Last week Boeing (BA) announced that they would be freezing their defined benefit pension plan for 69,000 nonunion employees. They will be shifting in 2016 to a defined contribution benefit plan where the company contributes a set amount to the pension plan and actual benefit payout are determined by the performance of the investment funds. The new plan is similar to the one agreed to by Boeing largest Union, International Association of Machinists and Aerospace Workers, last year after Boeing threatened to move 777 aircraft assemblies out of state.
Boeing is just the latest company to change it retirement plan to avoid the unlimited liabilities of defined benefit pension plans. Goodyear (GT) froze their plan this year and Macy’s (M)did the same at the end of 2013.
As people have begun to live longer it has been more difficult to pay the promised benefits to retired employees. The lost decade of stock returns and then 5 years of very low interest rates has made it difficult for the pension plans to earn enough money to deliver the benefits and they have had to contribute enormous amount so money to the plans.
Many plans are still underfunded and according to Bloomberg News Service data corporate pension plans in the united Sates have $2.7 trillion of benefit to obligations right now and just $2.1 trillion of assets. The $600 billion needed to fulfill their promises is going to come right off the bottom of line of corporate profits and companies are finding the costs unacceptable and turning to defined contribution and employee plans like 410ks in increasing numbers.
It is not just the big corporations changing pension benefits either. State and local governments have seen years of low returns and reduced tax receipts and many of them will have no choice but to lower benefits in the years ahead.
Last week Warren Buffett commented on the situation telling investors that “Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made. During the next decade, you will read a lot of news, bad news, about public pension plans.”
All of this adds up to a changing landscape for investors and the companies show mange investment. One of the major sources of funding for the large hedge funds and private equity companies has been the large corporate and public pension plans. This is going to leave them fighting over a smaller pool of assets and you could well see many of the smaller concerns go out of business or combine with larger asset management firms. This should favor the more established alternative asset management firms like Apollo Global Management (APO) and Kohlberg Kravis (KKR)
At the same time the increased need of individuals to rely on self-directed and self-funded plans like 401ks and other retirement products should be a long term boon for the traditional mutual fund manager like Franklin Templeton (BEN) and State Street (STI). They out of favor at the moment but as investors realized they have to rely on themselves to fund their retirement instead of an employee pension that will change. Investor looking to capitalize on what will be a powerful trend in the future should keep a close eye on the Portfolio Grader rankings of the asset managers.
The other part of the changing landscape is that you will be more responsible for your retirement funding than ever before. Investors are going to have to learn good saving and investment habits as well as be knowledgeable about how to select the right investment funds, the right stocks and become informed about asset allocation decisions and investment time frames. The American Retirement Dream