30 years too late and $20B short

[WWSituation]

http://blogs.wsj.com/economics/2011/02/14/dealing-with-higher-pension-costs/

I'm still very excited about the possibility of this going through. Anybody with an IQ over 80 has long said that the PBGC needs to charge risk-based premiums and that their current system is an obselete subsidy at best, and incompetent risk management at worst.

The idealist in me hopes this happens with integrity and it is the final death knell for the corporate DB system. The cynic in me says that it will just create more work and will be administered in a typically incompetent manner to ensure that world of mediocre pension professionals can continue the charade.

[Kenny]

http://blogs.wsj.com/economics/2011/02/14/dealing-with-higher-pension-costs/

I'm still very excited about the possibility of this going through. Anybody with an IQ over 80 has long said that the PBGC needs to charge risk-based premiums and that their current system is an obselete subsidy at best, and incompetent risk management at worst.

The idealist in me hopes this happens with integrity and it is the final death knell for the corporate DB system. The cynic in me says that it will just create more work and will be administered in a typically incompetent manner to ensure that world of mediocre pension professionals can continue the charade.

I don't disagree with the sentiment in the first paragraph, but I'd like to discuss why you think the corporate DB system should die. Do you think there is absolutely no redeeming benefit from an employer voluntarily bearing some of an employees retirement investment risk?

[SirVLCIV]

I don't disagree with the sentiment in the first paragraph, but I'd like to discuss why you think the corporate DB system should die. Do you think there is absolutely no redeeming benefit from an employer voluntarily bearing some of an employees retirement investment risk?

:iatp:

When most of the DC replacements ended up being mediocre 50% matches up to a maximum of 3% of salary, we're going to end up with a lot of people retiring with little to no assets.

[JMO]

In another thread, an example of what WWS thinks of pensions, and maybe you can see why.
This thread warms my heart. It has been 5 long years since I left a career of managing pension assets cold turkey. I knew the actuarial track was dead but I didn't expect the conversation to be at this level this quickly. I remember telling people 6-7 years ago that there is no future whatsoever for a college graduate in the pension actuarial space. It is sad because I did learn a lot about the business world from managing clients that I use today. There is no other route on the actuarial track where people can get that kind of exposure. Insurance consulting doesn't really do it because there are only a few companies out there to serve and you only really talk to the actuarial departments - you don't get to meet with CEOs and CFOs of real companies that make things (i.e. that don't just push paper around).

I don't think he has ever had anything positive to say about actuaries and pensions.

[HatCapitol]

:iatp:

When most of the DC replacements ended up being mediocre 50% matches up to a maximum of 3% of salary, we're going to end up with a lot of people never retiring.

IFYP

[WellThen]

:iatp:

When most of the DC replacements ended up being mediocre 50% matches up to a maximum of 3% of salary, we're going to end up with a lot of people retiring with little to no assets.

So they'll learn to accumulate assets while they're young, or to rely on their kids. Either way, just because there is a benefit from DB plans, doesn't mean it's worth the cost, which is apparently too high. I don't see why the PBGC should even exist, as all it does is distort costs. Clearly there is either a lack of ability to project future costs, or lack of ability to fund the PBGC properly, or both.

[WWSituation]

I don't disagree with the sentiment in the first paragraph, but I'd like to discuss why you think the corporate DB system should die. Do you think there is absolutely no redeeming benefit from an employer voluntarily bearing some of an employees retirement investment risk?

The existence of a redeeming benefit doesn't necessarily justify the infrastructure and expense despite the biased pleas of the tens of thousands of people that the system employs.

The typical employee in the corporate space does not stay long enough to be vested and those that do rarely stay long enough to get a meaningful benefit. Companies practice zero risk management in the space, which is disturbing for a $7 Trillion system or whatever that number is at. The mentality of an overfunded plan is to raise benefits, and the mentality of an underfunded plan is to increase the equity allocation to grow their way out.
Ask any company if they could go back in time whether or not they would still have a pension.

There were (and still are) subsidies whose existence make it worthwhile for some companies to have DB plans, namely the ability to make up fake earnings and to smooth asset values but most companies who have had the ability to do so have bowed out. The PBGC risk arbitrage is another such subsidy that would severely devalue the DB to an employer is it is removed.

DBs would be great in a utopia where companies acted altruistically towards the welfare of their employees. Nobody on this board is naive enough to believe that companies would provide a dime's worth of value unless they are getting 11 cents in return. As public companies, they are forbidden to do so at the expense of their shareholders. Given that the value proposition of a pension has been determined to be a losing one for some time (how many freezes & terminations since 2000?), how could you continue to justify the value if an additional benefit is removed?

[Kenny]

The existence of a redeeming benefit doesn't necessarily justify the infrastructure and expense despite the biased pleas of the tens of thousands of people that the system employs.

