After delivering the opening presentation at this year's national Retirement Industry Conference, Fred Munzenmaier and I were invited to lead an expanded session at Delta Data Software's annual FUNDLinx User's Group meeting in Columbus, on May 23.

Through the kind efforts of Don Beck, we were privileged to facilitate a lively discussion with about three dozen financial-service industry executives. The additional time made available for the meeting allowed for expansion of several points advanced at the Retirement Industry Conference, as well as the introduction of some new ideas. Also, Fred was able to update some of his figures, which only strengthen the arguments he'd originally made at the LOMA/LIMRA/Society of Actuaries Conference in April.

Here is a transcript of the Delta Data Software presentation. As always, for more information, return to the Main Page (by clicking the link to the right) and scroll to the Category Archives. There, you'll find multiple articles on this subject and other related matters.  Also, if you were one of people who attended either the Retirement Industry Conference, or Delta Data  Software FUNDLinx User's Group, please leave your thoughts and comments below.

Thank you.

THE DESTRUCTION OF PENSIONS AND
SOCIAL SECURITY, U.S. & WORLD-WIDE:
IS IT TOO LATE?

Fred Munzenmaier's Greeting

Good morning. It's great to be here with all of you today.

Corey Sherman and I are two of the four managing partners who founded Strategic Planning Associates, LLC. We're based in Atlanta with nearly a dozen associates, who represent a mix of consulting and client-side experience. Corey and I were senior-level consultants at large international consulting companies, but we left to form our own company because we wanted to do it better. We believe that it's possible to achieve greater impact and value with HR and benefit plans — while actually reducing program costs.

We're very excited about what we've been able to do for our clients - and the opportunity to talk with all of you about what can be done to save the U.S. Social Security and private pension systems. Corey will start by giving you some background.

Corey Sherman

A few months ago, I wrote a "Views & Vents" column for BenefitNews.com on New York Life's new national ad campaign: "A Promise of a Never-Ending Paycheck for All Your Retirement Days."  Since then, the theme has been picked up by a number of insurers, including John Hancock and AIG.

NY Life's premise is great, but it's not exactly novel. Isn't "a never-ending paycheck" the underlying concept of DB (defined benefit) pension plans?

Paradise Found

The first DB plans were started about 90 years ago, as a way to provide monthly income for life. In fact, the earliest pensions were funded with life insurance. Whole Life is a great vehicle for producing lump sums at death. But it's not an effective way to maintain streams of long-term, ongoing retirement income.

For this reason, insurance-based pensions were relatively inefficient and expensive. It wasn't till after World War II, when equity investment became widespread, that DB really caught on. Through stocks, employers could generate higher returns, making pensions more manageable and cost-efficient. Such plans also could easily be integrated with Social Security, as well as with private savings. For the first time, the average U.S. worker could actually develop a credible plan for retirement.

That was the "golden era" for U.S. pensions, when the number of DB plans skyrocketed. Between 1950 and 1970, company pensions were widely considered the most attractive, and sought-after, fringe benefit.

Paradise Lost

Like most idyllic situations, the pension "paradise" was not bound to last forever. In response to employer abuses of pension funds, regulators embarked on what they thought would be the perfect "marriage" of government and the public interest. Starting with ERISA in 1974, pension plans became subject to a series of new rules, including OBRA (1987), FAS (1987 and 1988), and the RPA (1994).

Over time, the marriage lost its luster. The regulations, intended to protect plan participants, had the unintended consequence of adding layers of managerial, accounting, and administrative burdens on plan sponsors. They complicated plan governance, made pension maintenance time-consuming and expensive, and imposed new layers of employer risk.

In addition, over this period, the work world had changed dramatically. The pensions of the 1950's and '60's were designed for a predominantly male, non-mobile work force. Today's HR challenges are different. For example:

• Over the next five years, net additions to the work force will be mostly women, minorities, and immigrants. With diversity comes increasing demands for benefit flexibility, and increases the need for effective communication.
  
