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The good Lord must like defined contribution plans better…. March 1, 2015

Posted by forwardfinancialplanning1 in 401k plans, Pensions.
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A recent survey from USI Consulting Group found that a majority (57%) of Catholic dioceses are planning to freeze or terminated their defined benefit pension plans.

Eighty percent of the diocesan respondents currently offer lay employees a 403b plan while 15% offer a 401k plan.

Private corporations saw that this was the way to go twenty years ago and now we have religious organizations following suit. Living in the state (Illinois) with the nation’s most poorly funded governmental sector pension plans causes me to wonder—“When will our so-called political “leaders” figure this out?”


We’re going in the wrong direction… February 4, 2015

Posted by forwardfinancialplanning1 in 401k plans, Pensions, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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The Center for American Progress has just released a study that can hardly be deemed as “progress”.

About 31% of Americans have nothing saved for retirement and also lack a defined benefit plan, such as a traditional pension. Among the age group closest to retirement (55-64 year olds), about one fifth (19%) reported no savings at all.

Of the 55-64 year olds who have saved something for retirement, the median retirement account balance was only $14,500. If you strip out the households who have saved nothing, the median retirement account balance of this age group rises only to $104,000.

While $104,000 is not an insignificant sum, it’s not going to support the life style that most of these households expect. Using the withdrawal rule of thumb which allows annual distributions of about 4%, we’re still only projecting about $5,000 per year. And income taxes will eat up a portion of this as well!!

Looks like a lot of people are going to be working well into their 70’s—or depending on the government. Neither of these outcomes look like progress to me.

Movie Review September 28, 2014

Posted by forwardfinancialplanning1 in 401k plans, Pensions, Personal Budgets, Retirement Savings, Retirement Spending.
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We’re generally not in the business of conducting movie reviews, but regular readers know that the woeful state of America’s retirement preparedness is a common theme of this blog. This topic is well addressed by the creators of “Broken Eggs” which is now available at no cost to viewers. It makes our case far better than we could.

Have a look at: http://brokeneggsfilm.com/broken-eggs-movie/#.

The “great experiment” may be soon reaching some conclusions October 2, 2013

Posted by forwardfinancialplanning1 in Pensions, Retirement Savings, Retirement Spending, Social Security.
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Much has been written about the private sector’s shift from employers offering defined benefit plans like traditional pensions, to defined contribution plans such as 401(k)’s, 403b’s, SEP’s and SIMPLE’s. Some pundits have termed this a “great experiment” in shifting retirement plan funding/management responsibility from the employer to the individual. Proponents of the shift applaud its emphasis on self reliance while opponents claim that it’s an abdication of responsibility on the part of employers. Still others point out that defined benefit pension plans, as well as employer based health insurance were employer responses to the wage and price controls imposed by the government after World War II. Being hamstrung (by not being able to raise wages) in their attempts to attract scarce talent in the late 1940’s, many employers offered pensions and health benefits in order to compete. Therefore, says this line of reasoning, employer sponsored retirement benefits are really a vestige from a very different era of US history. Further, they say employer responsibility for funding retirement was not a societal-wide plan, but merely an unintended consequence of government interference in the free market for labor.

Well, if this is truly a “great experiment”, we may start obtaining some data over the next few years. In a recently published research report entitled, “Age and Retirement Benchmarks: Key Analytics that Drive Human Capital Management”, the ADP Research Institute forecasts that 18% of the US workforce will retire in the next five years. If ADP’s predictions come to pass, we’ll soon see how well the aforementioned shift to individual retirement responsibility is going to play out.

Preliminary results do not look very good. Report after report covering “retirement readiness” finds that the average 401(k) balances of these “soon to be” retirees average in the low $100K range. While $100,000 is not an insignificant sum of money it’s clearly not going to last through a potentially long (30+ year) retirement. And, with Social Security also showing strains, one has to wonder how it’s all going to end. Stay tuned.

