By David J. Scranton, Founder, The Retirement Income Store®
It’s a crime of opportunity, but it doesn’t only occur on the streets or during disasters. Is it possible the pension you’re depending on for retirement is in the process of being looted?
Although defined benefit pension plans are largely a thing of the past, there are roughly over 50 million pension holders in the United States and millions more throughout the world. Unfortunately, they all have one thing in common: they’re facing major challenges to the solvency of their pensions.
Robert Kiyosaki, bestselling author of the Rich Dad Poor Dad series, and Ted Siedle, attorney and SEC whistleblower, were recent guests on my show, The Income Generation—where we discussed their new book, Who Stole My Pension? How You Can Stop the Looting.
During my interview with them, we talked about how the mismanagement of pensions and their investments, along with the subsequent looting of pension funds by certain forces on Wall Street, are jeopardizing the retirement security of many Americans.
What, if anything, can be done to stop the looting and other threats facing millions of pensions today? Are some of these same issues a threat to your retirement savings even if you don’t have a traditional pension? Before we answer those questions, let’s examine some of the basics.
What Is A Pension?
A pension is a defined benefit plan where the employer makes contributions into a pool of funds on behalf of their employee. That pool of funds is then invested in hopes that it will grow enough to pay a defined benefit when the employee retires.
As you might know, it was after the Great Depression that the idea of a ‘social safety net’ became popular. That’s when Social Security was established, and it’s also when pensions became common. In their heyday, pensions were an essential part of company culture. Big companies like GE offered famously generous pensions that lured in top talent and were the cornerstone of worker retention.
Pensions remained popular until the 1980s when interest rates started to decline – a trend that forced employers to start making larger deposits into their pensions to fund liabilities. That, combined with the increasing popularity of mutual funds, gave employers a chance to pass that liability onto their workers through self-funded plans such as 401(k)s – and they jumped at that chance.
What Is The Difference Between Pensions and 401(k)s?
While pensions and 401(k)s both provide a means of saving for retirement, the way they accrue money differs when it comes to who owns the risk and is responsible for managing the investments.
Pensions are defined benefit plans. That means pension-holders are guaranteed a certain benefit amount upon their retirements. If the invested money falls short of the defined benefit, then the company – or state / municipality – is liable for the shortfall and must make it up somehow.
On the other hand, 401(k), IRA, and 403(b) accounts are defined contribution plans. That means they require the individual employee to contribute their own funds. In this case, individual employees are responsible for how much they choose to contribute, how they chose to manage their accounts, and are also responsible if there is a shortfall.
Ultimately, the reason most employers have shifted their retirement programs away from pensions and into plans like 401(k)s is that doing so shifts the risk and liability away from them and onto the worker. However, if you’re one of the roughly 50 million Americans who still has a pension plan, there are other risks you should be aware of – including the outright looting of your plan by certain forces on Wall Street.
What Are Pension Plan Freezes?
Pension plan freezes like the one announced last October by General Electric have risen dramatically in recent years, along with pension payout offers.
According to the Pension Rights Center, “when a company freezes its pension plan, some or all of the employees covered by the plan stop earning some or all the benefits from the point of the freeze moving forward. A plan freeze may completely bar employees from earning any further benefits under the plan.”
Pension freezes are how many companies are addressing the multi-billion dollar pension deficits they’re facing—and payouts are a way to move pension liabilities off their balance sheets. Meanwhile, shrinking tax rolls and other issues are threatening the pensions of teachers, policemen, firefighters, and other public sector workers across the country.
Why Are The Remaining Pension Plans In America Facing So Many Challenges?
As we discussed on the recent episode of The Income Generation with Ted Siedle and Robert Kiyosaki, the solvency of many pensions is being threatened by a variety of forces. Chief among the issues facing pension plans today is the mismanagement of investments and the subsequent looting of pension funds by certain forces on Wall Street in the form of high hidden fees.
As a result of the low interest rate environment we are currently in, along with the increased amount of stock market volatility we’ve recently experienced, some pension fund managers are turning to riskier hedge funds to try and grow pension funds enough to be able to satisfy the defined benefits that are owed to pensioners. At a time when these fund managers should be moving to more conservative investments designed to better protect pensioners’ money, some fund managers are actually taking on more risk in hopes of making up for the lackluster performance of their funds brought about by low interest rates and extreme market volatility.
Another big challenge are the high fees being charged by some Wall Street firms to manage these pension funds. According to Ted Siedle, “In the last ten years or so, the fees that pensions pay have quadrupled and have become opaque.” For example, Ted recently did an investigation into a city pension fund and found it was paying nine percent in fees.
To make matters worse, since the way some Wall Street firms manage these funds can be less than transparent, this city had no idea it was paying so much in fees. Often, what ends up happening is that these high fees charged by some of these investment firms can end up eating away at the net return. In Ted Siedle’s own words, “Wall Street is running circles around pension funds, creating weapons of mass financial destruction.”
Are Your Retirement Savings In Jeopardy Even If You Don’t Have A Pension?
From 1982 to 1999, America enjoyed the most lucrative long-term secular bull market in its history. This made the fact that 401(k)s were largely tied to mutual funds one of their most attractive features, as workers in their prime earning years saw their accounts grow impressively. However, that changed in 2000 when the stock market dropped by almost 50% and ushered in a new long-term secular bear market period.
That long-term bear market cycle dragged on, marked by another major sustained correction of over 50% from 2007 to 2009, and by unprecedented levels of uncertainty in the years since the financial crisis.
Much of that uncertainty was caused by the use of artificial stimulus by the Federal Reserve and central banks around the world. The result is a stock market that, I believe, has become increasingly detached from economic fundamentals, is long overdue for a third major sustained correction, and is highly susceptible to bouts of extreme volatility.
We saw this throughout 2018 as Wall Street worried endlessly over the trade war, and again in recent weeks as coronavirus fears triggered more historic volatility. At the same time, we’ve also entered a period of historically low interest rates, which many analysts believe may be the new normal.
All of this has dramatically increased the challenges of saving for retirement regardless of whether you have a traditional pension or a 401(k). Whether the investment risk is held by your employer or by you, that risk has been increasing ever since the turn of the century.
What Should You Do If Your Retirement Savings Or Pension Are In Jeopardy?
While it’s true that defined benefit pension plans are largely a thing of the past, it’s also true that an estimated 50 million Americans still have pensions. Unfortunately, a variety of forces are threatening the solvency of those pensions. The bottom line is that whether you have a traditional pension, a 401(k), or another type of retirement account, the responsibility of managing and protecting your money is up to you.
It’s up to you to know how your money is invested and what risks those investments might carry. It’s up to you to stay on top of what’s happening in the financial markets, and how it correlates to the cautionary lessons of market history. You must understand all your options, which include Investing for Income, in the universe of fixed income investment strategies—geared toward helping to protect your principle and helping you generate reliable income for retirement. If you are asking, “What is Fixed Income Investing?,” we covered the topic previously.
The right financial advisor can help you fully understand the income model, and why it makes sense for those in or near to retirement. An advisor who specializes in strategies geared toward better protection and income can greatly increase your odds of success when it comes to retirement.
If you would like to learn more about how Investing for Income, claim your Free Retirement Income Kit, which is filled with resources to help you achieve the retirement you’ve always envisioned.