  
• The fastest-growing demographic group in the country is ages 50 and above. Not exactly fertile ground for recruiting an entry-level work force.

• The high-school dropout rate in the U.S. is over 30%. (In the southeast, it’s over 35%; in Florida, the rate tops 40%; and in New York City, it's above 50%.)

• Only about 6% of U.S. families now fit the "Ozzie & Harriet" model. Women are full participants at work, and tend to have retirement preferences, and needs, that are much different from those of men.

The average employer today is hard-pressed to maintain the talent it needs to remain competitive. Companies sponsor pension plans — and all other forms of employee benefits — not out of a sense of social grace, but as a way to attract and retain talent. With such intense "people" needs, and increasing pressure to manage benefit costs, companies are facing unprecedented benefit challenges. Retirement plans are just one part of a very complex strategic mosaic.

In facing the future, we have to keep in mind that the traditional, "three-legged stool" of retirement income — Social Security, pension plans, and private savings — is shakier than ever.

Fred Munzenmaier

Winston Churchill said, "You can always count on America to do what's right - after all else fails." With Social Security, though, it's different. If we don't get it right the first time, we will not get a second chance.

The State of Social Security

As you know, President Bush expended what political capital he had on trying to fix Social Security. I give him credit for being right about two things. First, there is a demographic problem that needs to be addressed. Second, the longer we wait to fix it, the more difficult it will be to fix. I would add that the longer we wait, the less we'll be able to preserve the good features of the current system.

The place where he and many others start going seriously wrong — and I'm sure many of you will disagree — is the idea that the best solution is to transition Social Security to individual accounts. This approach would get us away from the defined-benefit nature of Social Security, which is its strongest feature. Defined benefits help people weather through tough investment times, since, over enough time, investments always come back. Also, except in the most disastrous situations, troughs in the market do not affect the system's ability to make benefit payments. Defined-benefit arrangements also protect participants from outliving their money.

Under a defined contribution (DC) system, could you imagine the panic of someone already retired, or approaching retirement, during a period like the one we had from 2000 to 2002?  The stock market lost 37% of its value in just three years — requiring gains of 60% just to break even.

I have a branch office in a rural area in South Carolina, and see the people going into the Super Wal-Mart up there. These are good folks, but do not strike me as planners and investors. Aren't now, weren't then, and never will be. But these are precisely the people for whom Social Security was originally designed. And, there are tens of millions of them.

Like most everyone in this room, I am all for personal investing and defined contribution plans. However, those who are pushing Social Security DC accounts are from an economic stratum, and with a world-view, much different from the millions of people for whom the DB features of Social Security are so important.

From the Most Recent AARP Newsletter

The movement for private accounts has cooled off. With the issuance of the 2007 Social Security Trustees report just a few weeks ago, the American Association of Retired People listed eight possible remedies for the problem. All but one of these solutions call for either an increase in taxes or a cut in benefits. The one exception is the suggestion to invest the “trust fund” in the capital markets.

What is remarkable about what you see in the media is the lack of detail about the meaning, and implications, of each proposal. Social Security is an extremely complicated matter, and I doubt that many of those who write about reforming the system actually understand what the system is or how it works.

The "Road to Aspen (California)"

Have you looked at how Social Security financing works lately?  Have you read the 218-page Trustees' report?  I wonder if President Bush ever has. I call the financing approach "The Road to Aspen."  That's because I could not have dreamed up a better analogy for Social Security financing than the briefcase in the movie Dumb and Dumber.

As you may recall, the two stars find a briefcase full of cash. They head to Aspen . . . you know — the one in, uh, "California" . . . to return the briefcase to its owner. On the way, they run out of money, so dip into the briefcase. Their spending becomes increasingly lavish. Being the honest guys they are, though, they place IOU's in the briefcase, with the intention of making good some day. But, of course, they have no idea how.

There could not be a better metaphor for how Social Security financing works.

