Retirement Planning: Companies are Still Trying

Such is the conundrum of the 401(k). Your retirement planning tool is showing signs of increased balances even as some of the experiments to get people to invest more - via auto-enrollment - is as Aon Hewitt suggests, somewhat sub-optimal.

Auto-enrollment was supposed to get all boats to rise. New workers who knew little about this sort of plan to help them save for retirement were automatically enrolled in their new employer's defined contribution plan. But these new investors did not respond as the industry thought they would. Pamela Hess, director of retirement research at Aon Hewitt suggested in a January 26th press release from the company: "Auto-enrollment is a relatively simple and effective way for companies to help workers plan for retirement—especially younger workers who may not feel the immediate pressure to save for retirement." And yet, once in the plan, these new workers, often referred to as the Gen Y investor, failed to follow through on the effort with interest of their own.


Companies are still trying
It is not as if the companies aren't trying. Designed to simplify the investment decision process, more than half of the companies surveyed attempted to educate these new workers, appealing to this younger investor with the offer of online investment guidance coupled with online investment advice and managed accounts. Compared to 2010, when just 28 percent of employers offered managed accounts, this is a noticeable increase in what is often considered the most basic of fiduciary responsibilities.

Plan sponsors are undaunted by the lackluster use of these plans and continue to offer additional levels of services which include investment modeling and even attempts at profiling how what you have accumulated will be spent down once their employees do retire. Younger employees seem to accept the target date fund, the primary choice for the auto-enrollment effort despite the questions surrounding the viability and transparency of these funds.

Reinstating the matching contribution has helped some of these plans. By the end of 2010, in the wake of the Great Recession, 23% of the companies had stopped or lowered the amount of money the plans contributed. Over half have decided to add these matching contributions back to the plan in 2011 with about 18% of the 23% who stopped toying with the idea of bringing the matching contribution back.

Other incentives to get these workers to contribute more to their 401(k) plans are not so much incentives as elimination of other benefits that future retirees once banked on for their retirement. Fewer companies offer medical benefits to their employees and some have even raised the current cost of health insurance to employees to offset the cost of helping with retirement, a trade-off that seems counterproductive. Others have simply frozen their pension plans pushing workers to seek the alternative self-directed method of ensuring a secure retirement.

Some of these moves have actually forced the employee to invest more and the latest numbers published by Fidelity point to an increase in the average balance in these plans. yet the average balances, now estimated at the 2010 year end were still far below where they actually needed to be. If you had invested steadily over the last decade, your balance, according to Fidelity is around $180,000. If you are within fifteen years of retirement, you are still hundreds of thousands of dollars away from what is often considered the optimal balance.


The 14, 16, 18 Rule
For most investors - I prefer this term to overused "saving for retirement" - the accumulated balance in these plans should equal 14 times your last year's salary. Aon Hewitt points to a need for 16% of the salary of the 31 to 45 year old group as the goal, which includes the total amount of available benefits such as Social Security and any pension plans they might have. Because the youngest workers can count less on these additional sources of income for retirement, they will need 18% of their salary to make retirement comfortable.

If plan participants at Fidelity are any indication, these plans are moving in the right direction. Over a million people involved with the Fidelity offerings have accessed their online tools or simply called for advice. According to Beth McHugh, vice president of market insights at Fidelity, the answer to how much you will need still depends on the worker taking control of the plans. She suggests "At the end of the day saving at appropriate levels, saving continuously and ensuring that you have the appropriate asset allocation are the most critical components to help ensure that you have sufficient savings for retirement."

But contribution levels still remain lower than they should be. The average participant has increased their contribution, but from a paltry 4% to a better 7%. Yet this increase is still far from what the investment and retirement community would like to see workers contribute. Add to that the lack of portfolio diversification once they are in the plan, little effort by the participants to rebalance on a regular basis and for older workers, adequately defining the risks they are taking with those investments all increase the chances that these plans are not doing as well as they could.

Some of the uncertainty of retirement needs may be the problem. Not knowing the impact of taxes (although there has been an increase in the amount of Roth 401(k) options in many plans) and the negative effect of inflation. workers are underestimating what they might need and if they are making educated guesses on that number, taking too many risks too close to retirement to try an offset those issues.


The Selfish Approach
Perhaps the worker should instead frame the plan in a more realistic way. Most advice offered on how these plans should be spent down once you retire involve a suggestion that returns on the plan in a post-employment environment should be all that the retiree tap. This avoidance of using capital - in other words protecting the balance in the plan at all costs, may have created a greater worker angst than is needed.

Focusing on preserving wealth as an heirloom is not how these plans should be calculated. In a era of less, the retirement planning employee should be focusing on what they will need first and not so much on what they might leave to their heirs. While prudent lifestyles are still a great help - both prior to and after they retire - being selfish in your projections is not necessarily a bad thing.

Your Retirement: It is Still up to You

The stock markets seem to be poised for what has been termed often as the "Santa Claus rally". Consumers, at least according to business surveys, are beginning to spend. And this is all occurring, while in the shadows, the economy or its numbers remain little changed. That and most of us are still suffering from investment paralysis. 

Here we are, years after the fall of 2008, and the average middle class worker still has an account balance that is far from where it should be - if they plan on retiring. When most of us think is retirement age, we think in terms of what has been the generally accepted retirement age. This unfortunately is a failure on two fronts: yours and the plan sponsor.

Your responsibility is in the contribution.According to a Wells Fargo survey (pdf) conducted among 357 plans, middle class is defined as: "those aged 30 to 69 with $40,000 to $100,000 in household income or $25,000 to $100,000 in investable assets and those aged 25 to 29 with income or investable assets of $25,000 to $100,000." This group knows that they will need more than $300,000 to fund a basic retirement yet, on average those balances fall far short of that goal with $20,000. Is it any wonder that this group is increasingly buying into the notion that working longer is a fact of life in the post-downturn world?

Most of the middle class group contributes only about 7% of their pre-tax income to these plans. And if the survey is any indication, much of the fault lies in the employer's approach to these plans. The study suggests that employers are concerned about their legal liabilities in helping their employees even as they acknowledge the shared role in helping those workers.

These fiduciary concerns are widespread among plan sponsors who worry that should they provide advice, and that advice doesn't meet employee expectations, they will see the plan sued. 

This has led these employers to look for plans that offer third party advice, shifting the liability to another player. What they fail to embrace is that using a TPA (third party administrator) doesn't lessen the liability. While 89% of the plan sponsors understand that there is a need for retirement help, only 71% (as of 2009) think that they should help those employees understand what the plan can do for them.

In order of importance, and in reality, employers do something else entirely and your defined contribution plan's ability to get you there is reflective of this lackluster effort. Only 35% of the DC sponsors surveyed think that education is important, 22% encourage greater participation and increased contributions, 9% think investment diversification is important while only 2% facilitate the planning process by pointing out what is need in retirement and helping their employees use the plan to achieve this.