The typical employee in the corporate space does not stay long enough to be vested and those that do rarely stay long enough to get a meaningful benefit. Companies practice zero risk management in the space, which is disturbing for a $7 Trillion system or whatever that number is at. The mentality of an overfunded plan is to raise benefits, and the mentality of an underfunded plan is to increase the equity allocation to grow their way out.
Ask any company if they could go back in time whether or not they would still have a pension.

There were (and still are) subsidies whose existence make it worthwhile for some companies to have DB plans, namely the ability to make up fake earnings and to smooth asset values but most companies who have had the ability to do so have bowed out. The PBGC risk arbitrage is another such subsidy that would severely devalue the DB to an employer is it is removed.

DBs would be great in a utopia where companies acted altruistically towards the welfare of their employees. Nobody on this board is naive enough to believe that companies would provide a dime's worth of value unless they are getting 11 cents in return. As public companies, they are forbidden to do so at the expense of their shareholders. Given that the value proposition of a pension has been determined to be a losing one for some time (how many freezes & terminations since 2000?), how could you continue to justify the value if an additional benefit is removed?

This is about what I expected. The bolded sentence is the only thing that directly addresses my question, and is a certainly a reasonable arguement against the traditional DB benefit structure. My problem is that you keep saying DB plans suck and should die but your issue isn't really with DB plans, it is with the current structure (eg. legislation, accounting, general company approach, etc.). Some of that is changing and is where I think we should be focused to make sure it changes in a meaningful and useful way. And this isn't coming from someone who is trying to save his job (because while I enjoy the current security of my job I think I am more than capable enough to make a transition to plenty of other fields) but from someone actually intrested in the issues raised.

I don't know if you honestly don't see the difference, you think the only way to fix it is to destroy it first or something else. But, I think your passion could be useful in fueling the discussion, in the same way Jeremy Gold's passion for the accounting side continues to influence that discussion (despite the fact he contiues to drive one of my firm's partners nuts), as long as you stop simply bashing DB's and start actually discussing the real issues.

[WWSituation]

I'm sure the anger I've displayed in the past has created a perception about me, but I don't think I've really taken a position that "DB plans suck". I have a contempt for many of the professionals in the space (which doesn't garner me any popularity here, I understand) which is why I don't believe that the system is worth saving even if some kind of miraculous innovation were to occur.

I believe fundamentally in risk transfer from those who cannot do to those who can. Companies who sponsor DB plans are not effectively taking on that transfer even though it may look to most people here like they do. If they were rated like insurers based on capital/reserves/financial strength, the collective corporate pension system would be rated close to default status. If a deeper look was taken at the risk management culture, the ratings view would be worse yet. There are reasons why it is more expensive to lay a pension off to an insurer and it isn't because the insurer is making bank off the transaction.

The only reason why the PBGC would push for this now would be to wipe their slate clean.

[Duffer]

The main reason that pensions are not the same as insurance company annuity products is that insurers had their chance years ago, and their fees created opportunity for others to do the same job for less expense.

It is partly about the risk proposition, but also about control. If the insurance company controls the risk by controlling the funds, then the consumer has less freedom to change their focus.

[Arthur Kade]

(despite the fact he contiues to drive one of my firm's partners nuts)
Isn't it odd that something as almost self-evidently true as what Jeremy Gold says/writes would drive somebody in this industry nuts? Perhaps this is the kind of thing that feeds WWS's contempt.

[SirVLCIV]

This is about what I expected. The bolded sentence is the only thing that directly addresses my question, and is a certainly a reasonable arguement against the traditional DB benefit structure. My problem is that you keep saying DB plans suck and should die but your issue isn't really with DB plans, it is with the current structure (eg. legislation, accounting, general company approach, etc.). Some of that is changing and is where I think we should be focused to make sure it changes in a meaningful and useful way. And this isn't coming from someone who is trying to save his job (because while I enjoy the current security of my job I think I am more than capable enough to make a transition to plenty of other fields) but from someone actually intrested in the issues raised.

I don't know if you honestly don't see the difference, you think the only way to fix it is to destroy it first or something else. But, I think your passion could be useful in fueling the discussion, in the same way Jeremy Gold's passion for the accounting side continues to influence that discussion (despite the fact he contiues to drive one of my firm's partners nuts), as long as you stop simply bashing DB's and start actually discussing the real issues.

:iatp:

I think the current system of laws and regulations is really quite poor, and that the idea of the traditional DB (work for one company for life and retire after 35-40 years with 80% pay replacement) is not going to work in today's world of turnover, and I do agree that most (I can think of only one exception on the cases I've worked on) have woefully mismanaged their risk exposure over the years (not much you can do if a client ignores your advice).

However, I do think that DB plans have a very strong benefit to offer to employees, and if the problems could be fixed, and risk management could receive more focus, they could be viable in the modern world.

The status quo -will not work-. A maximum 3% match on 6% of income (that most employees don't maximize) is going to lead to catastrophe as people realize that $20,000 isn't going to last for 20 years of retirement.

