Thursday, October 21, 2010

A Week to Save for Retirement

Apparently, National Save for Retirement Week has been in place for about four years. It was instituted at a time of high hopes for the 401(k) plan. The defined contribution plan had recovered somewhat since its first real test (in 2000-2001 when the internet bubble burst atking a great deal of the market with it) to regain its stature as the main vehicle for a solid retirement strategy. This was good, of course, for those who came onboard with the retirement plan after that incident.

For most workers, the 401(k) which replaced the defined benefit plan or pension as the go-to plan for businesses and you was their only option. It was a stay-in-it or lose option that many were unwilling to take and even fewer understood. What they did know was how well the person in the cubicle next door was doing. And they invested as well.

If you were to ask the average worker whether they would be happier knowing exactly what their retirement payout would be on a month-to-month basis, many would respond with "yes they would". But over the last 35 years, the number of people who can count on such a thing happening has dropped from 35% of those employed to less than 25%. This shift has left over 75 million working people with their only option: the self-directed plan or the 401(k), which as a rule doesn't offer any such guarantees.

Euphoria leads markets higher. And at the time of the creation of this government sponsored cheering section, we were quite euphoric about what these plans could do. Matches, the employer's contribution to the plan, were prevalent throughout the investment land as returns on every invested dollar soared on just about any pick in the portfolio. While all of us with any experience should have seen it coming, the vast majority of us were swept up in the seemingly endless growth of everything we touched, tangible (our homes) and intangible (our portfolios). We were kings and queens and we had no idea why. And in truth, few of us cared. We were too busy planning our early retirement exit strategies.

Which makes National Save for Retirement Week both important and passe. For one, it doesn't even really involve us. It seems to be an industry sponsored function that is designed to get employers back into the fiduciary game - but not so much to give you the added boost you need - and everyone knows a boost would be nice - but to give the employer the guidance on how to proceed forward at a time when forward seems almost anachronistic. Many of us simply want to hold on to what we have, giving little and often fleeting thought about the future.

That boost, the missing or somewhat elusive matching contribution has taken the employer out of the retirement game and in many instances, the employee as well. How do we expect one group to continue to invest in their future when the plan sponsor has so little faith? The match contribution came in many forms in the pre-2008 meltdown. It was generous in many instances and in being so, employees chased those matches with great gusto, even zeal. Writers and pundits called it free money - which it really wasn't (it was your boss looking to incentivize your participation and offset their obligation to help you save for retirement).

The rules to get that match often confused and befuddled more than it helped even as companies strained to introduce Investment Policy Statements. These legal documents are designed to outline the sponsor's method of not only picking which investment is right for their plan but also how they plan to monitor it. The IPS, advisers suggested, need not be burdened with outsized complications. It might even be considered a document that was open to frequent editing, before and after the fact. If a business were to merge with another or there was a change in demographics, for example, the IPS would change as well. Like many policies in business, it is designed to shift with the needs of its creator, not so much for those it governs.

The same goes for the matching contribution, which all but dried up following the calamity known by many and still feared by most. And with it, the efforts by you, the investor, the plan participant, the one who is supposed to be in charge of your retirement future, also went away. Those that remained shifted the lion's share of their investments to much more conservative investment products.

At the center of National Save for Retirement Week is the National Association of Government Defined Contribution Administrators (NAGDCA), which was founded in 1980. According to their website, the "NAGDCA is a professional organization made up of the deferred compensation/defined contribution plan administrators from the 50 states and over 100 local governments and entities, as well as the private industry plan providers."

These folks help businesses design their IPS. They help interpret what sort of document you need (much of which is compliance with the Department of Labor with an eye towards what ERISA requires), how to build a policy and plan that attracts outstanding employees (a much more difficult job in an environment of corporate cash hoarding, increased vesting times and lower matching contributions), how to encourage those who currently are employed to participate (there is an increased emphasis on education which is ironically not so much a boon for the employee as a way to offset potential legal battles the employee might wage) and lastly, to do so without costing the employee too much (or the business too much as well).

Needless to say, many of these policies are written in sand. And groups like the NAGDCA suggest that this is probably the best way to do things. They suggest fiduciary responsibility and leave you with a plan that is often unsuitable for current plan participant. But they can, as a defense, suggest that the plan does often educational tools, low-cost funds and investments and argue that because of that, they have fulfilled whatever obligation they may have thought they had. In fact, these folks are relieved that many have continued to invest in your retirement plans, diverting on average about 8% of your pre-tax income.

But you could also ask: what other options did we have? Which leads us to ask: what other options could there have been that would have made it better? In a report issued today at Bloomberg: "A Bloomberg National Poll conducted Oct. 7-10 finds that 41 percent of female likely voters are either very or fairly confident they will have enough money in retirement, compared with 48 percent of male likely voters. Thirty-two percent of these women are confident they won’t have to work beyond their target retirement age; 40 percent of men say the same."

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