A recent Forbes article, Why 401(k)s have failed
, once again put the onus on fees being the culprit for participant under-performance in these plans. You would think we have a retirement crisis because of payola in these plans. It is also strange that this popular publication, one that even I admire, publishes the Forbes Honor Roll of Mutual Funds once a year made up of predominately loaded funds, including some of the most popular options in (k) plans.
You can imagine the uproar that is coming if the Department of Labor (DOL) promotes the inclusion of evil fixed indexed annuities (FIAs)
as a plan option. These increasingly popular savings vehicles combine some of the benefits of participation in the capital markets with a pension-like income that cannot be outlived and is guaranteed by an insurance company.
I am reminded that former fed chairman Ben Bernanke and Alan Greenspan have owned these annuities in the past. I am not sure current fed chair Janet Yellen owns dreaded FIAs, but, like Yellen, I am going to start every sentence off with, “So,” to justify why the DOL’s move is a prudent one.
1. So no one complained about the dominant leg in the retirement stool — pensions, when there were 140,000 pension plans in 1980 with excessive costs but a lifetime income benefit. So unlike pension plans, which did not include an accelerator for illness, unemployment, etc., many indexed annuities do include this feature, which most companies do not offer before or after retirement. So this would immediately benefit retirees who don’t have a long-term care policy.
2. So small businesses, which represent 70 percent of the businesses in America, cannot afford the luxury of a Mercer, Watson Wyatt or a
Callan to offer consulting services. Small business owners face an inherent bias as do their employees in the performance of their plans. In addition, increasing regulation in the administration of these plans, albeit needed, could not come at a worse time for small businesses. So, indexed annuities, with a lifetime income benefit, would provide an inherent cost of living hedge to retirees that traditional fixed annuities do not offer, as well as a pension — like income that also can keep up with the rising cost of retiring through roll-ups or CPI riders.
3. So if Social Security can survive for 80 years invested in treasuries with increasing morbidity and mortality, and pricing that originated in the rosy demographics of 1935 when there were 40 contributors for every beneficiary, let insurance companies price personal pensions
the way they have been doing successfully for hundreds of years. So they could invest in treasuries and corporate bonds, and earn 2 percent to 4 percent more than the Social Security trust fund and price their products on the basis of today’s demographics.
Finally, Janet Yellen graduated from Yale in 1971. I am reminded of a university student who was visiting relatives in Boston over the holidays. He went to a large party and met Janet Yellen. He started the conversation with the line, “Where does you go to school?” Yellen was not overly impressed with his grammar, but she did answer his question. “Yale,” she said. The university linebacker took a big, deep breath and yelled loudly, “Where does you go to school?”
So, maybe we should all go back to school, including Forbes with the supposed failure of the grand experiment called 401(k)
, and consider indexed annuities as a viable retirement plan option before Janet Yellen and the federal government have to bail out the plan participants in these plans — who are far short of the funds needed for retirement.