The phony investment aspect of Social Security was debated during the Social Security crisis of 1983. Senator Patrick Moynihan (the last politician to admit how Social Security really works) recommended that we should collect only enough FICA taxes to cover current benefits (i.e., a pay-as-you-go arrangement). That way, we would end up taxing workers only once. In contrast, under the current scheme, workers get taxed on their wages, and then, when they're a little older, get taxed again when the cash flow goes negative. But back then, in 1983, who could argue with the idea of building up a "trust fund"? A few people began to understand and write about how the fund worked in the late 80's.

Even now, though, no one will notice what's going on until benefits paid out start to exceed the net income (which is projected to begin in 2017). That's when we have to start redeeming the "IOU's."  But where is this "pay-back" money supposed to come from?  Guess what: it's you and I, as we can expect to get taxed once again.

The so-called "trust fund" (i.e., the IOU's) is projected to reach $5.9 trillion in 2025. With a head start like that already built into law, what a copout it is to say that we have to tear apart the whole system.

The Simple Solution to Social Security                                                      

The Social Security Trustees' Report gives you the information you need to solve the whole problem, though you have to dig for it.

After you wade through 181 pages of spurious information in the report and get to page 181 (out of 220), you will see the cash flow situation and you can solve the Social Security problem. Since the numbers after 2016 reflect only five-year intervals, you will have to phone the SSA actuary's office to get the year-by-year numbers, as I did.

You can then calculate that the average rate of return on the Social Security fund, through its projected bankruptcy in 2040, is 5.71%. Of course, this return is merely theoretical, since the interest credited is in the form of IOU's from the Treasury, on which we will all have to pay tax (again) to repay the debt.

When performing actuarial valuations for pension plans invested with real money, I typically use something like an 8% return, which I can easily justify as a conservative estimate based on historical capital market investment returns. So, why can't we fund Social Security with real investments?  Based on my calculations, the Treasury would not even need to repay the $2.048 trillion they've already squandered. Just pay us the 5.71% interest (e.g., $102.4 billion) in real cash so we can put it into real investments. Also, let us have the future excess build-up (the $87.1 billion revenue in excess of benefit payments) in cash so we can invest it.

The standard reply is that we can't have the government messing with the capital markets. Boy, have they sold us a bill of goods on that one. The Canadian Pension Plan is doing exactly what I recommend for the U.S. by building a wall between their pension fund and the government. You can find out more at their Web site.

Politicians and the media talk about what a beautiful thing the Chilean DC Social Security system is, but I've never heard anyone ever make reference to the Canadian system. That's no doubt because the Social Security excess is just pork for our politicians to spend to get re-elected. What a country!  And we let them get away with it.

"Real Investments" Earn 8% or 8.5%

When Einstein was asked what the most profound phenomenon in the Universe was, he answered "compound interest."

The following chart illustrates the potential effects of compound interest on the Social Security fund. Although not shown here, an extra half-percent return (i.e., moving from 8% to 8.5%) would make a huge positive difference.

8%

Many of my clients' plans are earning greater returns than those shown above, over long periods of time. What if Social Security earned more?  It would put us in position to either increase benefits or reduce taxes. I say give this method a chance. Also, just think of the benefits to our economy if we had these huge amounts of money invested in productive assets.

From "MMMC" to "Rat Sandwiches"

Now that we've solved Social Security, let's work on the private pension system.

The one unique thing that I have to offer in this discussion is my 35 years of experience, actually seeing the three-legged stool steadily, and for the most part unnecessarily, crumble. I date back to when both pensions and Social Security worked. I've witnessed, firsthand, the steady and unnecessary decline of pension plans because of the incredibly stupid things the government has done along the way to solve perceived, not real, problems.

Sometimes I forget that my younger actuarial colleagues (even some of the more senior ones) never knew the world without ERISA. I think many of them believe ERISA came down from the mountain with Moses. Even though I was just a few years after Moses, I can tell you that ERISA is not heaven-sent and was created by man.

In fact, ERISA and all of the ensuing “improvements,” and regulations are what I call "Maximum Man-Made Complexity."  I'm holding a thin mini-pamphlet: the description of ERISA that we got from CCH in 1974. On my desk at home are the multiple CCH volumes on employee benefit laws and regulations today. I could fit the 1974 rules in my shirt pocket, but my book bag wasn't big enough to bring today's CCH materials.

