Click below to listen to Episode 20 – Understanding Qualified Retirement Plans Part 1

Episode 20 – Understanding Qualified Retirement Plans Part 1

Check out Part I of our Understanding Qualified Retirement Plans series.

Bob & Mary Jo discuss the history of retirement planning from social security to company pension plans as well as complete breakdowns of various retirement plans including:

  • Individual vs Employee sponsored
  • Defined Contribution Plans vs Defined Benefit Plans
  • Qualified Plans

For much of the 18th and 19th centuries, most poverty relief was provided in the almshouses and poorhouses. Eventually, the Industrial Revolution transformed the majority of working people from self-employed agricultural workers into wage earners working for large industrial concerns. By the 1960s, 70s, & 80s most larger employers provided workers a pension plan to live on in retirement.

Now, employees are typically responsible for funding their own retirement years. Ideally they should be putting aside funds to help supplement social security in retirement. Today, Retirement Plans can be categorized in a number of different ways.

HOSTED BY: Bob Barber, CWS® and Mary Jo Lyons, CFP®

Mentioned In This Episode

Christian Financial Advisors
[dt_soc_icons soc_icon_gap_between=”4px”][dt_single_soc_icon link=”url:https%3A%2F%2Fchristianfinancialadvisors.com|target:_blank” dt_soc_icon=”dt-icon-website” soc_icon_border_width=”0px” soc_icon_color=”#ffffff” soc_icon_border=”n” soc_icon_bg_color=”#7ac9ab” soc_icon_border_hover=”n” soc_icon_bg_color_hover=”#014a8f”][dt_single_soc_icon link=”url:https%3A%2F%2Fwww.facebook.com%2FHelloCFAdvisors|target:_blank” dt_soc_icon=”fab fa-facebook” soc_icon_border_width=”0px” soc_icon_color=”#ffffff” soc_icon_border=”n” soc_icon_bg_color=”#7ac9ab” soc_icon_border_hover=”n” soc_icon_bg_color_hover=”#014a8f”][dt_single_soc_icon link=”url:https%3A%2F%2Fwww.twitter.com%2FHelloCFAdvisors|target:_blank” dt_soc_icon=”Defaults-twitter” soc_icon_border_width=”0px” soc_icon_color=”#ffffff” soc_icon_border=”n” soc_icon_bg_color=”#7ac9ab” soc_icon_border_hover=”n” soc_icon_bg_color_hover=”#014a8f”][dt_single_soc_icon link=”url:https%3A%2F%2Fwww.linkedin.com%2Fcompany%2FHelloCFAdvisors|target:_blank” dt_soc_icon=”fab fa-linkedin” soc_icon_border_width=”0px” soc_icon_color=”#ffffff” soc_icon_border=”n” soc_icon_bg_color=”#7ac9ab” soc_icon_border_hover=”n” soc_icon_bg_color_hover=”#014a8f”][/dt_soc_icons]
Bob Barber, CWS®, CKA®
[dt_soc_icons soc_icon_gap_between=”4px”][dt_single_soc_icon link=”url:https%3A%2F%2Fchristianfinancialadvisors.com%2Fwho-we-are%2Fabout-us%2Fbob-barber%2F|target:_blank” dt_soc_icon=”icomoon-the7-font-the7-login-02″ soc_icon_border_width=”0px” soc_icon_color=”#ffffff” soc_icon_border=”n” soc_icon_bg_color=”#7ac9ab” soc_icon_border_hover=”n” soc_icon_bg_color_hover=”#014a8f”][/dt_soc_icons]
Mary Jo Lyons, CFP®, CKA®

Want to ask a question about your specific situation? Schedule a complimentary 15 minute phone call.

Did you enjoy this episode? Sign up for email updates and never miss an episode.
  • This field is for validation purposes and should be left unchanged.

EPISODE TRANSCRIPT

[INTRODUCTION]

Bob: Welcome to Christian Financial Perspectives, a weekly podcast where we talk about ways to integrate your faith with your finances. This is Bob Barber.

Mary Jo: And I’m Mary Jo Lyons.

