Blog

Nov 14 2023

Q1 Fixed Annuity Sales Soared to a Record $70.9 billion

In the first quarter of 2023, fixed annuity sales soared, marking a 101% increase to $70.9 billion compared to the previous year. This significant growth in the fixed annuity market is attributed to factors like ongoing volatility in the equity market, attractive interest rates, and concerns about the banking sector and potential recession.

View of the Boston Massachusetts skyline

The dramatic rise in fixed annuity sales in early 2023 can be largely attributed to the growing demand for guaranteed income. As populations age, there is an increasing focus on securing stable, predictable income streams for retirement. Fixed annuities meet this need by offering a guaranteed return, which is particularly appealing in an environment where future economic conditions are uncertain.

Furthermore, broader economic concerns have also played a pivotal role. Amidst fears of recession and instability in the banking sector, investors have been more inclined to gravitate towards safer, more reliable investment vehicles. Fixed annuities offer a haven from these economic uncertainties, providing a level of security that is highly valued in volatile times.

Another major factor is the increase in interest rates. Higher interest rates generally enhance the yield of fixed annuities, making them more attractive compared to other low-risk investments. This heightened appeal is especially relevant for investors seeking stable, risk-averse income options.

Jul 12 2023

Pension Bailout Raises Eyebrows

Two things: 1) I’m not excited (as a taxpayer) about footing the bill for this fiasco and 2) It doesn’t appear any measures have been put in place to prevent this from happening again.

The American Rescue Plan, which includes unprecedented taxpayer bailouts of private multiemployer* pension plans, has raised concerns. So far, 37 multiemployer plans have requested assistance ranging from $4 million to $35 billion each. Of these, 25 plans have been approved to receive $6.5 billion in taxpayer money [from the Pension Benefit Guaranty Corp. (PBGC)], and it is estimated that a total of $97 billion will [ultimately] be provided. However, it’s important to note that these bailouts are not related to the COVID-19 pandemic, but rather a long-standing issue.

Before the pandemic, multiemployer plans had already accumulated $757 billion in unfunded pension promises. These plans were projected to pay out only 42 cents on the dollar in promised benefits. Unfortunately, the situation is expected to worsen, as taxpayers are now guaranteeing that certain union pension plans will deliver 100% of their promised benefits until at least 2051. Multiemployer pension plans are established by unions and employer representatives, bringing together workers from specific industries such as construction or mining.

While the number of individuals belonging to multiemployer plans is declining, there are still around 10.8 million workers and retirees who are part of approximately 1,400 of these plans across the United States. The root cause of the problem lies in the overpromising and underfunding of these plans, which have relied on unrealistic assumptions about investment returns and life expectancies. A fair solution to address the issue would have involved holding those responsible for mismanaging the plans accountable and implementing reforms to prevent similar situations in the future. Unfortunately, without such measures, the door is left open for unions and employers to deceive workers, a practice that should be illegal and discouraged.

*A multiemployer plan is a pension plan created through an agreement between two or more employers and a union. The employers are usually in the same or related industries, like construction or transportation.

Source: Nothing Equitable in Union Pension Bailout

Image: Public Domain; provided by Wikimedia Commons

Jun 27 2023

Will This Be a Problem for Your Clients?

What I'm about to tell you may be a looming problem for your clients.

What I'll do here is to frame the problem in terms of numbers that are currently in the news. You'll tell me if you think this situation will come down on the shoulders of your clients. If it is, maybe we can work together to solve it for them.

Here are the numbers I'm referring to:

1% / 26% / 3%

The top 1% of taxpayers (AGI above $548,336) paid taxes at an average rate of 26%. That rate is eight times higher than the bottom half (50%) of taxpayers that paid an average rate of 3%.

50% / 98% / 2%

The top 50 percent of all taxpayers paid 98 percent of all federal individual income taxes, while the bottom 50 percent paid the remaining 2.3 percent.

$600 billion / 90% / $60 billion

There is a $600 billion annual gap between taxes legally owed and taxes paid.

