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The Retirement “Reform” Continues

Home Retirement Accounts The Retirement “Reform” Continues

  • Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3030
    Joined: 09/18/2018

    “A pension only works when it contains actuarially conservative estimates and is fully funded.”

    It works until it doesn’t due the calculations that result in the required contributions.
    By definition future returns and future benefits are long term projections with the result being projected unfounded liability and the math of “how much this year”.
    Beginning +payments-target ending =required contribution. Great investment returns result in lower contributions. Each year this is updated by law. Rather than funding being maintained at a higher level, it is reduced. Double whammy, makeup for the “surplus + full funding the next year”. Yes it is more complex than that example. Primary difference between Defined Benefits and Defined Contribution Plans. The unknown variable is contributions or withdrawals. Your point is reasonable assumptions are required and reasonable contributions to have reserves for years of under performance. Unfortunately, decisions and assumptions are influenced, usually to require lesser contributions.

    #234984 Reply
    Liked by Roentgen
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 920
    Joined: 01/09/2016

    “A pension only works when it contains actuarially conservative estimates and is fully funded.”

    It works until it doesn’t due the calculations that result in the required contributions.
    By definition future returns and future benefits are long term projections with the result being projected unfounded liability and the math of “how much this year”.
    Beginning +payments-target ending =required contribution. Great investment returns result in lower contributions. Each year this is updated by law. Rather than funding being maintained at a higher level, it is reduced. Double whammy, makeup for the “surplus + full funding the next year”. Yes it is more complex than that example. Primary difference between Defined Benefits and Defined Contribution Plans. The unknown variable is contributions or withdrawals. Your point is reasonable assumptions are required and reasonable contributions to have reserves for years of under performance. Unfortunately, decisions and assumptions are influenced, usually to require lesser contributions.

    Click to expand…

    ‘Pension’ plans work when they are run by a ‘for profit’ private entity that is small enough to afford it (such as a medical or dental practice). And you set a plan that is not subject to the types of risks faced by big pension plans such as having to make payouts to plan participants in retirement and a constantly growing work force, not to mention very high investment risk (because that’s the only way these types of plans hope to solve their funding issues).

    When you start running huge pension funds with unrealistic return assumptions (that are poorly funded) for an increasingly growing work force and maintain the pension fund in perpetuity and make long term payouts to retirees, that’s when you run into problems of solvency.  This simply puts the risk on those who bail out these types of plans.  Thus instead of doing this they should convert this plan to a less generous Cash Balance plan and also eliminate lifetime funding in favor of lump sum distributions.

    They should also close the pension funds to all new participants and transition to a 401k plan system (with a generous match if they like). But neither of these proposals will be acceptable as long as public bailout is on the table.  You never give a gambler more money to gamble with.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #235067 Reply

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