Bob: Are you ready to learn how to apply biblical wisdom to everyday financial decisions?

Mary Jo: Join us as we look at integrating your faith with your finances. If it’s your first time listening, welcome to our podcast, and if you’re a returning listener, welcome back.

[EPISODE]

Bob:
In Hosea 4:6, it talks about how my people are destroyed for lack of knowledge, because they reject knowledge. In today’s podcast, we’re going to talk about understanding retirement plans, including required minimum distributions, and we’re going to have a two part series. The first part is going to be a lot on the history of retirement plans. Then, the second part’s going to be more on just the actual retirement plans that are available to us today.

Mary Jo:
Bob, as we were getting ready for today’s podcast, I was thinking about how we have moved from a pension plan where employers and the government provided income in retirement to a contributory system where we’re now responsible for our own retirement funding, a lot has changed. I realized that so many of our listeners are younger and they may not have this perspective on how we got from where we were to where we are today. I also read a report that I found some alarming statistics that I thought I would share with our listeners. The federal reserve in May of 2018, so just this year, they created a report, and the name of the report is “A Report on the Economic Wellbeing of US Households in 2017”. So in 2017, two fifths of non retired adults think that their retirement savings are on track. Yet one fourth have no retirement savings or pensions whatsoever.

Bob:
So you’re saying, Mary Jo, that a fourth of our population right now that they don’t have any retirement savings plan?

Mary Jo:
Nope.

Bob:
Wow. That’s scary. Like you say, in the whole enchilada, there’s nothing.

Mary Jo:
Nothing on their taco plate. They don’t have anything.

Bob:
Wow. Wow. That’s amazing to me. That’s just a huge number,

Mary Jo:
As we were talking about, they’re thinking that social security is going to provide for them, but social security really barely gives you income to live at the poverty level. So, we’ve got to do better. Three fifths of non retirees with retirement accounts have little or no comfort in managing what investments they do have. And regarding financial literacy, they asked the respondents in the survey five basic questions about their finances, and one fifth got them all wrong. The average number of correct answers was only 2.8. So that tells us that normal Americans, they really just don’t understand their finances. They don’t understand the responsibility of saving for their own futures, and so Christian Financial Perspectives to the rescue. We hope to do a little educating on this podcast, as well as our next episode where we’re going to get into the specifics on retirement accounts. We have some work to do, wouldn’t you say?

Bob:
I would say we have a lot of work to do, and with people retiring left and right today, wasn’t it in 2017, half of retirees retire before the age of 62 and a quarter between the ages of 62 and 64. So you know what Mary Jo, when I think about that, if they don’t understand it, how many are retiring today that may outlive their income?

Mary Jo:
One of the top questions we get all the time, and they’re not even really focusing in on it until they get to be about 60, and that’s just not soon enough. We hope to educate a little bit more around that.

Bob:
I think we’ve really seen what we call this golden era of retirement, Mary Jo, especially with our parents and those that are 75 to say 95, because they came from this era of you work for a large company, like a large chemical company or a large technology telephone company or a large oil company, and you work for them for 25, 35 years, and you get a pension plan. On top of the pension plan, you get some social security, and then there’s some savings on top of that. I don’t know about you, Mary Jo, but I’ve kind of, in the last 15 years, it just seems like you go up and down the highways, and you see these retirees that are 70, 75 years old. They’re in nice RVs, and they’re going to Colorado in the summertime to escape the heat. They’re coming down to Texas, your favorite place, Rockport or Port Aransas, down in that area during the winter to escape the cold up North. It just seems like this golden, I call it my la-ti-da era. I think our age group is thinking we’re going to have it like our parents did, but how are we going to have it like our parents did? We don’t have that.

Mary Jo:
Some things are going to need to change. I also wanted to share a little perspective. You referred to it as the golden era and how that got its name was back in the day, companies would provide retirees with a gold watch, and that was their reward for having worked for that company for 40 plus years. In our parents’ generation, that was their goal is to retire with that golden watch. That doesn’t happen anymore. We’ve gone from a system of employer and government provided pension system to an employee contributory system, but we haven’t done a great job in getting Americans to recognize that they are the ones that have to contribute to that system.