Are more funds in the plan the answer? Some DC sponsors believe they are and are looking to increase their offerings. But often, plans with more than fifteen funds aren't necessarily giving the employee more choices that suit their needs. The new choices are often in the form of target date funds and other more conservative investment offerings. This is often done at the exclusion of more suitable offerings (such as aggressive mutual funds for younger workers). Once again, they fear retribution for suggesting anything akin to risk.

DC sponsors are worried about what the industry calls investment paralysis. Too many funds, studies have suggested, often have lower overall participation rates that those with 15 fund or fewer in their plans. Because there is a growing movement to offer auto-enrollment, choosing a fund for that new employee often requires the plan to carry a wide variety of target date funds to pinpoint a "potential" retirement year.

But understanding the need and acting on it, from both a participants point-of-view and that of the DC sponsor are often far from what they are actually doing. Plan sponsors need to understand more than just the investment array, plan design, distribution options, education and communication, and fees charged by the plan. It is their fiduciary responsibility, one that carries legal risks if mishandled, to measure their plan's impact. Only 15%, according to the survey do so.

The employer still offers matching contributions in many defined contribution plans. But how and what are a matter of debate. Many still offer matches that are tied to company stock, put restrictions on access to those matching funds, and use the auto-increase contribution system as a way to offset raises. Often, maintaining the 401(k) plans they might have, as many of the companies surveyed suggested, is done for the sole purpose of getting and retaining new employees. This, in light of less-than-robust private hiring, might come at a reduction of other benefit programs.

If you are still in a DC plan and your employer's match is not as adequate as it should be, this doesn't let you off the hook. You still need to save more, much more than you are presently doing. While it is true that 5% is the cut-off point where pre-tax contribution investments don't impact take-home pay, some sacrifice on the employee's end is needed. And this should be done,match or no match.

If your employer's 401(k) plan is not as robust as it should be or doesn't fit your age needs, open an IRA or Roth IRA on your own. Contributing to both plans (10% to your 401(k) and the maximum allowed to an IRA or Roth IRA) is your responsibility. While we still look to the company we work for for guidance, and even to the point where we believe they care about us and our retirement future, the facts are not bearing this fuzzy feeling out in the surveys I have read.

As Laurie Nordquist, director of Wells Fargo Institutional Retirement Trust said: "If people aren't willing to pay for advice they are going to get a more vanilla approach to planning," adding, "But a simple plan is better than no plan."

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com

Retirement Poverty: The Two Words Don't Belong Together

This article previously appeared as a new feature at Target2025.com: Repercussion- A Retirement Review.

These days, if you really want to scare someone, use the words retirement and poverty in the same sentence. David McPherson used those words in a recent article published at ABC News.  Unfortunately, his suggestions may just help you get only a hair's breadth away.

Just a couple of thoughts on his suggestions: The sooner we think of the money we put away as an "investment" and not savings, the sooner we will get over the shock that we might lose a little ground along the way in order to gain more over the long-term. Far too many writers make this mistake.

He also suggests that a 1% contribution is the best place to start. I strongly disagree. A five percent jumping off point, match or no match, will not, in all most every instance, have any effect on a person's take-home pay.  And that is usually the focus of concern for most beginners whose focus is on the prize at the end of the week; not the end of the career.

The last thought: Don't be conservative about this effort.  Risk is the only path to reward over a long period of time.  If you are young, assume a lot of it.  As you age, assume less.

Read his thoughts here.

Missing the Target; Gaining Praise

Target date funds, those investments that pick a date in the far off future and sell you on the notion that your retirement plan is headed in the right direction continue to lose ground.  But that doesn't stop this default investment for the widely used defined contribution plan - your 401(k) - from receiving inflows in record amounts.

After the 2008 investment season and early into 2009, there were only a handful of investors who could claim to have these elusive skills. As far back as Benjamin Graham, the skill that was needed to be a successful investor was widely believed to be a possession of the few.  It wasn't necessarily the wealthy either.  But a subset of the populace who, for some reason, understood the mechanism better than others.

This led more than few folks to look at target date funds as an investment that might hold the elusive key to investment success. Money poured into these types of funds and continues to this day.  This in large part because of the default option that new hires receive.

While all investors face the same problem, those further along in their careers have an unique problem. Too conservative and there won't be enough money.  Too aggressive and there may be losses that are not welcomed.  But target date funds, while they have gained praise as they continue to underperform, are not the answer.

Paul Petillo is the Managing Editor of Target2025.com

Yet Another Spotlight on Your Retirement Plan

A short while back, I wrote about a company that uses a series of benchmarks and mathematical equations to determine whether your 401(k) plan is doing what it should. Brightscope's product was designed to help plan sponsors find the problems in their plans and make an effort to correct them. As noble as that effort may be, the hurdles are numerous for plan participants to get their companies to make the necessary changes to their plans.

Now we have another entrant to the market place, this one offering the plan sponsor a look a their employee's retirement readiness. Fiduciary Benchmarks, based in Kansas will provide a snapshot look at a company's plan and the chances that their employee will arrive at retirement with enough cash to be considered adequate.

Using 100% as the retirement readiness benchmark, a number that represents different things to different income groups, the report, provided free in brief and at the cost of $100 for more detailed analysis looks at the average employee. From there, the report then analyzes various pathways that employee can take, and if they did, how well the plan allowed them to reach the optimum amount in their retirement accounts.

In a downloadable pdf, they suggest that a person earning $20,000 a year will need 94% of their pre-retirement income to survive. Although the plan does take into account conservative longevity predictions and the available investments in the plan, it does not look at the statistics for this particular group and their overdependence on Social Security benefits.

Their benchmark also suggests that someone earning three times that amount would need only 78% of their working income to hit the 100% mark in the company's index. Some industries fair much better than others. But this is not reflective of the whole of the employees in the plan, simply what the plan may do for you should you use it to its fullest.

And therein lies the rub. Most employees, no matter how good the plan, do not max out their retirement contribution, leaving them with a huge gap in what they will need and what they enter retirement with. Without full participation, there is little another tool for plan sponsors can do. The vast majority of plans are adequate even if they fall short on the educational side.

While there is emphasis on educating the participant through education of the plan sponsor, it is beginning to seem a little overdone, even as this type of spotlight is still in its infancy. Most employees wonder why their plans weren't improved sooner. And still more see the incremental improvements as a way to sustain the current level of contribution rather than an enticement to increase it.

The real improvement will come from the IRS. Once they fix the expected tax rate for retiree's plans when disbursement begins, and not leave the rate the big unknown, employees will see the future through a much clearer light. Not having any idea what those future taxes will be make it difficult to determine how much will be enough.

Retirement Planning: Vacation Time and No Money?

We have found that 2009 was not so kind to those investing in their 401(k). Employers have reduced or eliminated their matching contribution and many recent surveys have suggested that this will be slow to return. What was once considered the competitive lure for many employees has no simply become a sidebar in the search for a job. For many, and employers know this all too well, just landing employment is benefit enough.