Thanks to funding provided by the Inflation Reduction Act (2022), the IRS plans to shrink this gap in part by spending $60 billion on enforcement.

(By 2031, the IRS will be 90 percent larger than it is today and its headcount will more than double. Of the $80 billion provided by the bill, $60 billion will be spent on enforcement. Over the next couple of years [2023-2024], the IRS will spend $8.64 billion to hire 7,239 enforcement staff.)

The $600 billion gap disproportionately reflects noncompliance with the nation's tax laws by high-income people. Roughly 28% of the gap is owed by this group.

In light of all this, the pain we are looking to address is this: business owners simply don’t have enough options for shielding their income from taxes.

In a strange way, we're actually on the side of the IRS as we think every tax dollar owed should be paid. However, we also believe that high-income earners largely unaware of all the options available to them for legally shielding their income from tax. (Is that being too generous? I realize some of them are just scofflaws.)

Our solution? We aim to educate high-income earners about the tax advantages of a Defined Benefit Plan (pension) so they have access to legal and highly effective tax savings that also guarantees a pre-determined level of retirement income. Perhaps this alternative would ease the pressure on those who don’t pay tax because they feel they have no other choice. The compliance audits are coming; can we work together to help your clients get prepared?

Sources:
Are 87,000 New IRS Agents Coming? (Kiplinger)
IRS to Hire Nearly 20,000 New Staff (Reuters)
The Case for a Robust Attack on the Tax Gap (U.S. Department of the Treasury)

May 25 2023

Where Did All the Pensions Go?

Searcher looking under his couch

An article in Forbes magazine (and titled the same as this post) provides an insightful historical perspective on the shift away from pensions to 401(k) plans in retirement planning. Starting with an anecdote about Mr. Smith, who, in 1965, was set to retire with a substantial pension after working for the same company for 35 years, the article contrasts this scenario with the present day where the certainty of a pension is no longer the norm.

One study cited in the article reveals that by the end of 2013, only 24% of Fortune 500 companies offered any kind of defined benefit plan, highlighting the marked decrease in pension provision in contemporary times.

So, what are the consequences of the 401(k) implementation for retirees and the workforce? Essentially, the onus of retirement planning now falls on the individual. The 401(k) absolves companies of the responsibility of funding retirees’ pensions and managing the investment risks involved.

One alternate retirement plan offering provides a lifelong income stream, akin to a pension, is feasible, but requires looking beyond traditional methods. Annuities, which are insurance products, offer such a possibility. These are contracts that guarantee an income stream for the insured’s lifetime.

In conclusion, it is critically important to understand the current landscape of retirement planning, where the primary source of income is likely to be the responsibility of the retiree. Partnering with a retirement professional, like Defined Benefit Partners, can ease the learning curve, help navigate the complex world of financial instruments, and ultimately play a crucial role in helping you achieve your retirement goals.

Source: Where did all the pensions go?

May 22 2023

Are Investors Top-of-Mind in a 401(k) World?

Open Safe Door In a recent post we discussed the 401(k), a bit about its history and some of the challenges individual investors face from their participation in these plans.

It's also worth mentioning that the introduction of the 401(k) plan has created other problems for the industry as a whole. When a large number of individuals invest in the same stocks [due to the limited investment options within 401(k) plans], it creates an abnormal demand for those stocks and artificially inflates their prices.

Industry pundits are also pointing out that the flow of vast sums of money into the market tends to make money managers complacent and less attentive to the needs of investors.
In a recent article in Forbes, John Wasik explains the impact. "Wall Street, needless to say, loves the 401(k) model, and is lustily funding the demise of the defined-benefit world at every turn through think tanks, white papers, campaign funding and influence on the 'free market' school of economics.

"The more society moves into a 401(k) world, the more fees corporations can charge to an ever-greater number of people. The more money under management, the more money they make on a straight percentage. It doesn’t matter if they had employed actual skill to make your money grow. In most cases, they did little or nothing and they still get paid when you lose money."

Source: The 401(k) World: a Deeper Look into Tom Friedman's nightmare.