One idea I've thought interesting is a DC plan with a DB floor. I don't think I've ever seen one IRL, but it satisfies the goals of employee and employer sharing the risk exposure.

[Arthur Kade]

One idea I've thought interesting is a DC plan with a DB floor. I don't think I've ever seen one IRL, but it satisfies the goals of employee and employer sharing the risk exposure.
I've seen it in the small plan market, where the goal is to give the older owner/partners a DB benefit but younger employees a DC benefit. But I've never seen it in the large US market. I believe some Canadian universities use this model.

[Kenny]

One idea I've thought interesting is a DC plan with a DB floor. I don't think I've ever seen one IRL, but it satisfies the goals of employee and employer sharing the risk exposure.

I know you probably don't want to do more reading since you are still studying for EA exams, but there are several papers on the FSA exams that discuss alternative approaches to traditional DB/DC plans. This being one approach.

I've seen it in the small plan market, where the goal is to give the older owner/partners a DB benefit but younger employees a DC benefit. But I've never seen it in the large US market. I believe some Canadian universities use this model.

One of the biggest risks is that the DB floor is providing an implicit put option and encourages risk taking in the DC plan. There are approaches to limiting the risk taking available but then that limits the flexibility of investment options for the participant.

[Kenny]

Isn't it odd that something as almost self-evidently true as what Jeremy Gold says/writes would drive somebody in this industry nuts? Perhaps this is the kind of thing that feeds WWS's contempt.

This is a bit off topic, but he is an actuarial traditionalist and from the public plan perspective there is no distinguishing between funding and accounting rules (since there are no minimum funding rules). I think some of his arguments make sense given the current political climate and what the traditional funding methods are supposed to represent, but think there needs to be a push to separate accounting from funding/budgeting in the public plan space. I think the FE and the traditional approaches have their place.

[SirVLCIV]

I know you probably don't want to do more reading since you are still studying for EA exams, but there are several papers on the FSA exams that discuss alternative approaches to traditional DB/DC plans. This being one approach.



One of the biggest risks is that the DB floor is providing an implicit put option and encourages risk taking in the DC plan. There are approaches to limiting the risk taking available but then that limits the flexibility of investment options for the participant.

I start taking FSA exams in November, so there you go ;-)

I think when I was introduced to the idea, the employer managed the DC pool to limit risk-taking.

[WWSituation]

I don't think he has ever had anything positive to say about actuaries and pensions.

This was predictably ignorant from you.

[HatCapitol]

I've thought the same thing for awhile. I like the variable defined benefit with a floor design. The trustees would manage the assets, which would discourage the risk taking that Kenny is talking about. The variable benefit feature gives the plan some flexibility so they won't need to do anything dramatic to remedy underfunding if it occurs.

The floor encourages conservative investing on the part of the plan, which I think institutional investors like pension plans should practice more of. Since they represent so much of the available investment capital, their return chasing plays a big part in bubble creation.

The advantage to have VDB instead of straight DC is 1) trustee investment management and 2) guaranteed annuitization.

[WWSituation]

The DC plan with a floor exists. They are sold everyday out of many insurance companies - companies with the expertise, infrastructure, oversight, governance and capital to price and hedge the risk. These insurance companies, despite all of their resources allocated toward managing these risks, are in over their head and do do an iffy job with the risk management. Does anybody here think that a regular company sponsoring a DB plan is an a position to do anything other than bankrupt themselves by issuing irrevocable put options?

[HatCapitol]

The DC plan with a floor exists. They are sold everyday out of many insurance companies - companies with the expertise, infrastructure, oversight, governance and capital to price and hedge the risk. These insurance companies, despite all of their resources allocated toward managing these risks, are in over their head and do do a great job with the risk management. Does anybody here think that a regular company sponsoring a DB plan is an a position to do anything other than bankrupt themselves by issuing irrevocable put options?

Yeah, we get it. You made a big commitment to change your career mid-life, and now you're devoted to your superiority complex over those of us still in the field. Get over yourself, we've heard your opinion already.

[ElDucky]

Removing the PBGC as an insurer (at most it should be a regulator) would strengthen the DB system.

I think variable DB will be the future of pension plans.

[limabeanactuary]

Given that I'm not really seeing myself sticking longer than 5 years at any employer, I'm not really invested in the concept of a DB plan as employer-sponsored deferred income benefits.

Portable deferred annuities! It's where it's at!

[limabeanactuary]

Hmmm, not as catchy as "Risk is Opportunity"

I'm going to have to work on my marketing slogan.

[SirVLCIV]

The DC plan with a floor exists. They are sold everyday out of many insurance companies - companies with the expertise, infrastructure, oversight, governance and capital to price and hedge the risk. These insurance companies, despite all of their resources allocated toward managing these risks, are in over their head and do do an iffy job with the risk management. Does anybody here think that a regular company sponsoring a DB plan is an a position to do anything other than bankrupt themselves by issuing irrevocable put options?

