Tag Archives: DB plans

04.23.25
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Housing: A Major Impediment to Saving for Retirement

By: Russ Kamp, CEO, Ryan ALM, Inc.

The demise of defined benefit (DB) pensions is putting great financial pressure on individuals to save for retirement through a defined contribution (DC) program. I’ve often railed about asking untrained individuals to take on the responsibility to fund, manage, and then disburse a “benefit” through a DC plan, arguing that most Americans don’t have the necessary disposable income, investment acumen, or a crystal ball to help with longevity issues.

Many (most)Americans are financially strapped and there are many contributors to this crisis, including student loan debt, monthly childcare expenses, food, medical insurance, car/home insurance, and housing costs to name but a few. I could address each of these and the impact that they have on the average American worker, but let’s focus on housing today. The cost of buying and maintaining a residence is suffocating. Property taxes often add the equivalence of a monthly “mortgage” on top of one’s monthly mortgage, especially if you live in high tax states such as New Jersey.

Here are some startling facts when comparing the impact of housing costs on families from the 1950s to today’s circumstances. It wasn’t unusual to have only one member of a couple (mostly the male) working outside the home in the 1950s. That ability has nearly vanished today. Why? Well for one, the average home was <$7,400 in the early ’50s and the average family income was roughly $3,300. So, for slightly more than 2Xs one’s family income you could own your roughly 1,000 square foot home.

Today, the median home is priced at $431k according to Redfin, while the median household income is <$80k. Maryland leads that way at just over $94,000, while Mississippi trails all states at $44k. It now costs more than 5Xs one’s family income to purchase a home in the U.S. By the way, the “average” home in the ’50s would be worth about $98k in today’s $s so about 23% of what it actually costs to buy today. Oh, my! The housing market has dramatically outpaced inflation during the last 7 decades, and there doesn’t seem to be an end to the escalation despite the greater home prices and today’s interest rate environment.

Just the housing costs alone are a great burden of the American worker. Add to this expenditure all that was mentioned above and then some, and you shouldn’t be surprised that median 401(k) balances are as anemic as they are. Let’s work together to bring back traditional DB plans so that most Americans will have a decent opportunity to retire before their 80th birthday!

03.31.25
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DC Participants: “Just Say No”

By: Russ Kamp, CEO, Ryan ALM, Inc.

Most everyone who lived through the ’80s will remember the slogan “Just Say No”. The slogan was created and championed by Nancy Reagan during her husband’s presidency. As you’ll recall, the slogan was part of the U.S.-led war on drugs.

I’d like to reuse the slogan of JUST SAY NO as it relates to using alternatives, especially private equity and credit in defined contribution (DC) plans. DC plans are proving to be a failed model for the vast majority of participants given the anemic median balances, as asking untrained individuals to fund, manage, and then disburse a “retirement” benefit with little to no disposable income, investment acumen, or a crystal ball to help with longevity is just silly policy. Trying to push alternatives onto these folks is maddening! They don’t need more offerings providing complicated structures, little transparency, high fees, and poor liquidity.

Importantly, what happened to being a “qualified or accredited” investor? As you may recall, private investments are restricted in most cases to individuals who meet certain financial thresholds that have been established by regulatory authorities. These considerations included minimum income levels (>$200k for some period of time and sustainable), net worth considerations at >$1 million not including your primary residence, and finally, investment knowledge, in which individuals need to demonstrate sufficient knowledge and experience in financial and business matters to evaluate the risks and merits of a prospective investment. Do you honestly think that the average 401(k) participant qualifies under any of these considerations?

The alternative suite of product offerings is proving to be challenging for many institutional investors/boards, often requiring the retention of a specialist consultant to support the plan’s generalist advisor. Given that reality, does it really make sense that an untrained individual will truly understand the potential risk and reward characteristics? Furthermore, these investments are NOT the magic elixir that they are made out to be. Performance results range far and wide and liquidity (capital distributions) is proving illusive. Do providers of these products really believe that more assets are needed at this time given how difficult it is to invest the current dry powder?

I put a similar comment to this post on LinkedIn.com earlier today. Somebody commented that a simple NO without exploration perhaps would violate my fiduciary responsibility. My answer: Someone needs to be the grown up in the room trying to keep our industry’s greedy hands off DC plans. I believe that I am acting very much in a fiduciary capacity.

