Retirement Heist:How Firms Trimmed Pensions

[MULTIZ321]

Retirement Heist:How Firms Trimmed Pensions - by NPR Staff/NPR Books/NPR.org


Richard

 

[bogey21]

The disappearance of Defined Benefit Pension Plans is going to cause extreme hardship on many retirees in the future. There are two ways to overcome this. First, have a bundle of money, and second, have a clean Balance Sheet. It is best to have both, but one will get you by. My advice to my children when they retire is to first, own your house free and clear; second, make sure your car is paid off; and third, have no debts when you go into retirement.

George

 

[pgnewarkboy]

The disappearance of Defined Benefit Pension Plans is going to cause extreme hardship on many retirees in the future. There are two ways to overcome this. First, have a bundle of money, and second, have a clean Balance Sheet. It is best to have both, but one will get you by. My advice to my children when they retire is to first, own your house free and clear; second, make sure your car is paid off; and third, have no debts when you go into retirement.

George

Retirement is so 20th Century! Just like home ownership.

 

[dwojo]

The company I work for eliminated the defined benefit pension plan for new hires a few years ago. I am afraid the rest of us are going to get forced out o f itsoon even if we do not want out.

 

[Fern Modena]

Jerry and I both retired with defined benefit programs. We worked with the same employer, in the same job, but they started a new tier shortly before I came along. We retired with the same amount of service. Jerry's pension was 1/3 larger than mine. There is now a third tier there, and their pensions will be even smaller (but there will still be something).

If I didn't have the pension, I'd definitely still be working. Life's tough, and it is going to be a lot tougher on the "instant gratification" generations which followed us.

Fern

 

[bobcat]

Jerry and I both retired with defined benefit programs. We worked with the same employer, in the same job, but they started a new tier shortly before I came along. We retired with the same amount of service. Jerry's pension was 1/3 larger than mine. There is now a third tier there, and their pensions will be even smaller (but there will still be something).

If I didn't have the pension, I'd definitely still be working. Life's tough, and it is going to be a lot tougher on the "instant gratification" generations which followed us.

Fern

Great post. Just tell your children to save. The days of leaving children money will soon be over if things keep going the way they are. Instant Gratification will be over too.

 

[pwrshift]

Here's something I read on this just today...

The Greatest Financial Gift You Can Give to Your Children
By Tom Dyson, publisher,*The Palm Beach Letter
Saturday, October 1, 2011
I wrote this essay for your children and grandchildren.

You've probably heard about America's huge debt load. The U.S. government's financial obligations now exceed $663,000 per American family. This burden will fall on the youngest Americans.

It's unethical. It's unfortunate. But it's the reality.

With this giant financial obligation bearing down on them, it's critical that now – right now – your children and grandchildren learn about money and finance. They need to know the basic principles… like how to be independent, why debt is dangerous, and how to grow money.

They don't teach finance in schools. If you don't teach them this knowledge, no one will. They call this financial illiteracy.

If our children are financially illiterate, they have as much chance of survival as a swordsman in a gunfight.*There will be no mercy for the financially illiterate in the future.*It's likely these people will live as indentured servants to the government and its creditors.

But if our kids have a grasp of finance and its basics – and they obey its laws – they will grow up rich. They will be in a position to help other Americans, too.

Below, you'll find the three vital financial concepts all children need to understand. Please pass them on to your children and grandchildren as soon as you can. I have two young children… And these three concepts are my starting point for their financial education.

First of all, our kids must know that they are not entitled to money or wealth… or anything for that matter, even Christmas presents. They must earn money. I want my children to learn that they shouldn't expect anything to be handed to them. I don't want them to rely on the government for their livelihood, like many people do right now.

So many people treat money and prosperity as an entitlement. The government even calls its welfare programs "entitlements." This word – and what it represents – gets stamped into young people's brains. Kids act as if they are somehow entitled to toys, video games, and cars. But why should they be? Just because they have parents, it doesn't mean they should get everything they want… or anything at all, for that matter.