What is the alternative??

I see four possibilities for the next 30 years.

1) Continue our current path. People have proven time and time again that they DO NOT save enough. As people reach 'retirement age', they will find they can not retire, and either continue to work through to death if able, or become a drain on the country if not. I don't think many people are willing to go the complete alternative route and say 'if you don't have the money to live, well, see you on the street!'

2) Expand the government's social insurance safety net.

3) Force people to save x% of income (again, the gov't).

4) Encourage better employer sponsored retirement plans.

If anyone has any better alternatives (less gov't intrusion the better, IMO), then I'd love to hear them.

[SirVLCIV]

Given that I'm not really seeing myself sticking longer than 5 years at any employer, I'm not really invested in the concept of a DB plan as employer-sponsored deferred income benefits.

Portable deferred annuities! It's where it's at!

Yeah, I think traditional DB funding, which accumulates more in the old years, doesn't have a bright future. I like the idea of flat funding (EAN style) used to purchase deferred annuities (maybe like a 401(k), let you roll over your 'benefit' to another employer).

I honestly haven't worked out my vague ideas (if I had, I'd have published an article).

[campbell]

I just really like(d) TIAA-CREF's model.

When I left, I left my 401(k) money there.

[campbell]

What is the alternative??

I see four possibilities for the next 30 years.

1) Continue our current path. People have proven time and time again that they DO NOT save enough. As people reach 'retirement age', they will find they can not retire, and either continue to work through to death if able, or become a drain on the country if not. I don't think many people are willing to go the complete alternative route and say 'if you don't have the money to live, well, see you on the street!'

2) Expand the government's social insurance safety net.

3) Force people to save x% of income (again, the gov't).

4) Encourage better employer sponsored retirement plans.

If anyone has any better alternatives (less gov't intrusion the better, IMO), then I'd love to hear them.

Choices have consequences.

This thread is already rather political, but my point is that adults putatively are responsible for themselves. The more one makes someone else responsible for adults' choices, the more irresponsible the choices will become. Aka moral hazard.


I think Social Security will one day become an explicit welfare program for the elderly/disabled. And that's going to happen because that's what we can afford as a country, demographically. I am not expecting the govt to do squat for me when I'm old. It's up to me to prepare.

Part of that preparation is having kids, who might feel some sort of obligation to help me once I become senile.

[JMO]

The status quo -will not work-. A maximum 3% match on 6% of income (that most employees don't maximize) is going to lead to catastrophe as people realize that $20,000 isn't going to last for 20 years of retirement.

And a lot of them won't even realize this until they have spent that $20,000 in the course of a year or two. (I'm assuming they will be getting SocSec as well, which may or may not be a good assumption.)

Even if it was $200,000, very few people understand longevity risk, and even fewer are prepared to do anything about it. Until it is too late.

[JMO]

This was predictably ignorant from you.
OK, I apologize. Your post above (#7 in this thread) was well thought out, and you deserve credit for that.

It's a good contribution to the discussion. You have identified serious problems with DB as it now exists. But I also agree with those who suggest that getting rid of DB is going overboard. It ought to be fixed, not eliminated.

[JoeAtlanta]

I just really like(d) TIAA-CREF's model.

When I left, I left my 401(k) money there.

Really? How come you've never mentioned that before?

[WWSituation]

OK, I apologize. Your post above (#7 in this thread) was well thought out, and you deserve credit for that.

It's a good contribution to the discussion. You have identified serious problems with DB as it now exists. But I also agree with those who suggest that getting rid of DB is going overboard. It ought to be fixed, not eliminated.

I'm not advocating the death Defined Benefit, however the system that is in place that has companies shouldering all of the risk, while service providers act as parasites while delivering little value to the sponsor, is one that needs to be scrapped. The sponsors have demonstrated themselves to be incompetent in the area of managing the risk, plain and simple. It will likely never change organically because too many people are making a good living off of it being the way that it is. I would love to see that all come to an end.

Lifetime-retirement income is the fundamental aspect of the DB that should be saved, and it is available from the insurance industry. I see new products being developed now very aggressively that provide equity guarantees with lifetime income. There is close to a $Trillion in these products already. Insurers are not a lot more competent than companies at running the risk either, but at least they are capitalized and have the resources to manage the risk effectively. Additionally, the accountability shifts to them and their shareholders as opposed to the sponsors themselves.

None of this implies the death of the defined benefit. It points more towards what the evolved DB looks like. The DB was a great product for the time that it lived. It was an effective tool to manipulate a workforce that was loyal, local and unskilled. It was also effective when the system was small and the incompetence with regard to risk could be masked by any number of other things. None of these factors exists today, but people can still go to an insurer and buy their lifetime retirement benefit with the money they saved in their 401(k) or they can begin to build one if they are starting out. I'm not saying that this is some panacea, but I believe it is a lot better than the unregulated banking system that currently exists with the corporate pension system.