These books are filled with rat sandwiches. That term was used pointedly by Sir David Tweedie, who heads the International Accounting Standards Board. He promised to serve that unappealing diet to the U.S. pension accounting system, which he has pretty much succeeded in doing. Mary Keegan, Sir David's successor on the U.K. financial accounting standards board, credited Sir David with single-handedly destroying defined benefits in the U.K. by serving as the prime mover behind FRS 17, the U.K. pension accounting rules.

But the term "rat sandwiches" also fits U.S. pension regulations, as the IRS, DOL, and the PBGC serve them to us on a regular basis. Their rationale?  To protect against every conceivable abuse. But, as I will detail later, what has finally succeeded in destroying our system is the idea that we must protect the PBGC above all else.

Latest Regulatory Nonsense - PPA

Last August, the day the Pension Protection Act (PPA) was signed into law, my fellow Iowan Senator Charles Grassley, then Chairman of the Senate Finance Committee, issued a "Memorandum to Reporters and Editors."  In it, while extolling the PPA as the savior of the private pension plan, Senator Grassley indicts corporations for dumping their pension liabilities on the government; i.e., on the PBGC.

I could not believe what I was reading. Does anyone who deals with pension plans think that corporations set out to dump their liabilities on the PBGC?  I submit that our government has created a situation where many companies have little choice but to terminate or freeze a plan.

Then, just a few weeks ago, the General Accountability Office came out with a report that the PPA actually increased the PBGC's long-term risk because it allows the airlines to fund their liabilities over 15 years using an 8.75% interest discount rate. But airline plans have been the largest source of the PBGC's problems. And they get a special deal — while the rest of us get punished. Don't get me wrong: I'm not for reversing the airlines' concessions. I just think the rest of the U.S. pension plans should get it, too.

Nice going, Senator Grassley. Congress again punishes all of us and makes the situation worse. But it's not all bad. After all, it did allow the Senator to issue a self-serving memorandum to the press.

Regulate Pensions the Bobby Dodd Way

There are two reasons for my bringing up Bobby Dodd. Most important is it allows me to brag about my son, who plays fullback for the University of Georgia. As parents, we had pretty good seats at the Chick-fil-A Bowl last season. I bought a program and read an article about the legendary Georgia Tech coach, Bobby Dodd, which leads me to my second reason.

The article’s main point was that Bobby Dodd never saw the sense in having a whole lot of team rules. He was a firm believer that, the more rules you had, the more that would eventually be broken. Coach Dodd maintained that keeping things simple was better, as long as you instilled a sense of right and wrong in your players and let them know, early on, what was expected of them.

That logic would be well applied to pension regulation. There is already a section in ERISA on fiduciary responsibility. I believe that these principles are pretty much all we need to regulate pensions, along with a change in the way plans are governed (as I will soon discuss). The rest of ERISA could, and should, then be skinnied down dramatically.

It's Not Too Late

Before you can fix anything, you need to have guiding principles. Here is a set of guidelines that should be officially adopted by the Administration, Congress, and the various regulatory agencies:

• Stop fixing problems that don't exist. This happens time after time, and we let it, out of political correctness. No one wants to offend the IRS - because we fear the agency could make our lives even more miserable. We won't admit the truth about the PBGC, since we worry that clients for which we've signed PBGC forms could wind up audited. We don't challenge Congress because we don't want them to think our industry uncooperative. And so it goes. 
  
  In its January 26, 2006 edition, The Economist placed the blame for U.S. pension problems squarely on the shoulders of my fellow actuaries. We should have ripped the publication to shreds on that one, but they got a free pass. The American Academy of Actuaries actually wrote an apology to the magazine! (I wrote a personal letter to the editors, but suspect they're tired of hearing from me on their perfunctory, misleading pension analyses.)  Indeed, some actuaries won't speak out at all, because their employers either would view it negatively — or, in most cases, won't even allow them to do so.
  