I plan to regularly remind my children of this when they are old enough to understand it. And I'm not going to pay my kids an allowance. An allowance would reinforce the sense of entitlement. They can make money by earning it: doing the dishes, making their beds, mowing the lawn… there are a million things. My wife and I will pay them for doing those things. But I'm not going to just give them money.

The second concept our children need to understand is debt. Debt is expensive. If you abuse it, it will destroy you. Like the entitlement mentality, debt is an enslaver. It robs you of your independence. I avoid debt in my personal life… and when I'm choosing investments.

The best way to illustrate the cost of debt is to calculate the total amount of interest the debt generates in dollars over the lifetime of the loan, instead of looking at the interest rate (like most people do). Once you look at it like that, you can see how expensive borrowing money really is.

For example, say you borrow $100,000 with a 30-year mortgage at 7%. Over 30 years, you'll end up paying $140,000 in interest to the bank. In the end, you're out $240,000 for a house that cost less than half that. Not a good deal.

The third thing our kids need to learn is the power of compound interest and the best way to harness it.

Compound interest is the most powerful force in finance. It is the force behind almost every fortune. The brilliant Richard Russell calls compound interest "The Royal Road to Riches." And it's mathematically guaranteed.

Let's say, for example, you have $100 earning 10% annual interest. At the end of a year, you'll have $110. During the second year, you'll earn interest on $110 instead of $100. In the third year, you'll earn interest on $121… and so on. This is the power of compound interest. The numbers get enormous over time, simply because you're earning interest on your interest.

Because time is the most important element in compounding, it's an incredibly powerful idea for children to understand.*They have the ultimate edge in the market: the time to compound over decades.

The stock market is the best place to earn compound interest. You buy companies that have 50 years or more of rising dividend payments ahead of them. Then you let the mathematics work.

As soon as my kids are old enough to understand some arithmetic, I am going to sit down with the classic compounding tables and show them which stocks they have to buy. I'll use Coca-Cola, Johnson & Johnson, and Phillip Morris as examples.

After that, assuming they have the discipline to follow through,they*will*get rich. There's no doubt about it.

In sum, you have the responsibility to educate your kin about finance. If you don't, no one else will, and they will suffer for it.

Encourage them to work hard and avoid the entitlement mentality. Teach them the power of compound interest and explain the dangers of debt.

If you do this, you will equip your kids and grandkids to survive financially in the difficult circumstances ahead. You'll provide them with something that nobody can place a price on: the power of independence.

Good investing,

Tom

 

[JeffW]

....The second concept our children need to understand is debt. Debt is expensive. If you abuse it, it will destroy you. ...

A problem with this though is that our own government provides a HORRIBLE example of this. How long has the insolvency of Social Security been talked about? Decades? I still don't think there's been any meaningful change on that. How many years over the last 50 has the federal gov't run on a deficit, basically unable to cover even current costs with current income. Maybe it's a little tougher, but it seems like there are a lot of people that still file for bankruptcy as a way to eliminate excessive debt. And although companies probably contributed, there were still many people who thought "the rules had changed", and they could acquire a house even though they probably knew they didn't have the money for it.

One could probably make an arguement that it's possible to run up debt without ending up on the street.

Jeff

 

[timeos2]

For example, say you borrow $100,000 with a 30-year mortgage at 7%. Over 30 years, you'll end up paying $140,000 in interest to the bank. In the end, you're out $240,000 for a house that cost less than half that. Not a good deal.

I still recall when we purchased our home in 1973 and, after we were all moved in, I looked at the payments, did the math, and the house we just paid $32,000 (the WORLD back then) was going to cost us about $62,000 with the interest! I called my Dad and told him there had to be a mistake. Of course there wasn't one, I learned that day exactly what interest can cost and thirty years later when we paid it off the $62,000 seemed tiny next to the house value then (and today). But that isn't the norm with purchases that are financed - most depreciate not appreciate like homes did then (and even that fell apart when the prices got artificially inflated in the last boom/bust).

