Autopsy of a Retirement Plan

May 24, 2018

AAUP Academe
May-June 2018

As I approached age sixty-five after thirty-seven years of university teaching, I took stock of what my retirement income would look like. Many retirement experts claim that at least 70 percent of preretirement income is necessary to maintain one’s standard of living. For example, someone whose final annual income will be $100,000 should have as a goal an income of $70,000 in retirement.

I ran the numbers for my Social Security and my employer’s defined-contribution plan, in which I had participated for thirty-one years. This 401(a) plan, which functions in the same way as a 401(k), had been administered at various times by TIAA, ING, and Prudential.

Together, my projected Social Security and employee retirement plan would amount to just 43.5 percent of my final income. The monthly Social Security check accounted for 19.5 percent; the annuity income option for my defined-contribution plan, 24 percent.

Something had gone terribly wrong. Despite having accumulated almost a half-million dollars, which is much more than the $125,000 average for people approaching retirement, I did not have enough to finance a retirement that would allow me and my family to maintain the middle-class standard of living that my $117,615 final salary as a university professor afforded.

Click to continue reading “Autopsy of a Retirement Plan.”


Retirement Savings Plan for Private Workers Only Partial Solution

May 6, 2016

Hartford Courant
April 30, 2016

The Connecticut House just passed a bill to mandate that employers who don’t have retirement plans for their workers participate in a new state-sponsored plan, essentially a public IRA, which gives workers the option of saving for retirement. The Senate should pass the bill and Gov. Dannel P. Malloy should sign it, but without illusions about what it will accomplish.

Opponents of the bill, including the Connecticut Business & Industry Association, say that the private sector provides sufficient retirement savings plans. The bill’s proponents counter with the undeniable statistic that half of Connecticut workers have no retirement plan and will be completely dependent on Social Security, which provides only a fraction of necessary retirement income. They imply that the new plan would make up the gap, solving the retirement crisis.

Neither side is right. We wouldn’t have a growing retirement crisis if private plans had been sufficient, and the public approach under this bill, HB 5591, while useful, will not be nearly enough to allow participants to retire with sufficient income.
Continue reading “Retirement Savings Plan for Private Workers Only Partial Solution”

Don’t Go After Military Pensions

December 27, 2011


New York Times

December 27, 2011


AS the nation’s budget pressures prompt officials to scour the Defense Department for cuts, one tantalizing target is the military retirement system. The Pentagon has reportedly been considering replacing the guaranteed pension that, for more than a century, has been a fundamental compact between the United States and its soldiers, in favor of a market-based 401(k) approach. But this would be a grave mistake, a disincentive to future volunteers and a threat to national security.

Needless to say, there are critical differences between the civilian and military work forces. Soldiers who have risked their lives for our nation should not also have to risk their retirement savings in stocks. But there are many more mundane sacrifices required of career service members that also make it hard for them to build up the kind of wealth — whether in their houses, their careers or the careers of their spouses — that cushions civilian retirees from the whims of the market.

Service members are often required to move, for example, which hinders their ability to build home equity. Many have to put off purchasing homes, and those who do buy do not have the option of choosing not to move if their mortgages become underwater. For this reason, the housing crash of recent years has hit service families especially hard.

Frequent moves also make it hard for service members’ spouses to find work and progress in their own careers. This is most likely a primary reason that median household incomes for military families are lower than those of their civilian counterparts.

Most important, the unique skills people learn on the battlefield do not easily translate into private sector employment, and many military retirees struggle to find new work. While the officer who managed a military transportation hub might anticipate an equivalent job from a civilian firm, and while a young private who served one deployment could relatively easily return to school or an entry-level job, an infantry sergeant first class who has spent a decade or more on multiple deployments to the world’s most dangerous places would not find the same ready options.

For these individuals, there can be a significant financial cost to agreeing to remain in military service beyond the years when it would be easiest to make the transition to more marketable civilian jobs. But these are the people the military needs, and needs to retain.

