Carolina economists advise investing in retirement accounts now
Jane Brown uses Faculty Mentoring Award to aid
students’ research
Enrollment for 403(b)retirement plan is under way
Economists, unlike many researchers, have no scientific
laboratory in which to test their latest theories.
Their laboratory is the real world where the variables lie
beyond their control. It is also where real fortunes are made or lost and real
people often suffer, as the last few months have dramatically shown.
That is why the still-unfolding global economic crisis is
such a heady time for people like Christian Lundblad and Jennifer Conrad, two
economists in the Kenan-Flager School of Business.
Lundblad is an asset pricer who studies investments and the
risks and returns associated with them, with a focus on emerging markets and
their links to the United States. Conrad, also an asset pricer, focuses
primarily on U.S. equity markets and the execution strategies of institutional
investors who buy and sell equities in large quantities.
Lundblad said no economist wished for the current
conditions, but economists worth their salt see them as a unique learning
opportunity.
“What is happening now is something we haven’t really seen
before, and it has challenged our understanding and preconceived ideas,”
Lundblad said. “The modern field of economics originated in the pain of the
Great Depression.
“The Great Depression was an awful time period, no doubt,
but it created a lot of first-rate thinking about economic forces and the ways
to deal with those forces. We may see some of that happening again. There is no
doubt for us that research will be moving in a very different direction. I am
sure of that.”
Economists’ excitement at that opportunity for discovery
however, is tempered by their reaction as human beings. Conrad said she is
aware of that whenever she stands in front of a class of bright students with
futures that, at least for the time being, appear to have dimmed.
Recently, she
and Lundblad talked with a group of alumni from Kenan-Flagler to help give them
some sense of what has happened to the global financial system and to offer a
hint of what might yet be in store.The only honest
answer to the latter question, they both agree, is: No one knows.
“My husband is a chemist and I tell him that, when you think
about economics, the problems are more difficult because you can’t set up your
experiment,” Conrad said.
A gas molecule always reacts the same way under certain
conditions. Markets, because people and politics are involved, are always
unpredictable, she explained. To explain how this economic mess evolved, Conrad
points to the chain reaction that originated in the United States with
mortgage-backed securities that relied on an ever-appreciating housing market.
When housing prices began to decline, people struggled to
pay their mortgages or to refinance into more affordable mortgages. And when
people started defaulting on their loans, some of the banks that had bought
most of the mortgage-backed securities came close to the brink of collapse,
Conrad said.
“Banks in particular need to maintain capital ratios. When
those assets started to decline in value, they needed to raise equity and/or
sell the assets to maintain those capital ratios. And they were unable to do
either one,” Conrad said.
Addressing the failure
Conrad said the bailout plan outlined by Henry Paulson, U.S.
treasury secretary, seeks to address both dimensions of that failure –
first by infusing money to prevent a run on the international banking system,
and second by creating a troubled asset program that will allow banks to remove
bad assets from
their books.
She said there is no doubt that economists will be able to
find fault with how the federal government went about this.
Yet, the scale and speed at which government acted was astounding, she said. She cited as an
example the federal government’s move to step in to bolster the teetering $3
trillion money-market industry to stem the wave of withdrawals that began after
Lehman Brothers declared bankruptcy.
“They made that decision in under 36 hours,” Conrad said.
“It’s the government trying to work at market speed.”
During a Nov. 12 press conference, Paulson announced that
the treasury would abandon the plan to spend billions of dollars buying up
illiquid mortgage assets and direct its firepower on the ailing consumer credit
sector.
Conrad said the change seems to have recognized the pricing
problem for the original “toxic” assets. The move also shows Paulson’s
recognition that the problem had expanded beyond the original assets and that
the money could be better spent through direct equity infusions into banks and
by targeting relief to consumers.
Lundblad said it was hard to know what changes would be in
store after a new president takes office, but he anticipates a new wave of
regulations.
And he said that can be both a good and a bad thing for the
economic system as a whole.
“Some of the complexities of the financial instruments have
called for a reasonable level of regulation that wasn’t in place,” Lundblad
said.
“One danger, though, is that the government isn’t
particularly subtle in the way it imposes regulatory controls, so there is a
danger in going too far in the other direction that could squash some of the
best parts of capitalism.”
On a personal level, Lundblad said the economic crisis has
changed his life in one other dramatic way. “When I go to a party and say what
I do, people want to start talking to me. That never happened before,” he said.
Advice from the experts
As for what people should do now with their investments,
both Conrad and Lundblad offer some simple advice that one might not expect
from economists: Quit thinking about it so much. When in doubt, the best course
of action might be to do nothing.
“The level of volatility right now is almost unprecedented,
certainly in the modern age that any of us have lived through,” Lundblad said.
“What that is telling you is that we simply have no idea where stocks are going
to go in the very near term. I am very optimistic over the long run, but for
the near term they are all over the place.”
Technology has created the opportunity to watch the markets
too closely and trade too much, which turns out to be a disaster for most
people, he said.
“The bottom line is that there is a great deal of
uncertainty in near-term forecasts so there is nothing one can credibly do to
try to take advantage of that or to necessarily shelter yourself from that.
It’s better to literally go do something else.”
However, both Conrad and Lundblad said people who are not
yet investing for retirement in a supplemental 403(b) plan should consider
doing it now. Lundblad said retirement accounts such as 403(b) plans (see
related story on page 11) are “dramatically underutilized” and that the 25
percent participation rate within the University is consistent with the
participation rate throughout the country.