A lesson that needs to be taught. As well as the reverse with your example of earning interest (but tough to do reliably right now I'm afraid). We're in a real period of upheaval and not running up debt is a good plan now (as virtually always).

Think of those spending $40-$50K on a TIMESHARE!!! WHAT are they thinking? Unless they are truly independently wealthy if they are paying those rates & the interest on a loan it is a seriously losing proposition - do the math folks. Timeshares are most definitely NOT homes and depreciate as virtually no other (even cars).

 

[bogey21]

Think of those spending $40-$50K on a TIMESHARE!!! WHAT are they thinking? Unless they are truly independently wealthy if they are paying those rates & the interest on a loan it is a seriously losing proposition - do the math folks.

One of the best moves I ever made was selling my 4 TS Weeks about 10 years ago for about $85,000 and using $8,500 of the proceeds to buy Weeks at 5 strategically located Resorts with low MFs being run by Owner dominated Boards.

George

 

[pgnewarkboy]

Deleted because in wrong spotted. Iwillplace comments by a quote.

 

[pgnewarkboy]

Here's something I read on this just today...

The Greatest Financial Gift You Can Give to Your Children
By Tom Dyson, publisher,*The Palm Beach Letter
Saturday, October 1, 2011
I wrote this essay for your children and grandchildren.

You've probably heard about America's huge debt load. The U.S. government's financial obligations now exceed $663,000 per American family. This burden will fall on the youngest Americans.

It's unethical. It's unfortunate. But it's the reality.

With this giant financial obligation bearing down on them, it's critical that now – right now – your children and grandchildren learn about money and finance. They need to know the basic principles… like how to be independent, why debt is dangerous, and how to grow money.

They don't teach finance in schools. If you don't teach them this knowledge, no one will. They call this financial illiteracy.

If our children are financially illiterate, they have as much chance of survival as a swordsman in a gunfight.*There will be no mercy for the financially illiterate in the future.*It's likely these people will live as indentured servants to the government and its creditors.

But if our kids have a grasp of finance and its basics – and they obey its laws – they will grow up rich. They will be in a position to help other Americans, too.

Below, you'll find the three vital financial concepts all children need to understand. Please pass them on to your children and grandchildren as soon as you can. I have two young children… And these three concepts are my starting point for their financial education.

First of all, our kids must know that they are not entitled to money or wealth… or anything for that matter, even Christmas presents. They must earn money. I want my children to learn that they shouldn't expect anything to be handed to them. I don't want them to rely on the government for their livelihood, like many people do right now.

So many people treat money and prosperity as an entitlement. The government even calls its welfare programs "entitlements." This word – and what it represents – gets stamped into young people's brains. Kids act as if they are somehow entitled to toys, video games, and cars. But why should they be? Just because they have parents, it doesn't mean they should get everything they want… or anything at all, for that matter.

I plan to regularly remind my children of this when they are old enough to understand it. And I'm not going to pay my kids an allowance. An allowance would reinforce the sense of entitlement. They can make money by earning it: doing the dishes, making their beds, mowing the lawn… there are a million things. My wife and I will pay them for doing those things. But I'm not going to just give them money.

The second concept our children need to understand is debt. Debt is expensive. If you abuse it, it will destroy you. Like the entitlement mentality, debt is an enslaver. It robs you of your independence. I avoid debt in my personal life… and when I'm choosing investments.

The best way to illustrate the cost of debt is to calculate the total amount of interest the debt generates in dollars over the lifetime of the loan, instead of looking at the interest rate (like most people do). Once you look at it like that, you can see how expensive borrowing money really is.

For example, say you borrow $100,000 with a 30-year mortgage at 7%. Over 30 years, you'll end up paying $140,000 in interest to the bank. In the end, you're out $240,000 for a house that cost less than half that. Not a good deal.

The third thing our kids need to learn is the power of compound interest and the best way to harness it.

Compound interest is the most powerful force in finance. It is the force behind almost every fortune. The brilliant Richard Russell calls compound interest "The Royal Road to Riches." And it's mathematically guaranteed.

