This is Embarrassing!

By: Russ Kamp, CEO, Ryan ALM, Inc.

The United States has by far the deepest capital markets in the world, an enormous asset-management industry that has made many participants quite wealthy, and trillions of $s in retirement assets. Yet we rank only 24th of 44 countries for retirement security based on the results from the Natixis Investment Managers’ 2026 Global Retirement index. I find that result embarrassing and you should, too.

The countries ahead of us aren't necessarily better investors. Many have simply done a better job of making retirement saving broad-based, automatic, and oriented toward producing sustainable retirement income. In addition, they've simultaneously reduced risks related to healthcare and longevity that Americans are asked to manage mostly through a defined contribution structure. As regular readers of this blog know, I remain a fan of 401(k)-type plans if they are supplemental to a DB pension offering, but unfortunately, that is rarely the case these days. Again, asking an individual to fund, manage, and then disburse a "retirement" benefit with little to no disposable income, investment acumen, or a crystal ball is just silly.

So why are we so poorly ranked? According to the survey, in which we were once ranked 14th just a decade ago, the U.S. is facing mounting pressures on its traditional “three-pillar” retirement model of government benefits, employer-sponsored plans, and personal savings, as a result of us living longer, DB pension plans going away, and a Social Security trust fund that is projected to be depleted by 2032.

The U.S. score of only 68% looks dismal when compared to Norway's 83%, which claimed the No. 1 spot from the 44 developed countries included in the survey. Ireland was second with 81%, and the Netherlands came in third with a score of 79%. What do they do better than us? First, the survey isn't just about retirement security. Natixis evaluates 18 indicators across four broad categories:

Finances in Retirement — inflation, interest rates, tax pressure, government indebtedness, old-age dependency and the strength of the financial system.

Material Wellbeing — income per capita, unemployment and income equality.

Health — life expectancy, healthcare spending and insured health expenditures.

Quality of Life — happiness, environmental conditions, biodiversity and related measures.

So, a country may have a decent, or even good, retirement system but still rank poorly because healthcare, inequality, inflation or government finances create retirement insecurity. Furthermore, most countries ranking ahead of us don't leave retirement to chance or the individual. The other countries get virtually everyone into a retirement system making savings largely automatic and they make contributions sufficient to produce meaningful retirement income not focused on the size of one's account "balance".

Unfortunately, our model since the mid-80s been much more dependent upon individual decisions. An employee has to first work for an employer offering a plan, become eligible, elect to participate, contribute enough, select investments appropriately, avoid withdrawing the money, continue saving after changing jobs, and eventually determine how to convert an accumulated balance into lifetime retirement income. Again, not an exercise designed for the average American worker!

Furthermore, we've heaped huge financial burdens on our citizens related to housing, healthcare, education, childcare, insurance, food, energy, utilities, etc. that financing a retirement is nearly a pipe-dream. Not only do we need to once again offer a retirement vehicle that isn't dependent on the individual for funding, but we need for the U.S. to make living in this country affordable for the masses. Why is it that we spend more $ on healthcare than any other nation yet rank so poorly (only 25th/44) in the survey.

Despite the move from DB to DC offerings, retirement-plan coverage remains an issue. Natixis cites Pew research which estimates that more than 56 million private-sector American workers lack access to a workplace retirement plan. That is a sorrowful statistic. I've spent most of my 45-years in the retirement industry focused on protecting and preserving defined benefit plans. I was thrilled to join Ron Ryan and Ryan ALM in 2019 given their similar mission. We need others in our industry to join the fight. Are you ready?

Why Wouldn't You Prefer a SD of +/-0%?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I continue to be surprised that more pension plans don't embrace greater certainty in the management of their funds. The Iran War is leading to great uncertainty related to inflation, interest rates, and economic growth. Yes, U.S. equities have enjoyed a healthy recovery following the initial outbreak in the Middle East, but is that sustainable?

