Pensions may be the zombies of the benefits business. While employer-sponsored defined benefit plans are shrinking by the thousands and considered dead to some, certain retirement industry professionals are insisting there is a unique market where the classic retirement vehicle can play a small but significant role. Not to mention a possible factor for others in how the retirement crisis may eventually get fixed.
According to data compiled by the Government Accountability Office in 2008, there are approximately 17,000 employer-sponsored DB pension plans in the United States. Representatives from the Insured Retirement Institute, a trade and lobbying organization for annuities, say that the total number of pensions now is around 26,000, while in the 1980s that number was closer to 117,000. While all rough numbers, the reality is pretty gruesome.
Insurance broker Matt Tassey is no stranger to these statistics, but he says advisers should not be deterred from still trying to use DB as a solution for small business owners. There is a specific place where they can be, well, resurrected.
"The opportunity for producers is to talk to high income people to consider instead of the 401(k) or other options," the Portland, Maine-based adviser and treasurer of the National Association of Insurance and Financial Advisors, says. "If they have an individual who has not saved enough money [for retirement] and can put money away on a tax-preferred basis, find a partner like a third-party administrator or major insurance carrier."
In other words, it's a market for a niche adviser and for a unique type of individual. Tassey elaborates: "There is still a place for DB plans, it's not a dead market, but it's a pretty unique market ... the high earning dentist, small law firm, small physician practice or a specialist physician, perhaps a plastic surgeon."
It "can be a really lucrative market, a spectacularly lucrative one for someone who needs to put money away [if] they weren't able to save because they spent it on educating their kids or a divorce and so on."
He also emphasizes how advisers should not do this alone. "The difficulty is that you need to be dealing with vendors, providers who are experts in this because there are all kinds of rules under the law that make it legal to have that DB plan, and documentation and fees and all kinds of issues that make it not as straight forward as writing a group life plan for 50 people or a six-person health plan or an 80-life LTD plan," he says. "There are rules and they're very stringent and very strict with reporting requirements, but if they have individuals who have not saved enough money [and own a small business], find a partner for it ... Lots of companies are selling DB pension plans."
Partner up and specialize
Jerry Kalish, president of National Benefit Services, Inc. in Chicago and an EBA advisory board member, says Tassey is spot-on with his strategy. Kalish's company is exactly the type of third-party administrator that Tassey recommends can help advisers with the actuarial side of DB plans.
"If you attempt to go at it alone, you will fail," Kalish says. "Anyone in the financial service industry, you've got to find business partners that will help you grow your business, whether it's an insurance company, somebody like us [a third party administrator], a CPA, because that's the way you're going to succeed - because you can't know it all and can't sell it all."
Once you have a partner, Kalish says there may be a real opportunity for an adviser to focus their practice in these sorts of solutions.
"If I were looking for a niche as an adviser, it would be in that one-to-one, helping pre-retirees and employees deal with retirement issues, of which there are many," he says. "I think that's where it is at this point."
He points out, too, that if advisers pitch DB pensions to select customers, then they also need to provide an exit strategy recommendation, which means a frozen plan at a certain point in time for employees. "Then, more than likely you'll pick up the 401(k) business as well," he adds.
But an adviser looking to specialize in unique retirement strategies wouldn't just have to rely on pensions. Kalish says the other retirement vehicles an adviser could get creative with are:
* ESOPs,
* employee education and financial literacy programs in the workplace for "retirement income adequacy,"
* tax things like cash balance pension plans,
* plan design tactics like safe harbor plans and profit sharing allocation methods that favor the highly compensated under IRS rules,
* auto enrollment and escalation plans, and
* individualized enrollment education plans.
All of this is very important for an adviser to distinguish himself in the retirement industry. Kalish adds: "I sense desperation from some of these [adviser] folks and they're trying to figure out, 'What am I going to do now?' ... Retirement is kind of like plastics, everybody is getting there in their own way so there should be discoverable niches under that need where innovative advisers can find a market."
'A certain aura'
The additional aforementioned retirement products are also important because DB pensions can at times be a tough sell. "I've been unsuccessful at educating brokers and advisers who are in front of business owners on a regular basis about this option because there's a certain aura when you say the word pension," Kalish says. "You fear you'll find yourself swept up in the actuary world."
Tassey agrees, and while he himself has done these types of pension transactions before, he hasn't had one in two years.
"The fact is it takes a lot of work and the margins can be small ... because you're going to share the revenue with someone who's an expert and it really takes a real actuary," Tassey says, but he adds that it can still be a great door opener to talk about retirement and other products, and insists it can be a smart move for those very select clients.
Jackie Salmon is a field vice president for consulting services and actuary at OneAmerica based in Indianapolis, Ind. She's also a fan of pensions. "I did a study one time replacing a DB plan with a regular 401(k) and the costs are less for pensions ... they're pooled and it begins to pay for itself," she says.
But she says that with low interest rates, legislation issues and market volatility, the costs for pensions have ramped up and made them undesirable for many. Where advisers can play a big role is in advising people with current pensions about the value of what they have.
"There are places out in California where people are selling their pensions ... and people need to understand that they need something to live on," Salmon says, adding that the younger a person is, the less likely they are to understand pensions have value. Pensions could also play a very big role in solving the retirement savings crisis, she believes.
Solutions
"I think legislation will eventually have to occur that will increase the retirement age for pensions, just like they increased it for Social Security ... even to an age like 80 to dramatically decrease the cost of the pension. And then participants who are in a defined contribution plan can save to make it to 80 and they have a more finite timeline ... and then they'll know their pension will kick in," Salmon says. "I think it's going to be a blend of 401(k) and pension or annuities that makes this retirement situation work and not put as much stress on Social Security and Medicare."
But, she acknowledges that this is a far-reaching idea. In the short term, pensions are not an option for most of the American people, but annuities are a must-have for 401(k)s. "Advisers should recommend annuities to make sure people have some income because your 401(k) is eventually going to run out, it's not guaranteed for life," Salmon says.
Lee Covington, senior vice president and general counsel of the aforementioned Insured Retirement Institute, also says that at the moment, DB pension plans are just not the right fit for most Americans.
The annuity trade organization emphasizes that nine in 10 workers say they would like an income generated option in their retirement plan, and annuities are that solution.
"For many years it's been a focus on accumulation, and with baby boomers, now they need to focus on lifetime income issues," he says, adding that he gives "credit" to the Obama administration for promoting annuities and to the Department of Labor for the organization's recent request for information on how to increase lifetime income in plans. "I think every plan sponsor, anyone in charge of employee benefits, should explore these [annuity] options ... there are a number of [companies that are] very active in the marketplace," he says.
Back in Portland, Tassey knows that his idea of utilizing DB pensions "will play in a very limited way," but, with so many people facing retirement with not enough saved, it could help in the short term. Like everyone quoted in this article, he has one answer to really fix the retirement problem: get young people saving earlier.
