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Old 10-13-2011, 11:37 AM   #41
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I agree with you. But you missed my question. How do we average out the performance of the economy to the satisfaction of those who would have received more had we left it as is?

It really is going to be hard to ensure equal investment results vs time for people saving for retirement. I think the first page of the FireCalc instructions explains it pretty well.
The issue is that the individual faces greater investment risk than the pension fund because the fund can share the risk and the individual cannot. The individual doesn't need higher performance but lower risk. A "public pension fund" - like a non-for-profit annuity type fund would be a valuable option for the worker. Individual risk can be reduced and time horizon can be extended, which both lead to a more favorable outlook for the average person.
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Old 10-13-2011, 11:44 AM   #42
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I agree with you. But you missed my question. How do we average out the performance of the economy to the satisfaction of those who would have received more had we left it as is?

It really is going to be hard to ensure equal investment results vs time for people saving for retirement. I think the first page of the FireCalc instructions explains it pretty well.
I'm not saying the concept of DC plans should be scrapped or replaced. I just think it would be good if people had other alternatives -- perhaps pooled investments run more like a (responsible) pension fund -- where people who are *willing* to forego potential growth for increased retirement security and certainty would have more ability to put retirement savings there.

Those who wanted to "play the birth lottery" and rely exclusively on the market could still do so -- and then if they fell short, it would be their own decision to choose the high risk/high reward route. As it is now, though, people who would prefer the stability and security of a pension instead of the risk/return of a 401K/IRA-based retirement really don't have much choice. Sure, they can "buy a pension" by rolling their DC plans into an SPIA when they retire but the amount they have is still highly dependent on the market.
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Old 10-13-2011, 11:48 AM   #43
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A "public pension fund" - like a non-for-profit annuity type fund would be a valuable option for the worker. .
So something like voluntary extra contributions to SS (on the part of the employee) resulting in a larger payout at retirement? I could go for that.

A "risk taker" puts his contributions in a low cost 401k and choses an investment AA to suite his style and lives with the outcome........ Or, a risk adverse person sends the money as voluntary extra contributions to SS which result in higher SS payments that are perhaps higher or perhaps lower than he would have gotten going with the 401k.

Current SS would still be mandatory as a safety net.
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Old 10-13-2011, 11:54 AM   #44
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So something like voluntary extra contributions to SS (on the part of the employee) resulting in a larger payout at retirement? I could go for that.

A "risk taker" puts his contributions in a low cost 401k and choses an investment AA to suite his style and lives with the outcome........ Or, a risk adverse person sends the money as voluntary extra contributions to SS which result in higher SS payments that are perhaps higher or perhaps lower than he would have gotten going with the 401k.

Current SS would still be mandatory as a safety net.
More or less. I think the idea is that those who don't have access to a traditional DB pension plan (but wish they had one) could at least have the option to funnel some of their 401K/IRA contributions into a somewhat "pension-like" vehicle which trades potential for certainty. And yes, it should be optional and folks should be educated about the tradeoff.
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Old 10-13-2011, 11:59 AM   #45
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In those instances where companies managed pension plans in good faith and were forced to close plans because they were under financial stress and without a good alternative I would agree that employees got what they were promised. But in many, many cases the plans were not managed in good faith. In these cases employees got what they had earned to date. But not what they were promised because when companies set up plans like these (which they were not forced to do) there is a statutory promise (effectively unenforceable) that they will manage the programs in good faith. This book provides ample evidence that the companies did not manage the plans in good faith. They plundered the plans to the benefit of executives and share holders and they spun the resulting demise to make most of America believe the fault lay with the plans themselves.
I love how you use the words 'plundered the plans to the benefit of executives and share holders'....

Nowhere did the companies say 'we will never change this plan... ever ever ever'.... and the companies paid what was PROMISED, which is what the employee had earned to date... you are not suggesting that an employee should be paid something they did not earn do you And in fact there were many employees who actually did get more than promised since if you were not vested, you became vested when they shut down a plan...