But what about those who already have a job? What if you are a long-term employee? Many of us, as we have noted numerous times in this blog (post about matchless strategies) and on BlueCollarDollar.com, have taken the wrong path when confronted with this issue. Far too many of us reduced our contribution to our defined contribution plans when this occurred. Some have even determined that if the employer doesn't match, you shouldn't contribute either. And just as bad for your retirement future, you did nothing to help make up for that plan shortfall.

As we have noted, the best way to make up for this decrease in contribution is to increase the one you are making. For older workers, the higher salary they receive may make this possible. For younger workers, the decision becomes one of increased frugality, living well within their means and doing without some of the luxuries they may have built into their budget. If your employer contributed 3% and you contributed enough to make the match effective, your best move is to make up for the employer's shortfall.

Yet, there may be another way that your employer might be willing to allow. In an effort to get more people contributing more to these all-important accounts, the Obama administration has allowed retirement investors the option of rolling unused vacation pay or accrued sick pay into their plans.

This past year may have seen an increased workload at your job because of employee cut-backs. This may have forced you to defer a much needed vacation in favor of staying right where you were. Fear of seeming dispensable at a critical time, even though the need for vacation has been proven the best way to increase productivity. But this leaves you with an account full of unused vacation time.

Contributing this sort of payment to your 401(k) requires your employer to make some changes to their plan. Even as some have reduced the availability of their matching contributions, some have added this provision to their plans to allow exiting employees to have their unpaid time put into their 401(k) plan prior to rollovers and to allow those who did not use what they had, to use the time to contribute to existing accounts. The later can only be done if you have not maxed out your account (currently at $16,500 for those under 50 and $20,000 for those over that age).

Companies may find this incentive very alluring. Not only does it make them slightly more competitive (for one, employees are on the job more throughout the year) but it offer the illusion of a benefit increase without the actual pay increase.

If your company currently does offer this or is considering it, keep in mind that it will not come with or apply to any matching benefits the company offers. And they may also see it as a temporary offering rather than a fixed part of the plan. The only thing that is certain is the option must be nondiscriminatory.

Five 401k Questions

On Friday 11.06.09, I will be talking with Gina and Kat about 401(k)s on their popular radio show MomsMakingaMillion. Here is a glimpse of what we will be discussing about your defined contribution retirement plan.

"So you're looking at your 401(k) and suppose its just average. Not too large and not too small. Can you pick too many funds?"

Five would be about the optimum number to own. Because you have to begin somewhere, most of us opt for the index fund that tracks the 500 largest companies. This is good first choice and if the 401(k) is really small, a decent only choice.

To read the full article about how to build a 401k from scratch...

Retirement Planning: Your 401(k) and Taxes

Writing for Boomer Retirement, I suggested that there could be some incentives added to the 401(k) plan that would make this all-important retirement vehicle much more attractive to those who under-invest or for those who fail to use their 401(k) at all.

As we all know, 401(k)s are not going away. But it is debatable as to whether this sort of defined contribution plan will be able to exist in the same form it has for almost three decades. Although, if you use it correctly, it can mean a much more secure retirement. So why haven't more people used it?

I suggest that it hasn't been around long enough, not enough people have been exposed to these plans to make the long-term effect work and the incentives are simply too small for the average investor to understand. Read the full article here.

Pick Me Up, Dust Me Off: The More Tax Friendly 401(k)

William Bernstein writing for Barron's foresaw the future of the 401(k), this country's most ubiquitous retirement plan. “The 401(k) is likely to turn out to be a defined-chaos retirement plan.” And so it goes. Almost nine years after that comment was penned, the 401(k) has, for the most part, turned out to be a failure for most, a disappointment for some and far too much work for those who use it to its fullest.

This is based on numerous reasons, almost all dealing with our own, largely undefined and for the most part, beyond description approaches to investing. We are all over the place, trying to attach method to our madness and sound reasoning where there is none. This means that there is an investor class and the rest of us.

Unfortunately, we don't have to be exiled to the outside. But keep in mind, despite your best efforts, you will never be completely admitted to this elite group. Don't worry, many of those who are members are there by accident, something time will uncover and because of the nature of the class, they too will be kicked to the sidelines. In many respects, we are simply spectators.

Pensions are not dead although they are quickly becoming something of the past, relegated to the obviously smarter workforce, the union laborers. These folks admit to not knowing about where they should put their money, so instead of directing their own fortunes, many let trusts operate the investments.

(This is where a group of concerned folks gather, the employers and the union and determine where the best place to invest is. And statistics have shown, that in many instances, they do better than companies do when they hire "professionals". Also damning any chance at success is the interest the company has in the pension and how it relates to their balance sheet.)

This is sort of a forced retirement with the laborer giving up pay increases for pension contributions. And in the case of the trusts, it generally works like a charm. There are exceptions, particularly during labor disputes and troublesome negotiations when the welfare of the member is often second to the economics of the contract.

And in the three decades since its inception, we have proven the concept more or less incorrect. We are forward looking creatures that mistakenly attribute possibility to reality. In many instances, we have pre-determined how much we will need, how much we will need when we retire and how much we will need to save to get there. We have the whole plan sown up. That is until there is a bump, or in some instances, a really big bump jostles our fragile framework to the core.

Companies have shirked their fiduciary responsibility time and again. They enlist plan sponsors who are hellbent on squeezing every dime they can from every nickle invested. These fees, some hidden, some acknowledged are often higher than the individual investor might pay. And because the funds you choose form are locked inside a structured plan, shopping around is limited to what is on the shelf. In the land of choice, the plan that needs to have the most options is closed to competition.

The 401(k) appeals to our herd mentality, driving up our gains (at least on paper as we chase the hot funds and the sizzling picks our cubicle neighbor has chosen) and driving our losses further as we try and stop the bleeding. We look at these accounts as money saved (which it isn't) and add to the debacle and withdraw or borrow against these accounts.

And we like to blame. It is also in our natures. Which is why some feel as though the 401(k) hasn't been given enough time to work. Yet those who have a pension, what I have referred to as the great economic stabilizer for many Americans who have them, have seen their fortunes in their post-work years remain stable. You have to realize, these plans were designed for those who had nowhere else to go with their high level of earnings. This tax-deferred portion of the tax code was custom made for this group. And it would have been for us as well except that we don't have enough time in the plan to make it work the way it was designed.

We haven't contributed enough either. To reach the portion of pension payment using your 401(k), you would have to retire with three times your current balance, provided you took advantage of all the free (matching) funds and maxed the plan out. Now the matches have gone away and fewer people bother with the maximum contribution. The catch-up clause is just wishful thinking.

So can this thing be fixed? Yes and no. If 401(k)s are only worthwhile when you retire, why then do the changes to these plans, improvements that make it easier to keep invested and stay invested have to come from the government? Talk has been shifting towards some sort of government run pension plan or an exchange where employees can by some sort of guarantee (adding a new player to the retirement game, the insurance company). Neither of these is feasible.

