Why Self Direction of Pension Funds Should Replace the Broken Promises of Corporate Plans

It's not bad enough that the value of shares in many Corporate 401k plans have been slammed by the sell off of securities in 2008, but there is another unintended consequence of the sell off in securities that will likely impact earnings on shares of companies with an active Defined Benefit Plan for many years to come.  The best short discussion I have seen on these issues is about a likely $409 Billion hole in Pensions that is likely to reduce U.S. corporate earnings for a long time.  

"Defined Benefit " (DB plans have largely been replaced at many corporations with "Defined Contribution" ( DC, or 401k ) plans. This process is part of a massive transfer of the financial responsibility for pension benefits to workers from corporations. This transfer has taken place because of the long term liability created by Defined Benefit plans to the corporations that still have them (similarly more and more of the costs of health care insurance have been shifted to employees rather than increase costs of health benefits to corporations). 

These long term pension liabilities have been created because the financial assumptions used to calculate the annual contribution of the corporations have been faulty. This is primarily because they assumed a higher annual rate of return from the stock market than could actually be sustained (except for short periods in a bull market). The faulty assumptions may have also included higher mortality rates ( betting that retirees would die sooner than they actually have in real life). This means that retirees who draw benefits after the date of their projected death have created financial pressure on the entire system. (Darn those pesky Octogenarians!) The mortality rate in the U.S. has been steadily increasing since WWII.

Many corporations layoff and settle with older higher paid employees getting close to retirement to reduce unfunded liabilities in the future.

There has been a moral hazard for Pension Actuaries (mathematicians for investment funds and insurance companies) since they were paid extremely well to calculate favorable numbers for major corporate pension plans, much like bond rating agencies were paid very well to assign high investment ratings to bundles of Sub-Prime Mortgage Loans.  Pension actuaries earn several hundred thousand dollars per year in salaries that are not connected to the results of their calculations. They lose nothing financially by underestimating contributions needed to adequately fund pensions.

One result is that for some companies, like U.S. auto manufacturers facing a shortfall of pension funds to meet commitments, more corporate earnings must be allocated to pension obligations. This means less money will be available to pay bills, improve plants and grow for the future. If they cannot grow and they must contribute to underfunded pensions from revenue, dividends will be cut.

One way that auto manufacturers have offset these obligations is to include the costs of unfunded pension liabilities in the cost of each auto sold to consumers. Included in the price of one U.S. manufacturer is about $1400.00 that goes to fund DB plans in place for existing retirees still covered by the DB plan. New employees are not covered by the DB plan in place for retirees and must make contributions to a 401k plan that may or may not have matching from the employer. Many employers have reduced or eliminated matching contributions to 401k plans. This same method is being used by other manufacturers in the same predicament, making them less competitive in pricing to foreign companies that do not have the same liabilities.

In part this mess is an unintended consequence of Globalization, since many high paying union jobs with DB Plans were sent to low paying markets that did not have pension liabilities and higher profits that resulted were not used to better fund the existing pension plan liabilities from jobs that were exported. The accounting for pensions is extremely complicated and over time has allowed corporations to create shadow earnings that relate to returns in pension plans and use those earnings to prop up balance sheets and pump up the payouts to key executives to astronomical levels.
 
Where is the Bottom Line?

For a really long time, individuals have looked to their Corporation or to the Government to take care of their future financial needs. All of these promises will be broken as they must be, since they cannot be met. 

Wherever possible and by any legal means possible, corporations will shirk their moral duty to meet the promises they made by going bankrupt and destroying existing plans. Think of all the broken promises at Enron where contributions to the pensions of hard working and honest employees were made in Enron stock.  The people may be retired, but without the benefits they were promised and the half-assed provisions for them to make up for what they lost mostly consist of ways for them to defer taxes on current earnings. Ask anyone that worked for Enron if they are satisfied with what is left of their Enron pension promises.

This means that starting today and going forward, we must each be responsible for the ultimate results of our pension planning. This can be done by using the simple mechanism of a Self Directed Retirement Plan for rollovers and especially for Small business owners with no full time (1000 hours or less per year) employees.

A Call to Action

Anyone that agrees with me that Corporations will do as little as they can to secure a dignified retirement for loyal employees, or that Social Security is unlikely to provide for a dignified retirement must start making plans to create their own Sustained Abundance for the future.

I know this will not be easy or fun.  Either you can live below your means and save more, or you can find ways to make more.  Either option will be difficult and reduce your current lifestyle or take away from your free time.

If you are interested in learning more, take a look at the Webinars and Seminars offered at www.botbseminars.com or contact me at lance@selfdirectioncentral.com .