Why Accept This As Our Fate?

The following is from a CTPost article (my editorializing in parentheses); “For most people who work for a living, a pension is something from a bygone era. (true) Maybe their grandparents had one. (maybe, as more than 40% of those in the private sector participated in a DB plan at one time) Retirement planning (whose decision?) for the masses long ago made the move from defined benefit — meaning you know what you’re getting every month (much preferred) — to defined contribution, which means you know what you put in, but what you get is up in the air (how unsettling).”

I can’t argue with the writer’s interpretation of our current “retirement” situation, but why should we accept such as our fate? Defined benefit pensions (DB) are the only true retirement benefit available to workers and regrettably the number of employees covered by DB plans has dwindled precipitously. Retirement in years gone by was really quite simple. You worked hard for a prescribed number of years and you knew that upon the end of your time working you received a monthly check that would be there for you each and every month until you passed, and it might even be there for your spouse after your demise. Simple and wonderful! My dad has enjoyed a 31-year retirement because of his company’s pension plan.

Today, we have a situation that isn’t quite as simple. As the author of the CTPost article suggests, we get to know what we contribute to a defined contribution plan, but we certainly don’t know how much we will have to live on for the remainder of our time on earth. This is a math problem that most of us don’t have a clue as to how to solve. Why do we think that it is good policy to ask untrained individuals to fund, manage, and then disburse a “retirement” benefit with little knowledge on how to accomplish this objective? Some people have amassed small fortunes in DC plans, but for the masses that is just not the case. First, nearly half the workers in this country don’t have access to a retirement vehicle through work. We know that most Americans only save when provided with a savings vehicle through their employment. Secondly, many of us don’t control when we will last work, either because of health reasons or loss of jobs. Find yourself leaving the workforce in early 2007? Oops, your 401(k) is now a 201(k), and that “benefit” isn’t going to stretch nearly as far as you had hoped and prayed! Lastly, there are roughly 40% of Americans living within 200% of the poverty line. Do you really believe that they have the financial means to fund a retirement benefit?

We may not be able to reverse the course of DB plans going by the way of the dinosaur in the private sector, but we can certainly do a better job of protecting the plans that remain whether private, public, or multiemployer. It is time to get back to basics in how they are managed. We need to stop treating these asset bases as anything more than the means to meet a promised benefit. Insurance companies and lottery systems have figured out how to fund their promises with low risk and low cost by focusing on their liabilities. They don’t try to shoot for an unreasonable return hoping to achieve success so that funding requirements might be reduced. They understand that the future liability has a present value, and they determine how much needs to be funded in order to meet that obligation. America’s pension system used to be managed this way. Regrettably, we’ve gotten away from the basics. We’ve created an arms race (return focus) ensuring that there is considerable volatility in both the plan’s funded status and contribution expenses, while failing in many cases to achieve the desired outcome. This is a silly game. It is nothing short of going to Las Vegas and hoping to hit RED.

Let us, as an industry, refocus on pension basics so that millions of Americans can count on a retirement benefit that will provide a known $ amount each and every month. Remember, for every American worker who retires with little to no retirement savings they quickly find themselves on the social safety net of federal and/or state programs. This pay-as-you-go system is far more expense to run than a well-managed defined benefit plan. Just think about how better our economy can be with a majority of our senior citizens still participating in our economy because they have the financial means provided by a pension. Think of how many jobs and how much tax revenue is created when you have 18% of our population demanding goods and services. Now that seems pretty simple.

5 thoughts on “Why Accept This As Our Fate?

  1. Hey Russ. Can you answer a question for me.A Union fund carried a $90 million fiduciary liability policy on the fund Trustees.These Trustees failed to review leases they had with the Union Regional Council every three years and adjusting them to market conditions as required by ERISA.As a result the fund paid $5.6 million more than it should have. After a DOL investigation it was ruled the Trustees had committed fiduciary breach for their failure and that they cost the fund the $5.6 million, Where does the insurance policy come in. Should the money be recovered from the Union Council or should the Trustees have been sued to recover the amount and wouldn’t this policy be for that purpose??Thanks

    • Good morning, Richard. I hope that you’ve been well. Thank you for your question. I am not a lawyer, so I am reluctant to comment, but I will do some reserach on your question and get back to you when I can. I hope that you have a great day. Russ

    • Hi Richard – Please note that this is not a complete or comprehensive answer without knowing all of the details.

      As described, yes, the insurance policy likely should have come into play and paid some, or all of the losses.

      But, there has to be an actual claim for the policy to kick in.

      Someone has to “tender” the claim to the carrier for payment. Usually, a claim is in the form of a lawsuit or a demand letter. The carrier will evaluate and make a determination as to whether they will pay, and if so, whether there are any restrictions on that payment (e.g. if there are possible fraud allegations and the policy has a fraud exclusion, then the carrier might pay under a “reservation of rights.” It’s like paying under protest and keeping the right to go to Court and ask the Court whether you were actually obligated to pay.

      Insurance law is mainly contractual, so the actual terms of the policy would be the starting point for determining coverage.

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