Bob:
Now, I hope somebody heard that, say that again. It’s gone from an employee…

Mary Jo:
Employer and government provided pension system to an employee contributory system.

Bob:
Now that’s where we’re going to share in part two is that contributory system. We’re talking about the 401ks, the 403B’s, the 457 plans, where they have to contribute towards their retirement because the company’s not going to do it.

Mary Jo:
And we do want to encourage our listeners to stay tuned and listen to part two because that’s where we’re going to get into the specifics of each of the various retirement plans and how they work, what the rules are, how you put money in, and most importantly, how you get money out without getting in trouble.

Bob:
So I guess we’re going to get into a little bit of a history lesson now, right?

Mary Jo:
We are. As we were thinking about those plans, I thought it would be kind of interesting to look at how they originated. How did we get from that pension plan mindset to where we are today? A lot of our listeners are younger and they don’t have that perspective. I thought a bit of a history lesson might be interesting.

Bob:
Well, so it kind of starts way back. Like you go back in the 18th and 19th centuries. Most poverty relief was provided in the alms houses and poor houses. And really, the relief was made as unpleasant as possible in order to discourage any dependency.

Mary Jo:
Bob, I remember in my history books and I know there’s a lot of revisionist history going on now, but I remember reading about how they would put a P on the sweatshirts of these people because they really wanted to let them know that living in a poor house was not a good thing. We didn’t encourage that. We wanted people to provide for themselves. It was really looked down upon back in the day.

Bob:
So as we got into the 20th century, it seemed like what was happening here is we were going through demographic changes in America. Beginning in the mid 1800’s and then into the 1900’s, we really looked at the traditional systems of economic security differently. And here’s what happened. So Mary Jo go through those things of what happened.

Mary Jo:
Well, first we had the industrial revolution and then the urbanization of America. We then had the disappearance of the extended family, and all along there became an increase in life expectancy. People began to live longer.

Bob:
So the industrial revolution, what it did is it transformed the majority of working people that were self employed, agricultural workers into wage earners for large, industrial companies. And you had Americans moving from their farms and small rural communities to large cities, thus the breakdown of family too. I mean, I gotta tell you, that’s where the breakdown of the family started happening.

Mary Jo:
That’s exactly right, but I think that’s another podcast, Bob.

Bob:
It most definitely is because that’s where the industrial jobs were. They were in the bigger cities. Listen to this stat. This is really interesting. In 1890…

Mary Jo:
Bob, okay, let’s think about that. 1890. So that was 128 years ago.

Bob:
It was, yeah.

Mary Jo:
It’s not that long ago if you think about it.

Bob:
Not when you look at the thousands of years of history. So in 1890, 28% of the population lived in cities. You get that? Only 28% of the population lived in cities. By just 1930, 40 years later, now we think about this over the thousands of years, over this 40 year period, it went from 28% of the population and doubled to 56% of the population. I don’t know what the percent is today. It’s much higher than that.

Mary Jo:
Much higher, and I think they all live in Houston.

Bob:
I think they all live in the in the San Antonio, Austin area now too, because we’re becoming one big gigantic city here in Central Texas. They’re saying in the next 15 to 20 years could be as large as the Los Angeles area. So boy it sure has changed here. Yeah.

Mary Jo:
It’s just amazing the growth, and so we want to look at the industrial revolution, the migration of the American population, and then let’s fast forward from 1890 to the great depression of 1929. In the 1930s, they found America facing the worst economic crisis in modern history, poverty among the elderly grew dramatically. And by 1932, 17 States had old age pension laws, but none of those were in the South. Well, that’s kind of interesting in and of itself. Social insurance was conceived by President Roosevelt and it was designed so that it would address the permanent problem of economic security for the elderly. It created a work-related, contributory system in which workers would provide for their own future economic security through taxes that they paid while they worked.

Bob:
So this is social security. Okay. Because when you hear the word social insurance, most people don’t think of social security.

Mary Jo:
Well, but that’s how it started.

Bob:
Okay. Gotcha.

