I have just returned from Las Vegas, NV where I was very pleased to participate in the most recent CORPaTH conference. This organization should be applauded for their continued work to preserve and protect defined benefit pension plans as the backbone of the U.S. retirement industry.  Importantly, their mission mirrors ours at KCS, which is why I was honored to be asked to speak on one of the panels.

The panel that I participated on involved three senior consultants from leading asset consulting firms and KCS, which was by far the smallest and least well-known entity.  We were each given an opportunity to provide an overview of the current state of the retirement industry. What became obvious to me was the continued focus by these leading firms/consultants on the asset side of the equation, as each stated how difficult it will be in the near-term to generate returns commensurate with a plan’s return on asset objective (ROA). I don’t disagree.

However, we believe that trying to cobble together a collection of asset classes and investment products has always been a challenging problem. There is great uncertainty over short to intermediate timeframes, and worse, there is no assurance that meeting or exceeding one’s ROA will guarantee funding success (please see KCS’s May 2016 Fireside Chat). To this point, we believe that managing a pension plan should be about delivering the promise at the lowest cost.

But, this entails getting one’s arms around the plan’s specific liabilities, and an update from the plan’s actuary once per year is not nearly often enough. Why is it the plan sponsors can tell you on a monthly, if not daily, basis what the market value of their plan’s assets is, but they truly don’t have a feel for the liabilities? We believe that by changing the focus from assets to liabilities, one can set the plan on a derisking path to full-funding in which both the funded status and contribution expense become less volatile. Wouldn’t that appeal to you?

The plan’s funded status should drive investment structure and asset allocation decisions. It should not be some “estimated” ROA. DB plans need to be protected and preserved but doing the same thing over and over, which hasn’t brought funding success to most plans, is certainly not the way to proceed. Embrace your plan’s liabilities, and this new found insight might just lead to your plan achieving greater success.

We, at KCS, have been railing about the impending U.S. retirement crisis since our founding in August 2011, primarily because of the demise of the defined benefit plan and greater use of defined contribution offerings.  However, we’ve been cautiously optimistic that the Millennial generation was going to turn the tide on this looming social crisis.  That is until we stumbled on a recent survey by Earnest, Amino, and Ipsos found that only 31% of this cohort (those born in the early ’80s to mid-’90s) were actually saving for retirement.

In addition, roughly 46% of Millennials reported that they’d have a difficult time covering bills if just their next paycheck was withheld. As scary as this number is, it pales in comparison to a US News and World report from 2016 that had a full 63% of the U.S. adult population not being able to meet within a 30-day period a $400 emergency auto repair or medical expense.

We know that the growing burden of student loan debt is negatively impacting a number of areas of our economy from the delay of family unit creation to the purchase of one’s first home, but the long-term implications of the failure to adequately prepare for retirement may be the most devastating of all. Saving as early and often as one can improve one’s financial situation later in life. The compounding of those early contributions will help to a far greater extent than the possibility of makeup contributions later in life.

Thank you to Rob Coursey, Value Line Funds, who shared the following fact with me. Americans age 55 and older make up more than a fifth of the total labor force today (22.8%, seasonally adjusted), compared with 17.6% at the start of the Great Financial Crisis. Over the last 10 years, in fact, labor force participation has risen only among the 55-and-older contingent.  Source: Pew Research

Think that this is an anomaly? I don’t! At KCS, we believe that the 55-and-older crowd will continue to see their participation in the labor force grow. The elimination of defined benefit pensions in the private sector and the greater use of defined contribution plans will force employees to remain in the workforce for much longer periods of time, if they are lucky to have that option.

Happy to share with you the video from a recent interview that I did with Asset.tv.  I sincerely appreciate the on-going support from the staff at Asset.tv, who remain as concerned about the future of the U.S. retirement industry, as we, at KCS, do.

Our conversation touched on the onerous impact on individuals from the demise of the traditional DB pension plan, the burden that this trend is now placing on employees, and what KCS is doing to try and preserve DB plans for both the private and public workforce.

We encourage you to reach out to us with any comments and/or questions.  We want to be a resource to those in the retirement industry who are trying to preserve and protect this critically important benefit. Without DB retirement plans, I believe that we will face profoundly negative social and economic consequences.

As details continue to emerge relative to the competing tax Bills before Congress, it becomes more apparent that the U.S. Middle Class and the elderly are going to get hosed! LA Times reporter, Michael Hiltzik, has just penned an article related to a proposed change to the CPI calculation that is embedded in both tax proposals.  What is being proposed is a move from the standard CPI to the chained CPI for inflation adjustments to tax brackets and other inflation-sensitive provisions of the tax code.

Most individuals wouldn’t necessarily appreciate how this change might impact them – I certainly wasn’t aware of it – but, the magnitude of this change will have a compounding effect over the next two decades and beyond.  Independent analysts at the Tax Policy Center have estimated that the difference between the two indexes is roughly 0.3% annually, with the chained CPI regularly coming in lower than the standard CPI.  By using the lower annual number, taxpayers will be driven into higher tax brackets prematurely just because of inflation.

For Social Security calculations, the chained CPI, with its smaller annual increase, will keep annual COLAs artificially lower than they should be.  In fact, the standard CPI is inferior for this purpose, as the CPI-E, which measures inflation for Seniors, should actually be used.  It is estimated that the CPI-E is 0.2% higher annually than the Standard CPI.

Regrettably, the lack of income, which is plaguing a significant percentage of our senior citizens already, especially for women who tend to have fewer retirement assets, will be exacerbated by this switch in the CPI calculation going forward. It is just another attempt to pay for this bill on the backs of those that can least afford it.

P&I has recently reported on an OECD report.  “The OECD’s “Pensions at a Glance 2017” report analyzed the level of retirement benefits from mandatory public and corporate plans relative to earnings.” The report found that for “full-career workers” with average earnings, the future gross replacement rate averages 53% for men and 52% for women in 35 OECD countries.

Unfortunately, but not surprisingly, the U.S. ranks below median with a gross retirement replacement rate for mandatory plans of just 38%.  Again, this is an evaluation of full-career workers in mandatory plans. With the demise of the DB plan in Corporate America, one can forecast without sticking their neck out too far that this ranking will continue to deteriorate.

The greater reliance on defined contribution plans is poor policy based on the fact that untrained individuals are being asked to fund, manage, and disperse a retirement benefit in an environment of modest wage growth, changing employment opportunities, and longevity issues caused by us living longer. There is a far greater likelihood that many of our elderly will be living on social security alone, as retirement benefits prove woefully insufficient.

Much more needs to be done to help our employees prepare for their retirement years, and mandating that they work longer is not the answer for most. Regrettably, this study points out that “reforms have been fewer and less widespread than in previous years”.