Tuesday, June 26, 2012

401(k) Plan for New Lockheed Hires ... Needed For All Americans, Too

401(k) plans have become commonplace in the private sector. They'll also become widespread and heavily implemented in the public sector during the coming years as well.

We'll begin our discussion with the proposed Lockheed labor contract resolution and finish with why 401(k)s are the solution to our retirement funding and many other competitive ills as a nation.

The concept of risk and reward is now generally little understood by most Americans, and it has to be.

In my opinion, 401(k)s are an appropriate, cost effective and highly rewarding solution for all Americans when contemplating, planning, preparing for and then living out our "golden" years. We'll begin with the Lockheed story.

Union Panel Urges Approval of Lockheed Contract has this to say in part:

"A bargaining committee for the union machinists on strike at Lockheed Martin’s fighter jet plant in Fort Worth has recommended that members vote for a new contract that would eliminate traditional pensions for newly hired employees . . . .

That is a victory for the company, the nation’s biggest military contractor, which had pushed for the pension change to cut costs as military budgets decline.

Lockheed agreed, in turn, to add a health insurance option that covers out-of-network services. The company would also extend the contract to a fourth year, with pay raises totaling 11 percent over the four years. . . .

The company would maintain the traditional defined-benefit pension plan for current workers and increase monthly retirement benefits by 14 percent. It would provide only 401(k)-type savings plans to new hires.

The union said in a statement that the federal mediator had advised it that the new offer was the best it could obtain. A union vice president, Mark Blondin, said, “While the end result leaves both sides with issues they feel were not completely resolved, the I.A.M. negotiating committee is recommending the offer to members as the best that can be achieved without a much longer work stoppage.”...

The workers had voted to strike mostly over proposed changes in health benefits and a Lockheed plan to stop offering a traditional pension to newly hired workers....

Top Lockheed executives had said repeatedly that the company would not budge on the pension issue. . . .

The union had lost leverage in recent days. More than 570 of the strikers had returned to work, and the National Labor Relations Board rejected several union complaints against the company. Pentagon officials had said they would remain neutral about the strike. . . .

Company officials said they had eliminated traditional pension plans for all salaried workers hired since 2006. They said most of the company’s unions, including other locals of the machinists union, had agreed to that change since then."

My Take

401(k) plans are the answer to our nation's underfunded pension and related retirement issues. {They really are the long term answer to the Social Security issues, too, but we'll save that story for another time.}

Many public sector plans have little money in the till to fund their retirement promises. See today's post "Public Pension Plan Underfunding ... It's A Really Big Deal."

Of course, that little or no money in the till problem has to be corrected and soon. As a result, real money will have to be contributed to solve the underfunding issues.

The only choice will be how that real and "new" money will be invested. Will it be at the discretion of and accrue to the benefit of the company or government agency, or will it be at the discretion of and accrue to the benefit of the employee?

In other words, who will bear the risk and who will receive the reward if under or over performance results from the assumed rate of return, as it most certainly will?

Using almost any historical set of numbers, equities will always outperform bonds or fixed income investments over time. Moreover, today fixed income yields are at historic lows. Accordingly, they have almost no chance of outperforming stocks over the next several decades, taken as a whole.

When predicting investment returns, public sector pension funds assume a mix of investments in stocks and bonds. They generally expect the average rate of return over time to be ~8%. Simply put, that 8% return won't happen if a substantial amount of funds invested are in bonds.

To illustrate, assume a 50/50 mix of stocks and bonds. Further assume that bonds yield 4%. That would require stocks to return 12% annually to achieve an average 8% rate of return.

Although that 12% probably won't happen, 8% to 10% for stocks is a good bet over time. That's because it always has been. Thus, we'll all be better off if we "bet" on America's private sector performance over the long haul.

For America to prosper, America's private sector has to perform well over time. It's just that simple. But what if it doesn't, you ask?

Well, where will the money to fund retirement benefits come from if it doesn't come from private sector profitability and return on investment? The money simply won't be there if it doesn't emanate from private sector profitability. No doubt about it.

Summing Up

Investing "safely" is not investing safely at all.

If our companies don't perform well, our country won't prosper.

And if our country doesn't prosper, it won't matter how many retirement benefits we've promised, either to private or public sector workers.

We'll go into more depth in the future on all this, but I wanted to start the ball rolling today.

401(k)s are a big part of the retirement funding and retirement pay solution. At least that's my view.

And in the end, it's a whole lot safer and will be much more rewarding for individual investors seeking adequate retirement income as well.

And that's true for both individuals and Americans as a whole, regardless of whether we work in the private or public sector.

Thanks. Bob.

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