Finally - the lack of a good solution is about the poorest excuse yet for why a company should expose its shareholders to risks that they have no clue how to manage.

[SirVLCIV]

OK, I apologize. Your post above (#7 in this thread) was well thought out, and you deserve credit for that.

It's a good contribution to the discussion. You have identified serious problems with DB as it now exists. But I also agree with those who suggest that getting rid of DB is going overboard. It ought to be fixed, not eliminated.

I'm just not sure if there is a fix shy of eliminating the current systems of laws/regs and starting over.

[SirVLCIV]

Lifetime-retirement income is the fundamental aspect of the DB that should be saved, and it is available from the insurance industry. I see new products being developed now very aggressively that provide equity guarantees with lifetime income. There is close to a $Trillion in these products already. Insurers are not a lot more competent than companies at running the risk either, but at least they are capitalized and have the resources to manage the risk effectively. Additionally, the accountability shifts to them and their shareholders as opposed to the sponsors themselves.

See, here's a potential solution I hadn't thought of. It could satisfy the goals of

1) Providing retirement security,

2) Portability of benefits (if your first employer pays for an $X annuity and your second employer pays for $Y, and you retire, you will get ($X+$Y); then finally, there could be a market for consolidation of benefits as an individual approaches retirement), and

3) Allowing corporations/insurers to maintain the risks they are best situated to maintain.

I like it.

And, 4) The current service providers (which, I believe, includes us pension actuaries) for DB plans could certainly learn how to model/manage the new benefits and work for these insurers.

The next step is to figure out the potential downsides, and (since the federal gov't can't butt out of anything), what government regulations are bound to be created to govern the new retirement benefits should a move towards them begin.

[WWSituation]

See, here's a potential solution I hadn't thought of. It could satisfy the goals of

1) Providing retirement security,

2) Portability of benefits (if your first employer pays for an $X annuity and your second employer pays for $Y, and you retire, you will get ($X+$Y); then finally, there could be a market for consolidation of benefits as an individual approaches retirement), and

3) Allowing corporations/insurers to maintain the risks they are best situated to maintain.

I like it.

And, 4) The current service providers (which, I believe, includes us pension actuaries) for DB plans could certainly learn how to model/manage the new benefits and work for these insurers.

The next step is to figure out the potential downsides, and (since the federal gov't can't butt out of anything), what government regulations are bound to be created to govern the new retirement benefits should a move towards them begin.

1, 2, and 3 already exists w.r.t. the lifetime GMWB products already being sold at a clip of around $50B/year. Insurers maintain the risks and get paid, fund providers get paid their fees and the company manages it much in the way they would manage a DC program with no headaches.

4 would up to you and your relationship but you would be a literal version of a consultant. You would likely work with a client the way you did back in the day - as an advisor to the HR department with something useful and valuable to say about their strategy w.r.t. their workforce/employee engagement and how their retirement programs fit in with that.

[limabeanactuary]

Really? How come you've never mentioned that before?

:squintyeyes:

[SirVLCIV]

1, 2, and 3 already exists w.r.t. the lifetime GMWB products already being sold at a clip of around $50B/year. Insurers maintain the risks and get paid, fund providers get paid their fees and the company manages it much in the way they would manage a DC program with no headaches.

4 would up to you and your relationship but you would be a literal version of a consultant. You would likely work with a client the way you did back in the day - as an advisor to the HR department with something useful and valuable to say about their strategy w.r.t. their workforce/employee engagement and how their retirement programs fit in with that.

So how do we get these products to sell? $50B a year sounds like a lot, but it could be a whole lot more. What's the total amount of money contributed to DB/DC/401k arrangements nationally?

[Duffer]

WWS wants us all to turn the problem over to him, so he can hold the money and give the contractual 3% guaranteed return.

Ho hum. Been tried before. No thanks.

[WWSituation]

WWS wants us all to turn the problem over to him, so he can hold the money and give the contractual 3% guaranteed return.

Ho hum. Been tried before. No thanks.

I have nothing to do with these products. My plate is full with other problems.

[Jwallace]

A thought experiment:

Take your annual contribution to your 401(k) and, instead of buying mutual fund shares, buy a deferred immediate annuity. You know, the kind with no cash value and no payments till you're 65, but then level payments for life. A true longevity hedge. Offer this product to all workers via 401(k). Each year, layer on another rung to the "ladder" until you retire with guaranteed income for life. Would this scheme reproduce DB-like longevity protection?

The first problem I see is, of course, that nobody but actuaries will like a deferred immediate annuity, so they'd just invest in mutual funds anyway. But at least I'd get my own longevity risk covered.

[SirVLCIV]

WWS wants us all to turn the problem over to him, so he can hold the money and give the contractual 3% guaranteed return.

Ho hum. Been tried before. No thanks.

:shrug: I don't care if someone stands to make a fortune on an idea. A good idea is a good idea.