The military pension helps compensate for their sacrifices. Soldiers and their families are more willing to put off other careers, and to accept frequent displacement, lower earnings and even the risk of being ordered back to active duty after beginning new careers, because of the promise of future compensation. The guaranteed pension is one of the biggest incentives keeping talented people in the military.

No one knows for sure how a shift to a 401(k) model would affect these families and their decisions to remain in military service. But we do know that there is a spike in retirements once soldiers complete the 20-year minimum to qualify for full pensions, and we can only assume that these people would retire far sooner without them. And it’s likely that many would not join up at all.

As policy makers continue their deliberations on military spending cuts — which are scheduled to begin again next month — they must keep the unique nature of military service in mind when they look to the costs and benefits of the retirement plan. And they should remember that no one imagined, back in the 1970s, that our all-volunteer force would last this long. Most believed that conscription would again be needed if the nation ever engaged in a significant conflict. The United States military has proved them wrong so far, but we should not underestimate the role the guaranteed pension has played in its resilience.

Darrell Driver, Jin Pak and Kyle Jette are lieutenant colonels in the United States Army.

Security Plus Annuities – A Bad Idea

July 18, 2011

The Aspen Institute recommends establishing “Security Plus Annuities” to supplement Social Security benefits, an idea endorsed by Richard H. Thaler, a University of Chicago economics professor with ties to the financial services industry, in the New York Times (“Getting the Most Out of Social Security,” July 16, 2011).

The idea is that individuals would be able to top off their benefits by purchasing with 401(k) or other funds supplemental annuities from Social Security. 

If the Aspen Institute had stopped there, it would have been a good idea.  Social Security could sell annuities to the public at a much lower price than are the life insurance companies that dominate the commercial market.  Purchasers could be guaranteed the same pay-out rate as the rest of their benefits.

But the Aspen Institute didn’t stop there.  It recommended that “the federal government pre-select a private market annuity provider or providers (depending on the volume of purchases) to underwrite Security Plus Annuities on a group basis.”  The federal government would  provide “record-keeping, marketing, distribution and other administrative services, keeping Security Plus Annuities low-cost and a good value.”  Pay-out rates would vary according to interest rates in the economy as a whole.

In other words, the federal government would provide the work and prestige of Social Security to steer customers to private providers who would reap substantial profits.

Such a plan might have marginal advantages for retirees over the commercial annuities that are available now, but they would be far less than if Social Security issued as well as administered the annuities.  It would be similar to having Medicare collect taxes and then give them to a private medical insurance corporation to provide the insurance.  As with the Security Plus plan, it would add a layer of unnecessary private profiteering that would drive up costs to participants.     

James W. Russell

Why 401(k)s Failed

July 5, 2011

As Boomers are preparing to retire, the news is full of stories about how their 401(k) plans are coming up short.  Most of the stories imply that it’s the Boomers own fault for not saving enough.  That explanation, though, grossly distorts the cause of the growing retirement crisis in the United States that was fueled by the wholesale conversion of tradition pensions to 401(k) stock market investment schemes beginning in 1981.

To understand why 401(k) plans are coming up short, it is necessary to understand how they are supposed to work. 

The basic idea is that participants will individually save for retirement through private accounts that are invested in stocks and bonds.  The accumulations from those accounts during working years are supposed to grow enough to finance living expenses during retirement years. 

Most people understand that much.  But that is only half the story. The other half is what participants are supposed to do with their accumulated savings once they retire.  There are many possibilities, but the most recommended according to the original theory of the 401(k) approach is to use the accumulated savings to purchase life annuities, which are sold mainly by life insurance companies.  In return for surrendering their 401(k) savings, annuity purchasers receive back a percentage of the purchase amount each month or other period of time for the rest of their lives.   

Life annuities are comparable to traditional pension payments since both guarantee predictable income until death, thereby sparing recipients the risk of outliving their source of income.

The ability of a 401(k) plan to provide adequate retirement security depends, it follows, on the size of the retirement savings accumulated during the working years and the payout rates of annuities at the time of retirement.   

The size of accumulated savings, in turn, depends on how much was invested in the accounts and how those investments fared in the stock market.  An account with little invested in it obviously is not going to pay off with handsome returns for retirement. 

