In the private sector, the defined benefit pension is rapidly becoming a relic of bygone era. As recently as the early 1980s, the defined benefit plan was the only retirement platform offered to as many as 60 percent of American workers.These days, that number hovers around 4 percent and the industries where these plans were the predominant retirement schemes, such as airlines, automotive, freight and trucking, are working with labor unions to reduce pension burdens and shift to hybrid plans or 401(k)'s.Still, advisors are likely to encounter clients that are receiving or eventually will receive defined benefits in retirement. Why? The answer is easy: defined benefit pensions are the primary retirement offering of nearly 85% of local and state governments across the U.S.For advisors with practices in large states, such as California and New York, not only does simple math dictate the chances of having pensioner clients will increase, but some of these clients are likely receiving lavish health and retirement benefits. In California, public employees on the CalPERS plan, essentially all public workers in that state aside from those in education, receive a defined benefit pension of 80 percent of their final salary . So an advisor with a practice in California could easily have a client that retired from a state job at a salary of $100,000 and is now getting an annual retirement benefit of $80,000.Pensioners represent a potentially lucrative client base for advisors...if advisors have the right value proposition in place. Let's explore some strategies for working with pensioner clients.
Know Your Pensioner
Knowing your clients is common sense, but this particularly true of pensioners. An advisor may have multiple clients on defined benefit plans, however, it is crucial that the advisor recognize that a private sector plan is a different ballgame than a government employee's retirement deal.Not only is there a very real chance that the client that's a former airline pilot or freight worker is older when entering retirement than his public sector counterpart, there are factors to consider when it comes to how much risk is appropriate for the private sector pensioner.The private sector retiree's benefits are guaranteed only if the employer remains financially healthy. Unfortunately, there have been examples of companies paying defined pensions falling on hard times or going bankrupt. This is why the Pension Benefit Guaranty Corporation (PBGC) exists.It's good that the PBGC, a government agency, is around, but if a pension plan eventually ends up in the hands of the PBGC, there's a high chance that recipients will see their benefits reduced. The PBGC itself acknowledges there is a
private sector pension crisisbrewing in the U.S. and that agency is not equipped to deliver benefits at a rate of 100% to retirees from companies that go under.Bottom line: advisors need to devise different strategies for private and public sector pensioners and do some homework on the financial health of the private sector pensioner's former employer.
Emphasizing Diversification And Preparation
As noted above, there's a good chance that advisors working with public pensioners will find some of these clients to be younger than their counterparts from the private sector. For instance, a public sector worker in California that starts her job at 25 years old reaches full retirement benefits in 30 years.Fifty-five years old is a relatively young retirement age and while that client has a guaranteed check coming every month from the city or state, advisors should take proactive steps to managing and enhancing the wealth of clients that fit this bill. Conversation topics can include the following:
Discussing the possibilities of part-time, freelance or consulting work so that the client creates an additional income stream besides the defined benefit pension. If the client resides in a higher tax/higher cost of living state, discuss the feasibility of moving to a lower tax area to further maximize the retirement benefits. Exploring non-traditional investment opportunities and strategies that go beyond equity and fixed income, assets that the client's pension plan is already heavily invested in.As is the case with private sector pensioners, advisors need to be prepared for the worst when it comes to their public pensioner clients. The “worst” also being a potential cut in benefits.Of course, there's a political element to cutting public worker benefits and since the government is involved, these actions can take years to go into effect, but the fact remains that even after one of the longest bull markets in U.S. history, many state pension plans
remain woefully underfunded.The idea here isn't to engage in scare tactics with clients, but rather to apprise them of all the moving parts involved with defined benefit plans and buffer their assets from unexpected changes in benefits. After all, a prepared, informed client is also likely a satisfied client.Related:
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