Retirement plan milestone approaching January 31, 2012
Posted by forwardfinancialplanning1 in 401k plans, Pensions, Retirement Savings.add a comment
State Street Global Advisors projects that 2012 will be the year that defined contribution plans such as 401k’s become the predominant form of retirement plan offered by employers. SSGA estimates that 2012 will the first year that more employees will be enrolled in these defined contribution plans than are participating in company sponsored defined benefit plans, such as traditional pensions.
Historians of the future will surely look back at this as an “accidental social experiment” with far reaching implications. Ted Benna, the retirement plan consultant credited with having “invented” the 401k (via a creative interpretation of an obscure section 401k of the tax code, which the IRS subsequently blessed) most likely never envisioned such widespread adoption. And, report after report has been published lamenting how employees have mismanaged their accounts. It will be interesting to see how all of this plays out over the next 50 years.
Regardless of one’s feelings on defined contribution plans (adding 403 and 457 type plans to the group), no one can deny that “they are here to stay.” This fact highlights the need to improve the financial literacy of our population, since individuals are responsible for managing these accounts. Our schools are being challenged to improve by meeting No Child Left Behind guidelines. Perhaps they need to add a section entitled “No Retiree Left Behind………………..”
For retirement funding, we’re increasingly on our own……….. November 28, 2011
Posted by forwardfinancialplanning1 in Pensions, Retirement Savings, Retirement Spending.2 comments
It’s been a well-known fact that the trend in U.S. corporate retirement plans has been away from defined benefit plans (such as traditional pensions) and towards defined contribution plans such as 401k/403b/457 type plans. And, this trend appears to be accelerating. In 2004, only 45 of the 633 Fortune 1000 companies with defined benefit plans had frozen at least one plan (“Freezing a plan usually means the the sponsor has discontinued future benefit accruals for some or all participants). According to a study by Towers Watson & Company, the equivalent statistics for 2010 are that 237 (or 40%) of the 584 Fortune 1000 employers with defined benefit plans have frozen at least one plan.
The implications of this trend???? Individuals are going to be increasingly reliant on their own resources to fund their retirements. This places a premium on “starting early” and continuing to maintain/maximize contributions throughout one’s tenure in the workforce. Making good investment choices and minimizing expenses will also help, but neither of these factors will be nearly as important as maximizing the number of years for investment compounding to do its thing.
Financial professionals are human, too August 7, 2011
Posted by forwardfinancialplanning1 in Investing-General, Pensions.add a comment
The increasingly popular field of behavioral finance points out the many biases that we humans possess that damage our investment results. One of those weaknesses is called “recency bias” which causes us to extrapolate the recent past into the future. This tendency manifests itself in “performance chasing” where investors flock into mutual funds that have performed very well recently. Many studies have indicated that performance chasing causes those who engage in it to underperform the market as a whole.
One might conclude that performance chasing is primarily a problem for individuals managing their own portfolios. This line of thinking assumes that the “smart money” (i.e., the investment professional) doesn’t suffer from this malady. Well, one would be wrong in making this assumption.
A study by Index Funds Advisors examined the performance of pension funds from 1994 to 2003. Since these large pools of funds are advised by high priced consultants, they surely must out perform the rest of us and avoid chasing performance. The researchers examined 8,755 hiring decisions by about 3,700 pension plan sponsors. The new money managers (added based on investment consultant recommendations) were responsible for $737 billion in assets while the fired managers managed $117 billion.
One of the criteria for choosing these so-called “top” money managers was past performance. Three years before hiring, they beat their benchmark by an impressive 2.91% per year. However, after being hired, these same managers underperformed by 0.47% annually. And, the “fired” managers turned in better performance than their replacements.
The moral of the story? Past performance is not indicative of future performance—a statement that the regulatory authorities require to be included with any table listing investment performance. But, somehow we just don’t listen. Perhaps a better lesson might be to use passively managed funds to a great extent. Since we can’t effectively use past performance to identify the best managers, it makes more sense to invest heavily in index funds and at least be assured of receiving close to the market performance (i.e.,the return of the index, less expenses).
Does “stupid” equal “apathy”? August 2, 2011
Posted by forwardfinancialplanning1 in Financial Planning, Pensions.add a comment
I recently saw a bumper sticker on a passing vehicle which read, “You can’t fix stupid!” Perhaps this same sentiment applies to many people’s approach to retirement planning where “apathy” might be substituted for “stupid”.
