The 2007 ‘correction’ laid bare the weakness of all self-directed retirement accounts
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]
What if there was an easy way to implement a whole new approach to retirement funding, pension planning, and Social Security? Would the politicians be interested? Let’s find out. What if the new plan actually reduced payroll taxes, cut prices, created jobs, increased salaries, raised shareholder dividends, partially funded decreased healthcare costs, and was available to everyone?
Sounds too good to be true, but it’s actually doable. The reasons for the present system’s failure are mostly political; the solutions are clear, practical, and non-partisan. What we want is a less expensive system for assuring that everyone is able to retire with an adequate income, higher than that provided now by Social Security.
What we need is a simple program, part mandatory and part voluntary, using experienced trustees who operate within the strictures of the old prudent-man rule — a risk-minimizing legal doctrine that restricts investments to those that seek reasonable income and preservation of invested capital — SIBORAP Tier One investments.
The 2007-2008 stock market correction and credit crisis laid bare the weaknesses of all self-directed retirement accounts. First of all, they are not (and never were) pension plan equivalents. They were cheap-to-provide replacements for fully funded defined benefit pension plans— supplemental programs at best.
Next, inexperienced investors were provided with an array of far-too-speculative investment options, and little if any training in basic QDI (Quality, Diversification, and Income) investment principles. Then, the mutual fund industry was allowed to monopolize the self-directed plan market place — ETF products have now replaced them.
Third, most participants still think of their programs (401(k)s, IRAs, ROTHs, SEPs, SIMPLEs, etc.) in guaranteed pension plan terms, encouraged to do so purposely by product distributors and inadvertently by uninvestment-educated employee benefit representatives.
If good news ever becomes an actual news story again, people would realize that both defined benefit pension plan and guaranteed fixed annuity contract payments were maintained throughout, and in spite of, this terrible financial environment. Why not deal with Social Security in the same manner?
A Social Security Retirement Income Annuity, or SSRIA, invested 70% or more in government guaranteed securities, could be phased in quickly as a mandatory replacement for the existing Social Security program. The personally owned SSRIA would also become a voluntary investment option for all self-directed programs and a guaranteed safe savings vehicle for after tax discretionary dollars.
These are the bare bones parameters of the new program:
SSRIA contracts will be provided by newly formed subsidiaries of insurance companies. They are deferred, fixed-income-only annuities with no commissions or fees paid by participants or employers. All companies would provide identical products, insurances, and maturity options. A minimum of 150,000 new jobs could be created.
The contracts would include $10,000 of term life insurance, provide for retirement at age 60 or above with just two immediate annuity options: life and joint life. No variable account features, or withdrawals, would be allowed, and all SSRIA retirement payments would be absolutely income-tax-exempt at every level.
SSRIA providers would receive an investment management fee of .65% of the Working Capital under management, emphasizing the importance of both income generation and preservation of capital. Participant account statements would reflect ever-increasing cash balances, growing at annually adjusted, contractually guaranteed rates
Provider operating profits would be distributed 70% to parent company shareholders and 30% to fund a trust for retiree health care benefits. An associated tort reform bill would cap jury awards and attorney fees for personal injury lawsuits against all health care providers.
SSRIA mandated contributions would be capped at 3% of pre tax total employment compensation; an additional 2% of pre tax earnings could be contributed voluntarily. Voluntary contributions to an employee’s SSRIA would be a required investment option of all self-directed employee benefit programs.
No employer contribution to individual SSRIAs
There would be no employer contribution to individual SSRIAs. Employers would be required to use their savings in any combination of these options: increase non-executive salaries, hire additional workers, reduce consumer prices, and increase shareholder dividends.
Employees earning total compensation in excess of $5,000,000 would pay 10% of the excess directly to the retiree health care trust. All special compensation arrangements, including stock option plans would be banned. Bonus payments in excess of 20% of base pay would be pooled, and divided among all employees and shareholders, dollar for dollar.
Employees would be assigned randomly to qualifying SSRIA providors, one contract per person. Self-employed persons, dependent spouses and children, would be eligible for SSRIAs, and would be assigned to a providor by the Social Security Administration. The Social Security Administration would oversee the operations, pricing, and investment practices of SSRIA providors, qualify companies wanting to become providors, and implement the transition from the existing program to the new. The process could take up to five years, unless peace breaks out in the Middle East.
The transition to the SSRIA program would commence immediately, starting with employees under age thirty. Existing Social Security accounts would be frozen. Balances would be applied 50% in cash as an SSRIA deposit, 20% to the retiree health care fund, and 30% as a Federal Income Tax credit. Older employees would have proportionately larger direct credits to their start up SSRIA accounts.
One other thought: All active government employees at all levels, elected, appointed, or hired, would be transitioned into the new SSRIA system. OK, there it is, a viable first step change plan that most of us would go for. Call your representatives, newspapers, and favorite radio talk shows. Hey, it’s our money; let’s keep it that way.