This means the pooled investment account does not have the money to pay its future obligations, and is short by about $27 billion.

What happens when a pension is frozen?
The employee is entitled to the benefit they have accrued up until the freeze.  They do not lose their pension, the benefits just stop accruing.  There is no effect on former employees who are receiving their benefit unless the company goes bankrupt.

What if the company goes bankrupt and cannot fulfill their pension obligations?
The Pension Benefit Guaranty Corporation (PBGC) steps in to fulfill some of the obligation.  All companies that sponsor a pension have to pay premiums to the PBGC each year, essentially as insurance.  Current and former employees may see pension cuts as a result but they should receive some of their promised pension benefit from the PBGC.

Why are companies shifting away from pensions and to 401(k) plans?
Cost and liability.  Sponsoring a pension plan can be a costly endeavor for an employer, and they assume the liability of providing retirees their main source of retirement income.  A 401(k) is a much cheaper option, and the liability is shifted to the employee to save and invest for their own retirement.

Should a former employee take the buyout, or elect for their pension benefit?
That is the big question.  Do you trust GE to turn around their business and have the ability to pay the pension benefit into the future?  Or, would you prefer to take your retirement into your own hands by taking the buyout and investing it yourself.

I would expect the trend of pension freezes to continue, as well as the shift from pensions to 401(k) plans.  I hope this update was helpful, if you have any questions at all please do not hesitate to contact the office.

Fed steps into overnight lending markets

3 Minute Read

Earlier this week, the US federal reserve stepped in to provide billions of dollars in liquidity to overnight lending markets, the first time since the financial crisis of 2008.

This action led to some pretty scary media headlines, so I wanted to take the time to explain exactly what happened, and its implications on our economy and investment portfolios.

What are overnight lending markets?
Banks around the country lend each other money overnight to fund business activities and to meet regulatory reserve requirements.  They charge each other a small amount of interest, usually around 2%, and pay back the money the next day.

What exactly happened?
Interest rates spiked to almost 10% because there was a shortage of cash.  The fed stepped in to provide cash and get the interest rates back down to normal levels of around 2%.

Why was there a shortage of cash?
We don’t exactly know, but it could have been a combination of factors including:

  • 3rd quarter corporate tax payments due.
  • High demand for mortgages.
  • Spike in oil prices following the Saudi Arabia drone attack.
  • The Fed taking money out of the system over the past several years.
  • Unnecessarily high bank reserve requirements.

Since the financial crisis of 2008 the Fed has been pumping money into our banking system to spur economic growth.  With the economy on solid footing, it has reversed course and began pulling money out over the past couple of years to try and curb future inflation.  For context, there is still $1.4 trillion of extra money in our banking system.

What likely happened is a handful of banks mismanaged their daily cash flow and got caught in a cash crunch.  Instead of letting the market run its course and teach these banks a lesson, the Fed stepped in to bail them out.

When there was lots of extra money in the banking system, banks could be looser with their daily cash flow.  Now that there is less, they have to be more diligent, just like you and I with our everyday income, expenses, and savings.

Another argument could be made that the regulations governing how much banks are required to have in reserves are too high.  Yes, there is $1.4 trillion in extra money in the system, but a good chunk of that has to stay in bank reserves and cannot be used for lending and other business activities.   A loosening of those regulations could provide additional liquidity, particularly during an economic downturn when liquidity is needed most.

While the headlines were scary, this action by the Fed actually had little impact on equity markets, and our investment portfolios.  The larger question is how much should the Fed be intervening in our everyday markets, and could bailing out poorly managed banks become a larger issue down the road?

I hope this update was helpful, if you have any questions at all please do not hesitate to contact me at the office.

US-China Trade War Facts

2 Minute Read

The US-China trade war has been dominating the headlines over the past several months, with many claiming this is will lead to our next economic downturn.

For context, here are some other significant economic events where similar claims were made:

  • Taper Tantrum (2013)
  • Russian Financial Crisis (2014)
  • Greek Debt Crisis (2015)
  • Chinese Stock Market Crash (2015)
  • Brexit (2016)
  • US Presidential Election (2016)
  • Turkey Currency and Debt Crisis (2018)
  • Federal Reserve Interest Rate Hikes (2018)

We will have an economic downturn at some point, but trying to predict the event that will lead to that downturn is very difficult.  In fact, some downturns are not associated with a specific event at all, and are simply a normal part of the business cycle.

