Challenges for Retirement Catch Up

“Better to light a candle than to curse the darkness” goes a Chinese proverb. Despite economic struggles and plenty of uncertainties, retirement planning needn’t be a Sisyphean task. I’ll share key insights and regulatory trends from the 401k Summit for you to consider and discuss with your financial advisors. The conference was sponsored by NAPA and ASPPA, two leading retirement plan organizations focused on professional education, advocacy and enhancement of the private pension system.

Four Challenges

• Predictably irrational – Few desire to work forever. Investors need to build a lifetime of retirement income by adequately saving, prudently investing, and not accessing the money until retirement; human behavior often interferes.

• Expanding worker access – Workers tend to save more when they have access to a salary reduction plan. About 78 million workers are without an employer or union sponsored retirement plan. That doesn’t sound ‘healthy.’ However, EBRI’s analysis yields a less onerous picture. Of the 78 million workers in 2011 who “lack coverage,” 42 million are under age 21, earn less than $10k in wages, and were not full-time/full-year workers; another 4 million were age 65 or older. How do you get the other 32 million to save more?

• Longevity risk – People are living longer; retirement funds need to stretch.

• Bigger government – Many prefer independence and opportunity. Alternatively, loud voices say “individuals don’t make good decisions” and government is the superior policymaker. ASPPA supports the “Save My 401k” campaign. Balance makes sense; regulation risks unintended consequences – higher compliance costs, plan terminations, and switching to less complex/effective plans. And $15 trillion in American retirement accounts and related annual contributions look awfully tempting to the deficit riddled taxman (e.g. revenue from “closing tax loopholes” such as reducing tax deferred contributions or accumulations).

Three Trends

• Increased impact and participation – Good plan design serves the sponsor’s (employer’s) goals. More offer automatic (unless employee opts out) enrollment, deferrals, and investment elections (e.g. target date or balanced funds); and matching contributions. Employees are more likely to sock money away for retirement. “Good” sponsors might target 75-80% income replacement ratios (percentage of employee’s wages at retirement), 6-12% salary deferral rates, and 80-90% participation.

• Lifetime income – How do you convert your savings into a monthly retirement paycheck? Some yearn for guaranteed benefits. Defined contribution (e.g. 401k plans) are more common than defined benefit plans; more employees “own” the responsibility for their retirement. Alternatively, pension plans (private, union or government) are not immune to benefit renegotiation or risk of severe underfunding. Nevertheless, 401k participants have numerous tools available for retirement readiness, and retirement income solutions (categorized as guaranteed vs non-guaranteed, in-plan vs out-of-plan). They include systematic withdrawals and managed accounts (non-guaranteed); annuities and guaranteed minimum withdrawal benefits (guaranteed); and each has its unique consideration of flexibility, control, and economics (e.g. low current interest rates vs your expectations for inflation). Expect to see continued innovative solutions.

• Reform – Under the present administration and Congress, expect continued regulatory pressure for disclosure and fiduciary liability, and potential tax reform. Participants and sponsors hopefully make better decisions from greater transparency and investment disclosures. Deductibility of plan contributions may be limited and hobble those who want or need to save more for retirement; talk with your advisors about tax efficient alternatives. Finally, there are numerous retirement proposals including Simpson Bowles 20/20, USA Retirement Fund, and state proposals (MA, IL, MD and CA’s Secure Choice Retirement Savings Trust).

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