Where have all the Pensions Gone?
It was in most of our lifetimes that pensions were the number one retirement tool for most individuals. I would guess that everyone who is reading this articles parents, if they worked in the corporate world, has or had a pension.
Over the last 40 years though they have disappeared, in 1978 64% of companies offered define benefit or pension plans, by 2018 it was down to 9%, why is that? It isn’t because employees didn’t like them. According to AARP 8 out of 10 Americans would love to participate in a defined benefit plan
Employee loyalty was more prevalent when companies were offering pensions than it is now. Just look at the amount of office turnover we have these days. You can’t pick up the newspaper, or more accurately look at your phone, anymore without seeing an article about everyone looking for a new job or for a quote unquote “change.”
This is a new phenomenon, and I would dare say there is a direct correlation between the two. The most loyal industries anymore are government positions and teachers and it isn’t for their lucrative pay.
What do both groups have in common?
Once someone works a few years in these sectors they don’t want to leave because they know what is there for them in retirement no matter how poorly they choose with their 401k or 403b or in some cases even if they contribute.
There is a lot of comfort in that feeling.
So why did they go away? And yes they have gone away. Responsibility and Cost.
Cost and responsibility. Pensions cost companies a lot of money. They are also on the hook for the financial decisions of these funds and most companies have failed miserably with that management. They have cut corners or went for the home runs in the market and are now way behind on funding.
Companies have decided it is easier to pass that responsibility on to the employee with 401k matches. The problem is most employees do not look at that benefit the same as a pension. Why? Well for one they have to contribute their own funds to get the match and for a lot of families even though they know it’s necessary it is hard to do with all the day to day expenses.
So What is the Solution?
Cash Value Life Insurance.
I am guessing your first response was to laugh, but many companies are now funding cash value life policies for their clients that will generate lifetime tax free withdrawals for them in 12-15 years.
Wayne Gretzky had a great quote about not skating to where the puck was but where it is going. Right now, the puck is at the defined contribution or 401k match in terms of employee benefits. The puck is headed to defined benefit plans through life insurance and the companies that realize it faster will be light years ahead.
There are two main factors this is happening. Cost and Responsibility. Companies can do this for minimal out of pocket expenses and they can protect the investments from market loss.
Here is the secret. They borrow all the funding from the bank and then collateralize the interest on the loan. Minimizing and in some cases removing completely their out-of-pocket cost. The life policies cash value will outpace loan interest rates on average in 7-9 years at which time the company has no exposure, has not spent any of their money (remember we were just posting collateral against the interest not paying it off), and has put together a benefit that again will distribute, depending on the employees salary, five to six, in some cases seven figure tax free withdrawals into perpetuity.
What employee is going to change jobs if offered a $10-$20k raise if you know if 6-9 years you’re looking at a benefit package of $100k+ in tax free withdrawals for the rest of your life? Very few, but if they do then the benefit stays with the company, and they can receive the income payments!
The employee benefit market is shifting, employees are looking for better and stronger offers from their employees and if you want to stay liquid and not spend all your cash on bonuses, 401k matches, ESOP’s then you better start thinking differently.
Just as Gretzky put it with hockey those who skate to where the puck is going will be the leaders whose business thrive. Now is the time to look at how you are incentivizing your top employees. Companies spend tons of money recruiting and training their talent, lets make sure it doesn’t walk out the door for another company who offers maybe a little more in salary. Better yet let’s go cherry pick that top talent using this as a recruiting tool!