And again, the excess funding of ANY plan would not go to the benefit of the participants.... if you were in a DB plan, you got your DB.. nothing more... if the plan was fully funded or 100% over funded, you got your DB... so who actually 'owns' that excess funding The company... surprise....

I still do not see where the companies were not acting in 'good faith'... sure, the employees lost a benefit going forward, or was receiving a different benefit... but that is life... tomorrow my boss can come in and say 'we are cutting your salary by 20%'.... I don't view that as 'bad faith', just that I got shafted... to bad for me...
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Old 10-13-2011, 11:59 AM   #46
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As it is now, though, people who would prefer the stability and security of a pension instead of the risk/return of a 401K/IRA-based retirement really don't have much choice. Sure, they can "buy a pension" by rolling their DC plans into an SPIA when they retire but the amount they have is still highly dependent on the market.
I disagree. But perhaps the 401k I participated is unique. We had an investment option called "money market." It was very stable and safe. Or, if you wanted to take a tad bit of timing risk, you could go with the short term bond fund. In either case, you could at the end then buy an SPIA.

I think the problem you're battling is wanting returns like you're in risky investments but stability and security like you're in ultra-conservative investments. It's hard to have it both ways. Unless some subsidization (probably tax payer) is going on.
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Old 10-13-2011, 12:06 PM   #47
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I disagree. But perhaps the 401k I participated is unique. We had an investment option called "money market." It was very stable and safe. Or, if you wanted to take a tad bit of timing risk, you could go with the short term bond fund. In either case, you could at the end then buy an SPIA.
But that actually highlights the point: At the individual level, the only way to "avoid risk" is to put your money into money market funds currently earning 0.1%.

Pension funds, on the other hand -- assuming they are responsibly managed and don't overpromise -- can (relatively) safely take more risk over a very long period of time and no one participant shoulders the "market risk" where the timing of their retirement determines how much they get -- and indeed, whether they can retire at all.

Again, much like insurance, the goal of a pension fund is (or should be) to offload "market risk" away from the individual. It can be done responsibly if invested appropriately (and again, if they don't overpromise benefits). In other words, many people would rather forego the potential of 10% returns on their 401K if they could participate in something that would pretty safely be able to assume (say) 5-6% returns with the risk spread out among all participants to smooth out the ride.

Seeing as this would be optional, I don't know why those who don't like the concept would oppose it. It's not like I'm suggesting the end of the 401K as Teresa Whats-her-name was doing a while back.
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Old 10-13-2011, 12:07 PM   #48
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More or less. I think the idea is that those who don't have access to a traditional DB pension plan (but wish they had one) could at least have the option to funnel some of their 401K/IRA contributions into a somewhat "pension-like" vehicle which trades potential for certainty. And yes, it should be optional and folks should be educated about the tradeoff.
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Old 10-13-2011, 12:10 PM   #49
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But that actually highlights the point: At the individual level, the only way to "avoid risk" is to put your money into money market funds currently earning 0.1%.

Pension funds, on the other hand -- assuming they are responsibly managed and don't overpromise -- can (relatively) safely take more risk over a very long period of time and no one participant shoulders the "market risk" where the timing of their retirement determines how much they get -- and indeed, whether they can retire at all.

Again, much like insurance, the goal of a pension fund is (or should be) to offload "market risk" away from the individual. It can be done responsibly if invested appropriately (and again, if they don't overpromise benefits). In other words, many people would rather forego the potential of 10% returns on their 401K if they could participate in something that would pretty safely be able to assume (say) 5-6% returns with the risk spread out among all participants to smooth out the ride.

