Tuesday, December 17, 2019

Fixing Retirement Inequality

Just last week, I suggested that retirement inequality is nearing an apocalypse. It's an awfully strong statement to make as both the US and the world have plenty of problems to deal with. Since this one is US-centric (I have nowhere near sufficient expertise nor do I have the requisite data to offer an informed opinion outside the US), I thought I would step up and make some suggestions.

First, the problem: according to the most optimistic data points I have seen, somewhere between 60 and 70 percent of working Americans are "on track" to retire. And, these studies, when they are nice enough to disclose their assumptions use pretty aggressive assumptions, e.g., 7 to 8 percent annual returns on assets (the same people who tout that these are achievable condemn pension plans that make the same assumptions) as well as no leakage (the adverse effects of job loss, plan loans, hardship withdrawals, and deferral or match reductions). The optimists don't make it easy for you by telling you that even their optimistic studies result in 30 to 40 percent of working Americans not being on track to retire (a horrible result). They also tend to pick and choose data to suit their arguments using means when they are advantageous, but medians when they are more so.

Yes, we do have a retirement crisis and as the Economic Policy Institute (EPI) study was good enough to make clear, it is severely biased against the average worker.

The EPI study presented data on account balances and similar issues. It did not get into interviewing actual workers (if it did, I missed that part and apologize to EPI). But, I did. I surveyed 25 people at random in the airline club at the largest hub airport of a major US-based airline. People who wait in those clubs at rush hour are not your typical American worker; they tend to be far better off. I asked them two questions (the second only if they answered yes to the first):


  • Are you worried about being able to retire some day? 19 answered yes.
  • Would you be more productive at work if you felt that you could retire comfortably? All 19 who answered yes to the first question answered yes to the second as well.
While I didn't ask further questions, many groused about fear of outliving their wealth. Some talked about issues that fall under leakage. A few, completely unprompted remarked that if they only had a pension ...

For at least the last 13 years and probably more than that, retirement policy inside the Beltway has been focused on improving 401(k) plans with the thought that pensions are or should be dead. Even the Pension Protection Act of 2006 (PPA) was more about making 401(k)s more attractive than about protecting pensions. Yet, 13 years later with an entire decade of booming equity markets, even the optimists say that one-third of American workers are not on track to retire.

We've given every break that Congress can come up with to make 401(k)s the be all and end all of US retirement policy. They've not succeeded. 

Think back though to when the cornerstone of the US retirement system was the pension plan. The people who had them are often the ones who are on track to retire. 

Yes, I know all the arguments against them and here are a few:

  • Workers don't spend their careers at one company, so they need something account-based and or portable.
  • Companies can't stand volatility in accounting charges and in cash contribution requirements.
  • Nobody understands them.
  • They are difficult to administer.
PPA took a step toward solving all of those problems, but by the time we had regulations to interpret those changes, the "Great Recession" had happened and the world had already changed. Despite now having new pension designs available that address not just one, but all four of the bullet points above, companies have been slow to adopt these solutions. To do so, they need perhaps as many as three pushes:

  • A cry from employees that they want a modern pension in order to provide them with usable lifetime income solutions.
  • A recognition from Congress and from the regulating agencies that such plans will be inherently appropriately funded and therefore (so long as companies do make required contributions on a timely basis) do not pose undue risk to companies, to the government, to employees, or to the Pension Benefit Guaranty Corporation (PBGC) (the governmental corporation that insures corporate pensions) and therefore should be encouraged not discouraged.
  • Recognition from the accounting profession in the form of the Financial Accounting Standards Board (FASB) that plans that have an appropriate match between benefit obligations and plan assets do not need to be subjected to volatile swings in profit and loss.

Give us those three things and the pensions sanctioned by the Pension Protection Act can fix retirement for the future. As the EPI study points out, we'll make a huge dent in the retirement crisis and we'll do in a way that makes the problem far less unequal.

It's the right thing to do. It's right for all working Americans.

Friday, December 13, 2019

If Income Inequality is a Crisis, Retirement Inequality is Nearing an Apocalypse

I've likely inflamed just with my title. So be it.

The Economic Policy Institute (EPI) earlier this week released an article by Monique Morrissey on the State of American Retirement Savings. It's subtitle is "How the shift to 401(k)s has increased gaps in retirement preparedness based on income, race, ethnicity, education, and marital status." It is stunning.

