10 Thursday AM Reads

I find these articles extolling the virtues of defined benefit plans and berating 401k/403b plans annoying. Defined benefit plans work great when you have very good job stability and can be at an organization for 20+ years, which is why many public sector workers have them and do well with them. However, employment in general in North America has been a precarious thing and particularly so over the past 30 years. As a result, most people are like me, having held multiple jobs during that period of time.

There was never a majority of private-sector employees that had defined benefit plans. Historically, most private sector employees had no retirement plan whatsoever, other than their own savings. 401ks/403bs opened up the door to making retirement plans much more widespread. A big problem is that many employers contribute very little or have the maximum vesting period allowed so that employees do not get much from their employer contributions.

For the first 35 years, 401ks had high fees and relatively poor investment choices, so there was virtually no way they could perform as well as a professional pension fund. That is changing now as fees are declining and the portfolio options are looking much better. Plans with low-fee target date retirement funds are a major game-changer as the average person just has to focus on saving. Based on my experience helping family members, confusion is the most common state of understanding of investing strategies with many having thrown their hands up in the air or turned their accounts over to high-fee “advisors” out of sheer frustration and bewilderment – the look of relief and relaxation on their faces when I simply direct them into a decent target date or fixed multi-asset allocation fund that is buried in the weeds in their plan is amazing and gratifying. The next revolution will be a much greater focus on efficient and low-cost withdrawal strategies.

The US retirement account system is very complex with account types randomly popping up in various tax code bills. As a result, somebody who has worked for several employers and has saved on their own likely has a litterbox full of different accounts. The $60k median account value may or may not have meaning because a person may just have that one account or several of them. If tax simplification ever occurs, the account types should be simplified so that it would be possible to have only two: a Roth -type or a standard tax-deferred IRA type.

Defined benefits are only as good as the guarantee behind them – just look at all of the companies that have gone bankrupt and handed their pension plans over to PBGC. The shift to transferring these liabilities to insurance companies hasn’t really been tested for multi-decade safety yet. Individual defined contribution accounts, if positioned in well-diversified low cost funds, are as safe as the global economy because it is unlikely that entire major stock and bond markets will declare every company and country bankrupt where you could lose everything. these days the two biggest dangers to people in defined contribution plans that I have seen is a lack of understanding of their investment options (usually explained in Wall Street legal gibberish) and the “solution” of turning to non-fiduciary advisors for advice (I have seen family member rollover accounts with lots of 5.75% front end loads and 1%-2% annual ER).

http://www.marketwatch.com/story/theres-a-glimmer-of-hope-that-the-retirement-system-isnt-broken-for-good-2015-08-06?page=1