Wednesday, March 7, 2018

“The 401(k) retirement plan has been getting great press this election season. Don’t bank on it"--Chicago Sun-Times Editorial



“Employer-sponsored 401(k)s, which started in the 1970s, allow workers to save some of their earnings tax-free until they retire. Often, employers will match at least part of their employees’ contributions. Workers don’t pay taxes until they withdraw their money. In the private sector, 401(k) plans have rapidly replaced traditional pensions.

EDITORIAL

“The candidates who are touting 401(k)s like the fact that governments wouldn’t accumulate liabilities over the long term if they switched to a 401(k) system. If the employees’ accounts lost value in a stock market crash, that would be the employees’ problem. Even if the employees lost all their money, the governments wouldn’t have to step in. There’s no FDIC for 401(k)s.

“But doing away with big government pension funds could hurt virtually every average investor in the state. As David Webber, a law professor at Boston University, recently wrote in the New York Times, big pension funds have the clout to push fund managers to improve investment returns. They can switch managers who aren’t doing a good job. They can put pressure on companies that overpay executives at the expense of investors. They can demand reforms.

“Try doing that on your own with your personal 401(k). You couldn’t even get a return phone call.

“Without big public pension funds, such as those in Illinois, investors would lose leverage. They could expect to see their savings gain less value over time. Only money managers and others in the financial class would be happy about that.

“Yes, Illinois has a big pension problem. Massively underfunded pensions loom over the governmental landscape from the local level all the way up to state government. There are exceptions, such as the Illinois Municipal Retirement Fund. But the habit of underfunding pensions and adding a series of pension sweeteners without paying for them has created an almost unimaginable stack of IOUs.

“But to say, as Republican gubernatorial candidate Jeanne Ives does, ‘I support a move to 401(k)s for all new workers,’ raises false hope [and is foolish].

“The state would have to fully fund new 401(k)s upfront. The existing pension debt wouldn’t go away, and government pension costs would rise because fewer new employees would be paying into the funds.

“401(k)s also hurt the economy in other ways. They encourage people to retire early when the economy is booming because the value of their retirement funds soars along with the stock market. But that’s just when the economy needs as many workers as it can get.

“In bad economic times, 401(k)s encourage people to keep working longer than they planned because their retirement funds have shrunk to the point that it’s not safe to retire. But that’s just when a few more job openings would be most welcome to people who can’t find employment.

“Moreover, 401(k)s often include indecipherable fees that reduce returns, and employees are unlikely to manage their investment choices as well as pension fund professionals would. A 2012 study found 401(k) fees for a median two-income family could reduce a retirement nest egg by nearly a third.

“The Illinois Supreme Court has made it clear that state and local governments must make good on the pension promises they’ve made. Switching to 401(k)s won’t allow the state to get out of obligations it already has incurred, but it could leave a new generation of workers without retirement security.

“As Webber reports, such groups as the Koch brothers’ Americans for Prosperity, the Laura and John Arnold Foundation and the American Legislative Exchange Council are engaging in a multi-state push to replace public pensions with defined-contribution plans, such as 401(k)s.

“Illinois should resist them. Switching to 401(k)s won’t erase our pension deficits. And doing so could cause long-range damage to both the state and its workers (Chicago Sun-Times Editorial: 401(k)s aren’t the solution to Illinois governments’ pension woes).


Commentary:

A Defined-Contribution Savings Plan:


A defined-contribution savings plan (401(k), 403(b), 457) was not initially created as a retirement vehicle but rather as a supplementary savings account. 


A defined-contribution savings plan shifts all the responsibilities and all of the risk from the employer to you; thus, your benefit is not guaranteed for life. 

Your benefit ceases when your account is exhausted. There are no survivor or disability benefits and guarantees. 

Your benefit is based upon individual investment earnings. You assume all funding, investment fees, and inflationary and longevity risks. 

A defined-contribution savings plan does not have the pooled investments, professional asset managers, and shared administrative costs that a defined-benefit pension plan provides. 

Though you bear no portability risks, accounts are not always rolled over when you change jobs. Changeover costs to this plan could be significant. 

Your employer (state) will have to bear the administrative costs of both defined-benefit pension and defined-contribution savings plans when you switch over. 

“Payments to amortize unfunded liabilities for the defined-benefit pension plan may be accelerated” (National Institute on Retirement Security (NIRS). 

The Governmental Accounting Standards Board “requires [an] acceleration of unfunded liability payments when the defined-benefit pension plan is closed to be recognized on financial statements” (NIRS). 

“No unfunded obligations [liabilities] for existing members are reduced when new members go into a defined-contribution savings plan” (NIRS). 

“The loss of new members makes it difficult to finance the unfunded obligations of the defined-benefit pension plan” (NIRS). 

The State will not save money. Most of the State’s obligation to the Teachers' Retirement System of Illinois, for instance, is for contributions not paid during the past several decades; therefore, the deferred cost of underfunding cannot be eliminated by switching to a defined-contribution savings plan. 

Shifting to a defined-contribution savings plan can raise annual costs by making it more difficult for a State to pay down existing liabilities. The plan will include fewer employees and fewer contributions going forward. Even with a defined-contribution savings plan option, states and localities are still left to deal with past underfunding. 

There is a several trillion dollar deficit between what 401(k) account holders should have and what they actually have.

A Defined-Benefit Pension Plan:


You cannot outlive your benefit. 


Your defined-benefit pension plan is more cost efficient than the defined-contribution savings plan. 

Your defined-benefit pension plan offers predictable, guaranteed monthly benefits for life. 

Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies. The large-pooled assets reduce asset management and miscellaneous fees. 

Your defined-benefit pension plan provides spousal (survivor) financial benefits. 

Your defined-benefit pension plan provides disability benefits. 

The State is responsible for funding, investment, inflationary and longevity risks. 

Because you are not affected by Market volatility, your defined-benefit pension plan is a more effective protection than the defined-contribution savings plan. 

Because teachers and other public employees understand the value of such a plan, they are willing to give up higher wages. 

A defined-benefit plan encourages a long-term career and stable workforce. 

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. 

Your defined-benefit pension plan is less expensive for taxpayers than Social Security – a reason why legislators, et al. had negotiated for Illinois teachers to not pay into Social Security. 

Your defined-benefit pension plan has an economic impact of over $4 billion on Illinois; the effect on Gross Domestic Product is $2.38 billion; jobs that are created: 30,448 (Teachers Retirement System of Illinois, TRS). 

Defined-benefit pension plans contribute over $100 billion to annual local, state, and federal revenue in the U.S. and provide capital to financial markets (NIRS).

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, and the Teachers Retirement System of Illinois (TRS)



“...The truth is this: the concept of a do-it-yourself retirement (401(k)s) [is] a fraud. It [is] a fraud because to expect people to save up enough money to see themselves through a 20- or 30-year retirement [is] a dubious proposition in the best of circumstances. It [is] a fraud because it allow[s] hustlers in the financial sector to prey on ordinary people with little knowledge of sophisticated financial instruments and schemes.


“And it [is] a fraud because the mainstream media, which increasingly relies on the advertising dollars of the personal finance industry, [sells] expensive lies to an unsuspecting public. When combined with stagnating salaries, rising expenses and a stock market that [does] not perform like Rumpelstiltskin and spin straw into gold, do-it-yourself retirement [is] all but guaranteed to lead future generations of Americans to a financially insecure old age. And so it [will].” To read the complete article, Click Here.




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