Seeing as this would be optional, I don't know why those who don't like the concept would oppose it. It's not like I'm suggesting the end of the 401K as Teresa Whats-her-name was doing a while back.
In addition to market risk, the pension fund can also deal with age and longevity risk, which the individual cannot. So the "pension-plan" type offering for someone with DC/401(k) is potentially very desirable.
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Old 10-13-2011, 12:16 PM   #50
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In addition to market risk, the pension fund can also deal with age and longevity risk, which the individual cannot. So the "pension-plan" type offering for someone with DC/401(k) is potentially very desirable.
I see it as a potential way to restore the "three legged stool" of retirement that fewer and fewer people have available to them as time goes by. I think FERS pretty much got it right, and I could easily see such an "optional portable pension-lite" as serving roughly the same purpose as the DB pension portion of FERS retirement would provide.
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Old 10-13-2011, 12:17 PM   #51
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But that actually highlights the point: At the individual level, the only way to "avoid risk" is to put your money into money market funds currently earning 0.1%.

Pension funds, on the other hand -- assuming they are responsibly managed and don't overpromise -- can (relatively) safely take more risk over a very long period of time and no one participant shoulders the "market risk" where the timing of their retirement determines how much they get -- and indeed, whether they can retire at all.

Again, much like insurance, the goal of a pension fund is (or should be) to offload "market risk" away from the individual. It can be done responsibly if invested appropriately (and again, if they don't overpromise benefits). In other words, many people would rather forego the potential of 10% returns on their 401K if they could participate in something that would pretty safely be able to assume (say) 5-6% returns with the risk spread out among all participants to smooth out the ride.

Seeing as this would be optional, I don't know why those who don't like the concept would oppose it. It's not like I'm suggesting the end of the 401K as Teresa Whats-her-name was doing a while back.
Zig, sadly I think you're dreaming. It's a pleasant dream and I like it. But it's a dream.

Pension funds might be able to invest somewhat more aggressively than individuals and still guarantee 100% successful results, but I don't think in today's markets their ability to do so is as significant as you are portraying.

Most pension funds, Illinois comes to mind, are screaming that their underfunded status is the result of "poor market performance." I think that tells the story.

I have no issue with pension funds "offloading market risk from the backs of individuals" as you put it. But, it absolutely must NOT be done by simply putting that risk on the backs of others. Having tax payers or newer entrants to the fund shoulder the expense of paying guaranteed amounts to older plan members due to crappy market performance cannot be allowed to happen. Kicking the can down the road to the younger folks has become much too popular these days!

I will note that my son's 401k (Fidelity managed) does offer a stable value fund that is paying a few percent and looks attractive. Does your 401k have anything like that?
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Old 10-13-2011, 12:19 PM   #52
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I love how you use the words 'plundered the plans to the benefit of executives and share holders'....

Nowhere did the companies say 'we will never change this plan... ever ever ever'.... and the companies paid what was PROMISED, which is what the employee had earned to date... you are not suggesting that an employee should be paid something they did not earn do you And in fact there were many employees who actually did get more than promised since if you were not vested, you became vested when they shut down a plan...

And again, the excess funding of ANY plan would not go to the benefit of the participants.... if you were in a DB plan, you got your DB.. nothing more... if the plan was fully funded or 100% over funded, you got your DB... so who actually 'owns' that excess funding The company... surprise....

I still do not see where the companies were not acting in 'good faith'... sure, the employees lost a benefit going forward, or was receiving a different benefit... but that is life... tomorrow my boss can come in and say 'we are cutting your salary by 20%'.... I don't view that as 'bad faith', just that I got shafted... to bad for me...
I purposely chose the word plunder because that is what she documents. I am willing to concede that I may have been deceived by a Wall Street Journal reporter who has a bias against business. I would recommend that you read the book and then either agree or disagree with what she found.

Employers chose to set up DB plans and were then obliged by law and regulation to administer the plans to the benefit of the plan enrollees. The author very explicitly documents that they intentionally did otherwise. Usually they could exploit loopholes to avoid penalty. But under ERISA, even if the employers were determined to have done wrong, employees have no right to punitive damages so corporations could "plunder" the plans with relative impunity - so they did.

