Friday, October 3, 2008

The Pension Problem: Retiring on Kraft Dinner


As manufacturing jobs go slowly down the bowl, a large number of factory workers are being dumped into the investment world with zero support and a larger amount of money to invest than they have ever imagined possible. For most it is the rolling over of the pension plans and for a lucky few it includes a severance package. On the surface this is a positive as in days of old workers were left with little to invest or live on. So what’s the problem you ask?

Many of these workers are doing the equivalent of walking out with a pork chop around their neck to feed the starving jackals. The pork chop is their pension money and the jackals are of course the many advisors chasing the employment ambulance! Let’s back this up a bit though.

EMPLOYERS DUMP THE MARKET RISK ON EMPLOYEES: The workers first began to lose their retirement nest egg when employers switched the onus onto uninformed employees to manage their own Defined Contribution pension plans. Knowing the difficulty the top pension managers have in keeping pensions fully funded, one can assume everybody knew that the workers had little or no chance of having their pension fully funded on retirement. However, not leaving failure to chance, the insurance companies managing the funds ensured employees had a miserable selection of high cost mutual funds or low return money market funds to invest in. In fact I could not imagine a respectable pension fund manager EVER choosing from the selection offered to the employees. To further show the care and concern for employees, millions of dollars in DC pensions sit in money market funds for years with no effort to contact employees and discuss better options.

EMPLOYEES LEFT HOLDING THE MONEY BAG: While a few employees might think they can handle the job of investing their pension over a 30-50 year period, very few actually can. The vast majority are left to wander the streets hoping to stumble onto an honest advisor to help them out. Sadly, many advisors adhere to the Modern Commission Theory and, unlike a true pension manager, they quickly ascertain maximum risk they can get away with and the employee ends up in an equity dominant, high fee managed product. While you might say, why not go heavy on equities when they have a long term investment horizon(?) that would ignore the fact they are nearing retirement, unemployed, and often have debt and cashflow challenges. For many capital preservation and emergency funds are the immediate need. Regardless, the fact is that all of these employees need a good financial plan before anything gets done.

SOLUTION: The solution is obvious and easy to implement. The challenge is that the people who need to help make it work are not focused on the people who are leaving the job.
The employers need to provide training to EVERY employee who is in a capital accumulation plan (CAP Plan) to ensure they have the ability to assess the plan and understand the role they now play in managing money for retirement.
The insurance companies running the plan should offer education in how the plans work, the options available, and most of all the fees. Every pension plan should have an index fund solution with diversified asset classes and auto re- balancing. Insurance companies should be providing options for successful investing, not herding the uninformed employees into fee heavy lucrative fund options.

Last of all, and the most perplexing to me, is the role of the big unions. First you allow the Defined Benefit pension to be bargained away, then you ignore the basic safeguards that YOUR membership needs to protect there interests. Wake up fellows, your membership needs help.

Overriding this whole issue is a regulatory system that truly seems to worry more about the advisors and insurance companies and a lot less about the employee being asked to become an investment manager. So who is going to step up? Self Regulatory Bodies….. OSC, IDA, IIROC, advocis,CSA? I suspect that will happen when pork is airborne.

Okay, this article will no doubt end my hopes for the Leacock award for humour, but remember even funny guys can get peeved when an injustice is in front of you. The economy is squeezing the worker and this is a forewarning that retirees in the next two decades are going to be impoverished if politicians (good luck) do not bring the key parties to the table to balance the risk that is now borne by those who can least afford the impact of that risk.
Retiring on kraft dinner.....SOISMIKE


Anonymous said...


All your blogs are good - but this is the best yet. This is something that needs to be circulated amoung union members.

Hoping for more than Kraft dinner.

Shane said...

Hit the nail on the head with this one Mike. Between the handling of pension funds and large tuition increases you can almost feel all that middle class money being sucked back away to its "rightful" wealthy oligarchs.