Saturday, April 11, 2009

“After” Thoughts

Last week, I attended a media briefing sponsored by BGI titled “Restoring Confidence: Saving the Future of Retirement.” That session featured insights from some new participant research, some perspectives about the current plan-trends landscape, some thoughts on annuitization in 401(k)s, and even some thoughts from a congressman who knows more than a little about pensions and 401(k)s.

Some random thoughts from, and stimulated by, that session:

• Research conducted by the Boston Research Group (BRG) (and sponsored by BGI) indicates that 33% of participants have put off looking at their statements because of the recent financial turmoil. I’m betting a like number never looks at their statements anyway.

• No news is actually bad news. Not only can participant statements provide some much needed motivation to do (more of) the right things, people might be surprised to see how well their accounts have held up.

• People have seen so many reports about how poorly indexes like the Dow and S&P 500 have performed that they probably overestimate their personal losses. Many, perhaps most, probably haven’t lost that much. Of course, some of those “too much in company stock” accounts may have fared worse.

• Data from the Employee Benefit Research Institute (EBRI) suggest that, in a “mere” two years, younger participants (who have smaller balances, on average) could be back to where they were last fall. It still feels like we’ve “lost” two years in three months—and most of that “recovery” is going to be funded from our own pockets.

• Disclosure is not (necessarily) clarity, and more disclosure is not (necessarily) more clarity. However, it beats the alternative.

• Two-thirds of participants in the BRG study who were previously confident that they would have enough to live comfortably say their confidence level was unchanged, and 18% said their confidence had actually increased. No word on whether that confidence was justified or not.

• Nobody is in favor of conflicted advice—there remains, however, disagreement as to when that potential conflict actually creates bias, and whether that conflict can (ever) be sufficiently disclosed.

• During the discussion, Congressman Andrews referenced a recent GAO report that purports to show that “biased” advice actually yields poorer investment results than unbiased advice. However, that recent (March 2009) GAO report is actually a report about a not-so-recent (2005) SEC analysis of (just) 24 defined benefit pension consulting firms registered as investment advisers, (just) 13 of which allegedly “failed to disclose significant conflicts.” The GAO report cautioned that “[b]ecause many factors can affect returns, and data as well as modeling limitations limit the ability to generalize and interpret the results, this finding should not be considered as proof of causality between conflicts and lower rates of return….” However, that distinction is NOT being made by those (including Congressman Andrews) who want to rely on the GAO report as saying exactly that.

• Interestingly enough, the GAO report, while only 16 pages long, is nonetheless twice as long as the SEC analysis it was based on (see “IMHO: Disclose Sure?” ).

• According to the BRG research, among participants whose 401(k) balances had declined over the past 12 months, 28% said they planned to delay retirement, while 20% said they planned to “work until they die.” Unfortunately, we don’t always have that option.

• Nearly half (45%) of all 1,000 participants surveyed said they would "save more” to replenish their 401(k) losses - though Warren Cormier noted that studies have shown that kind of good intention tends to be akin to people who, on New Year's Day, say they are going to go to the gym regularly.

• Nearly three-quarters (73%) of the BRG respondents said that "knowing I would have a consistent, guaranteed monthly income in retirement other than Social Security" would boost their retirement confidence. What’s up with the remaining 27%? Or is it simply that “consistent, guaranteed” is not the same as “consistent, guaranteed, and ENOUGH?”

• “Knowing how much money I would need to retire comfortably” was cited as a positive factor by just 61% of survey respondents. Doubtless the rest already have a sense that what they need and what they actually have are at variance.

• The BRG survey data indicated that 90% of survey respondents would be interested in a 401(k) plan option that would provide a means of securing guaranteed monthly retirement income. However, based on the (lack of) take-up rates in the real world, an acceptable source of “guaranteed monthly retirement income” wouldn’t appear to include an annuity.

• People confident about their retirement prospects behave differently (and generally, at least when it comes to saving for retirement, “better”) than those who aren’t. But are they more confident because they behave differently, or do they behave differently because they are more confident?

—Nevin E. Adams, JD

You can read the coverage of the session; Turmoil Dents Participant Confidence , Andrews: Dumping the 401(k) Would be a “Mistake”, Is the 401(k) Ready for Change? at http://www.plansponsor.com/pi_type11?RECORD_ID=45683.

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