Mary Jo:
It was actually started and was passed into law on January 17th, 1935. So, the benefits were to be based on payroll tax contributions, which is what they’re based on now, that the worker made during his or her working life. It was intended to provide unemployment insurance, old age assistance, aid to dependent children, and grants to states to provide various forms of medical care.

Bob:
But it kind of changed over the years because originally social security was designed to be a temporary relief program that would eventually disappear as more people were able to obtain retirement income through the contributory system, like the IRAs, the 401ks.

Mary Jo:
That’s right.

Bob:
But then you had your amendments that in 1939, it made a really big change in the social security program. And it added some new categories of benefits, like payments to the spouse. This is example. I’m married. If I were to pass away, those payments would go to my wife, Rachael, and minor children of a retired worker, what we call so-called dependent benefits and survivor benefits paid to the family in the event of a premature death of a covered worker. This is a good thing. If there’s nothing saved up at all, that takes care of those children. But this change really transformed social security from a retirement program into more of a family based, economic security program. I like the way that said that – into a family based, economic security program.

Mary Jo:
But what we have found is it’s just not sustainable. We’re already hearing a lot of talk about is social security going to become bankrupt in our time. I think that, lucky me, I don’t think that I’m going to see that, but certainly I think maybe Bob, your children are going to see that. So we need to kind of pay attention to that. It’s a wake up call. We had a system where funding and pension plans were provided by the employer, and then when combined with social security, it provided a reasonable lifestyle. Social security was designed, again, to be a contributory system and a temporary fix.

Bob:
Yeah. We’re not supposed to sit here and live strictly on social security.

Mary Jo:
No, it was never intended for that.

Bob:
It was not intended for that, and we get back to the beginning of our podcast today where we’re talking about 25% – 30% of the population has no retirement plan at all in their 50’s. And they’re thinking that social security is going to provide for them. Well, it’s going to provide some, but it’s going to provide it at about a poverty level. It’s not enough to provide that lifestyle that our age group has become accustomed to here in America. And this is where we’re showing you the history today, and the wake up call. In the 1960s, 70’s, and 80’s is when those large employer pension plans came along and they worked well, but also they become very, what we call, top-heavy. And the companies saw this. You remember the major automobile company? We can’t say the name of the company because then we might be saying go buy that stock or something. But it was a major automobile company that their pension plan went broke.

Mary Jo:
Well, you hear that now, Bob, all the time, unfunded liabilities and pension liabilities. It’s true in cities and states around the country. Just look at Detroit. So, there’s a lot of places where the fireman’s pension and the police officer’s pensions are at great risk.

Bob:
So, these pension plans were designed to take care of longterm employees over the course of their retirement years. But you know what’s happening? Everybody’s living a lot longer. And like you said, they’ve become top heavy and cost prohibitive. Today, those that are 10 years younger than I am, like I’ve said, I’m about 56, 57. Go 10 years younger, they’re not getting the pension plans. You have to rely upon a contributory plan like that 401k or 403b or IRAs. Most state, city, and federal workers also grew to depend on these pension plans, Mary Jo. And it’s just interesting to see what is happening now. And we’ve seen, also, the fall of some of these major companies over the years, and they completely go bankrupt.

Mary Jo:
People depended on them, but the companies, they just haven’t been able to keep up with the promises that they made, and it has created a real financial impact. And so we have gone from this pension plan mindset to the contributory system. Now, employees are typically responsible funding for funding their own retirement. And ideally, they should be putting aside funds to help supplement social security as well, but they need to start early in order to get this done. So to get started, it’s helpful to know a little bit more about retirement plans, how they’re categorized, and maybe some of the labeling that you hear. I think a lot of our listeners may not understand that. We wanted to give a little tutorial overall. There are individual retirement plans and there’s employer sponsored plans. These are tied to either you as the individual, an individual plan. That’s what a traditional IRA or a Roth IRA is. IRA stands for individual retirement account. So, it’s tied to you as the individual, or those plans are tied to you as an employee. These are commonly referred to as employer based plans or qualified plans. These include 401k’s, 403b’s, 457’s, and thrift savings plans.

