Achieving Sustainable Retirement Withdrawals: A Combined Equity and Annuity Approach

Journal for Financial Planning
by Craig Lemoine, CFP®; David M. Cordell, Ph.D., CFA, CFP®, CLU; and A. William Gustafson, Ph.D.

Executive Summary

• This article contrasts sustainable retirement withdrawals from strategies with annuity components and strategies without annuity components.
• The authors discuss today's market environment as it affects retirement planning strategies with and without annuity components.
• This study evaluates common retirement planning strategies by analyzing the withdrawal stability for portfolios consisting of equity, fixed income, variable annuity, and fixed annuity assets.
• This article uses replacement Monte Carlo methodology to determine retirement success over investor accumulation and withdrawal phases. The goal of each trial was to secure calculated retirement funding rather than to maximize wealth.
• Five retirement portfolio strategies are evaluated: (1) 50 percent in equities and 50 percent in bonds, (2) 100 percent in equities, (3) a combination of equities and bonds in which the equities percentage is calculated as 128-minus-attained-age, (4) a variable annuity with a 5 percent withdrawal rate, and (5) 100 percent equities with a fixed annuity lock.
• Different rebalancing strategies were modeled to capture any variances between frequency. Portfolios composed of a higher portion of equities outperformed those with a higher portion of bonds. The trials using 50 percent equities and 50 percent bonds yielded the lowest chance of success. Attempting to reduce portfolio risk by reallocating to fixed-income assets annually is less likely to provide long-term success than an allocation that remains fully invested in equities.
• The results indicate that using an equity portfolio with a fixed annuity component provides a higher chance of maintaining retirement distributions than other alternatives.

Craig Lemoine, CFP^®, is an assistant professor of financial planning at the American College. He also works with retirees and is completing a doctoral dissertation at Texas Tech University.
David M. Cordell, Ph.D., CFA, CFP^®, CLU, is director of finance programs at the University of Texas at Dallas.
A. William Gustafson, Ph.D., is an associate professor at Texas Tech University.

Best and Worst Jobs of 2010

Plansponsor.com reports on this year's CareerCast.com Jobs Rated report. After looking at such factors as stress, working environment, physical demands, income, and hiring outlook, here is how jobs are rated for 2010:

10 Best Jobs

1. Actuary
2. Software engineer
3. Computer systems analyst
4. Biologist
5. Historian
6. Mathematician
7. Paralegal assistant
8. Statistician
9. Accountant
10. Dental hygienist

10 Worst Jobs

1. Roustabout (one who performs routine physical labor and maintenance on oil rigs and pipelines)
2. Lumberjack
3. Ironworker
4. Dairy farmer
5. Welder
6. Garbage collector
7. Taxi driver
8. Construction worker (laborer)
9. Meter reader
10. Mail carrier

Congress restores incentives to make SBA loans more attractive

Memphis Business Journal

Memphis Business Journal - by Kent Hoover

Congress … restored incentives that made Small Business Administration loans more attractive for borrowers and lenders.
The $636 billion defense bill that was signed into law Dec. 21 includes $125 million for the SBA, which the agency will use to increase the government guarantee on its flagship 7(a) loans to 90%. The funds also will enable the SBA to eliminate fees for borrowers on its 7(a) loans and 504 loans, which primarily finance real estate. This will return the guarantee and fees to where they were before Nov. 23, when the SBA ran out of the economic stimulus funds that enabled the agency to make these enhancements.
The new funding, however, is expected to last only through Feb. 28, 2010. The House, in a separate jobs bill, appropriated $354 million to keep the higher guarantee and lower fees in place through Sept. 30, 2010. That extension awaits Senate approval.
“We’re hopeful that it gets done,” said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.
…The SBA “needs to be stepping up and filling that void,” [Wilkinson] said. Given the constraints on bank lending, “this is pretty much the only game in town.”
The SBA’s normal guarantee on 7(a) loans ranges from 75% to 85%, depending on the size of the loan. The higher guarantee made SBA loans even less risky for lenders, and the fee reductions made the loans more affordable.
“These changes proved very effective at jump-starting small business lending, and the need to continue them is clear,” said Sen. Mary Landrieu, D-La., who chairs the Senate Small Business and Entrepreneurship Committee.
…The SBA set up a waiting list for borrowers and lenders who wanted loans with a higher guarantee or reduced fees if more money for these breaks became available. As of Dec. 21, there were 838 loans totaling $431 million sitting in the 7(a) loan queue, and 192 loans totaling $114 million in the 504 queue.
President Barack Obama, who urged Congress to renew the stimulus-funded breaks on SBA loans, also favors increasing the size limits on SBA loans. This, he said, would enable more businesses to expand and hire more workers as the economy recovers.
Landrieu’s committee approved legislation Dec. 17 that would increase the maximum size of 7(a) loans from $2 million to $5 million. The bill would increase the size limit on regular 504 loans, which are paired with conventional loans, from $1.5 million to $5 million. The loan limit for small manufacturers or projects that meet certain energy guidelines would increase from $4 million to $5.5 million.
This legislation also would allow businesses to refinance short-term commercial real estate into a long-term, fixed-rate 504 loan.
Kent Hoover is Washington bureau chief for American City Business Journals. He can be reached at (703) 816-0330 or khoover@bizjournals.com

