by Jack Waymire
It stands to reason Wall Street analysts did not like traditional pension plans. 100% of the contributions came from the employer and company net worth’s guaranteed lifetime benefits for employees. Consequently, thousands of companies were impacted by unfunded liabilities when they got behind in payments to their plans.
Pension plans were great for employees, but they impacted the balance sheets and earnings potential of public companies in a big way. So Wall Street analysts were the catalysts behind a movement to replace pension plans with a cheaper type of retirement plan that did not create liabilities for company financial statements.
The analysts had a receptive audience. Corporate executives made more money from stock options that were driven by company earnings, than they did from company sponsored pension plans. The transition from a pension plan to another type of plan did not impact them like it did their rank and file employees.
The Rise of the 401k
Company after company discontinued pension plans and replaced them with 401k plans. Funding from companies for the new type of plan was based on profitability and formulas that matched employee contributions.
Companies no longer guaranteed benefits. A 401k plan defines company contributions, but it does not define the benefit.
Employees accepted the new type of benefit with barely a whimper. There was no way they could fight this change and keep their jobs.
One of the key features of a 401k plan is making employees accountable for their own investment decisions. They did not have this responsibility when their companies provided guaranteed benefits. Companies were impacted by the quality of their investment decisions and not employees.
401k plans generally offer several investment choices, primarily mutual funds that employees can choose from. Consultants educate employees to use diversified strategies to select several funds. And, they recommend increasingly conservative selections as plan participants get older.
Increased accountability for decision-making also makes employees responsible for their own performance. Make the right decisions and they will have more money. Make the wrong decisions and they will have less money. Make really bad decisions and they cannot afford to retire.
Very few employees are prepared to make these types of decisions. In fact, they are intimidated by investment principles they do not understand. But, that does not change anything. They are still responsible for making their own decisions and they are accountable for their own performance.
Employees accumulate assets in 401k retirement plans during their working years. Now it is time to retire. Company trustees throw them to the Wolves of Wall Street. Their 401k account balances are rolled into self-directed IRAs. They no longer have company trustees and consultants helping them. They are on their own and they are vulnerable based on what they don’t know.
If 401ks and wolves were not bad enough early retirees are faced with an even bigger risk. They will run out of money if they select the wrong advisors or make the wrong decisions.
Companies are probably breathing a sigh of relief that they no longer have to guarantee benefits to employees who may live 30 or more years in retirement. Now, it is their employees’ responsibility to make the right decisions during their working years and to make even better decisions during their retirement years. Thank you Wall Street!
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