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."

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 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 Whaling Industry

I begin chapter 15 with a story of Nantucket. While for many, the first thing that comes to mind are those bawdy limericks, the village in Massachusetts was once the third largest city in the state behind Salem and Boston.



Whaling was an important source of income for the city and as the video below shows, allowed the world to see after dark. Whale oil was a superior product. The quest for the riches it would provide to those willing to take the risk was often paid for with the lives of the men (and sometimes women disguised as men) who boarded the ships. But when the hunt was successful, everyone was entitled to a lay.



A lay was a fraction of the proceeds of the catch. In Nantucket, the average whaler would receive 1/175 of the proceeds. The Merriam-Webster Dictionary, in an entry dated 1590, describes the nouns as “terms of sale or employment : price b: share of profit (as on a whaling voyage) paid in lieu of wages”.

Elmo P. Hohman wrote an article for the “The Quarterly Journal of Economics” (Vol. 40, No. 4 Aug., 1926) titled “Wages, Risk, and Profits in the Whaling Industry” where he described the method of payment as singular to the whaling industry.

He wrote: “The whaleman was not paid by the day, week or month, nor was he allowed a certain sum for every barrel of oil or for every pound of bone captured. Instead, his earning consisted of a specified fraction share known as a lay, of the total net proceeds of a voyage.” The amount was determined by the skill and efficiency of the person hired.



This sort of partnership is at the heart of your retirement plan. Because of the structure of many defined contribution plans (your 401(k) is a defined contribution plan – you are responsible for making the deposits into the account for your future rather than receiving a set amount from a pension – a defined benefit plan). You are in it as a group, using a single captain – also known as, at least for the sake of this example, the mutual fund manager running your investment) to steer you towards profitability. In turn, each of the participants it entitled to his or her share depending on the amount they have invested.

This so-called partnership in the enterprise, according to John Randolph, who wrote The Story of the New England Whalers in 1909, this also extended to anyone involved in the ship including the boatbuilders, the blacksmiths and the coopers. Each man was working for himself and hoping that the captain was able to give them an adequate return for their efforts.



This may have been the first instance where “past performance, while not a guarantee of future success” was used as a guide to determine which vessel was the best one to sign on to.

I write in the book that like investing, “the seas can get rough, the catch can be nimble and sometimes scarce and worst of all, the world can be awfully unpredictable.”

Retirement Planning and the PBGC

As we approach the new year, we will no doubt hear the verse “auld lang syne”. The reference to the phrase, thought to have first been coined by Robert Burns (1759-1796), actually translates into “once upon a time”. When we begin the discussion on pensions in the book, we look thoughtfully back to an era when the obligation to employee was more than simply wage-based, it was a lifelong agreement with the firm.


Guy Lombardo played this song on a 1929 radio broadcast forever associating it with the passing of the New Year.




David McCarthy, author of numerous papers and as the book notes, a lecturer at the Oxford Institute of Ageing, at Oxford University (what the book doesn’t say is that he has since changed that position and is now a lecturer in the Finance group at the Tanaka Business School) studies the role of pensions in business.

His belief that pensions have an important life cycle is the cornerstone for much of his work. When the Employee Retirement Income Security Act of 1974 altered the way companies treated pensions – which are not an obligation under the law, the interaction, not to mention the relationship the employee may have had with the employer, changed forever as well.



The life cycle Dr McCarthy wrote of saw workers entering into an agreement with their employer when they were the most vulnerable cash-wise but had the most to offer from a human capital point of view. Pensions, through their conservative nature offered these employees a beginning at a future they might have ignored otherwise. When the human capital was at its lowest point, the pension was there to help.

Pensions unfortunately do not come with property rights. If a company is sold, dissolved through bankruptcy, or simply goes out of business, the employee can run the risk of losing most of their pension. This was the argument made for the 401(k) plan and was used by President Bush as the basis for his privatization of Social Security.



There are some safe guards in place. The PBGC, or Pension Benefit Guaranty Corporation insures against total loss but has not only a limited reach (companies need to participate in the program by paying premiums for the insurance guarantees.)

Here’s a recent example of how the PBGC works with smaller, lesser know companies.

”Tom's Foods filed for Chapter 11 protection in April 2005. In October 2005, it was purchased by Charlotte-based Lance Inc. for $40.2 million plus the assumption of some company liabilities. The transaction did not include the pension plan.”

Also noted in the article by Steven Taub for CFO.com was this comment about the transactions: “because Tom's Foods missed nearly $4.5 million in required pension contributions and the pension plan will be abandoned as a result of the sale of substantially all of the company's assets.” PBGC has guaranteed no interruption in pension payouts for current retirees and guarantees the pension for those that have vested.

How much pension you receive should your former employer face such events depends on when you retire. Recently, the PBGC, which was created by ERISA, raised its maximum pension payout for those retiring at 65 years old in 2008 to $51,750 (that is a 4% increase over the previous limit of $49,500 for plans ending in 2007.)

The maximum amount of payout for an individual who retires at 75 is $157,320 with a guaranteed benefit of $12,938 for those who retire at 45.

There are ways to check to see if your pension is at risk of being under funded. One is to ask for a health record of your plan. Troubled plans usually rely on optimistic projections of the underlying investments or worse and secondly, because of poor performance of the company leaving the plan with no funding to meet its obligations. Those obligations by the way are a result of actuarial tables used to determine the life span of the workers. If you sense your company is in trouble, plan for the worst – even if your pension payout is guaranteed.