Most people with 401(k) accounts, it is true, do not put enough in them to ensure retirement security.  The main reason, though, for them coming up short is not because of a lack of a savings ethic on their part.  It is because the savings necessary to ensure retirement security under the 401(k) approach is beyond the ability of anyone with ordinary incomes and expenses, including home mortgages and children’s college expenses.

The stock market is the other factor that affects the size of the accumulations in 401(k)s.  Since 1981 when they began, the stock market has risen greatly, leaving participants with the illusion that those rising values were ensuring retirement security. .

But as those stock market values were rising, annuity payout rates were falling.  In 1986 a life annuity purchased for $100,000 yielded a monthly retirement income of $977 for men and $931 for women—annuity companies discriminate against women by paying them lower rates to compensate for them living longer.  In 2010, an annuity for that same cost yielded only $631 for men and $531 for women–35 percent less.

Average Monthly Payouts for $100,000 Annuity Bought at Age 65

Year                Male               Female


1986               $977               $931

1990               $958               $865

1995               $808               $718

2000               $759               $693

2005               $647               $596

2010               $631               $591


Source:  Calculated from

401(k)s thus failed to deliver retirement security not so much because of the improvidence of Boomers, but because even if they saved a lot, the value of those savings in terms of future retirement income were continually falling due to the decreasing payout rates of annuities.  Those falling payout rates easily outpaced rising stock market values.  No one should be under the illusion that low annuity payout rates are temporary.  As the above table indicates, they have been in steady decline since 1986.    

Thirty years after its inception, it is clear that the 401(k) approach has failed working people by not delivering predictable or adequate retirement income. At the same time it has been an enormous success for the financial services industry that has siphoned off the accounts a bonanza of commissions, management fees, and profits.  Therein lies the reason why these powerful financial interests will make sure that they continue to be able to control the collective retirement savings of working people.  

James W. Russell

“Get Radical: Raise, Don’t Save, Social Security” by Thomas Geoghegan—New York Times op-ed article.

June 21, 2011

Thomas Geohegan’s “Get Radical: Raise, Don’t Save, Social Security” (New York Times, June 19, 2011) eloquently makes the argument that Social Security revenues and benefits both need to be raised, especially since 401(k)s have failed to provide sufficient retirement income.

Guest Post: Defined-Contribution Plan v. Defined-Benefit Plan by Glen Brown

June 12, 2011

 With a few exceptions, Defined-Contribution Plans were not initially created as retirement vehicles but rather as supplementary savings accounts
 With a Defined-Contribution Plan (401k, 403b, 457), only your contributions are defined
 A Defined-Contribution Plan shifts all the responsibilities and all the risk from the employer to the employee; thus, your benefit is not guaranteed
 Your benefit is based upon investment earnings
 A Defined-Contribution Plan does not have the “pooled investments, professional money managers, and shared administrative costs” that a Defined-Benefit Plan provides
 Your benefit ends when your account is exhausted
 There are no survivor or disability guarantees
 This plan does allow for portable assets
 Changeover costs to this plan would be significant
 Investment fees are paid by member
 On-going costs would be higher: in 2006, the expense ratio was 1.29%, 4.3x’s higher than a Defined-Benefit Plan; in 2004, the median cost was 1.4%, 4.7x’s higher than a Defined-Benefit Plan
 The State of Illinois will not “save money.” Most of the State’s obligation to TRS is for contributions not paid during the past several decades; therefore, the deferred cost of underfunding cannot be eliminated by switching to a Defined-Contribution Plan
 Shifting to a Defined-Contribution Plan can raise annual costs by making it more difficult for Illinois to pay down existing liabilities. The plan will include fewer employees and fewer contributions going forward
 Even with Defined-Con¬tribution Plan option, States and localities are still left to deal with past underfunding
 “There is a $6.6 trillion deficit between what 401k account holders should have and what they actually have.”