Will local government pensions be the next fiasco? September 20, 2013

Posted by forwardfinancialplanning1 in Pensions, Retirement Savings.
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There has been a great deal of concern over the past five years regarding the health of many states’ pension systems. While our home state of Illinois is clearly the poster child for pension underfunding, California, New York, New Jersey et al have also made the various published lists highlighting these slow motion fiscal train wrecks. Local governments have typically escaped the limelight, except when their overall finances implode, as is currently taking place in Detroit.

The sheer number of governing entities which have incurred a pension liability to workers/retirees is enormous and perhaps there is value in anonymity. However, Moody’s Investors Services recently issued a report noting that while numerous municipalities in the US have incurred the liabilities of promised benefits, more than 75% have no control over the investment pools that are expected to pay out these funds. This situation occurs because the governing bodies participate in centrally administered “cost-sharing” systems where the pension pool for all of the local entities is managed at the state level. Moody’s noted that local school districts are particularly vulnerable and many even rely on the state to pay part or all of their required pension funding contribution. It goes without saying that none of us in Illinois take much comfort in knowing that our dysfunctional state government is charged with task of watching over this portion of our local financial obligations.

Moody’s also commented that these aggregated net pension liabilities are equivalent to 150 percent of their outstanding debt and 100 percent of the annual operating budget for the typical municipality. And, taxpayers might have a harder time sleeping if they completely understood what “they’re on the hook for” based on the promises made by their elected officials. In particular, Moody notes that a resident of Chicago could be supporting 16 different pension plans.

When will the tipping point occur? Most likely, it will be triggered by an end or reduction in state payments to subsidize the liability of the local governing body. Moody’s notes that Maryland recently approved shifting pension costs to local schools and a similar tactic has been proposed in Illinois.

Taxpayers—stay tuned and hold on tightly to your wallets!!

Still more accolades for our “leaders” in Springfield….. November 30, 2012

Posted by forwardfinancialplanning1 in Pensions, State Income Taxes.
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Many of our readers are “fortunate” (as we are) to reside in the state of Illinois.  Doing so gives us a front row view of the procession of our former governors heading off to federal prisons.  And while we voters and taxpayers receive some small satisfaction from seeing the scoundrels punished for their misdeeds, we’re still left holding the IOU’s emanating from their dysfunctional governance. 

A huge future liability for Illinois taxpayers is going to be the unfunded state pension obligations incurred over the past twenty years of fiscal imprudence. Many of our long-term state legislators in addition to the past felon-governors can “take credit” for this disaster.  How bad is it?  Check out this state pension fund rating analysis conducted by Morningstar:    


The most amazing fact is that in the November 2012 elections, Illinois voters just gave a “super-majority” to the party that engineered this train wreck!

Retirement plan milestone approaching January 31, 2012

Posted by forwardfinancialplanning1 in 401k plans, Pensions, Retirement Savings.
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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.

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.

“Down Under” financial challenges similar to our own October 18, 2011

Posted by forwardfinancialplanning1 in Pensions, Retirement Savings, Social Security.
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Recently had the pleasure of spending two weeks “down under” in Australia and took some time to review several of their financial publications.  Due to a Chinese driven commodities export boom,  the Australian economy is far more healthy than ours in the United States.  However, a study released by commercial bank, Westpac reveals that Australian women share many of the same retirement concerns as their US counterparts.

The study found that only 13% of Aussie women feel very financially secure.  Almost half report that they feel it is unlikely that they will have the required level of wealth to retire comfortably. About 35% stated they have no idea of their superannuation (an Australian retirement plan similar to a combined Social Security/401k plan) fund balance.  Nearly 70% don’t use a financial advisor, but 36% wish they had a better understanding of the Australian superannuation program.

Much like women in the US, Australian females end up with lower superannuation balances than men because of a 17% gender pay gap as well as “career pauses” for child bearing.  Fully 64% felt that having children significantly affected their ability to work continuously and substantially impacted their working career cycle.

So, despite being below the equator, and a half a world away, women in Australia face most of the same retirement challenges found in the United States.

Financial professionals are human, too August 7, 2011

Posted by forwardfinancialplanning1 in Investing-General, Pensions.
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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).