Federal Reserve Report Shows Troubling Trends in Retirement Plans

Pensions & Investments Online recently reported on the June 6 Federal Reserve’s Financial Accounts report with many interesting findings. We need, in this and subsequent blogs, to unpack some of the facts that were revealed and discuss their meaning.

1) “State and local government pension assets rose 6.81% in the first quarter of 2013.” This is a deceptive statistic in that we don’t know whether this increase was due to market performance, or contributions from employees and public sector employers, or, most likely, a combination of the two. Nonethless, this increase is significant when we compare it to the next fact:

2) “U.S. corporate retirement plans assets rose just 2.78% in the quarter, to $6.82 trillion.” We should probably understand this statistic as some combination of the lack of comparative rate of contributions by employers and employees in addition to some lack of asset performance. The key learning here is that – for whatever reason – public sector pension assets are growing at twice the rate of private sector retirement assets. From a policy perspective, it would appear that people employed by state and local governments would most likely enjoy better retirement benefits at some point in the future.

3) “The real story, according to plan experts, was the level of net asset flows. A modest $4.4 billion in net asset inflows for defined contribution plans was a surprise in light of strong market returns. “I would expect that to be a lot bigger,” said Tim Barron, chief investment officer of investment consultant Segal Rogerscasey, Darien, Conn.” Incredibly interesting statistic here. The net inflows to DC plans – meaning 401(k) plans – were a small percentage of total assets. Private sector employees aren’t contributing to their retirement. Maybe they can’t – meaning that they need all their paychecks’ money being dedicated to current living expenses. Retirement savings are being deferred. Of course, corporate matching contributions are dependent on employees first making their contributions. It does not appear that this is happening.

4) “Comparing the 4.06% increase in defined contribution assets to a typical return of 5% based on a composite portfolio tracked by J.P. Morgan Asset Management (JPM), “it appears that they underperformed the market,” said Mr. Barron. “If that is a trend, it would be disappointing. If defined contribution is going to replace defined benefit, this pattern has to be continuously on the upswing.”” This is evidence of what we’ve been saying for some time now, that individuals are poor decision makers when it comes to investments. Even if they are turning their money over to mutual fund managers who make their investments, they must first decide which sectors in which to deploy money, e.g., small cap stocks versus large cap stocks, corporate bonds versus treasuries, etc.

We’ll have more to say on the P&I report in another blog, but here are yet more statistics that the continuing Siren call to move public employees to the failed defined contribution plan system is a wrong policy prescription that should be avoided. Similarly, something must be done about the failure of defined contribution plans for private sector employees. – Max Patterson