The migration from DB plans to DC plans isn’t working for the individual participant, and it will only get worse! As a result, a retirement crisis is unfolding in the US, and the social and economic ramifications are likely to be profoundly negative.

As a result of the greater use of defined contribution plans, we’ve asked our employees to become investment experts when nearly all of them aren’t trained to handle this responsibility. We certainly require training / licensing when hiring plumbers, electricians, nurses, etc. Under these circumstances, why would anyone think that this migration from one retirement plan to another is a positive development for our society? Worse, our Millennial children are earning wages that are dramatically lower than those from the Boomer generation.

Millennials are falling behind their boomer parents.  According to a new analysis of Federal Reserve data by the advocacy group Young Invincibles, Millennials are worse off than their Boomer parents by roughly 20%.  Couple the lower wages with much greater education costs and you have a formula for disaster.

In addition to excessive educational costs, our employers are footing a much smaller percentage of health care costs, while rental expenses are rising rapidly in many urban environments. Have you checked out Hoboken for instance? I am very concerned about the long-term implications that this toxic combination is producing.  We WILL suffer profoundly negative economic and social ramifications as a result of our failure to address the impending retirement crisis.

DC plan participants can have a successful outcome if they fund their retirement accounts with a good chunk of their compensation (10% to 15% annually), and do so as early in their careers as possible.  However, life gets in the way for many of us today, and the ability to make these on-going contributions can be a challenge. There is a basic level of compensation that must be earned just to survive, let alone thrive!  Clearly, for most of the younger population survival is today’s name of the game.

As a society, we must deal with the ridiculous cost of higher education, the lack of quality jobs accompanied by living wages, the assumption that everyone is capable of managing their own retirement, a public education system that is not producing outcomes that prepare our students for a 21st century economy, while retraining all those workers that have been displaced or soon will be (see driverless cars) as a result of major technology advances.

When will we get serious and begin to tackle these important issues?

We recently penned a post on the sustainability of public DB plans given the escalating cost to fund them.  Here is another example, presented to us through a P&I article, highlighting the contribution to CalPERS that will rise by $524 million next year

According to P&I, California will contribute $5.3 billion to CalPERS for the fiscal year starting July 1, up 11% from the current fiscal year, shows a proposed budget by Gov. Edmund G. Brown Jr.  Furthermore, it appears that the annual contribution will continue to grow substantially at least until 2019, nearing almost $10 billion a year at that point.

We are huge proponents of DB plans, but the continuing focus on the ROA and the subsequent volatility that comes with a traditional asset allocation and investment structure have the potential to drive contribution costs even higher.  We need to get DB plans on a derisking course in order to help stabilize the funded status and annual contributions.

Ryan ALM and KCS have developed a six-step process to become more liability aware.  Let us help you!

KCS is a leading voice in the trying to rescue DB pension plans. We established KCS in August 2011 with the mission to try to preserve these incredibly important social and economic tools. We need to be able to manage out labor force through a natural life cycle, but the demise of the DB plan and the greater, almost exclusive use of the DC plan (private sector), is undermining this important process.

We’ve seen DB plans nearly wiped out in the private sector.  However, a significant majority of public employees (estimated at about 85%) still enjoy the benefits of a traditional plan.  But for how much longer will they?  There is a perception among public plan participants and sponsors that these plans are perpetual. However, since the Great financial crisis most, if not all, public plans have taken action to reduce the future liability by asking employees to contribute more, extend vesting periods, reduce benefits for new hires, eliminate COLAs, etc.

This doesn’t signal to us that everything is honky dory! In fact, employer contributions have rocketed higher in the last couple of decades.  There are many examples of annual contribution rates being 25% to more than 40% of salary. At what level of contribution to these “perpetual” plans become unsustainable?  For many states and municipalities, the pension contribution is but one element of a social safety net that must be funded.  As the contribution rate escalates for DB plans, it naturally squeezes out other needy programs unless there is no restriction on the taxing authority.

Given the pension envy that exists among those taxpayers in the private sector, it is doubtful that they would be supportive of any administration that attempts to substantially raise taxes in this economic environment.