I've been saying for at least this decade that we have a retirement crisis. Despite protestations from those who favor self-sufficiency over employer and government-provided programs, the crisis looms larger. I wrote about this summer. But, as a full-time consultant working with clients who require that I place their needs first, I simply don't have time to do the research that the think tanks do. So, I often rely on the work that they have done. Regardless of the source, my considered opinion is that all of the data are sound whether the think tanks are right-leaning, left-leaning, or centrist. 

What I quibble with are the conclusions. 

More than half of Americans being on track to retire is not a favorable prognosis. It's especially not favorable when the modeling underlying that statement assumes constant, and perhaps unachievable, returns on investments and constant rates of deferral to 401(k) plans. We're asking a populace that is largely under-educated about financial and investment matters to instantly become great investors. We're also asking them to save for their retirement (including retiree health and long-term care) above all else -- no blips allowed. You lose your job? Keep saving. You pay for a child's wedding? Keep saving. You pay for an unexpected medical expense? Keep saving.

Is that practical? Of course it's not.

The EPI study has presented us with 20 charts. Each has a headline which, in my opinion (understanding that yours may be different) fairly depicts the data it shows. Here are a few of the more eye-catching ones (indented notes after the headlines are mine and should not be attributed to or blamed on EPI)::


  • Retirement plan participation declined even as baby boomers approached retirement
    • A smaller percentage of workers are now participating in employer-sponsored retirement plans than were 10 years ago. With the rise of the gig economy, this rates to get worse.
  • The share of families with retirement savings grew in the 1990s but declined after the Great Recession
    • Fewer than 60% have retirement savings. Period. How are the rest to ever retire?
  • Retirement savings have stagnated in the new millennium
    • Despite that savings of those above the age of 55 have increased fairly dramatically, those for the entire working population have barely moved suggesting that the runup in equity markets over the last decade has done little for most of America.
  • Most families—even those approaching retirement—have little or no retirement savings
    • This is frightening. In any age range, median (meaning half are better off and half are worse off) retirement savings are well beneath $50,000 ... in total.
  • More people have 401(k)s, but participation in traditional pensions is more equal
    • We'll return to this later, but this suggests that poorer people and minorities are less likely to make use of 401(k)s. Identifying the root cause is a highly charged issue and cannot be done with certainty, but identifying this as a sign of a problem is clear.
  • High-income families are seven times as likely to have retirement account savings as low-income families
  • Most black and Hispanic families have no retirement account savings
  • Single people have less, but retirement savings are too low across the board
    • The data show that single women, in particular, lack retirement savings. But, even among married couples, levels of retirement savings are abysmal.
  • 401(k)s magnify inequality
    • Those out of the top 20% when stratified by income represent a disproportionately low level of savings account balances.
I said I would return to the statement that participation in traditional pensions is more equal. It seems clear that this is because in most cases, an employee becomes a participant in a pension not through an affirmative decision to do so, but as part of his or her employment. It doesn't require an income disruption. It's not more difficult to participate when you have an unexpected expense.It's not easier for the wealthy to participate, nor for men nor ethnic or racial majorities. 

Yes, pensions have a horrible stigma attached to them right now. Many public pensions are horrifically underfunded and potentially place their sponsors (cities, states, etc.) in grave financial danger. The same could be said about some of what are known as multiemployer plans (that's a story for another day) except that their sponsors are, generally speaking, employers that employ very specific types of employees. 

For the rest of the populace and potential plan sponsors (employers), sponsorship of traditional pensions has waned considerably. About 18 months ago, I explained why. 

Before we write them off completely, however, let's look at what pensions do. According to the EPI study, participation is somewhat equal. They provide lifetime income protection, the single greatest fear of people nearing retirement. They can be part of the employment covenant.


The data in the EPI study and not simply their interpretations absolutely scream that more than income inequality, retirement inequality is the looming personal financial crisis. Congress will bat this around and try to make it a partisan issue. But, it shouldn't be. It's a people crisis. It's a dire crisis. It needs a fix and the fix is available, but it needs to get started.

Friday, September 20, 2019

When Your Deal Involves a Pension

Corporate deals abound perhaps like never before. Mergers, acquisitions, consolidations -- call them what you will. They're still deals and they involve pensions, sometimes frozen, more often than you think. If you are the acquirer in any of these transactions, it would not be at all surprising to find that your team is giving these pensions were getting shorter shrift than they deserve.

Why?

