Retirement Plans

I have just finished scanning the article by Munnell, Soto, Libby, and Prinzivalli. The most important Quote was in the Introduction:

The bottom line is that over the period 1988-2004 defined benefit plans outperformed 401(k) plans by one percentage point. This outcome occurred despite the fact that 401(k) plans held a higher portion of their assets in equities during the bull market of the 1990s. Part of the explanation may rest with higher fees, which are deducted before returns are reported to participants. But the one percentage point shortfall understates the investment problem in 401(k) plans, since an aggregate number does not reflect the fact that more than half of participants in 401(k) plans do not follow the prudent investment strategy of diversifying their holdings. Finally, the available data suggest that IRAs produce even lower returns than 401(k) plans, which, if true, implies trouble ahead given the massive amount of money that is being rolled over into these accounts.

This leads to the question of why would Defined Benefit Plans outperform 401(k) plans and IRAs? My intuitive answer would be that the Defined Benefit Plans remained a function of the Production process, while 401(k) and IRA plans try to farm out the issue of Retirement to exterior Market forces. (Here, by the way, is where I start taking Heat from the Economists and Business Interests)

Retirement plans based upon portfolio holdings rely upon growth of Paper Profits, not upon Production. Defined Benefit plans insist that benefits are maintained, as long as Production is continued. Business management cannot avoid Commitments made to Labor as alternative to Wage payment. Are We at this same position with Stock Holdings plans?

We must review the nature of Corporate Stock. Such is bought and sold like unto a commodity. When and if Stock is static in amount, and Production is uniform, then Purchase Price gain by a Seller must equal Purchase Price loss by the Buyer. The Buyer can only gain from the Sale by a future increase in the level of Production represented by the Stock. It is exactly this hoped-for increase in Production which Everyone hopes will fund Stock portfolio Retirement Plans.

There is one thing wrong with this Happy ever After fantasy: the little requirement that Stock stay static in amount. Corporate Management quickly recognizes one fact seemingly undecipherable by Anyone else: they can realize the full value of increased Production by the issuance of more Stock, which they can sell at Market price. The added Stock issued suppresses the Market price of all Stock--transferring the value of added Productivity through the sold Stock back to the Corporate Management.

Retirement plans based upon portfolio holdings will never gain the value of increased Productivity, because of the correct Corporate management recovery of the value of such Productivity through Corporate Stock sale. Defined Benefit plans will always prove superior to portfolio plans, due solely to Corporate inability to shift the value of increased Productivity from the former plans. lgl