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THAT COMFY FEELING

I had an occasion yesterday to speak to our General Agents about mutual fund sales strategies. During this discussion, I recounted an article I read last year indicating that the percentage of employees across all segments of the economy covered by a traditional defined benefit pension plan has now fallen to below 50%. For those in the private sector, traditional pensions have been a thing of the past for many years, and states and municipalities have also started to embrace 401(k) style savings plans.

The key differences between the two types of plans are cost and the bearer of risk. In a defined contribution – 401(k) – plan employers may match a certain amount of the savings contributions of their employees, and at that point, the employer no longer bears any financial risk. It is important to remember that as a sponsor of a 401(k) plan, employers must keep an eye on expenses and provide a broad array of appropriate investment funds for use by plan participants. In a defined benefit plan, employees receive a set amount in retirement until their death, based upon a predetermined formula. The plan sponsor bears the risk of making those monthly payments.

I have always been an adherent to behavioral finance and the core belief that people will act in their financial lives based on their psychology. For example, if an individual has a healthy amount saved for retirement across pension, 401(k), traditional investments, savings, etc., and also feels very secure in their job, they will be more likely to consider large purchases or investments versus someone who feels less secure. It is the same concept that provides individuals a sense of well-being, or not, in their retirement.

Someone I know who spent 37 years with a company and was covered by a defined benefit plan recently shared some comments about life in retirement. My friend explained that his pension and social security amounted to more money than he and his wife needed for a comfortable retirement, and he has not yet withdrawn any money from his 401(k). In other words, the dependability of the monthly checks allowed him to enjoy day-to-day living in retirement. He then contrasted this to his friends who are hyper-focused on the machinations of the markets and what that will mean for their spending power.

Bringing this back to my conversation with our General Agents, I explained that with the rapid and continued decline of defined benefit pension plans, we really need to focus our members and their families on retirement readiness. Using a combination of annuities and investments alongside social security may be a great avenue to help people attain that comfortable retirement all of us yearn for. Obviously, everyone’s financial circumstances have their own nuances and there is no one-size-fits-all approach, but developing a plan to generate consistent monthly income should be part of all our retirement thinking. I gave this advice to my son, as he was feeling fiscally constrained after he bought his house. He does periodically screenshot his 401(k) account to make sure Dad knows he is saving 15% of his paycheck.

I will continue to use this blog to occasionally provide personal financial advice, so please let me know if there is a topic that you would like me to write about.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

KoCAA is an SEC registered investment adviser that maintains a principal place of business in the State of Connecticut. For information about KoCAA’s business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at adviserinfo.sec.gov. KoCAA is a wholly owned subsidiary of Knights of Columbus, one of the world’s largest Catholic Lay Organizations. Investing involves risk and you may gain or lose money on your investments. For additional information visit KoCAA.com or write to kofcfunds@kofcassetadvisors.org.