Nothing says participate like less taxes and this sort of incentive offers some easily projected numbers that are easy for even the lay-est of investors to understand. Matching contributions may not have lured sideline investors because it meant money out of "pocket" or less in the budget.

The IRS could act to make all 401(k) plans more tax friendly.

Based on the fact that 401(k)s are essentially tax events, the wrong agencies are stepping in to try and fix an IRS problem.

Here is what I suggest: Consider making the tax deferred deduction on the 401(k) contribution twice what it currently is and you will, in essence, give the employee a raise. You could force a minimum contribution and surprisingly, it might not even be noticed. As many of you already know, 5% barely changes your take home pay. But getting an additional deduction would.

The IRS could take it one step further by then fixing the withdrawal tax table. Many of us don't know what we will be taxed when we retire because we don't know what we will be able to withdraw. The IRS could place a 5% cap on anything under $20,000 a year, 15% for all additional annual draw-downs. Upper tier investors would want to pile in and this would have the net effect of raising all investor boats. (To recover much of this lost taxable revenue, reducing the contribution limit by a thousand dollars to $15,500 would force those who could invest that sort of money to pay the taxes and put the money in a Roth. My roughest calculations show that it would add $10 billion a year to the coffers, offsetting the increased deductions.)

The IRS could also penalize those tax returns (in the nicest way possible) and tax any over payments in excess of $500. This would be directed to a group 401(k) that would be directed towards a state sponsored target date fund (even though I don't like them much, for this purpose, they may be custom made). When the person applies for retirement benefits, this fund would be added to their benefits and because it was already taxed, it would could not be taxed again. Applicable tax rates for 401(k)s would also apply on any interest gained.

Harsh medicine? Perhaps. But the end result would be more money to spend now, more money to spend later and more money that many would not have. All by changing the tax code.

Adding Less Risk: The Safe Harbor Option

There is no easy answer for how much risk is too much risk or too little. In the aftermath of this past year, plan sponsors are looking for a way to insure that those close to retirement have the money they invested over their careers there when they need it. The key word is insure. And it is the industry that offers this sort of product that is being considered as a possible option. But are annuities the option worth considering?

One of the most difficult things to do is provide protection for already accumulated money in a defined contribution plan. Currently, even in what the industry refers to as megaplans, the options are limited to targeted-dated funds or some sort of option that offers fixed income protections. These types of options adjust the level of stock market exposure as the employee ages, shifting from more aggressively invested dollars to more conservative investments.

The reason for the increased popularity of these products is the result of a Congressional mandate. Target-dated funds were made the default investment for those entering the workforce replacing other less retirement oriented funds such as money market accounts. This allowed the worker to begin investing for their retirement in what the industry called the best option for those who do not know what to choose.

But now, with the focus on asset preservation rather than the typical asset accumulation, a particular concern for older workers nearing retirement, the pension industry is considering annuities. There are several problems with this, first and foremost being the involvement of the insurance industry.

Annuities are designed to be purchased as a stand alone product that provides guaranteed income. The insurance company makes certain commitments to how much you will receive in retirement from accumulated assets. The cost of this quasi-investment/insurance product is high in the first seven years of the purchase and the underlying investments made by the insurer are designed to provide the insured with a lifetime income.

The introduction of such a product in your defined contribution plan presents all sort of problems, not only for plan administrators but for the participants as well. According to Pensions and Investments Online, this would involve tweaking the already suspect target-dated funds. (I say suspect in large part because they have yet to prove they are able to do what they were designed to do.)

PIonline suggest that these target-dated funds could allow their investors to buy "slivers" of an annuity from several insurers. This would keep some of their money invested even after they retire and some of it as guaranteed income.

The second option and probably the most costly would be to offer a "guaranteed lifetime withdrawal benefit". This would essentially allow the investor to roll the assets they have accumulated in the annuity where the insurer would offer income based on a high water mark withdrawal based on a certain percentage. This would, insurers suggest, provide income even when the market moves in unsavory directions during retirement.

Robert Reynolds, chief investment office at the conservative Putnam Fund has been making noise since taking over the once powerful investment house. Among his proposals:

Mr. Reynolds would like to create "a national insurance charter and an FDIC-like fund to back up lifetime income guarantees". This will essentially force employers and employees to consider this option. The FDIC-like fund, not federally insured but instead insurance company guaranteed would offer protections for assets already accumulated.

Involving Washington is the trickiest part of his proposals. He would like Congress to add tax incentives to both employees that participate and employers who offer matching contribution "that would require "employers to offer a lifetime income option, either through annuities or other insured methods".


Of course for such a move to pass muster, the insurers would need to have set "caps on the equity exposure in target-date funds as they become mature". Such action would need the support of legislation that would "require employers to enroll all of their workers in 401(k) plans automatically and increase their contributions over time." This would put pressure on the smallest of firms to comply, a costly maneuver and force the largest firms to take away what some feel is the most important aspect of the 401(k) plan: choice.

This would also jeopardize the portability aspect of the plan. Few insurers would continue to cover an employee after they leave a firm and would probably not participate in a rollover to an individual retirement account (IRA). The reason: no former employee would continue to pay the outsized costs on an individual basis which could be spread over a large group inside a 401(k) plan.

“Usually after a tough period like this you're presented with an opportunity to make the system better,” Mr. Reynolds said in an interview. “We need to fix 401(k)s, which have become the retirement plan of this country. At Putnam, we want to get out in front of the issues.”

This is scary talk indeed.

Rebuilding Your Wealth: What's Wrong with the 401(k)?

Your 401(k) is in trouble. While the concept of a self-directed retirement plan is, at least in theory a good idea, it was never meant to be all there is. So many components go into a the proper operation of such plans, it is hard to get a bead on which move is right and which might spell disaster.

So let's briefly examine some of the do's and don'ts of 401(k) investing:

Do: Participate. No matter how little your employer offers in the way of incentives, called matching contributions or even if they offer none at all, you need to be in the plan. Plan on a minimum contribution of 5%.

Don't: Believe that it isn't any good. There are a great many of these employer sponsored plans that are essentially worthless. They charge fees that are too high, offer too few good funds from which to chose, and lack good any real fiduciary responsibility (something the employer is required to do).

Do: Buy funds. There will, in almost every plan on the planet, be mutual funds to choose from in your 401(k). Mutual funds are essentially investors who feel as thogh the effort of pooling money spreads diversity and risk over a greater number of stocks than they would have been able to purchase individually. A fund manager is the person(s) you hire to make investment decisions for this group. The fund will charge fees for this.

Don't: Buy company stock. A lot of 401(k) plans are designed to force you to buy the company's stock. Some will do this by limiting any match to this purchase and prohibit you to sell those shares. This is still not a good reason to buy this stock or any other. When you put too much money into one stock (same goes for buying too specific of a fund in large quantities) you run the risk of jeopardizing your portfolio's overall performance. This is where many 401(k) plans got into trouble.