Supporters of the “nanny-state” deride defined contribution plans (such as 401k’s) as inadequate and hail traditional pensions and Social Security as the only effective solutions to prepare a society for retirement. But, perhaps the problems lie with the individual participants and not the plans themselves. A recent study by Fidelity Investments points out how apathetic many individuals are about their own retirement planning.
Approximately 42 million Americans are fortunate enough to still have traditional, defined benefit pensions. However, the Fidelity survey showed how disinterested most employees are. Consider these findings: (1) 71% of survey respondents admitted they did not have detailed knowledge of how their plan operates. This is in spite of the admission that over half expect to rely on the plan payments to cover essential living expenses in retirement. (2) 31% don’t know the plan’s vesting schedule. (3) 40% don’t know what payment options will be available to them (4) 27% don’t know at what age they can receive benefits. (5) 66% have never asked how much they will receive and (6) 29% report they are not knowledgeable and don’t even know who to ask for information.
As Yogi Berra once said, “If you don’t know where you’re going, you might wind up somewhere else……………”
Confidence in Congress Lacking April 4, 2011
Posted by forwardfinancialplanning1 in Pensions, Retirement Savings.add a comment
Cynicism about our governmental entities is probably near an all time high, but a recent finding by the ING Retirement Research Institute really puts it into perspective. Their survey of retirement plan participants found that 51% of respondents agreed it was more likely that scientists will clone dinosaurs in their lifetime than it is that Congress will save Social Security. That’s pessimism!
America’s retirement preparedness March 31, 2011
Posted by forwardfinancialplanning1 in Financial Planning, Pensions, Retirement Savings.add a comment
Came across an excellent documentary from PBS Frontline that can be viewed with Windows Media Viewer at the following URL:
http://www.pbs.org/wgbh/pages/frontline/retirement/
This production is entitled, “Can You Afford to Retire?” and provides excellent background about the upcoming retirement situation in our nation. Most distressing, however, is the realization that this episode was aired back in 2006, prior to the 2008-2009 meltdown of the financial markets. Just the same, it’s well worth the time, if only to alert the viewer to the precarious circumstances we can expect to see in the future.
Pension myths March 15, 2011
Posted by forwardfinancialplanning1 in Pensions, Retirement Spending.add a comment
Numerous articles have been written lamenting the demise of traditional employer sponsored pension plans. Clearly, the trend over the past 25 years has been for more employers to offer defined contribution plans like 401(k) and 403b(7) plans instead of defined benefit pension plans. However, these pension-related articles have created the impression that previous generations enjoyed generous and widespread defined benefit coverage. Actual data tells a different story.
According to research by the Investment Company Institute, 21% of retirees and their spouses received income from an employer retirement plan in 1975. That percentage is lower than the third of retirees who received income from an employer plan last year. And, the median income in 1975 was only $4,500 (in 2009 dollars) versus $6,000 today. Some might argue that the larger current amount emanated from the employees payroll deferrals, but it must also be remembered that employer matching funds and earnings represent substantial proportions as well. Thus, we see that the defined contribution plans are doing at least as well as defined benefit plans in replacing income in retirement
Who will fund these “bailouts”?? January 16, 2011
Posted by forwardfinancialplanning1 in Pensions.add a comment
The Senate Health Education, Labor and Pensions committee convened a hearing last month to discuss whether the Pension Benefit Guarantee Corporation (PBGC) needs stronger congressional oversight. The PBGC is the quasi-public agency (sponsored by the federal government but funded by its private sector members) that serves as a financial backstop for 29,500 privately funded corporate and multi-employer defined benefit pension plans. This agency has a reported funding deficit of $23 billion and is still grappling with the fallout from the recession. The agency also noted in its annual report that it could possibly become even more stressed in the future due to ”the very real chance” that some large pension plans could become insolvent in the near future.
From our perspective here in Illinois, we find the US Senate’s concern to be far too premature (tongue-in-cheek intended…) After all, our State Teachers Retirement System (STRS) and State University Retirement System (SURS) defined benefit plans hold the dubious distinction of being #1 of all the states in terms of greatest underfunding. And, since our recent 66% increase in individual state income taxes will only close a portion of the state’s $15 billion 2011 budget deficit, the outlook for improved funding ratios is not very promising. Lastly, potential beneficiaries of STRS and SURS pensions won’t receive much consolation from the fact that the these public sector pension funds are not protected by the PBGC!!
So, our advice to the many future Illinois STRS and SURS beneficiaries in our area is—-”You’d better have a plan B for funding your retirement!!”
