|
 Investing expert William Bernstein argued in a recent interview that
what has happened in our workplace retirement system over the past
30 years is analogous. We’ve shifted from defined benefit pension
plans managed by professional financial pilots to 401(k) plans
controlled by passengers.
Once, employers made the contributions, investment pros handled the
investments and the income part was simple: You retired, the checks
started arriving and continued until you died. Now, you decide how
much to invest, where to invest it and how to draw it down. In other
words, you fuel the plane, you pilot the plane and you land it.
It's no surprise that many of us, especially middle- and
lower-income households, crash. The Federal Reserve’s latest Survey
of Consumer Finances, released in September, found that ownership of
retirement plans has fallen sharply in recent years, and that
low-income households have almost no savings.
But even wealthier households seem to be failing retirement flight
school.
Eighty percent of Americans with nest eggs of at least $100,000 got
an “F” on a test about managing retirement savings put together
recently by the American College of Financial Services. The college,
which trains financial planners, asked over 1,000 60- to
75-year-olds about topics like safe retirement withdrawal rates,
investment and longevity risk.
Seven in 10 had never heard of the "4 percent rule," which holds
that you can safely withdraw that amount annually in retirement.
Very few understood the risk of investing in bonds. Only 39 percent
knew that a bond's value falls when interest rates rise - a key risk
for bondholders in this ultra-low-rate environment.
“We thought the grades would have been better, because there’s been
so much talk about these subjects in the media lately," said David
Littell, who directs a program focused on retirement income at the
college. "We wanted to see if any of it is sinking in.”
Many 401(k) plans have added features in recent years that aim to
put the plane back on autopilot: automatic enrollment,
auto-escalation of contributions and target date funds that adjust
your level of risk as retirement approaches.
But none of that seems to be moving the needle much. A survey of
401(k) plan sponsors released last month by Towers Watson, the
employee benefit consulting firm, found rising levels of worry about
employee retirement readiness. Just 12 percent of respondents say
workers know how much they need for retirement; 20 percent said
their employees are comfortable making investment decisions.
[to top of second column] |
The study calls for redoubled efforts to educate workers, but
there’s little evidence that that works. “I hate to be
anti-education, but I just don’t think it’s the way to go,” says
Alicia Munnell, director of Boston College's Center for Retirement
Research. “You have to get people at just the right time when they
want to pay attention - just sending education out there doesn’t
produce any change at all.”
What’s more, calls for greater financial literacy efforts carry a
subtle blame-the-victim message that I consider dead wrong. People
shouldn’t have to learn concepts like safe withdrawal rates or the
interaction of interest rates and bond prices to retire with
security.
Just as important, many middle- and lower-income households don’t
earn enough to accumulate meaningful savings. “We’ve had stagnant
wage growth for a long time - a lot of people can’t save and cover
their living expenses,” says Munnell, co-author of "Falling Short:
The Coming Retirement Crisis and What to Do About It" (Oxford
University Press, December 2014).
Since the defined contribution system is here to stay, she says, we
should focus on improving it. “We have to auto-enroll everyone, and
auto-escalate their contributions. Otherwise, we’re doing more harm
than good.”
Munnell acknowledges that a better 401(k) system mainly benefits
upper-income households with the capacity to save. For everyone
else, it's important that no cuts be made to Social Security. And
she says proposals to expand benefits at the lower end of the income
distribution make sense.
“Given all the difficulty we’re having expanding coverage with
employer-sponsored plans, that is the most efficient way to provide
income to lower-paid workers."
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Douglas Royalty)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