Do: Diversify. For many people, diversification is simply purchasing an index fund (a fund that tracks a particular sector be it the total market of the Standard and Poors 500 list of the top market capitalized companies. (Capitalization refers to the number of shares outstanding multiplied by the share price.)

Don't: Index funds/Target-dated Funds/ETFs. Index funds are very tax efficient and charge very low fees to manage. This is due to their passive nature. Once the index is bought, until the index is changed, there is no more trading. As money comes in from investors, it is simply used to purchase more stocks of the companies in the index. (Use index funds outside of your 401(k) and pay the taxes on them while the rates are still historically low). Target dated funds are a relatively new product and just about every 401(k) has something like this. They may call it a life style fund. These funds pick a date in the future when you would like to retire and the fund manager gradually alters the fund's focus from aggressive (although many are not too aggressive) to a conservative format as the fund gets closer to the target date (of your retirement). ETFs are not a good idea for 401(k) plans because they charge the employee each time they purchase more and in a 401(k), this happens every time you get paid.

Do: Pay attention. If you have built a portfolio that is diversified (some growth, some value, some international or emerging markets and further spread these funds to include large, mid and small cap areas) you will need to open your statement or check it online each month. Look for changes in fees, changes in the 10 largest holding and any statements that the fund manager might make.

Don't: Overreact. When markets rise, don't try to adjust your underlying funds to follow. When markets swoon, stay where you are. In a rising market, because of dollar cost averaging, you will buy less as the price goes up. In a falling market, you will buy more as the share price is discounted.

Do: Think first. Your 401(k) is your future, directed by you. Never withdraw money from this fund either by loan or by any other means. This single action will take years to fix. If you leave a company, roll your 401(k) into an IRA.

Don't: Panic. Things will get bad but they never stay that way. Your 401(k) is not a cash account and should not be eyeballed to save you from financial bumps in the road - even those bumps seem like they will last for a long time.

Retirement Planning: The Danger of Opting for Lazy

The Pension Protection Act of 2006, quite possibly the worst piece of retirement legislation to ever take hold, has some employees allowing their employers to do what they are too lazy to do: diversify their accounts, select the right age-appropriate funds and move allocations. Your contribution might stay the same. It is where that money is going that creates long-term and possibly adverse problems for workers who believe they are on the right path.

The PPA is a business-friendly bill that gives employers new abilities. Some of these changes, which can be blamed on a more economical plan for the employer, do not always translate into a better option for the employee.

An employer can look at the cost of their current plan and deem it too costly to maintain. When this decision is made, the funds that were currently chosen by you are shifted into similar types of funds. That is, if you do anything at all.

When there are changes in your plan, you receive notification, often twice before the event. Failure to react to these changes within the given time frame (often thirty days) allows the employer's new plan sponsor to make changes it deems best for your age. The problem with this kind of power is threefold: One - only on the rarest of occasions does the employer have enough information about your finances to make a good decision; two - the new group of mutual funds in the plan may not resemble the allocations you made previously; three - the default options often do not take into account your personal risk tolerance.

In other words, lazy now has a price.

This can have the most devastating effect on younger workers. They often have the poorest understanding of the age appropriateness of their investments. Some have simply under-invested in equities, preferring to avoid what they have witnessed with older co-workers and their parents. In other words, they do not want to lose money. In other words, they are avoiding risk.

Your employer can change that. New plan sponsors can offer to switch funds on you, to allow you greater exposure to equity risk while switching older workers to less risk exposure. They do this by enrolling unsuspecting (although, as I said, notified in advance) employees into target-dated funds.

I have raised suspicions about these types of funds, their ability to perform better than a simple index fund, and the possibility that these funds (more like a fund full of funds from a particular family and not all of them good) will do better over time. Target-dated funds have no track record and more importantly, no guarantee that the manager at the helm will be able to mix and blend the right investments to achieve growth and capital preservation.

Michael Malone, managing director of MJM401k, a 401(k) consulting company in Phoenix suggests that this is still only a possibility. He said, “There is a degree of paternalism associated with it. If we look at the allocations that employees have, there have been more cases than not that those allocations and selections of funds aren’t necessarily the best things for them.” He warns against doing nothing: “But if you want to maintain your existing elections, you can move back into any elections you want.”

The bottom line for any investor, whether they be independent or enrolled in your company's defined contribution plan is to be aware of any shift. While you can change these fund allocations after the fact in many instances, why would you allow the fund sponsor to do the thinking for you.

If your company has a new 401(K) provider with a new group of funds, try to mimic your investments from the previous sponsor's offerings. This may be a bit more difficult because many of the changes are to plans offering less investment options, not more.

But opting to do nothing could cost you thousands of dollars of potential earnings over the course of career.

Retirement Planning: A Good Retirement Plan (401k) Gone bad

Despite all of the faults with your 401(K) plan, from poor or limited choices, forced matches with company stocks, high management fees to name just a fee, your plan may not be getting any better soon. Is waiting around for improvements worth it?

The Company Match
The incentive called the company match may have been tossed to the wayside in this current economic cycle. And for good reason. Many business were forced to take drastic measures to stay afloat as consumers spent less, credit got tighter (for both their customers and capital expenditures) and labor costs seemed to rise (although in truth, they didn't actually go up as much as sales went down).

The 401(K), created for allow for additional savings for wealthier individuals looking to add to their retirement accounts in the presence of a fully funded pension plan, has been misused by many of the folks who are enrolled. As a self-directed plan (defined contribution plan), the responsibility of the employer to provide you some reward for years of service and your precious human capital diminished (the plan need only present you with choices), offer some advice (albeit generic), and direct non-participant employees to a default investment (as per the poorly written Pension Protection Act of 2006 - a misnomer if there ever was one).

The company match, a contribution by your employer that offered you free cash for every dollar you contributed on your own, up to a certain percentage (most commonly 3%) has been halted or scaled back by many employers. Some have switched their matching rules to include only stock with rules that make moving the plan more difficult.

Even if your company no longer matches, continue to participate in the plan. The pre-tax incentive is enough to make the plan worthy of your money. How much is often the questions I hear the most. And the answer is relatively simple: a 5% contribution to your plan will probably net you the same after tax income that you would have received had you made no contribution at all.

What's in the Plan
Companies have been forced to scale back or change plan administrators. In some cases, this is warranted. Many plans had too many options and far too frequently, contained products that were ill-suited for the average investor (although in many instances, the average 401(k) investor confused what they were doing as savings and because of that confusion, made them less-than-average participants in the plan).

Determining the worthiness of the underlying investments is even more difficult. Some companies offer a lot of funds; some only a few. Some offer a wide variety of mutual funds across a wide spectrum of possible investments; some offer only a group of index funds focused on specific types of investing (large-cap through small-cap, growth through value through balanced, and target-dated funds).