Bob:
Next week, we’re going to go over all what you could put in these plans and how they work. We’re going to get into those technical details. So again, as we get towards the end of today’s podcast, we’ve talked about the contribution plans and we’ve talked about the defined benefit plans. I’m going to define this for you. Defined contribution plans are funded by contributions from either the employer, the employee, and many times both. The employee manages the investments in the plan. So, how you manage it is totally up to you. Whether you go growth or conservative, it’s going to be how much you have during retirement. The totals, many times, are dependent upon contribution amounts, frequency, and investment performance. And there’s no guarantee as to what these plans will do. Then we have what’s called a defined benefit plan. That’s what we’ve been talking about for much of this program, about the company pension plan, in which an employee’s pension payments are defined or calculated according to how long they’ve been with the company and their salary. These are the plans that are very much disappearing.

Mary Jo:
In those plans, did they have a guarantee Bob?

Bob:
In the defined benefit plans? They had a guarantee, but it was only based on the strength of the company.

Mary Jo:
And as we talked about, there have been many instances where these employers have underfunded their pension plans and they can’t meet their obligation. So, it’s very common today in most states and in a lot of big cities. And then Bob, we’ll go into qualified plans. A lot of what we’ve been talking about are qualified plans, but what exactly does that mean? A qualified plan is simply one that is described in section 401A of the tax code. How many people have actually sat down and read the tax code?

Bob:
I definitely expect everybody to remember that one.

Mary Jo:
But that’s where the 401k, the 401A, those came from. And it’s the most common type of qualified plans or profit sharing plans, which is what your 401k plan is and the defined benefit plans. In general, your contributions are not taxed until you withdraw money from the plan. I like to think of it as this way, do your contributions qualify you for a reduction or deduction from your taxable income? So, that’s kind of how I know that that’s a qualified plan, and this is true for individuals as well as employers. So, if when you contribute money to the plan and you get a tax deduction from it, that’s what’s known as a qualified plan.

Bob:
So there is your history lesson from today’s podcast about retirement and how it has changed over the years. Mary Jo and I are here to help you. Christian Financial Advisors is here to help you go through the mine field, because it is so confusing today. And it’s scary, Mary Jo. I mean, quite frankly, it’s a little frightening.

Mary Jo:
Well, and that’s why people need to be working with a trusted financial advisor to help guide them and to help do some calculations and determine how much am I going to need to live on? That’s where we come in at Christian Financial Advisors. We’re here to help educate and guide you and help answer these questions. So that’s why we thought that providing this little bit of history was beneficial. I get these kind of questions all the time. I’m just finding that our listeners, they’re not really prepared for the future that they need to have, and so we want to help.

Bob:
And I think it’s important, too, that we always emphasize that you look for a fiduciary, not a commission based advisor, but one that’s going to work as a fee based advisor, in which you, the listener – those that are listening to our podcast – you pay the advisor. The advisor is not paid by some big, corporate company or some annuity company that’s forcing a sale on you so that you both are tied to the same side of the table, the same goals. So that the advisor benefits when you benefit, but when you don’t benefit, the advisor doesn’t benefit either. It can’t be a one way street. It has got to be both benefit or both lose at the same time. Does that make sense?

Mary Jo:
And recommendations are made in your best interest.

Bob:
That’s right. You got it. Yeah. So in our next episode, we’re going to look at all the specific plans and the rules associated with all the different IRAs, the 403b’s, how much you can put in them. Mary Jo, we’re going to go over the RMDs, also. We’ll go over that required minimum distribution.

Mary Jo:
Absolutely. And we want to make sure that everybody understands the rules. Bob, I know that this history lesson that we’ve gone over today, I found it interesting. I know that we’ve kind of lost sight of what happened to get us here, but the important message that we want to deliver to our listeners today is that you’ve got to plan for your own financial future. And we’re here to help you. We want to be alongside you. We want to help pray for you. We want to help you do it in a biblical way that honors God and gives all the glory to the kingdom.

Bob:
That’s all for now.

[DISCLOSURES]

Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors, a registered investment advisor. The information cited in today’s podcast can be found on the social security website at ssa.gov under social security history.