Let's say, for example, you have $100 earning 10% annual interest. At the end of a year, you'll have $110. During the second year, you'll earn interest on $110 instead of $100. In the third year, you'll earn interest on $121… and so on. This is the power of compound interest. The numbers get enormous over time, simply because you're earning interest on your interest.

Because time is the most important element in compounding, it's an incredibly powerful idea for children to understand.*They have the ultimate edge in the market: the time to compound over decades.

The stock market is the best place to earn compound interest. You buy companies that have 50 years or more of rising dividend payments ahead of them. Then you let the mathematics work.

As soon as my kids are old enough to understand some arithmetic, I am going to sit down with the classic compounding tables and show them which stocks they have to buy. I'll use Coca-Cola, Johnson & Johnson, and Phillip Morris as examples.

After that, assuming they have the discipline to follow through,they*will*get rich. There's no doubt about it.

In sum, you have the responsibility to educate your kin about finance. If you don't, no one else will, and they will suffer for it.

Encourage them to work hard and avoid the entitlement mentality. Teach them the power of compound interest and explain the dangers of debt.

If you do this, you will equip your kids and grandkids to survive financially in the difficult circumstances ahead. You'll provide them with something that nobody can place a price on: the power of independence.

Good investing,

Tom

Sorry that article is a load of baloney! I have decided not to waste my time shredding it and those like it to pieces. My post would simply be deleted as controversial or political as opposed to the original post which will stand despite being both.

 

[Rene McDaniel]

If you still have Netflix dvd's by mail there is a very good Frontline episode on this very topic:

http://movies.netflix.com/WiMovie/Frontline_Can_You_Afford_to_Retire/70054415?trkid=2361637

There are several Frontline's available via streaming, but this particular episode from 2006 is only available through DVD. We watched it just a few weeks ago, and it really does a good job of showing how corporate America changed from pension plans to 401k's and how it has/will have a huge impact for Americans who hope to retire in the future. A very well done episode that I highly recommend seeing.

--- Rene McDaniel

 

[carl2591]

Sorry that article is a load of baloney! I have decided not to waste my time shredding it and those like it to pieces. My post would simply be deleted as controversial or political as opposed to the original post which will stand despite being both.

care to expand your comments..

most everything stated is true. there is no magic bullet to wealth. hard work and smart choices, not allowing debt to rule your life like so many other have done. I can agree with JJ and Coke but PM is not a company i like to invest in but there are other that pay a nice dividend each year.

hard to find much fault myself with most of what he wrote..

 

[PigsDad]

most everything stated is true. there is no magic bullet to wealth. hard work and smart choices, not allowing debt to rule your life like so many other have done. I can agree with JJ and Coke but PM is not a company i like to invest in but there are other that pay a nice dividend each year.

hard to find much fault myself with most of what he wrote..

The article may have true facts, but may not be the best advice. People who are really successful generally do not make their fortunes by staying out of debt -- they make it by using other people's money (i.e. borrowing) to make more money.

Debt in itself is not bad, if used wisely.

Kurt

 

[klpca]

The company I work for eliminated the defined benefit pension plan for new hires a few years ago. I am afraid the rest of us are going to get forced out of it soon even if we do not want out.

Mu husband and I have worked full time since 1983. We have never had a pension. We have funded our 401(k)'s by ourselves (15% of gross wages), although we have always had a company "match". (Not to look a gift horse in the mouth but 2-3% match doesn't seem like a lot). We hope to retire at 65, but obviously the market isn't cooperating at the moment. We have also put two kids through college (no financial aid, no loans) and our third graduates in 2013, and will have our house paid off, but it's definitely touch and go with retiring before age 70. But all in all, we feel so blessed. We have had steady work and have had good health. Our kids are off to a good start (jobs, contributing to their 401(k)'s, no student loans, no car loans). They are responsible young adults, not into instant gratification. They do exist, but it depends on what they were taught at home.