  This way of thinking has gone on long enough. It is a charade exemplified by Senator Grassley's fallacious insinuations about corporate motivation. But corporations are just being used as a smokescreen. The real problems are such things as our fatally flawed plan-termination insurance system, and the destructive, unnecessary administrative complexity built over years of regulatory "reform."
  
  I like the words of Winston Churchill here: "The truth is incontrovertible. Panic may resent it; ignorance may deride it; malice may destroy it; but there it is."
• The Big Picture
  Instead of viewing pension issues in a vacuum, let's step back to consider the broader context.
  
  First, the PBGC claims it's running a deficit of nearly $19 billion. If these liabilities were valued properly, there would be no deficit at all (but that's another matter). Let's grant them their $19-million, I call it "bull-ion."  The fact is that any deficit is a one-time thing. Once paid, it's gone.
  
  Now, here's the context. President Bush's 2007 budget anticipates a gross domestic product (GDP) of $13.8 trillion, and federal expenses of $2.8 trillion. The PBGC's purported deficit, in turn, is less than one-half percent of these amounts. Since the PBGC deficit is static, while GDP and the federal budget renew annually, the alleged underfunded amount is infinitesimal. Yet the PBGC wants us to believe, and actually has gotten Congress and the Administration convinced, that its deficit is a crisis of "Savings & Loan" proportions.
  
  Also, look at other pension and entitlement plans. Some say that the Social Security and Medicare deficit may be $44 trillion. The military pension plan's deficit is about $500 billion, and the shortfall in the federal civilian employees' pension fund is even greater.
  
  Despite these staggering amounts, though, regulatory attention has been directed almost exclusively toward the relatively minimal deficits in private-sector plans. As a result, private employers are being regulated to an extreme.
• Americans need to recognize that DB plans are the best answer for the demographic crisis headed our way. Within a few years, hordes of aging baby boomers are going to reach an age where they want, and need, to retire — but lack the funds to do so. But, it doesn't have to be that way. All we have to do is stop punishing employers for having a DB pension plan, and start providing them with some incentives.
• Finally, everything is interrelated. Not since ERISA have pension issues been addressed holistically. We need new rules on plan governance, funding, accounting, and plan termination insurance. We've taken a piecemeal approach to dealing with these matters over the last 35 years, creating a morass that no longer makes any sense, and is ultimately destroying the system.

Scientific Proof

We all know that USA Today is one of the most renowned scientific journals out there. (Well, maybe not.) But, on February 1, they inadvertently published an article that proves my theory that pensions work best in a world without rat sandwiches and inordinate rules. (I’ve written about it on the Strategy Blog.) The control group to which they compared private-sector plans is the public sector. Governmental pension plans are positively flourishing.

There’s no question that these programs have problems from time to time. For example, the saga of the City of San Diego (I call it “Enron by the Sea”) demonstrates some of the worst behavior in the history of pensions. Actuaries, management, labor, and a whole cast of characters share the blame – and there’s plenty to go around. However, given the sheen number and size of public-sector pension plans, the problems are relatively few and far between.

Public sector plans deal with their issues at the grass-roots level. People are not dumb, and they do realize the gravity of their responsibilities. The danger is that the media will play up the San Diegos of the world and convince Congress that these plans, like yours, need a rat-sandwich diet. The General Accountability Office is in the midst of just such a study. As government agencies go, the GAO is one of the best. However, I have gotten vibrations coming out of this agency, and am not encouraged. The problem is that pensions can be extremely complicated, and you need about 30 years of experience before you understand how everything fits together.

Reinvigorating Private Pensions

Here are nine specific steps we could take to "fix" the private pension system. These were originally outlined in an article I wrote in the Journal of Pension Benefits, in which I presented model legislation, that I called "DBRISA"

1. Fix the PBGC (under DBRISA, we'd have full guarantees and no PBGC premiums).
   
   
2. Stop Maximum Man-Made Complexity, tear up the regulations, and replace them with basic guidelines.
   
   
3. Scrap outmoded actuarial models (from the days of Elizer Wright). Who among you understands the actuarial accrued liability under the entry age method, as opposed to the projected unit credit method?  With today's computers, we can project, year by year, what our assumptions imply, and make it so everyone can understand what is going on.
   