[JMO]

A thought experiment:

Take your annual contribution to your 401(k) and, instead of buying mutual fund shares, buy a deferred immediate annuity. You know, the kind with no cash value and no payments till you're 65, but then level payments for life. A true longevity hedge. Offer this product to all workers via 401(k). Each year, layer on another rung to the "ladder" until you retire with guaranteed income for life. Would this scheme reproduce DB-like longevity protection?

The first problem I see is, of course, that nobody but actuaries will like a deferred immediate annuity, so they'd just invest in mutual funds anyway. But at least I'd get my own longevity risk covered.

Better to leave the pre-retirement investment options as they are, but make the default payout in the form of a life annuity.

Hey campbell, is that something like the TIAA CREF approach?

[limabeanactuary]

Better to leave the pre-retirement investment options as they are, but make the default payout in the form of a life annuity.

Hey campbell, is that something like the TIAA CREF approach?

It's changed over the years.

The original institutional plan was a deferred annuity that you could get money out as income as a life annuity. That's the one that started in 1919. Later they added variable annuities into the mix. And other payment options [interest only, minimum distribution, annuity certain over 9 years [fastest can get out], various joint life options, different payout benefit calculation options - one more level than the other [trying to be semi-inflation indexed]].

I don't think there's a default payout method -- you have to affirmatively choose some sort of method to get the money out. I believe they will force the minimum distributions if you hit 70 (1/2?) without taking distributions. But that's the only "default" now.

Of course, they've got a line of mutual fund products, that one doesn't have to take as an annuity. But I believe in all the institutional contracts there is an option to annuitize. It's been a while, so I forget all the details.


So the contracts are institutional-based, but everyone has a personal account. Different institutions will have different things available to their active members (policy loans, for example). They keep track of one's accumulations from different institutional plans if you've worked at more than one TIAA institution.

Anyway, that's how it works, more or less.

[Duffer]

:shrug: I don't care if someone stands to make a fortune on an idea. A good idea is a good idea.

I remember the inflation of the Carter years, when these fixed annuity contracts lost so much value. No thanks, too inflexible.

[limabeanactuary]

I remember the inflation of the Carter years, when these fixed annuity contracts lost so much value. No thanks, too inflexible.

Well, that's why one has dividends, too.

I once looked at the dividend rates/payout settlement rates history for TIAA.... yowza in the early 80s.

[SirVLCIV]

I remember the inflation of the Carter years, when these fixed annuity contracts lost so much value. No thanks, too inflexible.

Well, then, come up with a better alternative! It's obvious that most corporations have moved away from DB plans in favor of fixed % of payroll contributions. How can we better encourage that money into providing retirement security?

[Duffer]

Well, then, come up with a better alternative! It's obvious that most corporations have moved away from DB plans in favor of fixed % of payroll contributions. How can we better encourage that money into providing retirement security?

Well, we have such examples now. If your model was an EAN cost method calculation for a projected DB benefit of 80% of pay, offset by SS PIA, then you could pick the annual contribution rate that gets to that goal. If you want to be more sophisticated about this, you would also add the potential for inflation and personal productivity gains. You could add such items as projected inflation. By considering the potential that you won't get there, you can add the cost of insurance for death and disability.

It is called financial planning. It requires discipline, and the consequences of failure are personal. You figure out the contribution target, you invest long term, and you don't blow the money on whims or toys. Boring, but it works. If you get lucky with extra income, fund ahead a few years.

Now, there are plenty of people who can't follow this model. Are you telling me that the govt has to nanny them? That's your political opinion, then. I don't hold the current system in contempt, because it meets the needs of many people.

[Retired Resource Actuary]

Well, then, come up with a better alternative! It's obvious that most corporations have moved away from DB plans in favor of fixed % of payroll contributions. How can we better encourage that money into providing retirement security?

Here is an idea from some actuary who was struggling with this issue back in 2004. He suggested something called the "Defined Cost Pension Plan."

http://www.contingencies.org/julaug04/defined.pdf

[ElDucky]

It's a fluke of history and tax codes that employers ended up responsible for DB pensions. DC is no good because of longevity risk. Variable DB plans with a third party trustree where employers only need to make contributions is the probable future imo. I think that's what TIAA-CREF is, though I don't know much about it. It would be very similar to the Ontario Teachers' Pension Plan.

[Duffer]

My family examples dealt with longevity risk by accumulating principal until retirement and living off the income. They only invaded principal for intentional major events, like buying their children a house. They invested in rentals and fixed income assets. When inflation hit, they raised rents.

They were content with the life they could afford. Others...not so much.

[Runner]

It's a fluke of history and tax codes that employers ended up responsible for DB pensions. DC is no good because of longevity risk. Variable DB plans with a third party trustree where employers only need to make contributions is the probable future imo. I think that's what TIAA-CREF is, though I don't know much about it. It would be very similar to the Ontario Teachers' Pension Plan.
Everybody says with DC plans all of the longevity risk is borne by the retiree, but is that still true? First of all, many DC plans are pension plans, so the default option must be a life annuity. Maybe the plan sponsor buys it from an insurance company, but still the longevity risk is pooled. Second, even if you have a straight 401(k) plan, don't most administrators offer annuities? Vanguard, Schwab, Fidelity, ... They all offer annuities.

