Tag Archives: personal-finance

03.31.25
by

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!

03.04.25
by

A Retirement is Out of the Question for Many – Unfortunately!

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

Is there such a thing as a retirement anymore? According to Fidelity’s Q4 2024 Retirement Analysis, 41% of “retirees” are working, have worked, or are currently seeking work. I would guess that the need to work is strongly correlated to the demise of the DB pension plan.

In other Fidelity news, a big deal was made out of the fact that 527k participants had account balances >$1 million (2.2% of their account holders), but despite those attractive balances, the “average” balance was still only 131k at year-end following two incredible years of growth for the S&P 500 specifically, and equities generally, especially if you rode the tech sector.

Regrettably, there was once again NO mention of the median account balance, which we know is rather anemic. Can the providers of 401(k)s, IRAs, and 403(b)s, please stop highlighting average accounts which are clearly skewed by the much larger balances of a few participants? According to an analysis provided earlier this year by Investopedia, median account balances at Vanguard were dramatically lower than average accounts. As the chart below highlights, there was not a median balance within 40% of the average balance. In fact, those 65-years-old and up had an account balance at 32% of the average balance. I can’t imagine that this ratio would be much different at Fidelity or any other provider of defined contribution accounts.

It is truly unfortunate that a significant percentage of the American workforce will never enjoy the rewards of a dignified retirement. My Dad, who just recently passed at age 95, enjoyed a 34-year retirement as a result of receiving a modest DB pension benefit. That monthly payment coupled with my parents Social Security enabled them to enjoy their golden years. Providing this opportunity for everyone needs to be the goal of our retirement industry.


Note: Fidelity’s 401(k) analysis covers 26,700 corporate DC plans and 24.5 million participants.

12.12.24
by

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!

11.13.24
by

The Joke’s On Us!

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

According to a P&I article, the ECB has undertaken an “exploratory review of bank exposures to private equity and private credit funds in order to better understand these channels and to assess banks’ risk management approaches.” According to P&I, the overarching message was that “complex exposures to private equity and credit funds require sophisticated risk management.”

Yesterday, there was a FundFire article that questioned the effectiveness of the “Yale Model” given the heavy dependence on alternatives and the weak performance associated with those products in recent periods. According to the article, the greater the alts exposure the likely weaker fiscal performance.

In a recent article by Richard Ennis, founder and former chairman of investment consultant EnnisKnupp, he estimates that Harvard University, with about 80% of its endowment assets in alternative investments, spends roughly 3% of endowment value on money management fees annually, including the operation of its investment office.

Given the concerns noted above with respect to fees, risk management, and the overall success of investing in alternative strategies, one would believe that a cautionary tone would be delivered at this time. But alas that isn’t the case when it comes to forging ahead with plans to introduce alternatives into DC plans where the individual participant lacks the necessary sophistication to undertake a review of such investments. According to yet another FundFire article in recent days, Apollo and Franklin are plowing forward with plans to make available alternative investments to the DC participant through a new CIT. Shameful!

I’ve commented numerous times that it is pure madness to believe that the average American worker has the disposable income, investment acumen, and/or the necessary crystal ball to effectively manage distributions upon retirement through a DC offering. Given this lack of investment knowledge, I find it so distasteful that “Wall Street” continues to look at these plans as just another source of high fees and revenue. Where are the FIDUCIARIES?

If the ECB doesn’t believe that their banks have the necessary tools in place to handle these complex investments, how on Earth will my neighbor, family member, former teacher, etc.? Can we please stop this madness!