More than most other elements of a corporate transaction, the costs of sponsoring a pension plan (single-employer) or being a participating employer in one (multiemployer) are both volatile and perhaps a bit out of your control. On the surface, that's bad. And, a significant problem is that traditional due diligence does not address this.

What do I mean by that? There are plenty of firms out there that perform due diligence in deals. On the financial side of this, the work is typically done by large accounting firms and their consulting arms or by the larger, traditional, multi-service consulting firms. What I have seen, and I have by no means seen everything, tends to be a fairly standard report with numbers filled in. It often relies a lot on the past and tends to assume that the past will be reflective of the future. For many of those future costs, that's probably not a horrible assumption. For pensions, unfortunately, it often is.

You see, whether you are focused on cash or on financial accounting, the amount of your future costs is dependent on rules. The rules are complex and they do not lend themselves to cost stability. Today, estimating what those costs will be is not easy. Doing so under a variety of economic scenarios is more complex and likely more expensive. Developing strategies to control those future costs adds even more difficulty and even more cost. It also takes a long time. And, of course, you are never able to work with current or perfect data. In the future, it will be much simpler. At least that sounds nice, but our predictions about the future are often wrong.

The future is here. It's here today.

Everything I said above that was difficult and expensive and more difficult and more expensive and takes a long time -- it doesn't have to.

We don't need great data. We don't need to bother your staff. We can move at the speed of deals. And it won't break the bank.

That future you were hoping for -- it's here now.

Wednesday, July 24, 2019

S&P Implies Hospital Pensions Are Not a Problem -- I'll Be the Judge

I read two excellent articles on the same topic recently. Both Rebecca Moore for Plan Sponsor and Jack O'Brien for Health Leaders Media wrote about an S&P study that implied that pensions are not a problem for not-for-profit hospitals in the US. I found the different perspectives interesting as Rebecca is a retirement plan journalist who was covering a hospital retirement issue while Jack is a hospital journalist who was covering a retirement issue with regard to hospitals.

In summary, here is what I learned:

  • The U.S. not-for-profit health care sector has benefited from an increase in the median funded status of its pension plans in fiscal 2018—increasing from 80.6% to 85%, according to S&P Global Ratings;
  • S&P measures the underlying pension liabilities using a "conservative municipal bond rate;"
  • S&P applauded that many hospitals have focused on de-risking liabilities;
  • S&P views the following as positive with respect to hospital pensions:
    • Full funded status;
    • Any sort of de-risking; and 
    • No pension plan at all.
I'm not going to spend a lot of time dissecting what S&P thinks is good. As a firm, they employ many excellent economists while my formal economic training is quite sparse. But, I'd be remiss if I did not comment on the use of municipal bond rates. While they are not far from the measures typically used for corporate pension plans, I'm not sure how movement in yields on municipal bonds should affect the measurement of obligations in hospital pensions.

Let's return to the initial premise that being that hospital pensions are well-managed (I said not a problem in my title, but the words that were actually used were well-managed). Are they? Is 85% a good funded status? Are the hospitals managing frictional overhead costs? Is de-risking the right approach for a plan that is 85% funded? If so, which type(s) of de-risking should they be using?

While it's not the case for all of them, the majority of hospital pension plans are either [hard] frozen or they are soft frozen (no new entrants). This implies that the goal is to eventually terminate those plans. A plan that is 85% funded cannot be terminated. In fact, generally speaking, a plan that is 100% funded on the basis that S&P uses cannot be terminated (annuities have some level of built-in costs as compared to a traditional actuarial measurement of pension obligations). 

Getting from 85% funded to just a bit more than 100% funded is a tall task. There are a number of ways to make progress on this, some passive and some active. They include watching discount rates increase, investing more aggressively (and hoping that produces better returns), contributing more money to the plan, and cutting the overhead costs of the plan.

Let's attack those in order.

Unless a hospital has more control over the economy than I think it does, it cannot affect the yields on municipal bonds.

Investing more aggressively works well when it works well meaning that if you can beat your bogie, you improve your funded status and get closer to being able to terminate the plan.

Contributing more money to a plan is an easy concept. All it requires is having money to contribute. In 2019, hospitals, generally speaking, don't seem to have that kind of money laying around. On the other hand, hospitals do have lots of assets many of them not pulling as much weight as they might were they re-deployed into the hospital pension plan. I have some ideas in this vein, and would be happy to tell you about them.