[ElDucky]

Everybody says with DC plans all of the longevity risk is borne by the retiree, but is that still true? First of all, many DC plans are pension plans, so the default option must be a life annuity. Maybe the plan sponsor buys it from an insurance company, but still the longevity risk is pooled. Second, even if you have a straight 401(k) plan, don't most administrators offer annuities? Vanguard, Schwab, Fidelity, ... They all offer annuities.

Ya, but annuities are expensive, because only healthy people buy them. You'd need a pooled annuity market or something so prices aren't so high. DC accounts tend to pay higher investment expenses too, where pooling would also help. A DC concept, but with the large asset base and group mortality of DB is the system that makes sense to me.

[SirVLCIV]

Well, we have such examples now. If your model was an EAN cost method calculation for a projected DB benefit of 80% of pay, offset by SS PIA, then you could pick the annual contribution rate that gets to that goal. If you want to be more sophisticated about this, you would also add the potential for inflation and personal productivity gains. You could add such items as projected inflation. By considering the potential that you won't get there, you can add the cost of insurance for death and disability.

It is called financial planning. It requires discipline, and the consequences of failure are personal. You figure out the contribution target, you invest long term, and you don't blow the money on whims or toys. Boring, but it works. If you get lucky with extra income, fund ahead a few years.

Now, there are plenty of people who can't follow this model. Are you telling me that the govt has to nanny them? That's your political opinion, then. I don't hold the current system in contempt, because it meets the needs of many people.

So, you're fine with 'status quo', I take it?

Because 'status quo' = a lot of 60-80 year olds who will be destitute, and yes, living off the government.

I have a close view of what's common in this country. My two parents, 48 years old, have $80k of 401(k) money between them (and $0 in other assets).

Hardly money that will lead to anything approaching retirement. I'm sitting here wondering how in the hell I'm going to fund my wife and I's retirement AND my parents' retirement.

ANY glance at statistics will show you that they are REPRESENTATIVE of this country's population.

And how is the 'status quo' of DB and DC plans not caused by government nannying? Eliminate tax benefits of DB and DC plans if that's your goal.

[SirVLCIV]

I'm trying to think up PRIVATELY sold products that achieve the goals of:

1) Providing retirement security.
2) Portability of benefits (not being tied up to one employer).
3) Shared investment risk between employee and employer.

DB plans and 401(k)s and 'well, just save your money' don't achieve these goals.

An employer purchased deferred annuity does. You mocked the idea and only provided 'well, just save' as the alternative.

[SirVLCIV]

My family examples dealt with longevity risk by accumulating principal until retirement and living off the income. They only invaded principal for intentional major events, like buying their children a house. They invested in rentals and fixed income assets. When inflation hit, they raised rents.

They were content with the life they could afford. Others...not so much.

Cool story. I'm glad you had a responsible family.

[Kenny]

First of all, many DC plans are pension plans, so the default option must be a life annuity.
Don't mix-up Canadian vs. US legislation. DC plans in the US might offer annuities, they might not, depending on the reg section they fall under and the desires of the sponsor. However, for most DC plans, a LS is the assumed form of benefit payment, regardless of what the default might be.

[WWSituation]

I was hoping to see some more talk on what ppl here think the impact will be if the PBGC actually rolled out a risk-based premium methodology. Anybody?

[campbell]

I'm just wondering how likely a proper premium will be charged.

[WWSituation]

I'm just wondering how likely a proper premium will be charged.

The question is entirely political. The PBGC knows exactly how to do this correctly - they have never gotten the go ahead to implement it. This is mainly what I'm wondering - does Obama's statements indicate a shift to the extent that the PBGC will be allowed to go as far as they want, or will it be a repeat of PPA where it ends up being a significantly watered down version?

[limabeanactuary]

Seriously.

What is likely?

I am not seeing that things are likely to change.

[JMO]

Seriously.

What is likely?

I am not seeing that things are likely to change.
Yep. It was ALWAYS supposed to be based on risk assessment.

[Duffer]

I have a close view of what's common in this country. My two parents, 48 years old, have $80k of 401(k) money between them (and $0 in other assets).


That is reasonable for people who are now through educating their children and starting their serious savings years. If they choose to go on extended vacations instead of investing for the next 12 years, then you get to fund their retirement (add a room for grannie), but if they do what other adult, responsible people do, they will make solid financial plans to go max on their 401(k) deposits, save on frivolous expenses, and try not to be a burden to others.

I hope they do, and you are the one to support that effort intellectually and emotionally.

[limabeanactuary]

48 years old? That's still young. I'd tell them to expect to work for at least another 20 years.

I think they could build up savings pretty well over such a period.

