Compliance June 11, 2015

Court Says It Cannot Force N.J. Pension Payment

The Supreme Court in New Jersey has found that the pension contributions promised in 2011 reform are not part of an enforceable contract.
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The New Jersey Supreme Court has ruled on a case about whether the state violated the law by making pension contributions that were less than what was agreed upon in 2011 pension reform.

The state appealed the decision of a Superior Court judge who ruled the state’s failure to make promised contributions into its pension systems was a substantial impairment of public employees’ constitutionally protected contract rights. The Superior Court judge ordered the state to pay approximately $1.57 billion to the pension funds, which was previously approved in a fiscal year 2015 budget by the legislature, but removed by Governor Chris Christie.

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However, the state’s Supreme Court ruled the legislature and governor were without power, acting without voter approval, to transgress a debt limitation clause and the corresponding appropriations and other budget clauses of the New Jersey State Constitution. According to the court’s opinion, the parties may have included contractual words in the reform legislation, “but those words, no matter their clarity, could not create an enforceable contract. Voter approval is required to render this a legally enforceable contractual agreement compelling appropriations of this size covering succeeding fiscal years…”

The court said the promised contributions are enforceable only as an agreement that is subject to appropriation, which under the Appropriations Clause renders it subject to the annual budgetary appropriations process. “In that process, the payment may not be compelled by the Judiciary.”

The high court added, “The Legislature’s strong expression of intent remains clear in Chapter 78, but it does not bind future legislatures or governors in a manner that strips discretionary functions concerning appropriations that the State Constitution leaves to the legislative and executive branches.”

Data and Research June 11, 2015

No Surprise—Fees Remain a Top Topic

The retirement plan industry shows little sign of dropping its focus on fees and lowering the cost of investing.
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The 2015 edition of Vanguard’s “How America Saves” study finds plan sponsors and advisers are in general focused on plan fees and bringing meaningful savings to the participants they serve.

The annual study shows more plan sponsors have incorporated a wider range of low-cost index funds into their plans, Vanguard notes. The firm says half of its plan sponsor clients now offer an “index core lineup,” defined as a comprehensive set of low-cost index options that span the global capital markets.

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Perhaps more surprising is participants’ willingness to take investment risk through passive investments. Factoring in index-based target-date funds (TDFs), a strong majority (82%) of participants serviced by the firm held some form of equity index investment as of year-end 2014.

Vanguard suggests key high-level metrics of aggregate savings behaviors—such as median and average deferral and contribution rates—remained steady across the client base in 2014. But the firm “sees encouraging signs with respect to the number of participants saving at double-digit rates,” says Jean Young, lead author of the report and a senior research analyst with the Vanguard Center for Retirement Research. “About half of participants in Vanguard-administered defined contribution plans are saving 10% or more.”

However, the study also found that in plans with automatic enrollment, more than 60% enroll at default rates of 3% or less, so there is significant ground yet to cover. Vanguard says its data clearly demonstrates auto-enrollment boosts participation rates, but it can lead to lower contribution rates when default deferral rates are set at too-low levels. The study recommends a target savings rate of 12% to 15%, including employer match.

“Plan sponsors are playing a more assertive role in shaping participant outcomes, and we commend them for their diligent efforts in designing, overseeing and continually improving their plans,” adds Martha King, the newly announced head of Vanguard’s Institutional Investor Group. “At the same time, we share with our sponsor clients an obligation to move the dial on savings rates, and give participants the best chance for investment success.”

Additional findings from the research can be explored here.

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