I could apply the “Just Say No” slogan to so many practices within our pension industry, but for now I’ll restrict it to this one area of concern. This one rant!

12.12.24
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How Comforting is $1,305.54/year?

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

One doesn’t have to spend much time on LinkedIn.com these days without seeing a discussion about the pros and cons of Defined Benefit (DB) vs. Defined Contribution (DC) aka 401(k) plans. Anyone who has read just a few of the >1,500+ posts on this blog know that I and Ryan ALM, Inc. are huge supporters of DB plans. Based on the following, it becomes apparent why that is the case.

One topic frequently mentioned among our peers is financial literacy. As a former member of two boards of education (11 years in total), I have witnessed first-hand how little financial literacy is shared with our high school students, especially as it relates to saving and investing. That said, as important as education is, the greatest issue for me is the lack of disposable income for the average American worker.

Frequently we read about the spending habits of younger generations, including being the “avocado toast” crowd. Examples often used include the daily purchase of a Starbucks drink or two, the use of Uber Eats, and similar examples of perceived wasteful spending. They fail to mention that even “well-paid” workers (>$100k) are burdened by a mortgage or rent payment, they likely have student loan debt, they have to buy insurance in order to use their car, which is also a very expensive purchase, they are required to have health insurance, homeowners or rental insurance, and God forbid that they have a spouse and a couple of kids. Childcare expenses have gotten to be insane. Is there any wonder that funding one’s own retirement has proven to be incredibly challenging?

So how are we doing? Unfortunately, most of the literature on the subject uses average balances to represent 401(k) savings. This practice needs to stop. According to Vanguard the average balance in 2024 is $134,128, but the median balance is $35,285. In addition, Morningstar has just published an article stating that retirees should use only a 3.7% withdrawal rate (no longer 4%) to safely use a 401(k) retirement balance given the recent performance of equity markets and the current interest rate environment. Let’s see: 3.7% * $35,285 = $1,305.54. That is an annual withdrawal, although it looks like it should be a monthly payout! What kind of retirement will that level of annual withdrawals provide? For comparison purposes, the average DB payout in the private sector is $11k and nearly $25k in public pensions.

As a reminder, DC plans were intended to be supplemental to DB plans. It is highly regrettable that they have morphed into most everyone’s primary means of “accumulating” retirement resources. This migration in proving to be an unmitigated failure and the consequences will be untenable. The American worker needs access to a DB plan. Let’s work together to protect and preserve those that remain, while encouraging former sponsors of these plans to rethink the decision to freeze or terminate. There are also state sponsored entities that afford employees in smaller companies access to a DB-like plan. That said, please manage them with a focus on the pension promise (securing benefits). Don’t rely on markets and all the volatility that comes with that exposure to “fund” these essential programs. That strategy hasn’t worked!

06.17.24
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Good Ideas Are Often Overwhelmed!

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

We have a tendency in our industry to overwhelm good ideas with much too much money. Asset flows can be evil as they drive valuations up as too much money pursues to few good ideas. The “winner” in the bidding competition frequently (eventually) becomes the loser in the long run. I recently wrote about this phenomenon as it related to private credit. Well, we have a similar, if not more egregious example as it pertains to private equity. With more than $3.2 trillion tied up in aging, closely held companies at the end of 2023, according to Preqin data. 

I recently read a refreshingly honest post on LinkedIn.com about the current state of private equity. The comments referred to a discussion given by a “leading” voice within the industry who mentioned that the “types of PE returns it (our industry) enjoyed for many years, you know, up to 2022, you’re not going to see that until the pig moves through the python. And that is just the reality of where we are.” That is quite the image. It speaks to my point about too much money chasing too few good ideas. Pension America has pursued a return objective in lieu of one that stresses the securing of the pension promise. Striving for return has forced most participants to load up on gimmicky alternatives, including real estate, private credit, private equity and worst of all, hedge funds.

For the early adopters, returns above those produced by the public markets were achievable, but again, once someone has a decent idea we tend to jump on that bandwagon until the horse can’t pull the cart any longer. What happens next is usually not pretty. This leading voice also mentioned that “fewer realizations and lower returns” were on the horizon until the proverbial pig was digested. Unfortunately, PE firms are holding onto these aging companies and they will need to be refinanced at much higher interest rates which will further reduce expected returns.