 Defined-Pension Plans are more certain
 You cannot outlive the benefit
 You are not affected by Market volatility
 Defined-Benefit Plan’s assets are held in trust and managed by professional investors
 Survivor and disability benefits are part of this plan
 This plan encourages a long-term career and stable workforce
 Since you do not or can collect Social Security, it is your retirement guarantee
 This plan is the best choice for middle-class retirement
 Teachers with a Defined-Benefit Plan are more likely to be self-sufficient and less likely to need public assistance
 Because teachers understand the value of such a plan, they are willing to give up higher wages
 TRS performance is well-diversified; it is in top ¼ of all public funds for the last 10 years
 Since 1982, the average rate of return has been 9.83 percent
 The costs for this plan are not excessive or expensive: 0.3% of total assets, and these costs are paid for by TRS.

Sources: The Teachers’ Retirement System, the Illinois Federation of Teachers, the National Institute on Retirement Security, Center for Retirement Research at Boston College, National Conference on Public Employee Retirement Systems, and Center on Budget and Policy Priorities

“Shedding Light on Excessive 401(k) Fees” – New York Times article

June 3, 2011

Ron Lieber’s “Shedding Light on Excessive 401(k) Fees” (New York Times, June 3, 2011) provides a useful concise introduction to the myriad fees embedded in 401(k) and other private retirement investment plans and how they add up to substantial losses for participants.

It is important though to note that even if courts or Congress find ways to lower those fees, which of course the financial services industry will fight with its substantial resources, including lobbyists, those plans will still not produce adequate retirement security for most.  Even in the best of situations with minimal fees, the same amount of money invested in traditional defined benefit pension plans would produce much more retirement security.

Traditional defined benefit pension plans have substantially lower overhead costs and fees than do 401(k) and other defined contribution plans.  That combined with the nature of the approach is responsible for them performing much better for participants.

See also “401k) Open and Hidden Fees” on this site.

James W. Russell

The Hammer and Anvil: Older Workers Pressured to Retire Despite 401(k) Crisis

May 29, 2011

In “Easing Out the Gray-Haired,” Nelson D. Schwartz (New York Times, May 28, 2011) describes the problem that law firms and other businesses have when older  workers resist retiring after their productivity has begun to decline.  It is in the interest of the firms, according to the article, to replace them with younger, more productive workers.

Aside from the ageism and age discrimination assumptions that infuse such arguments, a central problem is that Schwartz neglected to examine fully one of the major reasons why older workers are working past normal retirement age:  they can’t afford to retire without suffering serious plunges in their standards of living due to the 401(k) crisis.  The reader is left with the impression, rather, that these workers are simply stubborn or addicted to their professions.

Schwartz only in passing notes that 401(k) balances declined precipitously as a result of the 2008 recession, and that that may have something to do with older workers trying to hang on to their jobs.  These workers are doing precisely what financial experts are advising them to do when their 401(k) balances come up short.

The problem is not how to “ease them out.”  It is rather how to address the 401(k) crisis so that workers are not forced to involuntarily prolong participation in the active labor force. 

It is also a problem of how the failure of 401(k)s to provide adequate retirement security is aggravating unemployment since older workers cannot retire and make way for younger workers to replace them.

James W. Russell

From Connecticut to Chile: The Neo-Liberal Assault on Retirement Security (article)

April 8, 2011

Reposted from This Week in Sociology, April 4-10, 2011, edition 3

Since 1981 shaky 401(k) schemes that depend on stock market investing have increasingly replaced secure, traditional pensions in the United States. The financial services industry encourages a belief that these schemes produce generous benefits. But 30 years after their introduction, the first generation of workers to retire with these plans has learned they produce less than half the benefits of the pensions they replaced.

Even before the stock market crisis of 2008, signs were everywhere that very few people would accumulate enough wealth through these accounts to ensure financial security. As a result, most people expect to work longer and experience a dramatic decline in their standard of living when they retire—if they can retire.

401(k) benefits are lower than those of traditional pensions because the financial services industry drains considerable management fees, commissions, and profits from the accounts involved; and individual plans lack the advantages of risk pooling that traditional pensions have. In the strange language of pension economics, it is a risk that someone will live longer than average, thus taking out a larger share of investment.  Of course living a long life is a good thing.  The risk is that one will outlive her or his income.  With traditional pensions, funds built up by those who die early stay in the system to add to the lifelong support of those who live longer—unlike with 401(k)s where those funds are inheritable by younger family members and thereby drained out of the systems.  In other words, because of traditional pension risk pooling, the short lived subsidize the long lived.