“Put aside the financial crisis that is going on right now;
we need to be saving a whole lot more than we are saving,” Lundblad said. “The
effective saving rate in this country is about zero percent, which is part of
the
problem and part of the reason we are in the situation we are in right now.”
Jane Brown uses Faculty Mentoring Award to aid
students’ research
Jane Brown, right, works
with John Donahue, a graduate student in
pyschology, during the interdisciplinary health communication class.
Each Wednesday evening, 24 graduate
students from five disciplines meet in Carroll Hall to find creative ways to
improve public health through
effective communication.
Students in the
interdisciplinary health communication class represent the Gillings School of
Global Public Health’s departments of Nutrition, Health Behavior and Health
Education, and Maternal and Child Health as well as the Department of
Psychology in the College of Arts and Sciences and the School of Journalism and
Mass Communication.
Jane Brown, James L. Knight Professor of Journalism and Mass
Communication, teaches the class. Well-known for her research on the media’s
effects on adolescents’ health, Brown also is responsible for the journalism
school's undergraduate honors program. She has also been director of the
Academic Leadership Program at Carolina’s Institute for the Arts and Humanities
and was chair of the Faculty Council from 1994 to 1997.
The students in Brown’s class
do much more than study public health communication, however. They pool their
diverse perspectives to develop communication campaigns for clients who have
sought their help.
“The idea is to study how to
promote healthy behavior using communication tools,” Brown said. “We try to
reach a synergistic place across these disciplines, so the class is divided
into seven teams that have three real-world clients, all of whom have come to
us for help in developing health communication plans for their issues.”
This semester, all three
projects focus on communicating with parents, she said.
One project for the National
Institute of Alcoholism and Alcohol Abuse based in Washington, D.C., targets
parents with information about the dangers of underage drinking.
Another advises Nancy Zucker, assistant professor of psychiatry and
behavioral sciences at Duke University, in developing a communication plan for
the parents of children with eating disorders.
The third partners with the
University-based Public Health Institute in its work with local health
departments in North Carolina to encourage parents to have their daughters
vaccinated against HPV (human papillomavirus), a virus that can lead to
cervical cancer.
“The students come up with
fabulous proposals, which they present to their clients at the end of the
semester,” Brown said.
In fact, last year’s client,
the Washington, D.C.-based National Campaign to Prevent Teen and Unplanned
Pregnancy, is currently using the communication plan the class developed, she
said.
From start to finish, the
process for developing a communication strategy is rigorous.
Students conduct literature
reviews, examine existing data related to their clients’ topics and hold focus
groups in various communities to test key messages and gather input from target
audiences.
Sometimes the key to boosting
focus group participation is as basic as providing incentives such as
refreshments. So, to encourage parents to participate in the student-led focus
groups for health communication, Brown allocated her $5,000 stipend as a
recipient of the 2008 Faculty Mentoring Award to underwrite the cost of
incentives.
The award, presented earlier
this year by the Carolina Women’s Leadership Council, honored Brown’s
long-standing commitment to mentor junior faculty members at Carolina. She
chose to apply the stipend to support
her students.
“It seemed appropriate to give
the money to help the students produce the best possible proposals,” she said.
“No fund exists to support this kind of class activity, so I was happy to use
the unexpected mentoring award to do this. It was kind of like ‘found money’
that could be put to good use.”
The Faculty Mentoring Awards are
funded by an endowment established by the Carolina Women’s Leadership Council,
a volunteer committee formed during the Carolina First Campaign. Also honored
this year was Jo Anne Earp, professor of health behavior and health education;
she received the award for
faculty-to-student mentoring.
Enrollment for 403(b)retirement plan is under way
Employees can now enroll in the UNC system’s new 403(b)
supplemental retirement plan. This plan will replace the University’s current
403(b) option effective Jan. 1.
“To help facilitate
the change, we have been actively working with Fidelity and TIAA-CREF, the new
plan’s two vendors, to schedule group and individual counseling sessions, and
to provide employees with additional materials to help them make informed
decisions,” said Brian Usischon, senior director of benefits and employee
services. “Several information sessions have already been held, and more are
planned in December.”
Employees can attend
any of the following information sessions, which will include representatives
from Fidelity and TIAA-CREF:
Dec. 3 from 9 to 10
a.m., Stone Center – Hitchcock Room;
Dec. 8 from 10 to 11
a.m., Giles Horney Building – Magnolia
Conference Room;
Dec. 10 from 1:30 to
2:30 p.m., Student Union – Room 3102; and
Dec. 16 from 1 to 2
p.m., Administrative Office Building – Training Room A.
For those who already have 403(b) accounts with TIAA-CREF
and Fidelity, no action is needed. Employees who have accounts with one of the
University’s other vendors will need to follow the enrollment instructions
outlined on the 403(b) Web site, hr.unc.edu/Data/benefits/suppretire/403b-09.
The Web site also includes instructions on requesting an
individual appointment with a vendor representative, the 403(b) Program Guide
and a group of frequently asked questions.
One of the most frequently asked questions from
employees, Usischon said, has been why only two vendors were selected for the
new program. He noted that one of the primary goals of the new IRS regulations
is to enhance plan compliance.
“These new regulations will dramatically change the
manner in which 403(b) plans need to be managed,” Usischon said.
“Under the regulations, employers now have far greater
responsibilities as plan sponsors and are required to take a more active role
in administering their 403(b) plans. These new requirements are a major reason
why the UNC system decided to consolidate the individual campus plans, and why
only two vendors were selected for the
systemwide program.”