In other news, Heather Gillers, WSJ, reported that the honeymoon may be over between pension America and private equity managers. The promise of high returns may not be realized after all. According to Ms. Gillers, payouts from these expensive offerings have all but dried up. As a result, many pension funds are unloading their investments at significant discounts through secondary markets. According to this article, large public pension systems have migrated roughly 14% of the plan’s AUM into PE. What once looked like an investment that could produce a premium return is struggling to match returns of the S&P 500.

Worse, about 50% of the private equity investors have assets tied up in “Zombie funds”, which hadn’t paid out on the expected timeframe. Needing liquidity (should have invested in a cash flow matching strategy), these pension funds are getting an average of about 85% of the value of assets that were assigned just three to six months prior. According to Jefferies Financial Group about $60 billion was transacted in secondhand sales by PE investors last year.

Despite the lack of liquidity and the idea that too much money has been chasing too few good ideas, the “honest’ assessment by our industry “leading voice” stopped at their doorstep. You see, his firm believes that by 2026 (beginning or end of year???) their alternative assets under management will rocket from $651 billion to $1 trillion. Wow! Now how will that pig pass through the python? Are we to believe that growth of that magnitude will not negatively impact that firm or our industry? I guess that the news to date hasn’t been sufficiently ugly to stop this rampage into PE. I’ve seen this movie before. Spoiler alert – the train barrels forward until it goes over a cliff where the tracks used to be. I’d suggest getting off the next stop.

06.05.24
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The Status Quo Isn’t Working

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Anyone who has read just a handful of the >1,400 blog posts that I’ve produced knows that I am a huge fan of defined benefit (DB) plans. That I’ve come to loathe the fact that DB plans were/are viewed as dinosaurs, and as a result have been mostly replaced by ineffective defined contribution plans. As a result, the American worker is less well-off given the greater uncertainty of their funding outcome. A dignified retirement is getting further out of reach for a majority of today’s workers.

That said, just because I desire to see DB plans maintained as the primary retirement vehicle, doesn’t mean that I appreciate how many of them have been managed. The pension plan asset allocations remain focused on the wrong objective, which continues to be the ROA and NOT the plan’s liabilities. It is this mismatch in the primary objective that has exacerbated the volatility of the funded ratio/status and contribution expenses. As I’ve stated many times, it is time to get off the asset allocation rollercoaster. We need to bring an element of certainty to the investment structure despite the fact that outcomes within the capital markets are highly uncertain.

How bad have things been? According to a recently produced analysis by Piscataqua Research, Inc., which regularly reviews the performance of both assets and liabilities for 127 state and local retirement systems, since 2000 contributions as a % of pay have tripled, while funded status has declined by more than 25%. Again, I’m not here to bash public funds. On the contrary, I am here to offer a potential solution to the volatility exhibited. I wrote a piece many years (1/17) ago titled, “Perpetual Doesn’t Mean Sustainable” in which I discussed the need to bring stability to these critically important retirement plans because at some point there might just be a revolt from the taxpayers that are lacking defined benefit participation themselves. We can’t afford to have tens of millions of American public fund workers added to the federal social safety net God forbid their retirement plans are terminated and benefits frozen prematurely.

There is only one asset class – bonds – in which the future performance is known on the day that the bond is acquired. You can’t tell me what Amazon or Tesla will be worth in 10 years or the value of a building or private equity portfolio, but I can tell you how much interest and principal you will have earned on the day that the bond matures, whether that be 3-, 5-, 10- or 30-years from now. That information is incredibly valuable and can be used to match and SECURE the pension plan’s liabilities. That portion of the plan’s assets will now provide stability and certainty reducing the ups and downs exhibited through normal market behavior. Why continue to embrace an asset allocation that has NO certainty? An asset allocation that can create the explosion in contribution expenses that we’ve witnessed.

DB plans need to be protected and preserved! Ryan ALM’s focus is solely on achieving that lofty goal. It should be your goal, too. Let us help you get off the asset allocation rollercoaster before markets reach their peak and we once again ride those market down creating a funding deficit that will take years and major contributions to overcome.

