The Proven Inefficiencies of Defined Contribution Savings Plans for Retirement

“...Ted Benna (widely seen as the father of the 401(k)) notes that 401(k) plans are failing, and that the do-it-yourself plans were never meant to replace pensions. He has said that it was simply 

a financial product that ‘took off.’

“The 401(k) is no closer to working today than it was all those years ago, despite 35 years of tweaking (for example, should we match in company stock?).  The system remains inefficient, and financial advisors still can’t tell people how much they can safely withdraw per year in retirement.  The 4 percent rule of thumb (meaning a half-million dollars in retirement savings would produce only $20,000 in annual retirement income before tax) could take out too much money from the retirement nest egg in a poor stock market, according to recent studies. 

“The inefficiency of 401(k)s has been proven repeatedly in study (1988-2004 data) after study (1995-2011 data) after study (1990-2012 data), by researchers and even corporate consulting firms.  Each study shows that traditional pension funds outperform 401(k)-type plans, meaning you get more benefit per dollar invested.  

“During the years these studies covered, 401(k) plans had a structural advantage over pensions with a less mature demographic profile. However, in the next 35 years, those who are retired, or nearing retirement, will have to invest more conservatively.  These near-retirement individuals tend to have the accounts with the largest balances, too. 

“For individuals in or approaching retirement today, the fundamentals they face are brutal:  historically low bond yields and a loss of principal (in ‘safe’ bond investments) if interest rates rise.  Meanwhile, retail investment advisors continue to fight a requirement that they work in their client’s interests – what most of us see as a basic professional responsibility!

“Another key issue highlighted by the Center for Retirement Research at Boston College in their most recent study, is the trend of IRAs performing even worse than 401(k) plans on investment returns.  In fact, during 2000-2012, the average returns on IRAs were only 2.2 percent.  Granted these were very difficult years for investing, but defined benefit plans managed returns of 4.7 percent over the same period.  Knowing that the level of investment returns is a major driver of costs for retirement planning, relying upon IRAs that are falling short by 2.5 percent of assets each and every year means the cost of a secure retirement will skyrocket. This finding is consistent with CRR’s 2006 study, where IRAs earned only 3.8 percent over 1998-2003, far worse than either defined benefit or defined contribution plans.

“Moving forward, we should expect more 401(k) assets to move into the retiree column (lowering yields further), and a lot of assets to be moved into IRAs.  The inherent financial advantage enjoyed by retirement plans with pooled investments should not be understated. Sure, 401(k)s make some sense as a supplemental savings vehicle (other than the regressive nature of the federal subsidy if you want low income workers to save more).  But, 401(k) plans simply do not function well as a primary retirement plan” (401(k) Plans’ Inefficiency Struggles Will Grow by Daniel Doonan). 

Daniel Doonan is a Senior Pension Specialist at the National Education Association in Washington. Prior to joining NEA, Mr. Doonan was a labor economist for the American Federation of State, County and Municipal Employees. He was also the Assistant Director of Research for the National Association of Letter Carriers and served as a consultant actuary for Buck Consultants…

Commentary: 
Comparing the Defined-Benefit Pension Plan 

1)  You cannot outlive your defined-benefit pension plan; you can outlive a 401 k plan or defined-contribution savings plan;
2) Your defined-benefit pension plan is more cost efficient than the defined-contribution savings plan;
3)  Your defined-benefit pension plan offers predictable, guaranteed monthly benefits for life;
4)  Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies;
5)  The large-pooled assets reduce asset management and miscellaneous fees;
6)  Your defined-benefit pension plan provides spousal (survivor) financial benefits;
7)  Your defined-benefit pension plan provides disability benefits;
8)  The employer is responsible for funding, investment, inflationary and longevity risks;
9)  Because you are not affected by Market volatility, your defined-benefit pension plan is a more effective protection than the defined-contribution savings plan;
10) Because teachers, for instance, understand the value of such a plan, they are willing to give up higher wages during their careers;
11) A defined-benefit plan encourages a long-term career and stable workforce;
12) Your defined-benefit pension plan provides you with self-sufficiency in retirement; it is associated with far fewer households that experience food privation, shelter adversity and health-care hardship.

Sources: the National Institute on Retirement Security (NIRS), Center for Retirement Research at Boston College, National Conference on Public Employee Retirement Systems, Center on Budget and Policy Priorities

Two Poems by Mark Cox

Things My Grandfather Must Have Said

I want to die in the wintertime,

make the ground regret it,

make the backhoe sweat.

January.  Blue Monday

after the holiday weekend.

I want it to be hard on everybody.

I want everyone to have a headache

and the traffic to be impossible.

Back it up for miles, Jesus.

I want steam under the hood, bad directions,

cousins lost, babies crying, and sleet.

I want a wind so heavy the umbrellas howl.

And give me some birds, pigeons even,

anything circling for at least half an hour,

and plastic tulips and a preacher who stutters

“Uh” before every word of Psalm 22.

I want to remind them just how bad things are.

Spell my name wrong on the stone, import

earthworms fat as Aunt Katie’s arms

and put them under the folding chairs.

And I want a glass coffin.

I want to be wearing the State of Missouri

string tie that no one else liked.  God,

I hope the straps break

and I fall in with a thud.  I hope

the shovel slips out of my son’s hands.

I want them to remember I don’t feel anything.

I want the food served straight from my garden.