Finally, for the last three years, October Three has published a report on PBGC premiums. The report has found that hospitals, compared to any other industry, are consistently paying more in needless PBGC premiums than any other industry. In other words, there are techniques available to them to lower those premiums that as a group, they are not using.

So, with all due respect to S&P, the judge has ruled. Hospital pension are a problem and generally speaking, hospitals are not managing those pensions well. The judge thinks those hospitals should contact him.




Thursday, June 13, 2019

Do We Have A Retirement Crisis? Of Course We Do.

Do we have retirement crisis in the US? Showing my age and with apologies to Messrs. Rowan and Martin, you bet your sweet bippy we do. Despite all the pundits citing data and telling us that we don't have that problem, I'm telling you we do.

I was inspired to write this by an excellent piece that I read in Investment News this morning. The theme was that Vanguard's data shows that the average combined savings rate (employee plus employer) has increased since 2004 from 10.4% of pay to 10.6% of pay. To understand this better, let's look at what else has happened during this period.

The Pension Protection Act (PPA) of 2006 became law. Many defined benefit (DB) pension plans were frozen and or terminated. The new in vogue terms in the 401(k) world all suddenly started with auto: auto-enrollment, auto-escalation, auto-pilot. At the same time, the new fear became that of outliving your savings.

That's right, people are living longer. People know that people are living longer. This frightens many. From a retirement perspective, they don't know how to deal with this. So, the old normal (2019) cannot continue to be the new normal (beyond 2019).

Why do I say that? What's wrong with the analysis from pundits?

Suppose I told you that 55% of Americans are "on track to retire," whatever that means (every recordkeeping firm who puts out data like that has their own basis for what that does mean). Is that good news or bad news? Most who think that the 401(k)-only system is as close to nirvana as one can get would tell you it's great news. They say so on social media. They go out of their way to bash those who disagree.

Well, I disagree and here is why. I'm going to reword what they are saying taking what they say as factual. Suppose I told you that 45% of Americans are not on track to retire. How would you react to that? My intuition says that you would think that is a horrible thing. Yet, it is exactly the same thing as 55% of Americans being on track to retire.

Further, the data being used often assumes that Americans will take their 401(k) balances and draw them down ratably and prudently. Which Americans are those? They're not the Americans of 2019. They're not the ones who want the latest gadget. They're not the ones that love their Amazon Prime accounts. They're not the ones from the instant gratification world of today.

For most Americans, being able to guarantee a level of lifetime income protection is of nearly paramount importance. It's not easy in a 401(k) world. In-plan annuity options are rare and expensive. Taking a distribution to buy an annuity is even more expensive and requires an education in an industry that few Americans have access to.

Look at the generation that retired over the 25 years or so from roughly 1980 to 2005. They often have lifetime income. They may also have account-based savings. They, because they did not live in a 401(k)-only world, were able to get it right.

DB plans of the past had problems. Smart people designed better solutions, but the really [not so] smart people conspired to make us think that 401(k) only is the best solution.

It's time to visit those better solutions.


  • Cost stability and predictable cost for plan sponsors.
  • Lifetime income availability at actuarially fair prices for participants.
  • Account growth through professionally managed assets, but with a guaranteed return of principal.
  • The ability to take your account with you.
And, you can still have your 401(k) on the side to supplement it.

Doesn't this feel closer to nirvana. Isn't this a way to truly move the needle and get us out of the retirement crisis?

Wednesday, April 17, 2019

4 Problems at the Intersection of Finance and HR

They are two of the most visible departments in corporations even though neither directly produces revenue, but does require expenditures -- Finance and HR. Historically, they have been at odds neither particularly caring about the worries of the other despite being inextricably linked. This occurs in many ways, but I'm going to focus on four in the order that they seem to arise:

  1. Recruiting
  2. Cost control and stability
  3. Retention
  4. Workforce transition
Of course there are many more, but I have some thoughts that link all four of these together. In 2019, that's not always easy as there are constant pushes in Congress to tell employers how much they must pay, which benefits they must provide, and at what costs. How then does one company differentiate itself from another?

To the extent possible, every employer today seems to offer teleworking, flexible work hours, and paid time off banks. While they once were, those are no longer differentiators. After the Affordable Care Act took effect, the health plans at Company X started to look a lot like the health plans at Company Y.

