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If they can’t, how can we?

Here’s a snippet of a recent memo from a large hospital regarding the planned termination of their pension plan in favor of a 401(x) plan:

Very simply, the primary reason we are making these changes is because BLAH can no longer afford to offer the legacy retirement programs we currently provide our employees. Though our finances are stable right now, we can no longer afford the market ups and downs related to our $BLAH million BLAH BLAH Plan obligation. Despite timely and sophisticated efforts to manage funded status, cash contribution and expense issues during the past decade, external economic factors – such as low interest rate environment – continue to dampen the positive impact these actions could have on the BLAH BLAH Plan’s financial state and volatile plan costs.

So I guess my question is, if despite being able to use “sophisticated" efforts” (which I assume means well trained professional fund managers) they can’t adequately fund your retirement, how is it that you, a layman are going to do better?

I am not trying to pick on the Hospital in question here, but the point remains, what are we as retirement “consumers” being sold here with this nationwide march to 401 plans?

It would strike me that if professionals can’t find a way to profitably aggregate the investments of thousands of employees, how are isolated individuals making uninformed decisions going to adequately fund their own retirements?

It’s true, 401 participants can choose from a wide range of funds (depending on what their employer has opted for), but if somehow that is magically better, why couldn’t pensions invest in the same funds and cut out the middle-man?

The obvious answer is these 401 plans aren’t going to sufficiently fund the individuals’ retirements, just the difference is that the burden of that failure is going to fall squarely on the individual. This is particularly true if you consider that many 401 funds have high management costs and at time of retirement far more retirees are likely to be badly hedged against market downturns than pensions run by sophisticated managers. That is, again, if the big guys have a hard time of making a pension work in a downturn, how in God’s name are you going to?

The larger answer is of course the retirement system is broken and essentially we are quietly kicking the can down the road when we are likely to find most retirees are at least as unprepared for retirement as the pensions they are being kicked out of. Unlike pension plans, however, there will be no corporate profits or government bailouts to make up the difference. Cat food will be the meal du jour.

Which brings us to the final point – were pensions ever financially sustainable? If the answer is “no”, then we have our answer (but still no answer for future retirees). If the answer is “yes”, then what changed? Where has the money gone?

I mean, certainly it seemed to work out for a lot of our parents.

I have a theory on where that money went, just follow the sucking sound as the money flows to the top 1%…

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