The bottom line is that this book alleges and attempts to document that many, many employers intentionally and wrongly misused otherwise healthy DB plans. She is either wrong or right about that. I came away thinking she is right and it infuriated me. There is nothing to be done about it now, that song is sung. But so what? I want to rage about the practices. Please read the book cover to cover and disabuse me of my perceptions so I can chill out.
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Old 10-13-2011, 12:23 PM   #53
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Zig, sadly I think you're dreaming. It's a pleasant dream and I like it. But it's a dream.

Pension funds might be able to invest somewhat more aggressively than individuals and still guarantee 100% successful results, but I don't think in today's markets their ability to do so is as significant as you are portraying.
A couple of things here.

1 -- I'm not suggesting this "pension" has to guarantee a certain level of benefits unless the benefits are computed much more conservatively than they have been in legacy plans.

2 -- Even with more conservative benefit estimates, you'd almost certainly beat the only "certainty" available to the 401K crowd -- an AA of 100% cash.

And with the more conservative growth estimates (say 5-6% instead of the 8% or so commonly assumed with legacy plans) -- these funds could significantly overperform in bull markets which would cushion the blow in bear markets. And such a plan would eliminate several factors which make traditional legacy pensions less sustainable: for example there would be no spiking mechanism, and because it is 100% participant funded, there would be no companies or government bodies "underfunding" the plan when it's convenient for them to do so. A person's benefit only rises to the extent to which they contribute. You don't fund it, your projected benefit doesn't rise.
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Old 10-13-2011, 12:32 PM   #54
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A couple of things here.

1 -- I'm not suggesting this "pension" has to guarantee a certain level of benefits unless the benefits are computed much more conservatively than they have been in legacy plans.

2 -- Even with more conservative benefit estimates, you'd almost certainly beat the only "certainty" available to the 401K crowd -- an AA of 100% cash.

And with the more conservative growth estimates (say 5-6% instead of the 8% or so commonly assumed with legacy plans) -- these funds could significantly overperform in bull markets which would cushion the blow in bear markets. And such a plan would eliminate several factors which make traditional legacy pensions less sustainable: for example there would be no spiking mechanism, and because it is 100% participant funded, there would be no companies or government bodies "underfunding" the plan when it's convenient for them to do so. A person's benefit only rises to the extent to which they contribute. You don't fund it, your projected benefit doesn't rise.
So who would run this plan thats guaranteed to "overperform in bull markets?" Who would govern it? Would there be some kind of bailout mechanism if investment returns did stumble below their ability to support the prosmised pension levels?

Perhaps we could all have access to FERS? That might be close to what you're talking about.

Or, google the Wisconsin Retirement System. It's close to what you're talking about. It's 100% funded and the cola, if any, depends on investment returns. Right now, no cola which is appropriate for economic conditions. They can even reduce your pension due to poor investment returns, but not below the original level you received on day #1. Of couse, you'd have to substitute private funding for gov't funding.
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Old 10-13-2011, 12:33 PM   #55
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The issue is that the individual faces greater investment risk than the pension fund because the fund can share the risk and the individual cannot. The individual doesn't need higher performance but lower risk. A "public pension fund" - like a non-for-profit annuity type fund would be a valuable option for the worker. Individual risk can be reduced and time horizon can be extended, which both lead to a more favorable outlook for the average person.
You are spot on with this comment. Most forum posters here without pensions know how to handle their money, but are still at risk to the whims of the market. The "average person" you mention Michael has double the risk, not only are they subject to the whims, they don't even understand what they are trying to do.
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Old 10-13-2011, 12:41 PM   #56
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You are spot on with this comment. Most forum posters here without pensions know how to handle their money, but are still at risk to the whims of the market. The "average person" you mention Michael has double the risk, not only are they subject to the whims, they don't even understand what they are trying to do.
There it is! The youbet "understatement of the day." Congratulations on your award!