Callan does a good job of providing a regular review of what asset allocation would be necessary to achieve a 7% return and the risk (measured as standard deviation) to achieve that return objective. Callan indicated that it was very easy to achieve a 7% return all the way back in 1994 when U.S. interest rates were higher than they are today. In fact, an allocation of 85% to fixed income and small allocations to L.C. equity, SC equity, and int'l stocks would have produced a 7% return with only a 5.6% annual standard deviation.

However, in the most recent update from 2024, Callan suggests the following asset allocation is necessary to achieve a 7% return:

This means that 68% of the time, a plan sponsor should expect an annual return of 7% +/- 8.6%. At two standard deviations (95% of the observations or 19/20 years), the annual return will fall between +/- 17.2% of the 7% target. Would you be comfortable knowing that your fund could generate an annual return of -10.2%? Think about the impact a return like that would have on contributions?

What if I said that cash flow matching (CFM) a portion of your pension fund would result in those assets having an annual SD of 0% barring a default which occurs at a rate of 0.18% annually among investment grade corporate bonds for the last 40-years. How's that possible? When CFM is implemented, the plan's asset cash flows and matched agains the plan's liability cash flows (benefits and expenses). They mover in lockstep with each other no matter where rates go. Today's U.S. interest environment is attractive and getting more attractive as I write this post, as the 30-year Treasury bond yield has topped 5% (5.02% at 11:47 am DST). Higher rates are great for CFM, as they lower the present value of those future promises.

Furthermore, the use of a CFM portfolio secures the pension promises, dramatically improves plan liquidity, eliminates interest rate risk for the portion of the plan, extends the investing horizon for the residual plan assets, and reduces the cost of those future pension promises. Again, why wouldn't you embrace an element of certainty?

I'm not sure what the Callan team would identify as the proper allocation to achieve a 7% return today, but I suspect that the annual standard deviation is greater than the 8.6% from 2024. Every time a pension plan falls short of the annual ROA, contributions must increase to make up for the shortfall. Greater investment certainty, like that associated with using CFM, reduces the likelihood that the pension plan sponsor with suffer from a negative surprise associate from increased contributions.

I'm Prepared! Really?

By: Russ Kamp, CEO, Ryan ALM, Inc.

The Transamerica Center for Retirement Studies has published the findings for its 26th annual survey, “Life and Money: Retirement Security in the USA". Only 66% of the 10,015 respondents believe that they are on the right path to enjoy a comfortable retirement, including 22% who are very confident and 44% who are somewhat confident, while 22% are not too confident, and 12% are not at all confident. I'm not sure that describing oneself as "somewhat" confident should be an indication of being on the right path, especially when taking into consideration that the median retirement savings for participants in the survey was only $56,000.

According to the findings, those who felt they were currently building or had built a large enough nest egg was at 59% - we seemed to have lost 7% from the right path. Despite the optimism that the proper sized nest egg was being constructed, participants believed that they needed $500,000 in retirement. The difference between $56k currently accumulated and the $500k goal seems like a significant gap that might have led to a much smaller # of responders being confident at this time.

Transamerica found that 69% of respondents saved for retirement through a workplace 401(k) or similar plan, including 81% of employed respondents and 64% of self-employed respondents. Fifteen percent of employed workers indicated that their employer did not offer any retirement benefits. I wonder how many folks without any retirement savings or access to an employer sponsored retirement fund refused to participate in the survey?

Here's where it gets a little scary for the average American worker. Among those who are not yet retired, the percentage of Americans who plan to continue working after they retire stood at 48% including 13% who plan to work full time and 35% who plan to work part time, and another 19% are “not sure.” So, 67% of the American workforce will at least consider continuing to work after they retire. I guess that's how you can be comfortable that you are on the right path despite sitting at >$440k below the level of assets needed to retire.

American households are facing unprecedented financial pressures from housing, healthcare, education, childcare, food, energy, transportation, etc. Asking individuals to fund, manage, and then disburse a "retirement benefit" through a defined contribution plan (most of the respondents) is incredibly poor policy. Why do we think that these folks with little disposable income, no investment acumen, and no crystal ball to help with longevity considerations will produce successful outcomes? Regrettably, most won't.