Article by: Lillian Kazmierczak - Finance Writer for Toarc United
In 2019 Fed Ex announced they were discontinuing their company pension plan and replacing it with a "Portable" retirement fund. Portable to them, meaning they were moving to a 401k plan. Portable in general means you can take your pension earnings with you when you leave. Anyone hired after January 1, 2020, would have the 401k. Current hires could choose depending on how long they were with the company, and retirees would not be affected.
It was all very straightforward, and in truth, lots of companies had already done this. However, Fed Ex being nationwide and abroad drew a lot of fire for this.
Before I jump into the portability of pensions, why they are not so portable, and discuss the new twist in pension portability: I want to welcome you to toarcunited.com; you'll need to know that we are here to Motivate, Innovate and Elevate. My goal is to give you enough information to get you talking, thinking, and doing, so you can live your best life!
Company Pension Plan
If you're a Baby Boomer or your parents were, you may remember the "Company Pension Plan" created as an incentive for you to stay with a company until you retire. It's based on your salary and how long you have been with a company. It gave you a specific amount of money per month when you retired. You knew exactly how much you would receive monthly. Of course, you did not pay into this; this was an employer "Thank you "for years of service.
When you retire, you receive a payment based on this formula until you die, and your spouse gets a portion of this until she passes. If you had other beneficiaries, there was a possibility they may receive some of this as well. The economy did not affect these payments. It was a monthly lump sum. All the management of the plan and risks were on the employer. This was meant to be a Social Security supplement at a time when you could live off of Social Security.
If you left the company, that pension plan stayed, and you get what you earned while you worked there. There was no portability; it was like a brick; it remained with the building. It worked great in its day; people stayed at one company for years, retired, living comfortably till they died.
The advantage of this plan was that you never put a penny into it; It took all the work out of planning your retirement. But, unfortunately, it was not the best option for an employer and certainly contributed to its demise. Not until 2012 was the option of contributing to your own pension an opportunity.
The Birth of the 401k
In 1978 The Revenue Act of 1978 was created (section 401k of an IRS document, hence the name), allowing you to save pre-tax money in an account with an employer matching a small percentage.
Four years later, the IRS decided the 401k could be funded through payroll deductions, the 401k we know today had arrived.
According to Northwesternmutual.com," 50% of the big companies were offering this or were thinking of offering this." That was a big win for retirement plans. It offered portability, and it came with a bit of a choice.
If you left the company, you had the choice of rolling into a new 401k with a new employer; you chose how much you put into it. Those were the choices, not like today, where you have options in 401k, 403b, and IRAs. More portable than the company retirement plan but not really portable. I define portable as I can pick it up and take it with me wherever I go; my phone is portable.
So in 2019, Fed Ex moves from a company pension plan to 401k. They are no doubt trying to attract younger workers, which will save them money in the long haul. So naturally, everyone criticizes Fed Ex, who is joining the 401k party almost 20 years later than everyone else. Nevertheless, it's touted as a portable pension plan, and the financial world is acting like it's something new!
It is only portable in the rollover aspect of a 401k. If you don't roll it into your new employer's 401k, it's not moving anywhere unless your old company forces you to move it. Your old employer will likely move it into a different fund within the 401k, and you will no longer earn interest on it.
When your choice is a 401k or a 401k, there is no choice, nor is this portable!
One of the most significant issues with employee 401k's is vestment. In most companies, you are not vested until 5-7 years of employment. If you leave a job before you are vested, you have to leave the employer-matched distribution. While you would think a 3% match is not a big deal, it does add up over time.
In Steven L.Wilborns The Problem with Pension Portability, he does a side-by-side analysis of two employees over 30 years on a $20,000 salary with a 6% annual increase. Woman A has worked at the same company all 30 years; Woman B works 15 years at one company and her last 15 years for another company. They both retire with a final salary of $108,370.
After 30 years, Woman A has a pension of $48,766: Woman B has $34,557. Approximately $14,000 less because she left a job halfway through her career. That's a significant amount of money NOT to have for retirement.
According to the Bureau of Labor Statistics, younger baby boomers hold an average of twelve jobs by the time they turn 50. Moreover, current economic trends indicate that younger workers can expect to change jobs even more frequently.
With people changing jobs much more frequently, the impact of this is a small fortune in lost retirement income. Throw in a pandemic, and the impact just got that much worse. Unfortunately, that is what we are facing now in our 40s, 50s, or 60s, with retirement looming.
True Portability is Suggested
On Wednesday, Congressmen Jim Hines and Mark Warner introduced a bill to create Portable Retirement Investments Accounts(PRIAs), a congressional version of a portable 401k. Sadly, this same bill was introduced in 2018 and was rejected by congress. So if there was ever a time to let your congressman know how you feel about this, it is right now.
When you apply for a Social Security card(which in the US is currently at birth), a PRIA is created for you. The account will be monitored by an independent agency and managed by a "qualified financial institution."
There will be a "basic" option to invest in target-dated(you will pick a target date to retire, and based on that date, your risk will get smaller as you get closer to retiring) funds.
Basically, you will assume most of your risk while younger and can better absorb the loss. This is great because this is the way you should be working your investments anyway. But, essentially, it will make people invest in a way that will only benefit them, and it is idiot-proofing investing for people who are less educated on investment or don't care. There is a manager to guide them along the way.