Here in Illinois (this thread did start out being about Illinois.......) our ability to be dumb and greedy when making investments is exceeded only by our love and admiration of corruption, graft, payola, scams, machine politics and the public servants who pull them off.
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Old 10-13-2011, 12:44 PM   #57
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Would there be some kind of bailout mechanism if investment returns did stumble below their ability to support the prosmised pension levels?

Perhaps we could all have access to FERS? That might be close to what you're talking about.
Wouldn't the second paragraph make the first even worse? Make it a part of FERS and Uncle Sam is on the hook for all the underperformance -- not just of its own employees but for everyone who bought into it. I'm not necessarily opposed to that idea but it *is* in conflict with the concern over "bailouts" for underperformance.

And keep in mind that I am referring to concepts, not details. You are stuck on the details which would have to be worked out at a later time. First you need the concept, then you work the details to see if it can be feasibly done. I would think if nothing else you could pretty safely remove a lot of "market risk" in such a fund without needing to rely on the pathetic returns of cash and short-term investment grade bonds.

In reality, I think the greatest risk would be political risk -- resisting the pressure to increase benefits in bull markets because the pension fund is so "overfunded". Avoid that temptation (this helped ruin the solvency of some pension funds) and it becomes much more likely to survive prolonged bear markets like 1966-1982 or 2000-20xx -- and be sustainable for many decades.
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Old 10-13-2011, 12:52 PM   #58
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Make it a part of FERS and Uncle Sam is on the hook for all the underperformance --
Good point. Hey, I was just throwing out an idea.
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And keep in mind that I am referring to concepts, not details. You are stuck on the details which would have to be worked out at a later time.
I was accepting your concept as a good idea. But sometimes you have to probe the details to see if it could actually be implemented. For example, Roosevelt thought it was a good concept to provide a safety net for retirees called SS and fund it with 1% of participants payroll dollars. Hmmmmmmm..... While it's a good idea to have the safety net, the 1% part hasn't worked out all that well.......

Zig, if ya don't look at the details and challenge concepts, it's pretty hard to formulate an implementation plan and actually make it happen.

As I stated earlier, your concept sounds like a sweet dream to me. I'm just having trouble thinking of a way it could actually happen and, if it did, how we could keep greedy managers and politicians from fouling it up in short order.

Bear in mind, I'm a Chicago boy and always assume that both private and public sector folks who run anything are always completely in it for themselves. It's our culture.
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Old 10-13-2011, 12:56 PM   #59
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As I stated earlier, your concept sounds like a sweet dream to me. I'm just having trouble thinking of a way it could actually happen and, if it did, how we could keep greedy managers and politicians from fouling it up in short order.

Bear in mind, I'm a Chicago boy and always assume that both private and public sector folks who run anything are always completely in it for themselves. It's our culture.
Yeah, I added a paragraph to my post above to reflect that -- here it is again, repeated. This is probably the greatest "risk" of them all with such a proposal:

Quote:
In reality, I think the greatest risk would be political risk -- resisting the pressure to increase benefits in bull markets because the pension fund is so "overfunded". Avoid that temptation (this helped ruin the solvency of some pension funds) and it becomes much more likely to survive prolonged bear markets like 1966-1982 or 2000-20xx -- and be sustainable for many decades.
Basically the fear is that someone could "buy votes" by promising them a higher benefit if they are elected... and they just undermined the relatively conservative actuarial assumptions of the fund and put it at risk of going insolvent in a long bear market. That would need some way to be avoided, for sure.
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Old 10-13-2011, 01:00 PM   #60
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I could see all pensions turned into SS on steroids--no more private/municipal/state/federal pensions or social security retirement, just a mandatory contribution to a new national pension fund managed by a new agency; if you wanted to put more in, too bad, manage that on your own (like one does when they exceed limits on IRA and 401K contributions).
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