 

[carl2591]

I agree with using other people money. The vast majority of people do not have the skill set or aptitude to use other people money for much more than a car, a house or vacation money.

there are those that have a viable small / medium business or venture that by getting a loan or investors that put up funds can then become more successful. This is kinda what the TV show "Shark Tank" is based upon.

The guys and gal look at different business ventures and see if it make sense to invest money into them. Some of the business that come on are kinda lame.. and some are excellent and they, one or more, invest in the venture.. hence the other people money way to wealth you mention which is very true.


the article is written for the common man, women and still make perfect sense.

 

[vacationhopeful]

Let me explain how I personally feel about the companies and their concern for employees.

I remember November, 1982 like others remember Dec 7th, D-Day and 9/11. That was the month 20% of the non-union workforce was eliminated just weeks before the new Federal "5 year employee was vested in the pension plan" verses the "old must be employed 9 years 6 months plus 1 day rule". Why? Because the company laid off every nonvested employee over 3.5 years and up. I was less than 8 months from being vested. As a woman who hoped to have a family, stay home and still years later have a pension for retirement that became highly unlikely. Those early years of youth and hard work for an employer, would have to be competing now with kids, middle age, elderly parents, and PT graduate school. Afterall, I was among the first of the professional women hired as a professional. I was one of 165 professional women of the class action suit named for their sexual harressment and lack of opportunity. The Federal Court monitored us for 2 years. I was in the class, and not a named plantiff; yet, my immediate boss's question to me was "You aren't going to accept any of that BLOOD MONEY, are you?" in front of my male peers. $1200 was the total amount of Blood Money to each member. And this was the same manager, who a year earlier, told me I should living at home til I got married and then I wouldn't want/need more money. When I told his manager, IF he hired one more WASP male from an Ivy League College, I would sue --- his comment was, "what are you talking about?" and my response was "Name one person he has hired, out of 6 persons, who isn't a Ivy League WASP?" He named a person, and my immedate response was "when did Cornell drop of the the Ivy League?". I was told by a plant supervisor to tell Cliff to come out as they didn't have time to talk to me and I told him "Cliff is going nowheres unless you justify it to me - I am his supervisor; but I would be happy to tell my management how you killed a week of my time and travel sitting in the back of your office." It was a very long and tough almost 9 years.

And I promised myself I would never again be a employee/victim of corporate America.

And if you think, it might have been my personality --- in my outplace class that Human Resources ran for 2 afternoons by random assignment, my first session was an eye opener: 28 white women, 2 black men. And I was the ONLY woman who was NOT PREGNANT!

No, not much surprises me about corporations, their greed and senior management's law abiding compass. It was not the ecomony - it was the bottom line to increase management's bonuses and stock options. Yes, that oil company is still in business.

 

[JeffW]

I still recall when we purchased our home in 1973 and, after we were all moved in, I looked at the payments, did the math, and the house we just paid $32,000 (the WORLD back then) was going to cost us about $62,000 with the interest! ...Think of those spending $40-$50K on a TIMESHARE!!! WHAT are they thinking?...

This is a main reason why I often stop myself from thinking we need a federal balanced budget amendment. There are definitely some times, and some causes, that require "going into debt". I think the problem though is a lot of politicians can't decide what's a good cause and what isn't. I'd agree with the OP: getting a loan for a new house, probably a wise investment; for large expensive of a timeshare, probably not.

Jeff

 

[pgnewarkboy]

care to expand your comments..

most everything stated is true. there is no magic bullet to wealth. hard work and smart choices, not allowing debt to rule your life like so many other have done. I can agree with JJ and Coke but PM is not a company i like to invest in but there are other that pay a nice dividend each year.

hard to find much fault myself with most of what he wrote..

One comment only. The article states the old "play by the rules and you'll be rewarded argument ". That is both a myth and a lie depending on who says it. I suggest you read two books by Michael Lewis : "liars poker " and "the big short". Also, if you remember the GREAT RECESSION and read about the GREAT DEPRESSION You will realize that the "rules" are made by a few in secret for their benefit and for a game that only they can play and win.