For better context, here are some facts about this trade war that you may find helpful:

-In 2018, the US purchased $540 billion of Chinese goods.  China purchased $120 billion of US goods.

-The top trading partners with the US year to date:

  1. Mexico
  2. Canada
  3. China
  4. Japan
  5. Germany

-We have new trade deals signed with Mexico, Canada, and a deal with Japan has been agreed to in principal.  These agreements still need to pass legislature in their respective countries to go into effect.

-Companies are reconfiguring their supply chains and suppliers are leaving China in favor of places like Taiwan and Vietnam to avoid tariffs.  For example, Home Depot expects to buy $1 billion dollars in goods from suppliers who have moved away from China.

-Of the $22 trillion in US national debt, China owns just over $1 trillion.  Roughly $3 trillion is owned by other foreign entities, and the remainder by the American people and the government itself.  US government debt is another story and deserves its own article!

There is no question that this trade issue is disrupting American business, and our financial markets as they dislike any economic uncertainty.

While a prolonged trade dispute could certainly contribute to a downturn, recent economic data continues to point to a healthy consumer, job market, and economy as of this writing.

I hope this update was helpful.  If you have any questions at all, please do not hesitate to contact the office.

Long-Term Care Discussion

3 Minute Read

Long-term care is increasingly becoming one of the more complicated financial planning items for individuals, couples, and families as it is so difficult to project and plan.

Most of us have a retirement date, we know when our kids will begin college, when our home will be paid off, and we have a pretty good idea of when we will begin social security.

We have no idea if we will need long-term care, when that care would begin, how long it will last, or how much it will cost.

The planning is very much a gray area, but I think the discussion can be helpful.  Below are a list of questions/discussion points to better understand long-term care, but first let’s start with some rough statistics for context from the NYS Partnership for LTC and the below referenced article:

Cost: $120,816 per year or $331 per day average for nursing home care in the central region of NY.
Occupancy: Roughly 70% of nursing home residents are female.
Time: An average long-term care need of 1.5 years for men, and 2.5 years for women.
Length: 14% of people will need long-term care for more than 5 years.

More long-term care statistics – https://www.morningstar.com/articles/879494/75-must-know-statistics-about-long-term-care-2018-edition

What is long-term care insurance?
Long-term care insurance will help to cover the cost of in-home care, assisted living facilities, and nursing home care to help individuals live as independently as possible when they lose the ability to perform everyday activities on their own.

How does this insurance work?
Two popular types of policies, reimbursement and hybrid.  Reimbursement policies will reimburse you for long-term care service up to a certain dollar amount per day or month.  If you never need the care, the premiums you paid in stay with the insurance company.  A hybrid policy is similar but provides a death benefit to your beneficiaries should you never need the care.

Are the policies costly?
Yes, a couple could easily pay over $10,000 per year for this insurance.  In fact, the insurance company reserves the right to petition the state insurance board to increase premiums in the future should claims come in larger than expected.  This recently happened with several companies such as John Hancock and GE, and many companies are leaving the long-term care industry all together.

Are there other options?
Yes, in addition to help from family members a person could self-pay.  There are private companies that will help with long-term care needs for individuals and charge hourly rates around $20-$30 depending on the service.  These services will also provide additional help such as grocery shopping, transportation, etc.

Do I need to protect my house and assets with a trust?
Medicaid trusts are quite popular these days.  How they work is you place all non-retirement assets in this trust, and as long as they stay in the trust for 5 years, you may be able to qualify for Medicaid and those assets would be protected.

The question then becomes, is it more important for you to protect those assets and pass them along to heirs, or to spend them down and have greater control over the type of care, should you need it, later in life?

Other thoughts
There are also contractors that will come to your house and help make it easier to navigate your home as a senior.  Simple things such as changing door knobs from the twisting type to a simple pull down, widening hallways, and adding handrails.

Technology is also making it easier for seniors to remain in their home.  There are delivery services for everything from food to wine, and we can shop at the largest mall in the world (Amazon) from the comfort of our living room.