DB plans can be saved, but plan sponsors and their consultants need to begin to think outside the box. Focusing on the ROA, as if it were the Holy Grail, has lead to greater volatility and little reward to show for it! DB plans need to focus on the promise that they have made, use their funded status to adjust asset allocation, and derisk plans as they see improved funding.  We missed the boat to derisk at the end of the 1990s.  Let’s not blow it again!

I have been so very fortunate during my 35+ years in the investment industry to work with and learn from so many incredibly bright individuals.  One particular individual, Charles DuBois, is a former colleague of mine from my days as a member of the Invesco quant group. Charles was an early pioneer in quantitative investing dating back to the late ’70s, and he continues to be an incredible resource today.  It is through Chuck that I have learned about MMT (Modern Monetary Theory), and because of his introduction to this subject I’ve had to relearn so much of what I thought I knew about economics.

The following letter to the editor was written by Charles.  It is but one example of his many insights on U.S. monetary policy.  Please don’t hesitate to reach out to me if you’d like to receive other examples of his forward thinking on these issues.

To the Editor:

Beware Balanced Budgets!

Part 5 of “Saving America” (December 26) is a thoughtful and thorough review of how a balanced Federal budget could be achieved over time.

However, under current and projected circumstances, such a balanced budget, if achieved and maintained, would likely send the nation into prolonged recession or worse. The U.S. runs a trade deficit of about $500 billion annually. This means that $500 billion flows out of the domestic private sector – as money paid to buy imports exceeds money received from selling exports by this amount.

Public sector budget deficits offset this financial drain. For example, a $500 billion deficit means that the private sector is receiving $500 billion more from government spending than the private sector is losing from paying taxes. If the budget were “balanced”, this needed offset to the trade-related financial outflow would disappear.

Reflecting this straightforward arithmetic, countries with meaningful trade surpluses, such as Germany, can maintain balanced budgets without incurring private sector economic distress. However, countries, such as the U.S., with persistent trade deficits, can not afford balanced budgets. Be careful what you wish for.

Thanks to the folks at Asset.TV for providing KCS with an opportunity to present our views on how DB plan sponsors can become more liability aware.  The presentation addresses the KCS / Ryan ALM 6 step roadmap on getting more in tune with the plan’s liabilities while using the output from our analysis to drive investment structure and asset allocation decisions.

We hope that you find our comments both insightful and practical. Please don’t hesitate to reach out to us if you’d like to learn more about using your plan’s liabilities to help derisk your pension plan while stabilizing funding costs. Also, our thoughts on this subject can be found in the January Fireside Chat, which is available on both the KCS website (kampconsultingsolutions.com) and blog (Kampconsultingblog.com).

Happy New Year from KCS! We wish for you an incredible 2017, one filled with great health, family, friends, and prosperity.

We are pleased to share with you the latest edition of the KCS Fireside Chat series.

In this article we highlight our process to become more liability aware within a defined benefit plan. 2016 was a good year for DB pensions, as returns were stronger and liabilities weaker, as the present value of liabilities fell when interest rates rose during the second half of the year. If rates were to continue to rise and returns were to be somewhat normal, DB plans could witness improved funded ratios in 2017. As we discuss in our newsletter, plan sponsors should take action to secure the improved funding status.

2016 was our fifth full year in business, and we thank all of our clients for making it such a wonderful year for KCS. In addition, we also want to thank the many organizations that support us on a day-to-day basis, especially Ryan ALM and CMIT. Lastly, we continue to embrace our mission to help preserve DB plans. We know that it is an incredible challenge given the rapid demise of these offerings, but we will continue to fight the good fight!

We’ve been highlighting the U.S. retirement crisis since KCS’s inception in 2011. As frequent readers of our Fireside Chat series and this blog will recognize, we’ve placed the blame firmly on the demise of the traditional defined benefit plan and the greater (almost exclusive) use of the defined contribution plan as the primary culprit.  FINALLY, we have some realization from the financial world (thanks, WSJ) that there is indeed a retirement crisis and acknowledgment that the benefits of the DC plan may have been overstated.

The article highlights all the ugly stats that we’ve been throwing out, including; only 13% participation in a traditional DB plan for the private sector (down from 39% in 1979), only 30% participation in any type of retirement plan for the private sector, retirement savings of <$3,000 for the median family with a significant percentage of those not having any savings, etc.  The numbers are staggeringly poor!