 

[Tia]

Funny this guy is on TODAY SHOW right now being interviewed by Matt Lauer.

http://today.msnbc.msn.com/id/44730...ing-wreckage-financial-disaster/#.TonLBHKDmSo

... I suggest you read two books by Michael Lewis : "liars poker " and "the big short". Also, if you remember the GREAT RECESSION and read about the GREAT DEPRESSION You will realize that the "rules" are made by a few in secret for their benefit and for a game that only they can play and win.

 

[heathpack]

Sorry that article is a load of baloney! I have decided not to waste my time shredding it and those like it to pieces. My post would simply be deleted as controversial or political as opposed to the original post which will stand despite being both.

I also think the article is baloney-ish.

The biggest issue that I have with it is that it is overly simplistic. For example, no matter whether you rent or own, you will have a monthly housing expense. It doesn't matter what interest rate you are paying on your mortgage, if your totally monthly expense (principle, interest, taxes, upkeep, insurance, etc less the taxe benefit of owning) is less than what you'd pay to rent, you are coming out ahead. This is not the same as other forms of debt (like buying a new set of furniture on credit) where it is a viable alternative to have no monthly expense in that category.

Debt that is managed well represents leverage, not danger. We have a mortgage, car loan (at 3%, could have paid cash for the vehicle but decided we'd pay the 3% to keep that money liquid), student loans, and a business loan. All totaled, our debt is about 2.5 times our annual income. We owe nothing on credit cards or other forms of bad debt. Except for our business loan (which is at 7%), all interest rates are low, ranging from 1.75% to 5%. We pay our bills, invest in our retirement accounts, save money every year, and have credit scores over 800. However, by a simplistic understanding, we are running a deficit (our obligations exceed our income) which is "bad."

Yes, managing debt requires some degree of self control. Teach your kids the lesson not that debt is bad, but that some debt is extremely bad and completely unacceptable (credit card debt, non-essential financed purchases like timeshares, new furniture, new appliances) and some debt is good and to be used wisely (mortgage, student loans, some car loans).

The savings example is also completely unrealistic, and ignores the fact that some debt like a mortgage is also a method of accumulating wealth.

H

 

[MelBay]

Thought this was a timely article to share....

Human Resource Executive, 2 Oct. 2011

Maximizing Drawdown

New programs that offer payout or drawdown options for retirement savings are complex to research and explain to defined-contribution-plan participants. But many of those participants are asking for guidance and help in stretching out their savings through their post-employment lives.

By Anne Freedman

With a volatile stock market and an uncertain economy, those halcyon days when employees retired with a gold watch and a pension never seemed so far away.

And even though those days never really existed in reality -- fewer than 25 percent of private-sector retirees received pension checks back in the day -- the dream of a steady post-employment income persists.

It was the desire to provide that future for workers at Mannington Mills that led Mike Hopp, the company's vice president of HR, to explore some of the newer products on the market today that offer guaranteed-lifetime-income-payout options.

Hopp says his Salem, N.J.-based company, which manufactures residential and commercial flooring, froze its pension plan in 2007 -- and he was deluged afterward with questions from workers: " 'How do we take our money out? How do we ensure we have enough money to retire on?'

"They look at our HR department and say, 'You have got to help us make good decisions.' They look at us for advice and help, and we try to give them something ... ," Hopp says.

What Hopp gave them was access, within their defined-contribution plans, to a Prudential product called IncomeFlex Target, which, he says, "acts like a pension plan."

"To me, this has all of the positives of an annuity and all of the positives of a pension plan -- and very little downside," he says.

Participants choose an appropriate target-date fund based on their retirement time frame, and their income guarantee is activated 10 years prior to retirement, but no earlier than age 55, according to Prudential.

A participant receives a steady income -- an income that is guaranteed to never be less than the total contributions (employee and matched) that were made to the plan, regardless of the actual market value should the stock market drop. At the same time, it allows the plan funds to stay invested after retirement so a participant will see gains if the market rises.