[Duffer]

Yep. It was ALWAYS supposed to be based on risk assessment.

But the major risk in found in ruin theory. The risk is that you are ruined, and must bail out.

If the stockholders have money in the bet, then they don't want to have the PBGC grab their equity. If their stock price goes near to zero (even temporarily), the moral hazard in the PBGC system is that they must dump the burden on the state to protect their own interests.

It worked for all the biggest PBGC failures, airline, steel, energy, auto...

Real risk assessment needs to be matched with real disincentives to the moral hazards. PPA went a long way, but there are still more issues to address. I would like to see the PBGC make a public case for better ways to prevent dumping. How can the PBGC better manage that?

[SirVLCIV]

That is reasonable for people who are now through educating their children and starting their serious savings years. If they choose to go on extended vacations instead of investing for the next 12 years, then you get to fund their retirement (add a room for grannie), but if they do what other adult, responsible people do, they will make solid financial plans to go max on their 401(k) deposits, save on frivolous expenses, and try not to be a burden to others.

I hope they do, and you are the one to support that effort intellectually and emotionally.

Well, my mother's probably going to eat into a lot of hers over the next year or two, and the fact that she makes $25k in the best of years....

[Duffer]

Well, my mother's probably going to eat into a lot of hers over the next year or two, and the fact that she makes $25k in the best of years....

About $10,000 more than my father made in his best year. And they were a one-income family.

[JMO]

Well, my mother's probably going to eat into a lot of hers over the next year or two, and the fact that she makes $25k in the best of years....
:iatp:

Some people seem to think that an actuarial salary is the norm. Suprise, suprise.! There are a lot of people who make less than that, and it's not for lack of work ethic.

[limabeanactuary]

People need to revise their expectations.

With regards to retirement age. With regards to how they will get to live in retirement.

If they have not prepared for it, there will be consequences. Assuming that someone else will take care of it is dangerous.

[WWSituation]

Supporting extended family isn't the end of the world. It is how life is done in most of the world.

[SirVLCIV]

About $10,000 more than my father made in his best year. And they were a one-income family.

Inflation-adjusted?

[SirVLCIV]

Supporting extended family isn't the end of the world. It is how life is done in most of the world.

I'd prefer not to be forced to do that against my will. Planning for two people is hard enough.

[SirVLCIV]

In reality, once I'm debt free, I'll probably contribute $X a month to an account (not telling my mother about it), just in case.

[SirVLCIV]

People need to revise their expectations.

With regards to retirement age. With regards to how they will get to live in retirement.

If they have not prepared for it, there will be consequences. Assuming that someone else will take care of it is dangerous.

But what if they don't?

I just see a lot of people approaching 'retirement age' with nothing approaching the assets they need, and they're going to be surprised.

And they vote.

[JMO]

Supporting extended family isn't the end of the world. It is how life is done in most of the world.

It doesn't work well at all for those with no living descendants.

[ElDucky]

I was hoping to see some more talk on what ppl here think the impact will be if the PBGC actually rolled out a risk-based premium methodology. Anybody?

Companies would be better off borrowing the money to fully fund their pension plan, because capital markets are more efficient than insurance. They'd probably invest in bonds too. Lawrence Bader and Jeremy Gold would rejoice.

[ElDucky]

It doesn't work well at all for those with no living descendants.

In Japan, the deceased relatives also contribute to the family.

[limabeanactuary]

But what if they don't?

I just see a lot of people approaching 'retirement age' with nothing approaching the assets they need, and they're going to be surprised.

And they vote.

Which is why the people who know something about this sort of thing perhaps should be doing a better job of educating the public.

Then at least they won't be surprised.

As for people voting more goodies for themselves, I think that we're seeing what happens with that in Europe (first). The Greek voters were pretty damn pissed off. But their country did not have the money to give them all those goodies. And so they're not going to have those goodies.

[Jwallace]

Same advice as I gave to my little brother when he kept getting dumped by hot girls.

Lower your expectations.

[NoRiskNoGain]

Companies would be better off borrowing the money to fully fund their pension plan, because capital markets are more efficient than insurance. They'd probably invest in bonds too. Lawrence Bader and Jeremy Gold would rejoice.

:rofl: And Dimitry Mindlin would have a heart attack.

[tommie frazier]

In Japan, the deceased relatives also contribute to the family.

any idea what happens in, say, russia or korea? thanks!

[ElDucky]

In Russia, pension plans you!

[Kenny]

My brain is addled and my history escapes me, but if I remember a story that one of our more senior consultants told me some are suggesting a full circle return to pension plans from 30 or 40 years ago. At one point plan sponsors simply purchases deferred annuities reflecting the normal cost for the year (i.e. the benefit accrual during the year), until regulatory and accounting changes made it more advantageous to do it yourself.

I don't think I had a point, just wanted to share.

[Kenny]

any idea what happens in, say, russia or korea? thanks!
In Korea old people plan pensions?