   
4. If you want to improve funding, do away with 401(a)(17) pay caps. Before we had such limits, CEOs and CFOs were full-fledged members of pension board, and frequently opted to make the maximum deductible contribution — not because of a so-called "financial economics" model, but because their own pensions were at stake.
   
   
5. Change plan governance rules. No matter how much we purport to operate plans exclusively for the benefit of participants, that just does not happen in practice. We need independent pension boards, like many of those in the public sector, which include employer, employee, and outside representation.
   
   
6. Eliminate lump-sum options from DB plans (including cash balance and pension equity). Lump sums add to funding pressures, and, in some cases, allow participants to "play games" with the system. Most important, lump sums are contrary to the intended purpose of DB plans: to provide guaranteed, lifetime income.
   
   
7. Facilitate employee contributions. As in the public sector, allowing pre-tax contributions would both support plan funding and allow for higher benefits levels. Under current nondiscrimination rules, it's almost impossible to have a contributory DB plan.
   
   
8. Remember that excess assets belong to the employer. Let's give employers tax incentives to build up excess assets, and allow them to get the money back, on a tax-favored basis, without having to buy annuities and terminate the plan.
9. After accomplishing the steps listed above, let's also take "rat sandwiches" off the menu.

Wanted: A Different Mind-Set

By now, you probably think I'm off my rocker. But, I have to refer you back to my buddy, Albert Einstein. He once said, "The significant problems we have, cannot be solved by the same level of thinking with which we created them."  What a plain and simple thought from the greatest genius who ever lived.

We have too many smart people today, turning something so simple, like Social Security and the private pension system, into something complex. In the process, they have managed to destroy it.

Corey Sherman

We started our look at the “three-legged stool” of retirement planning by acknowledging that employers don’t sponsor benefits to be “good corporate citizens.” They do so to attract and retain the talent they need to achieve their business objectives. With such sweeping changes in work force demographics, which we discussed earlier, employers face unprecedented cost pressures in all areas of benefits – especially retirement plans.

MetLife recently released its 2007 Annual Study of Employee Benefits trends. For the first time, benefit managers listed “Retain Employees” as their most important objective. In previous years, the no.1 goal was to control costs. Just goes to show you how the dynamic has shifted.

Retirement Benefits Today

The efforts of the government to protect employee pensions have just about destroyed these benefits. The considerable administrative burdens regulators created for employers led to a situation in which, by the end of the 1990's, most companies had significantly cut, or even terminated, their DB pensions. In contrast, over 90% of employers sponsor such DC plans as 401(k), 403(b), and 457. Employers do so to avoid DB’s complex actuarial and accounting burdens. DB is also perceived to be less popular with employees. We can see why most employers have reservations about DB pensions.

But what worries them about DC? A recent survey shows the Top 10 concerns benefit managers have about DC plans. No. 1 on the list, cited by 80% of responders, is “employee inertia” – a tendency to be inattentive to retirement needs. No. 2, at 55%, is insufficient levels of employee participation and contribution levels. It isn’t till we get much further down the list, at No. 8, that we see any mention of DC’s lack of a lifetime income feature – and it’s referenced by only 4% of the managers. That means for every 20 expressions of concern about employee awareness of retirement needs, only one manager was aware of employees’ needs for ongoing income.

A Mixed Bag

DC plans are great for certain situations.  For employers, they substantially limit benefit commitments to their people. (Unlike under pension plans, employer DC obligations are pretty much done once matching contributions are made.)  Other than basic fiduciary responsibilities, employers have very few compliance requirements. There is no employer investment risk, since participants manage their own DC accounts. And DC helps in attracting certain types of employees, like younger people and women (who tend to prefer DC to DB).