To summarize, there is no easy way to plan for long-term care needs.  I think we all would like to remain in our homes, and some proactive planning could help in that regard, starting with the discussion itself.

I hope this information was helpful, if you have any questions or would like to discuss in more detail please do not hesitate to contact the office.

Equifax Data Breach Settlement

4 Minute Read

As you may have heard, the credit rating agency Equifax has recently offered a settlement to all individuals affected by their much-publicized data breach.

Please find below a complete analysis of how this affects each of you along with some steps to take in helping to prevent identity theft.

What was this breach and what exactly happened?

In July of 2017, Equifax found out the personal information of 147 million people was compromised by hackers.  This information included names, birthdays, social security numbers, credit cards numbers, driver’s license, and passport information.

This security hole was discovered by Equifax in March of 2017, but they did not properly patch this hole to prevent the compromising of consumer information.  Equifax did not disclose this breach for over a month and a half.  In fact, their Chief Intelligence Officer sold all of his stock in the company upon learning of this breach and is currently under SEC investigation for insider trading.

Was my information compromised?

To find out if you were affected, you will need to visit the website:

https://www.equifaxbreachsettlement.com/

From there, you will enter your last name and last 6 digits of your social security number to see if you were affected.  If you were, you could be eligible for the choice of free credit monitoring over 4 years, up to a $125 cash payment, or identify restoration services.

What does it mean to have my personal information compromised?

When your information is stolen, hackers could use this information to open new accounts in your name, file false tax returns, or make real estate purchases.  Once discovered, it could take many hours to prove you didn’t initiate these transactions and fix your credit.

What exactly is Equifax offering?

The choice of:

  1. At least four years of free credit monitoring through Equifax, Experian, Transunion, and another six years of free credit monitoring through Equifax along with $1 million of identity theft insurance.
  2. Up to a $125 cash payment.
  3. If you were a victim of identity theft from this breach, cash payments to compensate you for the time you spent restoring your identity.

Analysis

The cash payment option of $125 is not exactly what it appears.  There is a bucket of only $31 million dollars to pay for those who opt for the cash payment.  If more than 0.2% of the 147 million affected choses the cash payment, that $125 will be reduced proportionately.

If your identity was compromised after the breach in 2017, and you have spent time and money having to restore your identity and credit, you can file a claim of up to $20,000.  You will need proof and detailed records of the money and time spent.

Based on my research, if you haven’t been the victim of identity theft since the breach, the credit monitoring and $1 million of identity theft insurance looks to be the best deal.

Here are some steps you can take to help be proactive in protecting your identity:

  • Sign up for some sort of credit monitoring, either through this settlement or a free service such as Credit Karma.  This monitoring will detail any credit inquiries, new accounts, late payments, payment history, and your credit score so you can proactively monitor your credit on an ongoing basis.

 

  • Freeze your credit.  By placing a freeze on your credit, no new accounts can be opened in your name because a credit check cannot be done.  You can freeze and unfreeze your credit at any time, and there is no cost to do so.  To do this, you will need to contact all three credit bureaus (Equifax, Experian, and Transunion) where you will receive a special pin that you will use to freeze and unfreeze your credit going forward.

 

  • Add text message confirmations to credit card purchases.  This will alert you via text message any time a purchase is made with your credit card.  When a hacker has your credit card number, many times they make test purchases of just a couple of dollars to see if you notice, and then start making big ticket purchases if you do not.

 

  • There are also services out there such as LifeLock that offer comprehensive identity theft protection for a monthly cost.  Their $35/month plan offers up to $1 million of reimbursement for stolen funds along with comprehensive ongoing credit monitoring and cybersecurity services.

I think the most important thing with protecting your identity is being proactive and assuming some of your personal information could be out there.  Cyber criminals are only getting more sophisticated, and these data breaches are most likely to continue.

I hope this information was helpful, if you have any questions at all or would like help implementing any of the above suggestions, please don’t hesitate to contact the office as I would be glad to help in any way that I can.

 

Kane Financial is an Investment Adviser registered with the state of New York. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.  Please contact us at (315) 801-9028 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions.  Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website.