One of the most fundamental aspects of a well-constructed plan is not eliminating too much risk. Because the plan is built on a 'pay the taxes later' concept, there should always be a certain level of risk involved. I have long been an advocate of keeping investment mainstays such as the S&P500 index funds on the outside of your retirement plan. Doing so will force you to pay the taxes on the fund now, rather than later and because capital gains taxes are still historically low and the fund is very tax-efficient, paying the tax now will give you all of the money in the fund whenever you need it.

Fees are a Consideration
Always compare a fund against its peer group rather than against some index for more than just performance. Most fund managers want you to look at an index that, in most instances, does not reflect what they are trying to do. Take for example the S&P500. This index is not necessarily considered a growth sector. Although there are companies in the index that are growing, the largest in that group are dividend paying (often) behemoths that might be better categorized as value plays.

But fees that are too high, as compared to their peers, act as an additional drag on your investment. The best way to get these funds out of the plan is to complain. If the plan is charging fees that are excessive, employers might be paying too much as well and employees might under-participate in the plan because of it.

Self-directed is not the same as set-and-go. In fact, the more control you have over your investment decisions, the more difficult it becomes. Take a moment to review our examination of why investors do what they do and how you can benefit from a new approach to your plan.

Retiring on Time: The 401(k) Accumulation Problem

There have been numerous reports over the years that we have a problem with self-direct retirement plans such as the 401(k). These reports suggest that we are not taking full advantage of the process and worse, we underestimate how much of what we may have accumulated in these 401(k) plans will be available as a percentage of our retirement income. In other words, we simply have not used the plans the way they were intended and we haven't invested enough.

Accumulation
Everyone who has a 401(k) has heard this before: invest at least what your company matches. The company match is the best way a business can help their employee invest in the future. There is no obligation to do this, just as there was no obligation (unless contracted through a labor organization) to fund a pension. As pensions disappeared and 401(k)s stepped in to replace these defined benefit plans, companies began helping employees direct their savings by offering a matching contribution of up to, and sometimes more than 3%. That meant, in order to get the full company match (the free money the business was going to deposit into your account) you needed to put at least 3% of your pre-tax income away.

For most folks, 3% is not even missed. In fact, many people could contribute up to 5% without changing their take home pay. Because the contribution to the plan is done before taxes are taken out, the after-tax take home is almost identical to what it would be had you had 5% taken out before taxes.

So why are so many of these plans not only underfunded but under-invested? I believe that there are two reasons, neither of which has been fully addressed. One is the fact that company stock is, for the most part, what is offered by the matching contribution, not the funds in available for investment. Far too many companies saw their generosity as simply creating a larger shareholder base. These "shareholders could not sell the stock and because of that, were forced to hold what they may have wanted to sell or redirect into other more lucrative investments in the plan's portfolio of offerings. Eliminating this practice may have saved hundreds of millions of retirement dollars. Two is the lack of understanding about that pre-tax math benefit I just mentioned.

According to a recent report from Boston College, which opens with the caveat that what is being reported may no longer apply in light of the economic downturn, suggesting that it might be worse rather than better, they found "In theory, a typical worker who ends up at retirement with earnings of about $50,000 and who contributed 6 percent steadily with an employer match of 3 percent should have about $320,000." That $320,000 potential account balance was, for the sake of the study considered simulated. Why? Because the report continues with this fact: "actual holdings of $78,000 for those 55-64 are dramatically lower than those simulated for the hypothetical worker." (As low as $54,000 on average.)

Add a thirty percent loss due to the market downturn, the possibility that job loss or other financial hardship forced some folks to tap those accounts for day-to-day needs, and the chance that like so many folks I have spoken with recently, switched all of their holdings to a target-dated type of mutual fund (one that picks a retirement year and readjusts portfolio holdings from risky but only mildly so to conservative as they age and near the target date) and you have a real problem on the horizon.

Generosity Wains
With six million people out of work and more yet, disparaged, business realize that this benefit (along with insurance in many instances) is not worth maintaining. Losing this match is not the end-all for this type of plan. Although it does make it more difficult to grow without the free money.

Not impossible but somewhat harder. More companies than ever are suspending the matches until they see some sort of economic change. Some have reduced the dollar for dollar basis to half of that amount, contributing fifty cents for every dollar contributed. Some have explained that halting the company match is better than cutting the workforce by 3%.

While it is difficult to determine whether this employer generosity will ever resume to the pace it was on prior to 2008, some things have not changed. The employee who still had a job was not likely to change their contribution rate based on the news. And less than half of those eligible for these plans, used them. The good news: the last time we had a similar downturn (2001), the suspension of company matches was only temporary.

Match or no match, you must keep putting money into these accounts.

Match or no match, you should, if possible increase your contribution.

Match or no match, you should not withdraw any of these funds no matter how bad things get.

Match or no match, the report concludes that: "The time may have come to consider returning 401(k) plans to their original position as a third tier on top of Social Security and employer-sponsored pensions."

Some Retirement Account Suggestions

A recent Boston Globe article offered this: "When millions of U.S. investors open their second-quarter retirement account statements soon they might be disappointed with their dividends, analysts say.

"Most investors will find their stock and bond funds in 401(k) and individual retirement accounts sank between April and June amid skyrocketing fuel prices and a slowing economy." The temptation many fear is that these individuals will begin tapping those plans, seeing the balances as better used for day-to-day living expenses rather than day-to-day expenses in the future.

You should avoid touching that 401(k), now posing more as a 201(k) after recent market turmoil for two reasons: One, if you are well away from retirement (say fifty or below) you are looking at a long time for the markets (and your savings tied to those markets) to recover.

The second reason has more to do with why. If it is for debt relief, then scale back your contribution and use the extra cash towards debt (contribute only what matches). If it is for market relief, reduce the fees in your plan and index your savings. Normally, I suggest index funds be held outside your defined contribution plans for the better tax treatment but with the markets sending mixed signals and more aggressive funds failing to offer fee relief, perhaps the switch would make the losses less painful.

These times do make pensions (defined benefit plans), those antiquated savings stabilizers (like Social Security) look awfully good. I just hope next time some politician suggests privatization, that we remember these trying times.

Retirement Planning: At 30

Retirement planning at age 30 puts you in a unique position. You would have done better had you started saving years ago. And yet, you are still at an age where you can capture many of the same opportunities that you may have missed.

At age thirty, life begins to seem like a game of rock-paper-scissors. You are familiar with the game. Competitors face off against each other, pump their arms and reveal a fist (rock), an outstretched hand (paper) or two fingers (scissors). Best of three wins the contest.

The game is so simple; it has been used to decide court cases and even disputes over works of art. They played it recently on the television show Survivor to determine who would go to Exile Island. Some scientists even suggest that game may govern the equilibrium of the universe.

In your thirties, the wrong move could leave you facing financial set back, one that could take years to unravel. If you are just beginning your retirement journey, you will find yourself in one of three financial positions. You will either have no debt with no savings, no savings and debt, or a family, house, car, and everything that goes along with life at this stage in the game. (Ironically, even those that have started to save, possibly through their work, still fall more or less into one of the three categories.