10.28.15
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PBGC Announces Maximum Benefit Coverage for 2016

The PBGC has just announced the maximum benefit coverage for both a single-employer plan and a multi-employer plan. The difference in coverage among the two plan types is huge!  Here is the PBGC’s release:

PBGC Maximum Insurance Benefit Level for 2016

FOR IMMEDIATE RELEASE
October 28, 2015

WASHINGTON – The Pension Benefit Guaranty Corporation announced today that the annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer plan remains at $60,136 for 2016. The guarantee for multiemployer plans also remains unchanged.

Single-Employer Plan Guarantee

The PBGC maximum guarantee for people covered by single-employer plans is linked to a cost-of-living adjustment, or COLA, in Social Security law. Next year, SSA’s cost-of-living-adjustment will be zero. Accordingly, the maximum guarantee for the agency’s single-employer program will not change from the current 2015 levels.

The single-employer guarantee formula provides lower amounts for people who begin getting benefits from PBGC before age 65, reflecting the fact that they will receive more monthly pension checks over their expected lifetime. Amounts are higher for benefits starting at ages above 65.

Also, benefits are reduced for retirees who select to have payments sent to a beneficiary following their death. A table showing the 2016 single-employer guarantee amounts payable at ages other than 65 is available on PBGC’s website. Because the age 65 amount isn’t changing, the 2016 table is identical to 2015.

In most cases, the single-employer guarantee is larger than the pension earned by people in such plans. According to a 2006 study, almost 85 percent of retirees receiving PBGC benefits at that time received the full amount of their earned benefit. (For more information see the entry “Making Sense of the Maximum Insurance Benefit” in PBGC blog, Retirement Matters.)

The published maximum insurance benefit represents the cap on what PBGC guarantees, not on what PBGC pays. In some cases, PBGC pays benefits above the guaranteed amount. This depends on the retiree’s age and how much money was in the plan when it terminated.

For more information about how the single-employer guarantee works, see PBGC’s fact sheet Pension Guarantees.

Multiemployer Plan Guarantee Limit

The PBGC maximum guarantee for participants in multiemployer plans is also based on a formula prescribed by federal law. Unlike the single-employer formula, the multiemployer guarantee is not indexed (i.e., it remains the same from year to year) and does not vary based on the retiree’s age or payment form.

Instead, it varies based on the retiree’s length of service. In addition, the multiemployer guarantee structure has two tiers, providing 100 percent coverage up to a certain level, and 75 percent coverage above that level. For a retiree with 30 years of service, the current annual limit is 100 percent of the first $3,960 and 75 percent of the next $11,760 for a total guarantee of $12,870. This limit has been in place since 2001.

About PBGC

PBGC protects the pension benefits of more than 40 million of America’s workers and retirees in nearly 26,000 private-sector pension plans. The agency is directly responsible for paying the benefits of more than 1.5 million people in failed pension plans. PBGC receives no taxpayer dollars and never has. Its operations are financed by insurance premiums and with assets and recoveries from failed plans.

10.28.15
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Bad Policy – AGAIN!

Further hikes in PBGC premiums will help pay for a federal budget bill agreed to by the White House and congressional leaders late Monday.

But, at what cost to our economy and employees?

According to P&I, the budget deal, which lays out a two-year budget and extends the federal debt limit until March 2017, raises per-person premiums paid to the Pension Benefit Guaranty Corp. from $64 in 2016 to $68 in 2017, $73 in 2018 and $78 in 2019. The 2015 rate is $57. Variable rate premiums would increase to $38 by 2019 from the current $24.

The proposal also calls for extending pension funding stabilization rules for two more years, until 2022, to allow sponsors to use higher interest rates when calculating contribution rates. Regrettably, this is nothing more than fuzzy math, and it continues to mask the true economics for DB plans.

“Once again the employer-sponsored system is being targeted for revenue,” said Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee, who predicted that the premium hike will give defined benefit plan sponsors “more reasons to consider exit strategies.” We, at KCS, absolutely agree. DB plans need to be preserved. Punishing sponsors by raising PBGC premiums is not supportive.