For employees, DC also offers advantages. It's great for those who change jobs (today, the average is nine changes over the course of a career), or are diligent long-term savers. In fact, for savers who are both disciplined and relatively sophisticated, DC plans have the potential to produce substantial wealth.

But DC also has clear disadvantages. For one ting, employers lose some funding flexibility. Although DB allows for benefits to be funded over a period of time, DC requires payment of a set amount, in cash, each year. Along with DC comes the expectation that employers will educate their people about planning for the future. Even when an investment-services vendor provides communication materials, employees still tend to look to the employer for direction. And DC really doesn’t function as a workforce-management tool. DB is great for helping companies transition employees into retirement (i.e., nudging them out the door). In fact, when companies need to downsize, you’ll frequently see them offer “early out” incentives through enhancements in the pension plan. DC doesn’t provide for any of that. If employees don’t contribute enough, or make poor investment decisions, there may not be enough in the account to permit them to retire. It makes it difficult to get the turnover you may need at certain positions and age levels.

There’s also the matter of risk: for employees, it’s substantial. Under DC, employees run the risk of not being sophisticated, or engaged, enough to take responsibility for planning for the future. They may not start saving soon enough, or contribute enough, to build adequate amounts on which to retire. They may make less-than-ideal decisions about how to invest their funds, and may withdraw funds early or take loans against their accounts (in both cases, reducing the amount of money available for retirement). Worst of all, there are precious few guarantees – or certainty. Other than their own annual contributions, and the employer match, there's no assurance of how much money will be in any participant’s account. And there's no provision to provide for, let alone guarantee, retirement income for life.

Earlier, I showed you the Top 10 concerns that benefit managers have about DC plans.  Here’s a list of the Top 10 things they plan to do about it by the end of the year.

The No. 1 action item is to improve employee communication, cited by just 53% of respondents.  Interesting: 80% view communication as a problem, but only about half intend to do anything about it!  Way, way down the list – at No. 13 – is the idea of pursuing annuity purchase options. Again, it shows how out-of-touch most benefit managers are with the needs of their people.

Make no mistake: Employee survey data clearly show that, heading into retirement, people want assurances, security, and protection. As DC participants, employees are therefore stuck with some glaring needs, both economic and psychological.

Back to the Future

Remember the original pension plans, circa the 1910s? They were funded with life insurance. As you’ll recall, employers found that, while insurance was great for producing lump sums, it was not the ideal way to maintain a stream of income.

Same with DC plans. They’re ideal for building up savings accumulations. But, like life insurance, DC is ill suited for paying out consistent amounts of income, guaranteed, over long periods of time. That’s why DC participants are facing a real void. And, like in the earliest days of retirement plans, it's insurance companies that seem best positioned to step in and fill it.

The need for savings that last a lifetime is one that insurers can easily address — through their portfolios of fixed and variable annuities. These secured, guaranteed products assure monthly income, for life — no matter what.

Of course, this commitment was always part of the original DB promise. But that was a different in a world that was different economically, demographically, and culturally. Today, such security is available – but only as a discretionary add-on.

So, in a sense, we've come full circle. The idea of retirement planning for the "average American" was originally underwritten by insurance companies. Now, and for the foreseeable future, insurance companies will, once again, play a major role in individual retirement planning.

Taking A Step Beyond

As to where things go from here, it's hard to tell.

Will regulators change course — and let employers "get [pensions] back to where [they] once belonged"? 

Or will we continue to shift courses, again and again, trying to avoid the inevitable "iceberg" of Social Security and private-pension destruction?

The only things we know for sure is that there are answers – but they’re not for everyone. They’re for forward-thinking organizations, willing to take action independently — on behalf of themselves, their stakeholders, and their employees.

For information on strategic plans that are "out of this world," please contact us by e-mail, at info@strategicplanningassociates.com; visit us at www.StrategicPlanningAssociates.com, where you can find resources for every conceivable HR and benefit concern; and join the dialogue on our interactive blog, www.HRStrategyBlog.com.

Fred and I thank you for your time this morning.  Be seeing you!