President Trump may have made popular the use of the phrase “fake news” but I’ve complained for years about what I saw as false and misleading reporting of various financial topics such as the cause of the financial crisis of 2008-2009. Some of the reasoning and inuendo that the “mainstream media” (MSM) engages in and gets away with without being called out makes be wonder if we’ve entered some sort of twilight zone.
The particular subject at hand for this post is all the clamor in popular media regarding an “impending retirement crisis”. Just “Google” the phrase and see how many results are returned. Now, maybe there is a real threat of such a looming crisis and maybe there’s not – there are reasonable arguments on both sides (Is There Really a Retirement-Savings Crisis, Wall Street Journal 4/23/2017). The thing that irritates me is the way it’s presented (in my view) as somehow the fault of corporate America because of its abandonment of traditional pension plans (Americans Haven’t Saved Enough, Harvard Business Review 03/18/18). Never mind that you find these plans today predominantly in the government sector and it’s rare to find one that’s not broke (see Illinois pension). There are many reasons for their poor financial status including extended life expectancy, assumed rates of return that are unrealistic as well as promised benefits that are even more unrealistic buts that’s another story for a different day. The point here is that at our Firm we have a “front row seat” helping many types of entities with retirement planning and my first-hand observations lead me to an entirely different view of any retirement problems. So, sit back, gentle reader and let’s take a look.
First: When I mentioned earlier that such traditional pension plans (defined benefit plans) didn’t work, I meant they created financial hardships that had crippling effects on the companies that sponsored them. In fact, these plans helped lead to the bankruptcies of companies in various sectors like automakers, steel manufacturers and airlines (Demise of Defined Benefit Plan, Investopedia). The companies couldn’t keep up with the exorbitant annual contributions that were required, not to mention the amount of resources it took to manage the plan and comply with the Department of Labor regulations that govern them. Corporations wanted to focus on the business that they had an expertise in as opposed to being responsible for the financial lives of others – something they weren’t equipped to do in the first place. So, beginning in early 1980’s, in response to the Revenue Act of 1978, companies began moving to 401(K) plans (A Brief History of the 401(K), CNBC January 4, 2017). Social Security is a similar program and it is forecasted to run out of money in 2034 per the Social Security Administration site (www.ssa.gov, Summary of the 2018 annual reports). So, let me finish this point by saying, again, these plans have severe problems that can and have jeopardized the firm’s/sponsor’s very survival. Any person or entity that doubts this should start and run their own defined benefit (pension) plan.
Secondly: We handle retirement plans of different types for a wide range of companies. Unfortunately, what we see is the all too common occurrence of the employee taking out contributions, made both by them and their employer, on a regular basis and constantly depleting the account. In fact, in those plans where only the employer contributes (i.e. Simplified Employee Pension) it is very common that we witness the employee removing 100% of funds very soon after they are contributed. It is harder to access funds in a 401(K) plan and in some cases not possible without terminating employment. Keep in mind that folks change jobs on an increasing frequency in todays world which makes the funds “accessible” at that time. This assumes, of course, that the individual is contributing at all. The point here is that I never read or hear anything about the individual’s responsibility to fund their own retirement. If that person is indeed going to experience a financial crisis because they don’t have funds in some sort of retirement account, whose fault is it? Give me a break.
Thirdly: The media makes this to be a “David & Goliath” type story. Common accusations you’ll read are that individuals are forced into paying high fees; don’t have access to professional management; lack the understanding to take care of themselves. This is just not true. Low fee index funds are ubiquitous. Employers that we are in contact with provide more than ample education and at the level of a 401(K) plan it’s mandatory. With today’s access to social media (do you know anyone that isn’t glued to their smart phone?) never before has computing power, information, education and yes, basic financial literacy, been at the common man’s disposal more than today. In my opinion, there is no question that big media (MSM) is looking to sell its agenda. This type of story plays well to their audience and this leads to my most serious concern regarding this topic: I believe this is going to lead to more government involvement and in fact I’d say it is already happening. The article I cited above in the Harvard Business Review outlines plans that would create government sponsored accounts that employers would be forced to implement and contribute to. More government is the last thing we need as the “market” has already and will continue to provide all the options needed to save for retirement.
What is needed to avoid any retirement “crisis” is for individuals/participants to step up. Otherwise they may find themselves in a condition similar to the fella that is the subject of Queen’s hit song Bohemian Rhapsody – “caught in a landslide, no escape from reality”.
I encourage you to access any of the sources I cite here and of course do your homework. There is plenty of data sources to choose from.