“It’s an incredibly bad idea and it’s going to have, in the long run, devastating consequences for the (defined benefit) system,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, in an interview.

According to P&I, PBGC officials had not called for additional premium increases in the single-employer program on top of ones already scheduled. “PBGC’s finances for the single-employer program have been improving steadily over the past few years, and there is really no reason to increase single-employer premiums at this time,” said Michael Kreps, a principal with Groom Law Group.

We’ve witnessed a precipitous decline in the use of DB plans during the last 30+ years. The elimination of DB plans as THE primary retirement vehicle and the move toward DC offerings to fill that gap is creating an environment in which there will be grave social and economic consequences. Enough already! Wake up Washington before the slope gets too slippery.

09.23.15
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Housing Rental Expense killing DC contributions?

Despite the fact that inflation, as measured by the CPI, seems to be contained, rental expense for housing has jumped significantly in the US during the last decade.  As a country we are moving away from being a home ownership society to one that rents housing, as home ownership is now at its lowest since 1967! Furthermore, the only reason the home ownership rate is as “high” as it is, is due to homeowners in the 65 and over age group. For everyone else, home ownership rates are now the lowest recorded.

Compounding this problem is the fact that US household incomes are 7.2% less than they were in 1999. The lower incomes are being crushed by rising housing costs, medical expenses / insurance and education. Is it no wonder that folks don’t have any additional resources to fund their DC plans? What percentage of the US population really has discretionary income at this time?

According to the “State of the Nation’s Housing” report released by the Center for Housing Studies at Harvard, which showed that while inflation among most products and services may indeed be roughly as the Fed and BLS represent it, when it comes to rent things have never been worse.

According to the report, 2013 marked another year with a record-high number of cost burdened households – those paying more than 30 percent of income for housing. In the United States, 20.7 million renter households (49.0 percent) were cost burdened in 2013.  Alarmingly, 11.2 million (25%) all renter households, had “severe cost burdens, paying more than half of income for housing.” The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs.

So, do you still believe that the failure to fund defined contribution plans is because we have a population hellbent on consumption? The demise of the DB plan means that a significant percentage of our population will never be able to make adequate contributions (if any) into their retirement plan. The social and economic consequences for our country will be grave.

07.29.15
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KCS Second Quarter 2015 Update

We are pleased to share with you the KCS Second Quarter Update.  As we previously reported through this blog, 2015 has been a better year for pension funding than 2014 was despite the lower market returns, as interest rates have backed up creating a negative growth rate for plan liabilities.  We hope that you find our update insightful. Have a wonderful day.

Click to access KCS2Q15.pdf

06.16.15
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NJ’s Pension Battle – We Are All Losers

Last week the state Supreme Court of NJ ruled that the Christie administration had the right to reduce / eliminate the annual required contribution (ARC) for the public pension system, based on a constitutionally established practice that the responsibility to allocate public funds is embedded in the budget process. What appears to be a victory for Christie and NJ tax payers couldn’t be further from the truth!

In a pattern that has been repeated for nearly 20 years, one NJ “leader” after another has failed to make the necessary payments to adequately fund public pensions. By not making the full contribution again this year, we are once again kicking the proverbial can down the road.

Remember folks, the benefit that has been promised to our public fund employees is a LIABILITY that must be met. Not funding that liability only makes it more challenging for the pension plan in the long-term, as the plan loses the benefit of compounding returns / interest on each contribution.  Just think about the economic impact of not funding the $3.1 billion in 2015, especially if the plan would have earned the state’s presumed return on assets over the next 10-20 years.  By deferring that payment, we create a pay as you go system that is much more costly for everyone.

Furthermore, NJ’s pension issue isn’t just a matter of not making the annual required contribution. Why on earth would NJ’s pension officers decide to invest heavily in hedge funds / alternatives at the bottom of the market in 2009?  This decision has increased management costs, while returns on the funds have substantially underperformed cheap equity beta. DB plans have a relative objective (liabilities) and not an absolute objective (ROA). Using absolute product in a relative return environment makes little sense.

Our elected officials are kidding themselves If they think that the pension liability is somehow going away.  By not appropriately funding the liability now, they are only making it more difficult for the state the future.  Think that pensions are taking a big slug of NJ’s budget now, just wait for another 15-20 years.