The Dallas Police and Fire Pension Exemplifies the Storms Our Entire Retirement System Faces

The Dallas Police and Fire Pension System, according to news reports last month, finally sold a Napa California resort for $22 million, which it had spent $111 million to acquire in 2006. While the backstory is interesting, we believe Dallas taxpayers should focus on three features of a story we call the greatest story never told.First, the abject failure of America's new pension strategy, evolving since the Employee Retirement Income Security Act was passed in 1974. Second, malinvestment due to low interest rates. Third, the Dallas Police and Fire Pension System's perfect storm of extravagant pension benefits and poor investment returns.America's pension failureBooks have been written about the abject failure of America's new pension strategy. This strategy evolved from a mostly employer-funded, defined-benefit retirement system to an employer/employee-funded, defined-contribution retirement system. According to Department of Labor data, in the old retirement system (usually a pension plan) employers put up most of the money — 89 percent, with employees contributing just 11 percent. Now, in this retirement system, which is usually a 401(k) plan, employees pay more than half — 51 percent, while employers contribute 49 percent. Since ERISA there has been a huge shift in cost from employers to employees, totaling billions of dollars annually.Moreover, in this new retirement system, employees often delay joining their employer's retirement plan, if they join at all. And once they join, they tend to personally contribute too little, too late. They typically earn employee-directed investment returns ranging from low to lousy.For illustration, one large employer's 401(k) plan recently posted a 2016 annual employee-directed investment return of 4.9 percent, whereas the Couch Potato portfolio conceived by columnist Scott Burns earned 9.3 percent. That equates to thousands of dollars lost by the average plan participant in one year. Our experience is that most 401(k) plans consistently and materially underperform the market, as this example illustrates.Low interest ratesThere are two reasons why needed investment returns have been anemic and they are connected. The Federal Reserve kept interest rates abnormally low following the dot-com bubble bursting in 2001. That made it difficult for investment managers to get adequate returns from relatively low-risk investments. Reaching for yield, some took big risks in hopes of big rewards.The Fed has made the same mistake for the last 10 years, so malinvestment of all types has occurred again, and some of this is in the same pension plans.The Dallas Police and Fire PlanA person hired as a police officer or firefighter in Dallas at age 25 can retire at age 55 on 90 percent of the individual's highest five-year average pay. If that average pay was $70,000, as appears likely, the officer's annual pension, starting at age 55, would be $63,000 a year, adjusted annually for inflation, for life, as determined by the board. A retiree may live more than 30 years. Thus, years retired could exceed years worked. That means that a retiree could receive more pension dollars after retirement than pay dollars before retirement. Many taxpayers unknowingly paying for this fabulous benefit have no pension at all, except perhaps Social Security. And even those citizens who have pensions will get relatively modest retirement payments, perhaps 15 percent to 25 percent of pay, never adjusted for inflation. We should all be in favor of fair, and even generous, compensation and benefits for first responders. But we simply question whether a city grappling with enormous poverty can afford to pay this level of compensation and benefits to first responders, whose average annual pay, plus pension contributions, plus investment income in their pension account balance, is more than $120,000 annually.Dallas taxpayers who don't know the benefits promised or the risks assumed can ill afford either.Brooks Hamilton is a lawyer and expert on pension and retirement plans.Dennis McCuistion is a university professor, former banker and host of the McCuistion television program on KERA in Dallas. They wrote this column for The Dallas Morning News. What's your view?Got an opinion about this issue? Send a letter to the editor, and you just might get published.  Continue reading...

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