A retirement mismatch

When it comes to retirement plans, is there a mismatch between employers and employees? It’s possible. Employers seem to buy plans almost totally based on the cost involved. The word “employers” here suggests a family business, locally owned store, or franchise operation, the kind of operation a financial advisor might target; it does not mean Fortune 500 corporations (although larger employers may even focus more on low costs). The locally owned business is going to focus on building value in the company more than building value in its retirement plan. Why? Because the owners of the business are likely to make their money on the down-the-road sale of the company itself rather than on retirement plan income.

In some ways, the qualified plan is a nuisance; it is understandable that employers want it done cheaply and without a lot of hassle. Employees, on the other hand, would like to retire with dignity and — to put it bluntly — dignity ain’t cheap. In other words, employees need a decent lifetime retirement income.  

Once upon a time, defined-benefit plans ruled, and a worker’s pension was a fixed amount, usually a percentage of average pay. For small- and mid-sized companies, it was often arranged through an insurance company, a transfer of risk from the employer. The employer’s responsibility was to meet the annual actuarially determined deposits for each employee; so long as the correct deposits were made, the employer was off the hook and the insurance company solidly affixed thereto. When the employee retired, he or she was paid an annuity income for life from the insurance company — the actual pension could be based on fully insured values or a mix of investment and insured amounts. The employer made its payments to the insurer and had no further responsibilities. Compared to defined contribution plans today, retirement plans seemed simple and good.

One nice feature of insured or partially insured plans was that a beneficiary received a lifetime benefit if the employee died in-service — this feature kept many families alive and well. The insurance policy provided a death benefit that could be structured to pay out income for life for survivors. 

At odds

In many ways, the defined benefit plans were better for most employees, especially when the low participation rate for today’s 401(k) plans is considered. Many workers contribute nothing to 401(k) plans and therefore don’t have an employer match. 

Employee and employer education