Green Business: Outsourcing the Carbon Accounting Chore

CRM News

By Ned Madden
E-Commerce Times
Part of the ECT News Network
01/04/10 5:00 AM PT
Accounting for the amount of carbon a business emits is already a fact of life for some firms, and it could soon become business as usual for many more. Doing the carbon accounting work in-house could be a major obstacle for companies worldwide as they scramble to deal with rising regulatory and market forces. Solutions for outsourcing the work are emerging.
Carbon accounting outsourcing (CAO) could be the next big thing in the US$80 billion business process outsourcing (BPO) industry. …
While numerous green consultancies offer firms advice on how to comply with carbon reporting requirements, none have been able to undertake the complex and time-consuming work necessary to collect and report on energy use and carbon emissions, according to Ian McGowan, director of FirstCarbon, a carbon data management subsidiary of global outsourcing services provider ADEC Solutions.
"We don't pretend to have huge expertise in carbon offsets and strategy and so on," McGowan said. "But we are able to look at the granular level and pull together the information firms need to work out their carbon footprint and report on it."…

In-House Accounting Challenges

Counting carbon -- specifically, measuring and reporting the emission levels of its dioxide form (CO2) -- is big news. Carbon emissions made headlines worldwide in December, when delegates from 193 countries gathered in Copenhagen, Denmark, at the U.N. climate summit to discuss how to fund global greenhouse gas (GHG) emission cuts.
Doing the carbon accounting work in-house could be a major obstacle for companies worldwide as they scramble to deal with the rising regulatory and market forces currently driving major organizations to establish public goals for reducing energy and resource use -- and all the carbon emissions that result from such activity.
U.S. companies are gearing up for operating in an economy characterized as "carbon constrained" -- that is, one in which the government limits yearly carbon emissions and requires big emitters to accurately report them.
Mandatory reporting of greenhouse gases (GHG) in the U.S. is now required for some companies nationwide. The U.S. Environmental Project Agency (EPA) Final Mandatory Reporting of Greenhouse Gases Rule requires reporting from most large U.S. GHG emissions sources. The stated purpose of the rule is to collect accurate and timely emissions data to inform future policy decisions. Initial reports, covering emissions during 2010, are due on March 31, 2011.
Energy management outsourcing is a way of addressing the current energy challenges facing all organizations, namely high and volatile energy prices, the need to mitigate climate change and potential supply constraints as oil production peaks. … Carbon impacts are a growing consideration for managers deciding whether and how much to outsource…
"The coming mandate for carbon management, while placing unwanted burdens on many enterprises, will certainly be keeping law practices busy helping their clients comply with carbon reduction legislation," said Shekhar Chitnis, president and CEO of Chisk, with offices in the U.S., UK, Germany, Japan and India. "Since tracking carbon credits is a non-core activity for most corporations, doing the work themselves offers very little direct economic advantage, which makes it an ideal activity for outsourcing to dedicated specialist third parties."…

