IRA. 401K. YOYO.
IRA. 401(k). SEP. 457. You may recognize these numbers and letters as short-hand for various employer-sponsored retirement plans. Here’s another acronym to add to the list: The YOYO plan.
In terms of popularity, the 2015 National Compensation Survey from the Bureau of Labor Statistics provided the following breakdown of retirement plans available to employees in the private sector:
14%: have a… Defined Benefit Plan (Pension)
26%: have a… Defined Contribution Plan (401(k)), with employer contribution
25%: have a… Defined Contribution Plan (401(k)), no employer contribution
35%: have… No plan
“Take a moment and let this sink in.”
Those are the words of Tim Todd, an insurance and retirement specialist, in an October 2018 blog post, as he points to the sobering reality that 60 percent of private companies “do not contribute 1 cent to their employees’ retirement…” Todd concludes: “Welcome to the 21st Century YOYO Retirement Plan — also known as, ‘You’re on Your OWN!’”
Regardless of what other letters or numbers you use for your long-term saving plans, the bottom line is you bear the lion’s share of the responsibility for funding your retirement. Yes, you might get something from Social Security, for which your employer provided half the funds. But for most workers, that won’t be enough to sustain a stable and comfortable retirement. In the private sector, nobody’s saving for your retirement if you’re not.
Even Pensions Have Been “YOYO-ed”
And as for the “lucky” workers, particularly government employees, who have employer-funded pensions? Well, get acquainted with the word “underfunded,” because it’s the explanation for why your corporation, municipal government, school district or state administration hasn’t set aside enough to ensure you’ll get what you were promised. Today, a fully-funded pension is as rare as a unicorn.
Whether it’s a private sector pension or one administered by a government (and that includes Social Security), too many plans have too many retirees living too long. And that combination has made most pensions too costly to maintain. Businesses don’t have the excess revenues, and governmental units can’t collect enough taxes to keep their pensions afloat. Whenever possible, both private and public sector employers are looking to either terminate or offload their pension responsibilities, and are replacing them with defined contribution plans that transfer the funding and investment responsibilities to the individual.
Some employers who continue to offer a pension have modified the format by making employees responsible for keeping the plan solvent.
In 2017, the State of Michigan adjusted its pension option for incoming teachers by having them make a one-time decision to enroll in a pension or a defined contribution plan. If they opt for the pension, teachers are required to contribute 4 percent of their annual salary to the plan, which is matched by their employer. The obligation of the teachers to fund half the pension is open-ended: if at any time the plan becomes underfunded, both teachers and the school district will have to increase their contribution percentages to address the shortfall.
This bleak YOYO scenario is even more discouraging when you realize that in 1960, 50 percent of the private sector workforce had a defined benefit retirement plan; i.e., an employer-funded pension that promised a regular retirement check, based on average salary and years of service. How did this change?
The short explanation: retirement models, particularly pensions, have no good answers for increased life expectancy and slowing population growth in developed countries. John Mauldin, writing in a November 2018 investment newsletter, expands on this problem.
“We are simply not prepared for a world in which old people outnumber the young. But it may be coming, thanks to life extension at the upper end and falling fertility rates below. National pension systems—what we call Social Security in the US but similar elsewhere—are not designed for that combination. They presume a high ratio of working young to retired old citizens. That is no longer happening and is increasingly hard to ignore.”
Safety Tip: Don’t YOYO Alone
The YOYO trend is clear: it is becoming less likely that employers, either in the private or public sector, will fund retirement benefits for their employees. The math just doesn’t work.
Policy wonks and economic experts can continue to pursue that elusive pension unicorn, the one that guarantees a pension for all without exorbitant contribution commitments. Maybe they’ll find it. In the meantime, YOYO is the one practical alternative.
But just because the funding is YOYO, doesn’t mean you have to do it all by yourself. Guidance from financial professionals is not only available, but recommended. If you’re serious about making a YOYO retirement plan work, you should also be serious about professional assistance.
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This article was prepared by an independent third party. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9 Fl., New York, NY 10017, 212-541-8800. Securities products and advisory services offered through PAS, member FINRA, SIPC. This firm is an agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Wealth Advisory Group LLC is not an affiliate or subsidiary of PAS or Guardian. Wealth Advisory Group LLC is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. Neither Guardian, PAS, Wealth Advisory Group, their affiliates/subsidiaries, nor their representatives render tax or legal advice. Please consult your own independent CPA/accountant/tax adviser and/or your attorney for advice concerning your particular circumstances.
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Submitted by Elozor Preil