Those who still have traditional pensions, mainly public employees (school teachers, fire fighters, etc.) now find themselves under attack for having decent retirement plans. The financial services industry – aided and abetted by conservative think tanks – has mounted a massive propaganda campaign to convince taxpayers that public employee pensions are the primary cause of state budget deficits. They claim privatized plans would result in significant savings over public pensions and Social Security.

This attack on public pensions amounts to a massive class swindle. The financial services industry is raiding the collective retirement savings of tens of millions of people to inflate its own profits, which have grown enormously at the expense of most peoples’ retirement security. But undermining retirement security in the United States is part of an international pattern promoted by the World Bank, conservative think tanks, and the financial services industry in general.

In 1981—the same year 401(k) plans expanded in the United States—the Pinochet military dictatorship privatized the entire social security system of Chile.  In 1994, after the restoration of formal democracy in Chile, the World Bank endorsed the private model and urged all Latin American, formerly communist Eastern and Central European, and Western European countries to adopt it.  This plan had the most success in Latin America where by 2000 over half of the region’s citizens lived in countries that had partially or fully privatized their national retirement systems. By that same year, however, the first generation to retire under the privatized Chilean system realized—like 401(k) participants in the United States—that their retirement incomes would be far less than promised than those who had stayed in the country’s traditional pension system.

U.S. College professors who have TIAA-CREF and similar plans have also fallen victim to the same swindle since those are variations of the 401(k) approach. In Connecticut public university teaching and administrative employees were eligible to choose a 401(k) type retirement plan originally administered by TIAA-CREF (now by the Dutch financial giant ING) or join the state’s traditional defined benefit pension plan. Most, deceived by the claim that they would do better under the 401(k) type plan, chose it. After years in the plan, they realized that they were paying more than twice the contributions as colleagues in the traditional pension plan yet would receive less than half the retirement benefits.

As in Chile, a movement developed among Connecticut state employees to allow them to switch from their failing plan to the much better traditional pension plan.  A rank and file organization with members in several state employee unions, the Connecticut Committee for Equity in Retirement (CCER), initiated and led the campaign.

Faculty filed a grievance through their unions claiming they had been unfairly steered into the 401(k) type plan when the much better traditional pension plan was available.  On September 22, 2010 an arbiter ruled in their favor – finding that faculty had not been given sufficient information to make informed choices nor had they been told that their decisions, once made, would be irrevocable. As a remedy, the arbiter ordered that they be allowed to voluntarily transfer to the pension plan using accumulations from their defined contribution plans to purchase credit for years of employment.

The Connecticut state employees joined West Virginia schoolteachers who won a similar victory in 2008. Both were significant precedent-setting victories over the financial services industry which has succeeded in transforming the great majority of private sector retirement plans from secure traditional pensions to much less secure and adequate—but more profitable for itself—401(k) like stock market investment schemes and is seeking to do the same with public sector retirement plans.

The transfer in Connecticut was supposed to be accomplished by December 31, 2010.  However, the Retirement Commission, in violation of the terms of the Grievance Award, delayed it based on advice from an anti-union corporate law firm it had engaged.  The firm alleged that an Internal Revenue Service preauthorization through a Private Letter Ruling was needed—a complicated process that could take up to two or more years.

The delay will benefit ING, the third party administrator of the plan, which collects millions of dollars in fees for each year that it maintains control of these retirement savings. CCER is now urging their unions to contest this delay on the grounds that other states that have allowed similar transfers from defined contribution to defined benefit plans have not required IRS preauthorization.

The Connecticut struggle is part of a small but growing movement against 401(k) retirement plans. A parallel campaign exists among Massachusetts state workers. Both hope to achieve the success of West Virginia schoolteachers who in 2008 were able to transfer from their failing 401(k) type plan into the state’s much better traditional pension plan.

James W. Russell