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.

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."