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Transforming retirement savings into wealth

Some states and cities are taking at least halting steps to improve the funding of their pension plans, either by efforts to eliminate the huge funding deficits they have accumulated, or reducing the assumed rate of return on the assets to more realistic levels, even though that will boost the required annual contributions, or by setting up hybrid plans.

But whether sponsoring a defined benefit plan, a defined contribution plan or a hybrid, employers should remember John Maynard Keynes' assertion that real investing "is the long-term transformation of savings into wealth-producing capital" as paraphrased by Canadian pension expert Keith Ambachtsheer.

Helping employees convert savings into wealth they can draw on in retirement must be a key focus of all seeking to help employees prepare for the shift.

Unfortunately, too many employers have stumbled at the first step: Helping employees accumulate those savings. Some have done this by failing to contribute sufficient funds to defined benefit plans to guarantee the pensions promised to current workers — the future retirees, or by investing the funds' assets unwisely or inefficiently. Others have done it by eliminating or reducing matching contributions to defined contribution plans, placing a heavy burden solely on the shoulders of the employees.

Too often in the DB arena, the interests of those determining how much the contribution will be (note — not should be) are not aligned with the interests of beneficiaries.

This is less so in the corporate world because of ERISA's teeth and IRS funding rules. But in the public sector, the annual contribution is often determined by elected officials whose key interest is getting re-elected. Political concerns might prompt them not to allocate the required contribution so taxes can be kept down. The result in the U.S. is that many public pension systems are greatly underfunded.

That might be changing. Governors in South Carolina, Pennsylvania and Texas all have signed legislation establishing reforms to retirement plans. Other reform efforts — as in Illinois — have stumbled.

A key part of Mr. Keynes' assertion about real investing is "long-term" transformation of savings into wealth. He rejected "beauty contest" investing, or frequent buying and selling of the latest hot stocks, in favor of selecting stocks in companies that had "intrinsic value for a period of years ahead."

Corporate and public DB funds must establish governance structures that encourage long-term investment by putting into place boards and management teams with knowledgeable members compensated with the right incentives.

Likewise, sponsors of defined contribution plans must ensure they are sending the right signals to beneficiaries to encourage long-term investment thinking. This involves selecting the correct investment options and sending strong messages in educational materials and regular communications.

And plan sponsors, government officials and regulators around the world should look outside their own countries to see what lessons can be learned from the experiences of others. What lessons can the U.S. learn from Canada, Australia, the U.K., Holland? And what can they learn from the U.S. to improve the outcomes for beneficiaries as they seek to turn savings into the wealth that will provide for them in retirement?