Are retirement plans in the Fed's crosshairs next?
By Kevin Startt
Before you or your client gets “whacked” in a bad retirement plan, it may be a great time to consider an annuity or life insurance alternative that provides diversification outside the possible federal takeover or cutback in benefits.
Recently, I was reminded of the old proverb, “Half a loaf is better than none." That was first said by a federal employee going out to play golf at noon. It is hard to believe that less than a decade ago, we were talking about partial privatization of the Social Security system under the Bush administration. It looks today as if we have gone 180 degrees in the opposite direction toward even more federal control of the retirement system.
Now, the Brookings Institute is talking about capping tax deductions at 28 percent, after the Employee Benefit Institute (EBRI) recently announced that 82 percent of employees at least participate in an employer-sponsored plan. Eight percent of employees also participate in a non-qualified plan like a private pension plan funded by a myriad of savings and investment vehicles. That includes indexed annuities that provide a lifetime income benefit similar to a pension, without the taxpayer-funded Pension Benefit Guaranty Association (PBGIC) which has been billions of dollars in hock for over a decade.
Corporations like UPS, Boeing and Ford are struggling to meet mounting health and pension costs. Now, with employee participants grossly under-performing market indices — despite the market doubling in the last four years along with mounting federal revenue needs to fund a $17 trillion budget shortfall — there may be a perfect storm brewing that could benefit the annuity industry’s inclusion in the retirement plan industry in a big way. The question is, if the administration’s bean counters look for revenue in capping 401(k) deductions, would non-qualified annuities be included as well? Right now, the gap between what pension plans owe and what they say they can pay retirees is $347 billion. The total outlay for senior federal entitlements is over $75 trillion, according to the actuaries. Much of the money in 401(k) plans and other related qualified plans is invested by Joe lunch bucket, but with $22 trillion in IRAs, (k) plans, defined benefit plans and other related plans, that could mean as much $5 trillion to $6 trillion in additional revenue for the Feds, primarily from employees making more than $183,000 a year singly or $223,000 jointly.
In addition to the reduction in tax benefits, the government may require employee retirement funds to be partially invested in Treasuries, further driving down interest rates and confiscating investor and saver dollars. Is this much different from what is taking place in Cyprus, as the government seizes bank accounts in guaranteed deposits, or what our own Treasury did with gold deposits in the 1930s?
It is important to remind clients and prospects of what is transpiring in Europe between rich Northern countries like Germany and the debt-riddled Southern European countries like Cyprus, Greece and Spain. This is also happening here between red states and blue states. Ask them if a non-qualified source of safe funds outside of federal control might make sense for a portion of their federally controlled funds, especially if it is regulated by the states.
With the deep, subtle suspicion and skepticism of the federal government’s plan for the retirement market, this is a valid time to begin talking about retirement plan geographic diversification between federally controlled funds and state controlled funds. One could position these retirement funds as lifetime income planning options offered by a local retirement income specialists, as opposed to a federal plan that may be capped as far as federal tax deductions and allocated mainly to Treasuries. This emphasis has been used successfully for years to justify supplemental employee retirement plans (SERPS) and deferred compensation.
With a 28 percent cap, the idea of a personal pension plan may be going mainstream with the Joe Plumbers of America. In fact, the third largest indexed annuity company recently released a client statement that looks very much like a pension statement or Social Security statement to make it even easier to understand lifetime income benefits. They say the difference between a good golfer and a bad golfer is that the bad golfer goes “whack damn” and the good golfer goes “damn... whack.” Before you or your client gets “whacked” in a bad retirement plan, it may be a great time to consider an annuity or life insurance alternative that provides diversification outside the possible federal takeover or cutback in benefits.