While the situation is far from dire, you do need to get things together quickly.

If you have no debt and no savings, there are some simple solutions to your retirement plan. Begin to build an emergency account - $25 a week to a money market account with limited check writing abilities is often enough to get started.

A money market account generally pays a higher interest rate than regular passbook savings and checking. Access to the account is often limited to a few checks a year. This limited access but immediate availability make these accounts ideal for creating an emergency savings account

Next, if you haven't done so already, look into beginning to save for retirement with a tax deferred retirement account.

Using your employer's retirement plan, the most common being a 401(k) account (public employees often use a 403(b) account in the same way), you can begin building an account for your future. If your employer offers a match, lucky you.

A match acts like an incentive to save. Offered by your employer, your contribution, up to a certain limit, is matched dollar for dollar.

You need to contribute at least that much to the account. This is free money that is put into your account with your contributions, and when invested and allowed to grow over time, will give you a sizable jump on where you need to be.

• What is a 401(k)?
  
• How much should I contribute?
  
• What is an index fund?

Even if your employer doesn't match your contribution, you should put away 5-10% of your pre-tax income. This money is withdrawn before the taxes are taken out and in some instances, this can actually lower your overall tax by licking you into a lower bracket. The upside to this: it may have very little effect on what you take home.

If you have no savings and debt, a much more common scenario, you can also be saved and surprisingly, without too much pain. It is obvious that you are living somewhat beyond your means. You have financed your lifestyle with money you didn't have.

The simplest way for you to get back on track is to build a spending framework. That's right: a budget.

Budgets act like road maps. They simply give you an overview of where you are now ­ assets (income) minus liabilities (what you owe and to whom) equals how much you have left to spend or save in a given period of time, usually over the course of a month.

Budgets can be like diets and New Year's resolutions. You start out with the best intentions but the changes you have promised yourself to make are often too drastic to achieve. But unlike diets and New Year's resolutions, they are incredibly important for two reasons.

It allows you to see where you are financially. Your money is not working for you if you are servicing debt. Debt comes with a cost and each time you pay interest on debt, you are paying for the use of that money. This exacts a toll on your savings.

Budgets also give you some idea of what it takes to get through the month ­ real dollars. At this stage of life, it is no sin to live paycheck-to-paycheck. We have all done it. Many of us still do.

Paying off your credit cards is easier than you might think. I have developed a simple way called the sliding scale. Here's how it works.

If you have three cards ­ this about average ­ list the minimum payments of each on a sheet of paper. For the sake of example, let's assume that these minimums are $25, $35, and $50. Your plan of attack using the sliding scale is simple. Pay double the amount due on the lowest minimum until that card's balance is paid off.

The payment schedule on the sliding scale would change from $25, $35 and $50 to $50 ($25 x 2), $35 and $50 for a total of $135

This increases your monthly credit card payments ­ something you should make on time and without fail every month ­ from $110 to $135.

Once that card is paid off, put it away for extreme emergencies and roll the $50 payment over to the next minimum. You are still paying the same amount but with one card paid off and the other card getting an $85 payment instead of $35 ($50 from the first plus $35 from the second), you are well on your way to satisfying that card's outstanding balance.

When that card is paid-off, put it away as well. Now, you are paying $135 to the card with the $50 minimum payment. Without taking too much from your budget (just $25 more a month), you have begun to tackle your credit card debt in a meaningful way.

At thirty, however, you might also have a car you have financed, college bills and possibly even a mortgage. A budget will give you the opportunity to see how much money goes where.

If you fall into the last category: family, a house, a car (possibly two) and no savings, it is time to change that. Now it becomes vitally important to begin to use your employer's retirement plan (see the thirty-year old with no savings and no debt), work on living within your means (see the thirty-year old with no savings and debt), and enjoy yourself.

The attitude you bring to life is more important at this stage than ever. You can see the future and have made tentative plans on how you will get there. You need to look forward to forty, and fifty, and even sixty as something worth achieving. Making the right retirement moves now will allow you to move forward with no regrets.

Retirement Planning and the Spoiler

Retirement Planning and the Spoiler

Some people just itch to ruin the ending. Perhaps they are giving instructions for video game play “Look for snake juice”, “Get magic glow”, or my favorite “Bring the Princess out of the Poor Quarter” give new players an unfair advantage and frustrated players the courage to brave on. Some folks stick to sporting events focusing on saved stuff on your Tivo, often blurting out scores before you have had a chance to stop them.



Currently the blog, Real Clear Politics is calling Texas Congressman Ron Paul the spoiler in the Republican Presidential race. Most of you know Ralph Nader as the classic Democratic spoiler, garnishing votes that reside on the extreme left.



The most common scene of the spoil is movies (“Chigurh leaves the house and makes sure there’s no blood on his boots”). Movie reviewers walk a fine line, hoping to give you enough information about the film that will serve to make the reader a more educated filmgoer and do so by expressing their opinion about the work. Good or bad, a reviewer never tries to spoil the ending but as Nathan Lee, film critic for the Village Voice, readers should focus on specifics.

He writes, "It’s silly to insist that the critic never spoil. In practice, spoilers can be irresponsible, motivated by laziness, vindictiveness or snark, but if the ambition to inform the reader outweighs the need to protect them, then spoilers are warranted on principle. The integrity of the critic doesn’t revolve around whether or not they’re willing to spoil, but why they chose to do so.


One mustn't criticize other people on grounds where he can't stand perpendicular himself.

- Mark Twain “A Connecticut Yankee in King Arthur's Court”

"Our obsession with spoilers has a diminishing effect, reducing popular criticism to a kind of glorified consumer reporting and the audience to babies. People outraged by spoilers should avoid all reviews before going to the movies or reading the book they’ve waited so long for, because the fact is all criticism spoils, no matter how scrupulous."

But retirement planning is the true realm of the spoiler and I probably take as much pleasure in it as Mr. Lee. It is why I do it and like every good investment book, the when and how are what makes most people make the purchase.



So far the conversation has concerned itself with the numerous roadblocks in the way of an easy retirement plan. From kids to parents to your own disposition, to the way the industry courts you and leads you on to the role the government has in maintaining economic growth. Collecting taxes – enough to finance what they do without pushing any debt burden onto future generations – who, may just rebel if they find out how much of their tax dollars is funding a portion of our retirement years and we may still have to work to the composition of that defined contribution plan.



The spoiler: To get where you want to go, you need to start early. If you have not, you will need to account for those missteps and false starts and if you are close to the end of the road, you will need to account for not only when you began the journey but also how far you have come.

Most of us have come a nice distance but worry about how much road is still ahead. At this point in the book, we examine the only thing that will make your portfolio perform better than it has and at the same time, could injure what you have accomplished. It is the risk and reward. It is volatility.

Retirement Planning and Observation

You will always be able to find two views. One comes from industry insiders who will be willing to signal the end of an era and the glorious advent of another. The other comes from the observer’s point of view, which is never given a voice, or more often than not, simply misunderstood.