"The whole time you are drawing off [funds], it's still earning money. That's the reason why you might have a nice bucket of money at the end [of life]," Hopp says.

"I am very committed to this [hybrid-annuity concept], whether it be the Prudential product or a similar product," he says. "It helps the blue-collar person, particularly, who is not sophisticated in investments ... to take this money and make it work for you. This takes a lot of stress off of [retiring employees]."

And yet, Mannington Mills -- which has between 1,800 and 2,000 employees in seven locations, depending on its business cycle -- is one of the few companies providing such retirement-plan options to employees, even though there are many different vendors offering various retirement-payout options.
Vanguard and Fidelity both offer managed-payout funds that are designed to provide inflation protection and capital appreciation over the long term, while making monthly distributions. Financial Engines offers an Income+ program to manage retirement funds as part of a systematic withdrawal plan.

In addition to Prudential, other insurance companies offering guaranteed-lifetime-income options, known as GLIOs, are Diversified SecurePath, Great-West SecureFoundation, John Hancock Guaranteed Income for Life, Mutual of Omaha, MetLife and The Hartford Lifetime Income, according to the Institutional Retirement Income Council, a nonprofit think tank in Iselin, N.J.
GLIOs are different than annuities in that they offer more flexibility in accessing savings and provide added protection in the accumulation phase, according to the IRIC. At the same time, GLIOs are different than mutual-fund-payout products in that they offer guaranteed values.

According to a March 2010 survey by the Chicago-based Profit Sharing/401k Council of America, roughly nine of 10 (91 percent) plan sponsors are aware of guaranteed-retirement-income products, but only 6 percent currently offer them. Another 4 percent have decided to add such an option to their plans and 22 percent are considering whether to add such an option.

Other studies, such as one by Mercer, shows 25 percent of plan sponsors offer a fixed-payout option to participants, while another by Aon Hewitt puts the number at 15 percent.

Part of the reason defined-contribution-plan sponsors are not rushing to offer access to payout or drawdown options is fear: They fear the potential liability should things go wrong; they fear the government will find they didn't fulfill their fiduciary responsibilities because of the offering; and they fear any provider they select might go belly-up 20 years down the road.

In addition, such plans are complex and would require extensive educational efforts for participants -- as well as for the plan sponsors who have to research and select offerings in a fairly new field.

Live Long without Prospering

"I think the financial crisis put a big dent in people's willingness to offer these kinds of products," says Alan Vorchheimer, a principal at Buck Consultants in New York, noting that, if the federal government offered some information "clarifying any fiduciary risk, ... that might be helpful."

The concern, he says, is that plan participants will sign up for an annuity or drawdown program of some type and if "people can't get their money out, then they are going to come back after [the company]."

At the same time, many plan participants don't know how to go about converting savings into a life-long stream of income and many may end up facing 20 or 30 years of retirement with too few funds to comfortably survive.
More than half (51 percent) of U.S. households are "at risk" of seeing a big decline in their living standards when they retire, according to the National Retirement Risk Index from the Center for Retirement Research at Boston College in Chestnut Hill, Mass.

The typical 401(k) participant has about $78,000 in his or her account, which equates to about $3,200 a year for that retiree based on the standard 4-percent drawdown each year, said the Center's director, Alicia Munnel, during a recent webinar. That's assuming the funds are not earning interest during the drawdown period.

"I think people are going to be shocked when they get to retirement and see how little money they have and how little that provides as a source of monthly income," she said. "It's expensive to support yourself for 20 years without working."

Christine Marcks, president of Hartford, Conn.-based Prudential Retirement, says the typical balance is far higher -- $160,000 -- yet even that will only provide an income of $12,000 a year.

