Why does retiring in “dignity” seem to be a problem for the current generation?

America’s new “Retirement Income” strategy since 1980 or so, based on phasing out DB pension plans in favor of DC 401(k) plans, is not working.

First, half of all workers are not even offered a retirement plan by their employer;

Second, of the half which are, one-third of the employees eligible to participate in a 401(k) plan decline to do so;

Third, most employees who do elect to participate contribute far too little far too late; and

Fourth, most employees who both participate and make material and timely contributions achieve dismal investment results.

Consequently, most employees (perhaps over 90%) are on track to retire in despair and run out of money before they run out of living.

While employee benefit gurus differ as to whether any one factor is the dominate cause of this PROBLEM, most agree that the following bundle of factors play the major role:

First: We are living much longer. In 1900, USA life expectancy was 47.3 years; by 2002 it had soared to 77.3 years – a 63% increase. And future increases in life expectancy may accelerate and dwarf this sharp increase. If retirement years exceed working years, what does such a demographic tsunami portend?

Second: A sea change occurred in corporate America’s retirement income strategy since ERISA became law in 1974 with Section 401(k) soon added in 1978; that is, from a DB pension plan “model” typically costing a company 6% to 8% of payroll to a DC 401(k) savings plan “model” generally costing a company 2% to 3% of payroll. When ERISA was enacted in 1974 companies made 89% of what was then a relatively higher total contribution to retirement plans; today they make just 49% of a lower total contribution, with employees now picking up the tab for this seemingly 40% company contribution reduction by means of a stealthy cost-shifting.

Third: Participants in 401(k) plans are achieving lousy annual investment returns. On November 3rd, 2003, John C. Bogle, founder and former CEO of the Vanguard Group and now President of the Bogle Financial Markets Research Center, addressed the United States Senate Governmental Affairs Subcommittee on Financial Management, the Budget, and International Security. Bogle testified that from 1984 to 2002 the overall stock market returned an average of 12.2% annually, mutual funds earned 9.3%, yet the average fund investor earned just 2.6%. This testimony is a must read, and is at http://www.vanguard.com/bogle_site/sp20031103.html.

Fourth: The soaring cost of health care is “crowding out” budgets for retirement in America’s employee benefit garden, resulting in far too little being saved for retirement by both companies and employees over the past generation.

Fifth: ERISA has imposed a federal fiduciary duty and responsibility on corporate executives and directors who serve as “ERISA Fiduciaries” requiring them to act exclusively in the best interest of plan participants and beneficiaries. A growing chorus of benefit industry gurus believe that such executives and directors had a pre-existing fiduciary duty and responsibility to the owners of the business. Query: has Congress unintentionally crafted an incurable conflict of interest? That is, can any person faithfully serve two masters? Plan participants may believe they are safe, as fiduciary oversight is mandated by ERISA, but increasingly this appears to be a watchdog that doesn’t bark. And fiduciaries created by ERISA may now sleep well at night, but as the plaintiff’s bar comes to fully understand the failure of these fiduciaries to measure up to even simple responsibilities (like knowing a Plan’s true fees and expenses) fitful nightmares may soon dominate dark times.

Sixth: Since the early eighties there has been a seismic shift in how vital retirement decisions are made, from experienced professional and institutional providers engaged by an employer in DB plans, to the workers themselves (i.e., mostly financial novices) in DC plans. One result is that several strains of an insidious “yield disparity” financial cancer have been detected but ignored. Furthermore, the qualitative change from a DB to a DC paradigm has also shifted inflation, market, and all similar financial and economic risks from the employer to the (novice) worker. Students of history weep at the thought.

Seventh: Middle class lifestyle expectations have rapidly accelerated, and have also tended to “crowd out” (that is, along with soaring health care costs) a worker’s ability, even willingness, to save for retirement. One example is that the country’s savings rate in 2005 and 2006 – that is, the percentage of household income that consumers don’t spend – slipped to a minus 0.5% in 2005, making it the third-worst savings rate in U.S. history. But then is slipped even further to a minus 1.0% in 2006! A negative saving rate has happened only twice before: in 1932 when the savings rate was a minus 0.9%, and again in 1933 when the savings rate was a minus 1.5%. One explanation offered: consumer spending for today’s “essential luxuries” (IPods; flat panel HDTV; et cetera) has significantly diminished a worker’s mental disposition to save for tomorrow’s “essential necessities” (like food et cetera) which retirement income will have to provide.

The various CAUSES of our PROBLEM include exploding life expectancy; a stealthy 40% cost shifting from employers to employees; lousy investment returns; soaring health care costs; fiduciary watchdogs which don’t bark (especially regarding excessive [and often legally hidden] plan fees and expenses); decisions now made by novice workers instead of pension professionals; and a national negative savings rate driven by the exuberant and irrational purchase of “essential luxuries” which have overwhelmed an employee’s motivation to prudently save for retirement.

Will this set of causes combine to spell doom for America’s current “Retirement Income” strategy which has been built upon a 401(k) plan foundation?


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