Percy Hutchison, the late poetry editor of The New York Times once offered the following criticism: ““From one end of the book to the other there is not an idea that can vitally affect the mind; there is not a word that can arouse emotion. Hence, unpleasant as it is to record such a conclusion, the very remarkable work of Wallace Stevens cannot endure.” The comment was made about Mr. Stevens book Harmonium and was added because of a quote that was used in the book to illustrate a point.

Mr. Stevens suggested that, “accuracy of observation is the equivalent of accuracy of thinking.” And while Mr. Hutchison described poetry as “"stunts" in which rhythms, vowels and consonants were substituted for musical notes”, his work has endured. But that is not why he was given quote space in the book.



Stevens is not often the poet that comes to mind when greatness is discussed. And I’ll admit, he is not among my favorites. But the following piece, ripped from the heart of his work titled “Of Modern Poetry” offers a suggestion about what we hear and how we should think about the message that is being delivered.



“And, like an insatiable actor, slowly and
With meditation, speak words that in the ear,
In the delicatest ear of the mind, repeat,
Exactly, that which it wants to hear, at the sound
Of which, an invisible audience listens”

I offer harsh criticism for those who offer opinions about why pension plans (defined benefit plans) have fallen to the wayside in favor of the more corporate friendly defined contribution plan. I don’t believe that the majority of people who participate in them – and this may be a direct reflection on those that still do not – relish in the thought that making the kinds of decisions necessary so far in advance of actually having to use them.

And when folks like John Brennan, Vanguard chairman and CEO suggest that the “era of defined benefit plans is drawing to a close”, I wince. The original idea behind defined benefit plans was to encourage loyalty. And the fact that corporations rarely if ever, nurture the kind of commitment from their employees that pension plans once offered has made it easier to shift the burden of retirement to the worker.



That doesn’t make it better. It simply makes one believe that what is directly in front of you, what is presented to you as the best option, is not always as it seems.

J. Hillis Miller writes of Steven’s work Sunday Morning: “If the natural activity of the mind is to make unreal representations, these are still representations of the material world. So, in "Sunday Morning," the lady's experience of the dissolution of the gods leaves her living in a world of exquisite particulars, the physical realities of the new world: "Deer walk upon our mountains, and the quail / Whistle about us their spontaneous cries; / Sweet berries ripen in the wilderness."



And as much as I am loath to admit it, the defined contribution plan is here to stay, a physical reality of the new world.

Retirement Planning and the Social Science of C.W. Mills

Discussing C. Wright Mills is often controversial, always enlightening and somehow necessary. Including a quote from this distinguished social scientist was a risk worth taking. Even discussing social science with retirement planning can be a stroll through a minefield.



Mills, who was born in Texas (1916-1962), delved into topics that many in his field of thought considered out-of-bounds. He was gifted at separating smaller personal troubles from the much larger and more prominent public issues of his day.

Consider this: “When, in a city of 100,000, only one man is unemployed, that is his personal trouble, and for its relief we properly look to the character of the man, his skills, and his immediate opportunities. But when in a nation of 50 million employees, 15 million men are unemployed, that is an issue, and we may not hope to find its solution within the range of opportunities open to any one individual. (Mills 1959: 9)”



He was a radical. He interviewed Castro. He denounced American Imperialism. He attacked intellectuals for knowing enough to change the course of history but refusing to do so. He believed that knowledge could change the course of society and much of what he wrote (beautifully), read with great passion and has been accused of criticizing the same traits he exhibited. According to the Encyclopedia for Informal Education, “He was said to disguise his faults by admitting to even worse faults.”

He was, as his biographer Irving Louis Horowitz wrote in his profile of Mills titled American Utopian, “However much those who knew him firsthand differed about the quality of his work, they were unanimous about his personality.”



Mills did not address the topic of retirement planning specifically but instead sought to have a more open, well-discussed opportunity to choose. That is not present in our current retirement system.

Pension were, at there founding, a way of keeping workers with skill when their human capital, the cost of what they had to offer a fledgling enterprise by rewarding them in their later years with a degree of financial satisfaction. Focus on growing the business and we will focus on taking care of you in you golden years.

While that did not present choice, at least as we often define it, it did allow us to develop relationships with our families, grow intellectually if we so chose to do and give back to society when we had the opportunity. With the advent of self-directed retirements, we were given choices – that few understood and many still do not – and told that by doing so, our participation in the defined contribution plans would allow us to have much richer lives.




But that is not the way it worked out. Mills, who lived far in advance of this change in retirement thinking and worker contribution, would have been appalled. His many confrontations with the power of stratification in American society over the life of the individual would have gained new strength. His focus on the distinct levels of difference between who runs the country and who provides the labor would have risen to a boil. He was confrontational and by examining the stress of workers within the labor movement, in the situation of the middle class, in the elite strata of society, within the discipline or sociology or in his own personal life--there was a search for some path to achieve "the all-around growth of every member of society."

The following four notes come from Mills’ book “The Power Elite” published by Oxford Press in 1956. Keep in mind several things as you read them. One, even though you are permitted to choose, there are boundaries already placed around you retirement choices and they were not open for discussion. Secondly, the cost of those choices was not democratically considered with the input of the largest group – the actual investor – who is almost completely ignored in the process of picking which plan administrator, is best for the whole. You have to accept the plans offered by your employer – if they offer any at all, limit your contributions based on legislation and exercise the so-called portability of many plans that often comes without good instruction on how to best create an alternative plan when the worker leaves her or his current employer.




Mills writes:

“I. In the democratic society of publics it was assumed, with John Locke, that the individual conscience was the ultimate seat of judgment and hence the final court of appeal. But this principle was challenged-as E. H. Carr has put it-when Rousseau 'for the first time thought in terms of the sovereignty of the whole people, and faced the issue of mass democracy.'

“II. In the democratic society of publics it was assumed that among the individuals who composed it there was a natural and peaceful harmony of interests. But this essentially conservative doctrine gave way to the Utilitarian doctrine that such a harmony of interests had first to be created by reform before it could work, and later to the Marxian doctrine of class struggle, which surely was then, and certainly is now, closer to reality than any assumed harmony of interests.

“III. In the democratic society of publics it was assumed that before public action would be taken, there would be rational discussion between individuals which would determine the action and that, accordingly, the public opinion that resulted would be the infallible voice of reason. But this has been challenged not only (1) by the assumed need for experts to decide delicate and intricate issues, but (2) by the discovery-as by Freud-of the irrationality of the man in the street, and (3) by the discovery- as by Marx-of the socially conditioned nature of what was once assumed to be autonomous reason.

“IV. In the democratic society of publics it was assumed that after determining what is true and right and just, the public would act accordingly or see that its representatives did so. In the long run, public opinion will not only be right, but public opinion will prevail. This assumption has been upset by the great gap now existing between the underlying population and those who make decisions in its name, decisions of enormous consequence which the public often does not even know are being made until well after the fact.”