The New IRA: Individual Retirement Attitude (Part One)
by Mitch Anthony
All you need to do to get in touch with modern economic realities of retirement is to take a look at the trend of the past decade away from the paternalistic pension approach toward the autonomy of defined contribution (DC) plans including 401(k) or 403(b). The percentage of people being covered by pension plans has been shrinking since 2000, and as of 2013, 84 percent of employees in the public sector had pension plans, while only 21 percent in the private sector had them. The migration from pensions to self-directed plans will be a massive trend going forward as more and more states and municipalities struggle to meet their pension liabilities.
The chief difference between a defined benefit and a defined contribution plan is who is on the hook of responsibility. Organizations have, and are sending, a clear message that they are not interested in being on that hook any longer. For decades, workers were like passengers on the retirement bus, leaving the driving and benefits planning to organizations. Today, however, they are being put behind the wheel of their own retirement savings vehicle and told to drive. What happens on the road ahead is entirely up to them.
Many DC plans originally came about because companies were failing and couldn't meet their pension obligations; but these days, even financially stable firms are doing away with pension plans. Employers like DC plans because they are cheaper to maintain, while employees like them because they are portable. In the days when pensions proliferated, people were afraid to walk away from careers they found unsatisfying for fear of losing the pension benefits that could sustain them for many decades. Today, without such pensions in place, most people can simply transfer their DC accounts into an individual retirement account (IRA) and portage their career efforts to other streams.
There has never been a more serious need for people to take responsibility for themselves and their own retirements. And there has never been a more serious need for those same people to have a trusted financial life planner to help them on their journey. Many of the pensions that still exist are seriously underfunded. According to the Pew Center for the States, the underfunding is approximately $1 trillion. This massive amount is nothing more than hidden debt, representing an obligation owed where the promising party no longer has the resources to meet its obligations. For years I have written that the proper definition of a pension is "a promise that is good until it's not."
A closer look at the obligations assumed by the Pension Benefit Guaranty Corporation (PBGC) should give us all pause. The PBGC assumed the pension obligations of a number of failed airlines' pensions as well as those of steel companies and auto manufacturers. As of 2013, the PBGC is underfunded by over $35 billion. Keep in mind the statistic in the previous paragraph ($1 trillion). Something clearly isn't adding up. Also bear in mind that the PGBC is the party guaranteeing the benefits of failed institutions. More corporate pensions will fail in the next decade, as will many of those of states and large cities.
The reasons the private sector has largely done away with pension plans are manifold but include the fact that companies disliked having to report their actuarial soundness to the Department of Labor (there were penal fees for not reporting). This lack of reporting—as well as turning a blind eye toward critical information such as long-term perspectives on plan funding—is a critical factor in contributing to the underfunding of pension plans. Additional accounting hanky-panky comes into play when corporations often state pension benefits as assets, and use those assets to balance their budgets in order to stay in business. As absurd as it sounds, accounting rules allow firms to list those benefits as assets even when the firm is severely underfunded toward meeting those obligations.
On the public pension side of the matter, there are political drivers to blame for long-term insolvency in many of these public pensions. DB plans are funded by means of cyclical resources, meaning you would expect additional funding when times are good and possible cutbacks in funding when resources are scarce, but elected officials tend to cut pension funding when the markets are good and cut back on pension funding when markets are bad to balance budgets. Only politicians could come up with such an ingenious plan for hastening insolvency!
The developing scenario around public pension obligations will emerge as a major concern for all of us in the coming years. Half of the state budget deficits of $11.4 billion projected for 2011 were due to pension-related expenses. Many state and local governments are following the acts of failing pension plans—like those of the airline industry—where market values of pension fund assets and liabilities are off the balance sheet (Statement of Net Assets) of state and local governments, which only delays the inevitable. Pensions are like bonds in that they are obligations to pay. When the entity cannot pay, they raise taxes or cut back on programs that currently benefit their employees.
My goal is not to paint a bleak portrait of the future but to help you help your clients prepare for what lies ahead. The irreversible conclusion is that the onus is now squarely upon each and every one of us to assume responsibility for every aspect of our economic well-being. Some people make the argument that much of the European debt crisis can be traced to institutional obligations that were never realistic. Europeans who planned on retiring with full benefits at 58 years of age are now busy making other plans. My point is this: no one can afford to sit around expecting an institution to follow through on promises they have made, corporations and governments included. Next month, we'll discuss some of the reality checks of the new retirementality and the new retirement attitude.
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Adapted from The New Retirementality: Planning Your Life and Living Your Dreams...at Any Age You Want, Fourth Edition.
©2014 by Mitch Anthony. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Available in February 2014 at mitchanthony.com and booksellers nationwide.
© 2014 Mitch Anthony
Mitch Anthony is the founder and president of Advisor Insights Inc., the leading provider of financial life planning tools and programs.
For more than a decade, Mitch and his team have provided training and development for both individual advisors and major organizations throughout the world. Mitch personally consults with many of the largest and most-recognizable names in the financial services industry on both financial life planning and relationship development.
Mitch has been named one of the financial services industry's top "Movers & Shakers" for his pioneering work, and is interviewed by the media on a regular basis. The Institute is partnering with both Texas Tech University and the University of Georgia to develop financial life planning programs for their undergraduate programs. Mitch is a popular keynote speaker, columnist for Financial Advisor magazine and Journal of Financial Planning, and host of the daily radio feature, The Daily Dose, heard on over 100 radio stations nationwide.
Mitch is also the author of many groundbreaking books for advisors and consumers, including perennial bestseller StorySelling for Financial Advisors, cited by "Financial Advisor" magazine as the number one "must-read" book for financial professionals. Mitch's other books include From the Boiler Room to the Living Room, The New Retirementality, Your Clients for Life, Your Client's Story, The Cash in the Hat, and The Bean is not Green. For information on these books and more resources, click here. Contact Mitch at firstname.lastname@example.org.
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