I want the head of the table set.  I want

everyone to get a pennant that says,

“Gramps was the greatest,”

and a complete record of my mortgage payments

in every thank you note.

And I want to keep receiving mail for 13 years,

all the bills addressed to me,

old friends calling every other month

to wonder how I am.

Then I want an earthquake or rising water table,

the painful exhumation of my remains.

I want to do it all again.

I want to die the day before something truly

important happens and have my grandson say,

“What would he have thought of that?”

I want you all to know how much I loved you.

At the Crematorium, My Son Asks Why We're All Wearing Black

These days the system is state of the art—scrims of smoke,
no odor. At least the neighbors don't protest
and the birds still gather on the tarred roof’s edge
around seeds pooled at drain tiles. We accumulate
and are dispersed at the traffic light out front, while within
this relay point of caskets and morgue lockers,
the husks of our fallen continue their diminishment.

We're all members of this committee, son. We serve
with our tanks full and our windows down
until in one moment
we are reduced to manila envelopes
of movie stubs, bus transfers and address books;
in another, to pollen ruffling
the overcast, distended cloud cover of the world.

The passing lanes, the turn signals, the green and yellow lights,
the no U-turn and school crossing signs,
they all lead here.

You’re old enough, now, for one dark suit and tie—
and to know exactly why
you’re uncomfortable wearing it.

Mark Cox has published five books of poetry: Sorrow Bread: Poems 1984 - 2015, Serving House Books, 2017; Natural Causes, Pitt Poetry Series, 2004; Thirty-seven Years from the Stone, Pitt Poetry Series, 1998; Smoulder, David R. Godine, 1989 and Barbells of the Gods, Ampersand Press, 1988.  His honors include a Whiting Writers' Award, a Pushcart Prize, the Oklahoma Book Award, The Society of Midland Authors Poetry Prize, and numerous fellowships.

His poems have been published in various periodicals such as Green Mountains Review, Tar River Poetry, Crazyhorse, Poetry Miscellany, Mid-American Review, Greensboro Review, Indiana Review, Black Ridge Review, Slate, Solo and many others.

Getting Rid of the Government Pension Offset and Windfall Elimination Provision

“There is a lot of talk about expanding and improving Social Security, but no one is saying anything about getting rid of the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). Despite the repeal bills currently in Congress, (H.R.973 and S.1651), there is nothing being said about how badly these offsets affect the FULLY-EARNED benefits of retired public employees...

“GPO—At least 615,000 retirees are affected by the GPO; 74% of those affected have lost ALL their Social Security retirement benefits; 81% of those affected are women. Women affected by the GPO have lower pensions than men… The GPO is a direct attack against families.  Parents who stay home and care for children usually lose all their spousal benefits, and they often don’t get any survivor benefits as well.

“WEP—More than 1.5 million people are affected by the WEP. It harms low-income retirees more than those with larger pensions. Everyone knows that the formula and premise are wrong.  People are punished by not earning Social Security in their work as public servants, and then they are punished again when they retire by losing what they had already earned in other work (Congressional Research Report).

“THE COST TO REPEAL BOTH OFFSETS WOULD BE LESS THAN 2% OF WHAT IS PAID OUT TO OTHER RETIREES IN SOCIAL SECURITY BENEFITS!

“Below is a list of addresses. Please MAIL each of these organizations a personal message or email them from the links below…”

AARP
National Policy Council
Association of Retired Americans
601 E Street, NW
Washington, D.C. 20049
member@aarp.org

AARP has a National Policy Council that makes decisions about what legislation to support. They used to be against repeal. We helped them change their position. They are currently neutral about the offsets. They need to know more. They need to know how the offsets affect retirees. YOU can be a member of the National Policy Council! Go to aarp.org/npc and apply by February 28.

Social Security Works
Nancy Altman
Social Security Works
815 16th St NW Fourth Floor
Washington, DC 20006
www.socialsecurityworks.org
Social Security Works is an activist group supported by a number of unions. They have not paid attention to our issue. They need to know more about GPO/WEP and what happens to us.

National Committee to Preserve Social Security & Medicare

Max Richtman, President
NCPSSM
10 G Street NE Suite 600
Washington DC 20002
 800.966.1935
www.ncpssm.org
This group has studied the GPO and WEP and has endorsed the current repeal bills. Thank them and let them know how you have been affected.

Alliance for Retired Americans

Richard Fiesta, Executive Director
Alliance for Retired Americans
815 16th St., N.W., 4th floor
Washington, D.C., 20006
retiredamericans.org/contact-us
This is a group of active seniors who have ratified a resolution to support the repeal of the offsets. They need to know how the offsets have affected you. Please encourage them to do more!

Older Women’s League OWL

Margaret Hellie Huyck, President
Older Women’s League
1627 Eye St., N.W. Suite 600
Washington, D.C. 20006

info@owl-national.org
This group is particularly interested in issues affecting older women. They have been understanding, but they need to hear more stories.

American Association of University Women
Patricia Fae Ho, Board Chair
AAUW
1111 Sixteenth St. NW
Washington, DC 20036
202.785.7700   800.326.2289

connect@aauw.org
You can write the Board of Directors from this link:
http://www.aauw.org/who-we-are/leadership-and-staff/board-of-directors/

If you belong to another group that should be supporting this cause, please let us know at ssfairness@gmail.com . You can also respond on the Social Security Fairness blog: click here. Thank you!