Retirement plans in the new age

I remember during the late 70’s when IRAs hit the market and plan participants were excited about selecting mutual funds for  their accounts. It was easy.  Mutual funds were thought to be bullet proof, asset allocation would keep us safe and we could invest through dollar cost averaging, because mutual funds went up and down and back again.  The modern portfolio theory was in full swing, so we stayed fully invested in the market at all times. There was no market timing, and we rebalanced our portfolio when the allocations  went too far off their goals. Can you imagine a professional portfolio manager operating your account this way?  In all fairness to retirement accounts, which are not trading accounts, some changes have been made to give retirees a slight chance to make some money in the account through options activities.  Defined contribution plans and the way they are managed requires an understanding of the limitations they have, and the need for retirement planning to combine with them  the use of available nonqualified assets that are appropriate for retirement use. Deregulation is in the air, so don’t be surprise how retirement planning will be affected in the future.

Traditional defined contribution plans focused on rates of return, account values and market volatility. These are asset modeling investment approaches that are popular with  wealth management. However, there is the risk of uncertainty of retirement income. And of course  you could say that the purpose of a retirement plan is supposed to provide a guaranteed lifetime retirement income. That is generally on the minds of most employees. So what’s the solution.  Well insurance companies and banks figured it out. Banks use a financial management approach called Asset Liability Management. With their big pension plans banks, recorded their pension obligations on the financial statements of their companies. On the asset side of the financial statements and inside the investment accounts they would purchase various bonds that had different maturity dates, and used a laddering effect to match the maturities to cash needed to pay off the pension obligations on a particular date. When they used this approach, banks could go out and buy low cost bonds to satisfy a large future debt that was out there 15 years away. That technology is now available and is being used by certain investment firms in their retirement plans.  This system is managed through  a third party administrator, record-keeper, investment advisor and plan custodian. The education or conversation with the employees is also simpler, it’s how long to you want to work, how much can you put away and when do you want to retire.

However,  defined contributions still have the problem of compliance with the IRS or funding that is too small or too late.  This problematic space calls for the use of nonqualified plans, which don’t have funding restrictions, but don’t have that tax favored tax deduction. But there are tax deferral assets such as insurance that have benefits that can stand up with any investment products. They have a death benefit.  And good planning can turn that benefit into a living benefit.

All these subjects of course should be discussed with your financial agent and most are aware of this matter. But if you want to know about it or have any questions about it please contact us.

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