Enterprise Carbon Accounting Software

Many companies begin the carbon accounting process internally by manually gathering baseline information, then using spreadsheets to calculate and track initial results.
"If a firm needs to outsource this process, they hire a consultant who brings expertise and has a preferred tool," said Groom Energy Solution's VP of Consulting Paul Baier, who told the E-Commerce Times that "99 percent" of such consultants use Microsoft (Nasdaq: MSFT) Excel spreadsheets.
However, according to Baier, a growing number of companies are also turning to new sustainability enterprise carbon accounting (ECA) software offerings, primarily Web-based tools intended to help businesses manage, analyze and report on their carbon footprints. …
This development is giving rise to a global market for carbon accounting, collecting data and consulting services that is expected to reach $7 billion to $9 billion … by 2012, according to a Groom Energy June 2009 report.

Knowing Your GHG Physics and Chemistry

… BPO service providers have a strong potential future in implementing sustainability accounting software initiatives and GHG management, said Larry Goldenhersh, CEO of Carlsbad, Calif.-based Enviance, provided that outsourcers fully understand the business processes involved in achieving compliance with air, water and waste permits, and know how to use centralized software systems like the Enviance platform grounded in the physics and chemistry of GHGs.
Given strict adherence to those constraints, "I believe carbon accounting will drive multi-billion dollar opportunities for all companies in this space," Goldenhersh told the E-Commerce Times. …

Removal “Spot”: the duty to remove investments

PLANSPONSOR.com

It is commonly accepted that fiduci­aries of participant ‑ directed plans, such as 401(k) plans, have a duty to select, monitor, and remove investments prudently.
The threshold question is whether a fiduciary’s duty to remove investments applies to individual investments or whether the decisions are judged on the basis of the investments in the aggregate. The trial court in DeFelice v. US Airways, Inc., applied an aggregate test. …
The court was wrong. The duty of fiduciaries is to select, monitor, and remove individual investments prudently, in addition to considering the portfolio as a whole. …
The DoL made it clear in the preamble of a regulation that its view is that the prudent selection of investments incorporates both a consideration of the individual investments and the portfolio.

The regulation, however, is not intended to suggest either that any relevant or material attributes of a contemplated investment may properly be ignored or disregarded, or that a particular plan investment should be deemed to be prudent solely by reason of the propriety of the aggregate risk/return characteristics of the plan’s portfolio. Rather, it is the Department’s view that an investment reasonably designed—as part of the portfolio—to further the purposes of the plan, and that is made upon appropriate consideration of the surrounding facts and circumstances, should not be deemed to be imprudent merely because the investment, standing alone, would have, for example, a relatively high degree of risk.

… While participants can decide which of the offered investments to use, they cannot decide which investments are offered—that job belongs to the fiduciaries. In fulfilling that responsibility, ERISA requires, in effect, that the fiduciaries make a legal “promise” to the participants that each of the investment options is selected and monitored prudently (and removed, if it is no longer a prudent choice) and that the lineup of options offered to the participants is prudent in the aggregate.
Why is this the case? Unless a participant’s account is professionally managed, the participant must put together a portfolio in his account that is allocated among different categories of investments to create an appropriate blend of risk and return. If the investment choices are not prudent in the aggregate (for example, if the investments do not constitute a broad range that allows participants to balance risk and reward by selecting among them), the participants could not construct portfolios according to their needs. On the other hand, if some or even all of the investments were individually imprudent, then even a well-constructed portfolio would likely underperform. Thus, each investment must be prudent and suitable on a stand-alone basis, and the lineup of investments must be prudent in the aggregate. …
Returning to my earlier statement that “the court was wrong,” it was not as brazen as it may have seemed. The 4th Circuit Court of Appeals subsequently reversed the trial court saying:
“[A] fiduciary must initially determine, and continue to monitor, the prudence of each investment option available to plan participants.”

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Fred Reish is Managing Director and Partner of the Los Angeles-based law firm of Reish & Reicher. A nationally recognized expert in employee benefits law, he has ­written four books and many articles on ERISA, IRS and DoL audits, and pension plan disputes. Fred has been awarded the Institutional Investor Lifetime Achievement Award and PLANSPONSOR’s Lifetime Achievement Award. He is also one of the 15 individuals named by PLANSPONSOR magazine as “Legends of the Retirement Industry.”
PLANSPONSOR staff
editors@plansponsor.com