So stop giving me the stink eye and acknowledge that there is a group of investment-challenged people in this world, some through little choice of their own and some that I call "Bobbers."
The Bobbers bob in the water, waiting for something to happen; they like to think they are victims of circumstance; they are the non-decision makers. Not the way to achieve financial security for your retirement!
You get a paycheck, a percentage goes into your account, and it's invested( No, it is not that simple; I am getting to that!). The ambitious ones are putting extra money they find along the way into this account. If your parents are great with money, they can help you too. It is an investment win, win, and we aren't at the really good part yet.
The absolute best part is this is your account; it follows you like a shadow. Imagine putting all your retirement money in a bucket and taking that bucket anywhere you work! No rollovers, no penalties, no 60 days or else. You take it from job to job; it is yours and only yours. You call the investment shots; it will be whatever you make it. The power to retire well depends on how you manage this account.
The money you earn through any company 401k goes in this bucket. If you choose to invest this money in stocks, bonds, or banknotes, all your investment money goes into this bucket. The possibilities are only endless at this point. You can go big and go home with a fantastic retirement fund! Honestly, the closer I get to retirement, the more excited I will be about this.
Remember about 20-30 years ago when all these companies when bankrupt or "lost" retirement accounts( people worked 35 years at a company and lost every penny of their retirement plan). This account will not be lost; that's now eliminated. If your employer goes out of business, your money is still safely in your bucket. This bill is a game-changer for retirement
The Pros of Portability
When you reach age 18 and have $15,000 in the account, you can move into an IRA. This blows me away for so many reasons.
Now the investment conversation is part of the dinner talk. You have to talk about it, everyone in your house has one, and you can't ignore it anymore. Once we are all talking about this, people will be more invested in educating themselves on investments.
Two years ago at Christmas, my daughter and niece got their first real "grownup" jobs. As a family, my brothers, sister, and kids are talking at dinner about benefits and 401ks. I was so excited that there was a narrative about investing with these kids, and they were asking questions and asking advice; they were engaging in their future without even realizing it!
My parents, especially my mother was great with money, but we never talked about money or investing! We heard about it if my dad was honked about something financial, but there was no open discussion on why.
Can you imagine having this conversation at home, discussing options when your kids reach eighteen years old(why wait till they're eighteen, start talking money and retirement as soon as they can understand. We teach them about sex in middle school, why aren't we discussing money with them?) A conversation where they listen because it does affect them and they are interested in what it means for them.
If you read my FIRE blog(toarcunited.com/resources), these are the people who will make the FIRE method of retirement work. Finally, these kids will have the time and account to do what most adults are struggling to do right now.
Once your money is in these PRIAs, financial managers assist you in the following steps, and the program alerts you when you can move your money into the IRA.
Is this perfect? Probably not; it will need tweaking as the years go on. But, it is much better than what we are doing now, and that is a great start.
We are in a Gig economy (needing two jobs to pay your bills) of short-term contracts and freelancers instead of a permanent employer. This would give people in non-traditional jobs a retirement plan as long as they were working.
When I left my full-time job to be a freelancer, I left behind an employee 401k option. If I hadn't already set up an independent IRA twelve years ago, I would have had no options for retirement unless I sought one out. PRIAs allow you to freelance and have a retirement account. As I am closer to retirement than not, this was a huge deal as I chose to start a freelance business. Too bad there are no health insurance options(that my friend is a whole different blog).
According to Jim Himes, over 40% of part-time workers have access to 401k's. But, that 60% who have don't have access or anything set up for retirement. That's a lot of people who will be living in poverty when they retire. That will cost Americans a massive amount in federal programs to help them, and they will outnumber the people with retirement accounts; that's a colossal mess in itself.
Are There Any Cons?
As I read and researched the act, I couldn't find any real cons. But, of course, there will be people who will not be happy with this, and it will undoubtedly be an individual personal objection.
One thing that has yet to be addressed is how the fund managers are to be compensated. Whether the compensation will be from the government or if it will be individual fund compensation as we currently have.
In the beginning, if this is passed, there may not be enough options for investment to everyone's liking. However, these are all things that can be fixed.
There are going to be people who will struggle with the responsibility of this account. There will be people who will try to hack these accounts and steal from the less knowledgeable people about these accounts. There will always be people who will not contribute to their accounts and don't believe in retirement. Unfortunately, you can't fix everything in one day, and life happens whether we like it or not.
People will complain that they are "being forced" to save money for retirement, That we are infringing on their rights. You can't make everybody happy!
The takeaway in all of this is, our current system is not working. People are retiring on very little and no savings but social security. The money to be spent making sure poverty-level retirees have enough of what they need will soon be a massive burden on the government and significantly affect our economy. We need to make changes to ensure this is not the case for future generations. We are responsible for fixing this broken system and creating a working plan available to everyone. We aren't accountable for what they do with it. But we cannot continue the way we have been; we live the consequences of that right now.
We can hand our kids and grandkids this huge mess we have created and say good luck. But, if we are not part of this solution, then we become the problem!
If you're looking for more Thoughts of a Random Citizen, head over to the podcast section. I think you'll find some fascinating podcasts to listen to.