I have a different idea and while I am probably biased by my consulting focus, I am also biased by research that I read. Employees are worried about retiring someday. They are worried about whether they will have enough money or even if they have any way of knowing if they will have enough money. They are worried about outliving their wealth (or lack thereof). They are worried about having the means to support their health in retirement.

I know -- you think I have veered horribly from my original thesis. We're coming back.

Today, most good-sized companies have 401(k) plans and in an awful lot of those cases, they are safe harbor plans. They are an expectation, so having one does not help you the employer in recruiting. While once they had pizzazz, today they are routine. 

Cost stability seems a given, but it's not. Common benchmarks for the success of a 401(k) plan including the percentage of employees that participate at various levels. You score better if your employees do participate and at higher levels. But, that costs more money.

If there's nothing about that program that sets you apart, it doesn't help you to retain your employees. And, as we all have learned, the cost of unwanted turnover is massive often exceeding a year's salary. In other words, if you lose a desirable employee earning $100,000 per year, it is estimated that the total true cost of replacing her is about $100,000. That would have paid for a lot of years of retirement plan costs for her.

There will come a time, however, that our desirable employee thinks it's time to retire. But, she's not certain if she is able. And, even if she works out that she is able, retirement is so sudden. One day, she's getting up and working all nine to five and the next, she has to fill that void. Wouldn't it be great to be able to transition her into retirement gradually while she transitions her skills and knowledge to her replacement?

You need a differentiator. You need something different, exciting, and better. You need to be the kid on the block that everyone else envies. 

You would be the envy of all the others if you won at recruiting, kept your costs level (as a percentage of payroll) and on budget, retained key employees, and had a vehicle that allows for that smooth transition.

I had a conversation with a key hiring executive earlier this month. He said he cannot get mid-career people to come to his organization from [and he mentioned another peer organization]. He was exasperated. He said, "We're better and everyone knows it, but their best people won't come over." I asked him why. He said, "It's that pension and I can't get one put in here." I asked him to tell me more and he explained it as one of those new-fangled cash balance plans with guaranteed return of principal -- i.e., no investment risk for participants, professionally managed assets, the ability to receive 401(k) rollovers, and the option to take a lump sum or various annuity options at retirement. He said that it's the "talk of the town over there" and that even though it seems mundane when you first hear about it, it's their differentiator and it wins for them.

We talked for a while. He wants one. He wants one for himself and he wants one to be as special as his competitor. He wants to be envied too. We talked more.

Stay tuned for their new market-based cash balance plan ... maybe. He and I hope that maybe becomes reality.

Thursday, March 7, 2019

Hospitals and a Sky is Falling Economic Prediction

The headline from today's CFO Journal published by the Wall Street Journal was stark: "Sour Economic Outlook Weighs on CFO Spending, Expansion Plans. Let's leave off the lack of expansion plans, but focus on spending.

Consider a low-margin industry that employs highly-skilled workers in short supply -- hospitals -- in particular. Talk to heads of HR in the hospital sector. Most have nearly identical top concerns: how do I attract and retain skilled professionals? What they are obviously referring to are physicians, nurse practitioners, nurses, technologists, and technicians. These are all careers that require very specific, often extensive, education. They are all in short supply and feeling burnout. What is there to keep them around?

Direct cash is not a good option. First, as the WSJ piece suggests, CFOs just won't part with the levels of cash necessary to attract and retain. Second, and while data demonstrating this phenomenon are difficult to find, people live to their levels of income. In other words, if you have a doctor earning $200,000 per year with annual savings in his 401(k) only, if you give him a $50,000 pay increase, his savings in many cases will remain 401(k) only.

This is not good. Some day that physician is going to burn out. He may tire of a profession that has changed from being highly personal to largely impersonal. He may tire of insurers telling him how to practice medicine. He may tire of government intervention.

In any event, if he tires, he is going to do so without being prepared for retirement.

Therein may lie the key.

Prepare your skilled staff for retirement. Do it not by increasing your costs, but by reallocating your labor costs.

Most people live to (or above regardless of pay or nearly to) their paychecks. And, they want pensions.

Give them what they want. Give them a pension that checks all the boxes:


  • Secure
  • Lifetime Income Options Without Subsidizing the Profits of Large Insurers
  • Portability
  • Easy to Understand
  • Professionally Managed Investments
  • Stable, Predictable, and Manageable Costs
The time is now. Act while the economy is still strong and prepare yourselves and your employees for when it's not.