Since President Obama unveiled the new MyRA as his plan to revive Americans’ saving habits, we have been making comparisons between funding for retirements and preneed. Like the MyRA, the non-guaranteed preneed contract could represent more of an introduction to preplanning funding than the final preneed product. As the AARP acknowledged a few years ago, the guaranteed price contract offers a benefit to the consumer. However, fewer consumers can afford to purchase their prearrangement without installments. Low preneed funding returns preclude death care operators from extending price guarantees during installment terms (or from offering any price guarantees). Consequently, we are seeing a variety of ‘hybrid’ preneed programs that evolve around the non-guaranteed arrangement. But as critics of the MyRA point out, the new brand of consumers’ preneed accounts cannot survive on interest income alone.
Through the Government Securities Investment Fund (“G Fund”), the MyRA provides a safe, short term savings plan. Chuck Jaffe of MarketWatch suggests that despite such safety, the G Fund has severe limitations as a long term investment vehicle. While the G Fund is intended to “produce a rate of return that is higher than inflation while avoiding exposure to credit (default) risk and market price fluctuations”, Mr. Jaffe’s analysis shows that the fund has not been keeping pace with inflation as measured by the Consumer Price Index. Those numbers fall even shorter of the 3% to 4% funeral cost increases reported by industry surveys.
The government bond has long been a staple investment of preneed and care funds, and death care fund managers have been facing difficult decisions whether to assume credit risk (corporate bonds) or market fluctuations (long term government bonds). The Economic Stimulus Package of 2009 resulted in an extended period of lower government bond rates. To produce an interest return that paces not only CPI, but also industry cost increases, fixed income portfolios have been forced to assume more exposure to credit (default) risks and/or market price fluctuations. Now as the Federal Reserve begins to ‘taper’ the program, the value of long term government bonds will decline. How quickly will depend on the Federal Reserve’s actions.
The court filings made by the receiver for the Wisconsin Master Trust provide a perspective of the preneed fund manager’s dilemma. Decimated by investment losses and high administrative costs, the program is finding it difficult to produce an “adequate” return from the fixed income market. But for the Wisconsin Master Trust, the adequacy of investment return does not yet include funeral cost increases or true costs of administration and taxes.
The MyRA critics advise that a true retirement plan must eventually provide an investment return that exceeds inflation. That cannot be done with an investment plan like the G Fund. An interest bearing MyPA may serve as a short term introduction to another preneed product, but a viable long term non-guaranteed product will need proactive asset management.