The “financial experts” have determined that an individual should retire if they have an account balance that is roughly 8 times their current income.  Oh, boy, we are in deep trouble!  Excessive fees, misaligned product (relative return versus absolute-oriented), poor oversite, and longer lives are just some of the reasons why this crisis is unfolding.  However, the biggest culprit is asking untrained individuals to become portfolio managers in funding and managing this responsibility. This hasn’t worked and it is NOT going to work going forward.

We need to protect those defined benefit plans still in existence (both private and public), further help those employees mired in only a DC plan while trying to create new retirement vehicles that will provide an annuity-type product for the masses to stretch throughout their retirement (such as Double DB). These actions must be taken unless we are confident that our government can foot the bill for a greater percentage of our population to live on welfare later in life!

A very interesting article appeared in The Record (Bergen) on Christmas Day. The title was Retirement Savings vs. Student Loan Payments, by Janet Kidd Stewart.

We have been discussing this topic for years. Given the financial demands on individuals, whether they be in their 20s or 60s, the ability to fund a retirement program is being compromised. Wage growth has been stagnant since the late ’90s, and the labor force participation rate keeps on falling and is currently 62.7% (11/16), with roughly 95 million age-eligible workers on the sidelines.

In addition to being burdened with incredible student loan debt, many individuals are paying a much larger share of their medical insurance premiums, while incurring rising housing and rental costs. In the wake of all this debt and expense is the need to fund a retirement program through a defined contribution plan, as the private sector is just about out of the defined benefit game.

Regrettably, funding retirement accounts hasn’t been the highest priority for most households, and according to the the National Institute on Retirement Security (NIRS), the median U.S. household has just $3,000 in retirement savings! We believe that a retirement crisis is unfolding in the U.S., and the social and economic impact will be devastating.

There are many who believe that irresponsible behavior (spending more than one earns) is leading us down this path, but we believe that our economy’s lack of quality jobs, flat wages, and exorbitant educational costs are crippling many, both young and old.  Sure, there will always be those that spend recklessly, as seen by the incredible total of auto loans and revolving credit debt that has been amassed, but we believe that it isn’t the norm.

Obviously, we’d welcome the revival of the traditional DB pension with the monthly payout until death, but we are not naive enough to expect that plans that have been shuttered will once again rise from the ashes.  However, we can do a better job to make sure that those DB plans still active today start on a new path to better funding by focusing more attention on the promise that they have made.

For those of you in a DC plan, we know and appreciate how difficult it is for the untrained (that is most of us) to manage this responsibility.  We at KCS have strategies and ideas on how to make your participation in a DC plan a more successful venture, but it all starts with funding whatever you can afford as early as possible.  Let us help!

We are not generally in the habit of endorsing a company or product, but given our on-going concern about the U.S. retirement crisis, we feel compelled to highlight an effort being put forward by Asset.TV.  I first was introduced to this organization roughly 5 years ago, and the growth in their scope and reach has been amazing.

We often question the lack of advocacy within the investment industry for the traditional defined benefit plan.  However, Asset.TV is an organization that can be proud of their effort to elevate critical retirement-related issues, while bringing to their subscribers unique perspective and content that challenge the status quo.

According to Asset.TV, they launched a new platform called the Retirement Channel several months ago as a landing page for fine content (both video and written) that focuses on the issues concerning the macro retirement industry. Content comes from all providers in the space on Asset TV and we promote the channel with a monthly wrap up video highlighting the sponsors on our platform. The monthly update videos are promoted via a dedicated email to 230,000+ professional investors.

As a rule of thumb across the website: All Asset TV content is intended to be insightful and used for research. No product pitches or endorsements; they take a third party, unbiased approach when creating content for investors to ultimately make their own conclusions.

There are many successes within the retirement industry that should be highlighted, but regrettably there are many more failures, and the greatest of these is our failure to be able to retire a significant percentage of our population with the financial means to actually enjoy a retirement.  The social and economic ramifications of this failure will be grave.  With organizations, such as Asset.TV, hopefully our industry will be able to improve the outcomes for those who are most in need!

2016 has been a wonderful year for my family and me.  I want to wish you a Merry Christmas, Happy Chanukah, Happy Holidays, and a wonderful 2017, filled with happiness, great health, many friends, and prosperity. I hope that our paths cross in 2017, and I look forward to assisting you in any way possible!