"The point," says Betsy Dill, a Los Angeles-based senior partner at consulting organization Mercer, "is, whether it's $78,000 or $160,000, it's not a lot."
It is for that reason that many organizations have been focusing on the accumulation phase of retirement planning. More than half (56 percent) of the employers polled by Chicago-based Aon Hewitt automatically enroll participants in their defined-contribution plans and nearly that many (51 percent) have an automatic contribution escalation in their plan.

But, regardless of the amount of money they have saved, nearly all plan participants (90 percent) want more guidance on how to make sure their funds last through retirement -- and 57 percent say their plan sponsors have not been helpful in that regard, according to the Annual Defined Contribution Plan Survey by BlackRock, a New York-based provider of investment, advisory and risk-management solutions.

According to BlackRock's survey, in partnership with Boston Research Group, 93 percent of participants have expressed interest in receiving a stream of retirement income along with -- or instead of -- a lump sum. But, only 23 percent of plans offer such an option.

"People want to know what they should do," says Kelli Send, senior vice president of client services and principal at Francis Investment Counsel in Milwaukee, "and they are scared to death of the financial-services industry because they don't know who to trust ... and employers oftentimes say, 'Bye,' and that's unfortunate."

Regulations to Come?

"I think the No. 1 thing employers have to consider [in offering a retirement-payout plan]," says Jack VanDerhei, research director at the nonpartisan Washington-based Employee Benefit Research Institute, "is the potential fiduciary exposure ... [of] a contractual obligation for your employee, with an entity, that may actually go decades into the future. It's very difficult, obviously, to predict the claims-paying ability of a financial entity that far into the future.

"I think until something is done to provide for ... that fiduciary-liability exposure to be somewhat mitigated, I think a lot of employers just don't think they can get involved in something yet," VanDerhei says.

This year, the U.S. Departments of Labor and the Treasury issued a joint request for information about regulations they should consider that would enhance the retirement security of workers in employer-sponsored retirement plans.

VanDerhei says the DOL and Treasury received hundreds of submissions, many of which were from plan sponsors concerned about fiduciary liability.
Ben Yahr, a Philadelphia-based executive with Ernst & Young and an adviser to the IRIC, says many plan sponsors "have done research on [payout and drawdown options], but most companies don't want to be the first company to make that move. They want somebody else to blaze that trail and navigate through that system."

Adoption of such plans may not remain slow, however, says Mendel Melzer, an IRIC member and chief investment officer for The Newport Group in Heathrow, Fla., comparing such programs to the now-popular target-date funds.

"Just a few years ago, target-date funds were new and untested, and plan sponsors and consultants needed to develop a framework for evaluating them ... . The same creativity must now be applied to retirement-income products for them to become a successful component of a plan sponsor's overall retirement-plan strategy," he says.

Yahr says adding a payout or drawdown program will entail an extensive education and communications effort by HR leaders. "The benefits are really complex and trying to turn around and explain that in a way that your participants are going to understand what they are selecting ... is a real challenge," he says.

Mannington Mills' Hopp says his education efforts began with his board of directors and management committee -- and the issue was an involved one, even for them, "because it was so complicated -- the way [retirement-income options] work behind the scenes."

That's because, he says, there are two different balances for guaranteed funds -- one is the market value, which might drop in reality, while the other value -- the artificial value -- stays at the high-water mark of the "income-base" value.

To prepare for his company's launch of the product, he held about a half-dozen employee focus groups to get a sense of their interest level, questions and concerns, and then worked with Prudential to redesign the information packets to simplify the explanations.

The company also offered education via webcasts, online forums, on the phone and in person.

"I think you have to design your training platform around multiple audiences and make sure you hit every part ... ," Hopp says. "We needed to get more creative on how to help our people, and this was one way ... to do that."

 

[geekette]

Thanks, Mel, I had not known such a thing existed! Will be interesting to watch the rate of adoption (or disappearance).

 

[pgnewarkboy]

I read numerous articles that are extremely negative about target date funds. There Is no such thing as a guaranteed pay out in a certain amount by an insurance company. Exactly what is the guarantee? The company will always be profitable and never go bankrupt? I would laugh if it wasn't so sad.