The Florida House of Representatives on March 22 passed HB 7011, which would eliminate participation in the Florida Retirement System defined benefit plan for all new public employees.
Under the plan, employees hired on or after Jan. 1, 2014, would be required to join the FRS 401(a) plan. This proposal is being put forward as a cost-saving initiative for Florida's taxpayers, despite the fact that Florida's retirement system is one of the best-funded plans among state plans.
The Florida Senate has pending its own legislation, SB 1392, which would close the FRS pension plan to new elected officials and state employees classified as senior managers. The bill would keep the defined benefit plan open for other state and governmental employees, but change the default enrollment for new employees to the 401(a) plan, requiring participants to actively decide to join the DB plan.
I disagree with this thought process and potential change in benefit structure. The United States is on the verge of a retirement crisis. A recent report highlighted just how poor our retirement preparedness is as a nation. Unfortunately, of the workers polled, 57% reported assets of less than $25,000, excluding their homes.
The U.S. retirement system has seen a massive shift from defined benefit plans in the past 25 years. The Department of Labor reported there were 114,000 defined benefit plans in 1985. Today, the department indicates only 38,000 remain. Many plans moved to 401(k) defined contribution plans. However, shifting responsibility for one's retirement from a defined benefit plan overseen by professional pension officers supervised by a board of trustees to defined contribution plans, whose investments are self-directed by untrained individuals is a formula for disaster.
Would we ever ask an individual not trained in dentistry to attempt to fix a cavity? Of course not. Then why would we ask that same untrained individual to manage his or her retirement? In the former case the pain associated with messing up one's tooth would likely last about 30 days. However, mess up your retirement and the pain associated with that could last 30 years.
Whatever happened to the concept of a retirement stool? We were taught that one's retirement consisted of participation in a defined benefit plan, personal savings and Social Security. If fortunate, a secondary retirement vehicle, such as a defined contribution plan, would supplement those three legs of the stool for participants. Unfortunately, the demise of defined benefit plans has created a significant imbalance in this stool concept. What was once a three- to four-legged stool is now a one-legged balancing act, as most individuals don't have personal savings, and for many public employees Social Security is not available.
The U.S. is experiencing the retirement of the baby boomer generation.
Most of these individuals are not adequately prepared for retirement, and this cohort had access in many cases to a defined benefit plan. It is among the next generation where we will begin to witness the major consequences of our retirement crisis. Only about 16% of employees in the private sector are now covered by a defined benefit plan. Public-sector employees are much more likely to have a defined benefit pension plan — some 85% are covered. But there has been significant movement to remove this benefit from future employees. I suggest everyone should have access to a monthly compensation through a defined benefit plan.
The social, economic and political consequences of not providing an adequate retirement will dwarf the potential savings from the termination or freezing of defined benefit plans in favor of defined contribution plans. In addition, the potential impact on the investment management industry, including investment managers, actuaries, accountants and consultants will only exacerbate the current weak employment environment. Why? As plans are shuttered, many have elected to engage in risk transfer strategies involving the insurance industry. This removes most of the day-to-day management for the asset base and administration.
I favor a back-to-the-future approach in which defined benefit plans once again assume their rightful place as a critical leg in the retirement stool. Defined contribution plans have a place, but not as the primary retirement vehicle. It would be great if Social Security and personal savings could round out the necessary funding, but given the statistics from that recent report, the less than $25,000 in savings and investment isn't going to fund too many benefits.
Albert Einstein is quoted as saying, “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.” We couldn't agree more! Retirement industry participants need to adopt a new approach to the management of defined benefit plans.
Let's stop focusing on the return on assets and begin focusing on the primary objective, which happens to be the plan's liabilities or benefit promise made. Creating an asset allocation framework that is geared specifically to a plan's liabilities is likely to reduce the funding volatility that we've witnessed with changes in interest rates. Controlling contribution costs will help to mitigate some of the frustration expressed by our government and corporate representatives. n
Joseph Nodarse is CEO and president of Hudson, Riley Asset Counsel Inc., Miami Beach, Fla. Russell D. Kamp is managing partner of Kamp Consulting Solutions LLC, Midland Park, N.J.
