Sunday, April 28, 2013

“Gamble” Gambit

This past week PBS’ Frontline ran a segment on retirement titled “The Retirement Gamble.”

During that broadcast several individual cases were profiled—a single mother who lost her job (and a lot of money that she had apparently overinvested in company stock); a middle-aged couple whose husband had lost his job (and a big chunk of their 401(k) investment in the 2008 financial crisis); a couple of teachers who had seen their retirement plan investments do quite well (before the 2008 financial crisis); a 32-year-old teacher who had lost money in the markets and found herself in an annuity investment that she apparently didn’t understand, but was continuing to save; and a 67-year-old semi-retiree who had managed to set aside enough to sustain a middle-class lifestyle. The current income and/or working status of each was presented, along with their current retirement savings balance.


Much of the promotional materials around the program focused on fees, and doctoral candidate Robert Hiltonsmith featured prominently in the special. Hiltonsmith, as some may recall, was the author of a Demos report on 401(k) fees released about a year ago—one that claimed that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees (Demos report online here), according to its model—which, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund.

A fair amount of the program was devoted to the trade-offs between active and passive/index investment strategies, and the lower fees generally associated with the latter. Participant savers might not always choose them, but PLANSPONSOR’s 2012 Defined Contribution Survey found that nearly 8 in 10 (77.4 percent) of the nearly 7,000 plans surveyed already include index fund(s) on their menu, and that nearly 9 in 10 of the largest plans do. Similarly, the Plan Sponsor Council of America’s 55th Annual Survey lists “indexed domestic equity funds” as one of the fund types most commonly offered to participants (82.8 percent of plans).

“Balance” Perspectives

Hiltonsmith, 31, “had no savings to lose” in the 2008 financial crisis, according to the Frontline report, but after entering the workforce he began saving in his workplace 401(k). However, “even in a relatively good market, he began to sense that something was wrong,” the voiceover notes. Hiltonsmith explained: “I have a 401(k), I save in it, it doesn’t seem to go up… I kept checking the statement and I’d be like, why does this thing never go up?”

For some time now, EBRI has tracked the actual experience in 401(k) accounts of consistent participants, by age and tenure. Looking at the experience of workers age 25–34, with one to four years of tenure, and considering the period Jan. 1, 2011, to Jan. 1, 2013, the average account balance of consistent participants (those who continued to participate in their workplace 401(k) plan during that time period) experienced a nearly 84 percent increase (see graphic, online here). Granted, at that stage in their career, most of that gain is likely attributable to new contributions, not market returns—but it is an increase in that savings balance, and one that Hiltonsmith,(1) as a consistent participant-saver should have seen as well.

Pension Penchant

The framing of the retirement “gamble” was that “it used to be much easier,” in 1972 when, the Frontline report states, “…42 percent of employees had a pension…” But one point the Frontline report ignores (as do many general media reports on this topic) is that there’s a huge difference between working at an employer that offers a pension plan (the apparent source of the Frontline statistic), and actually collecting a pension based on that employment. Consider that only a quarter of those age 65 or older actually had pension income in 1975, the year after ERISA was signed into law (see “The Good Old Days,” online here). Perhaps more telling is that that pension income, vital as it surely has been for some, represented less than 15 percent of all the income received by those 65 and older in 1975.

In explaining the shift to 401(k) plans, the Frontline report notes that, “over the last decade, the rules of the game changed…” and went on to note that people started living longer, there were changes in accounting rules, global competition, and market volatility that affected the availability of defined benefit pension plans. While all those factors certainly did (and still do) come into play, another critical factor—one unmentioned in the report, and one that hasn’t undergone significant change in recent years—is that most Americans in the private sector weren’t working long enough with a single employer to accumulate the service levels required to earn a full pension.

For years,(2) EBRI has reported that median job tenure of the total workforce—how long a worker typically stays at a job—has hovered around four years since the early 1950s, and five years since the early 1980s. Under standard pension accrual formulas, those kind of tenure numbers mean that, even among the minority of private-sector workers who “have” a pension, many would likely receive a negligible amount because they didn’t stay on the job long enough to earn a meaningful benefit from that defined benefit pension.(3) Consequently, one could argue that American private-sector workers have been “gambling” with their pension every time they made a job change.

The Gamble?

It is, of course, difficult to evaluate the individual circumstances portrayed in the Frontline program from a distance, and via the limited prism afforded by the interviews. Nonetheless, even those in difficult financial straits were still drawing on their 401(k): the single mother had apparently managed to hang on to her underwater mortgage by tapping into her 401(k) savings, as had the couple who incurred a surrender charge by prematurely withdrawing funds from what appeared to be some kind of annuity investment. While this “leakage” was described as a problem, it does underline the critical role a 401(k) plan can play in the provision of emergency savings and financial security during every “life-stage.” Moreover, while the report focused on the circumstances of several individuals who had saved in a workplace retirement plan, one can’t help but wonder about the circumstances of those who don’t have that option.

The dictionary defines a gamble is a “bet on an uncertain outcome.” While the characterization might seem crude, retirement planning—with its attendant uncertainties regarding retirement date, longevity risk, inflation risk, investment risk, recession risk, health care expenses, and long-term care needs(4)—could be positioned in that context.

However, the data would also seem to support the conclusion that this retirement “gamble” isn’t new—and that it may be one for which, because of the employment-based retirement plan system, tomorrow’s retirees have some additional cards to play.
 
Nevin E. Adams, JD

You can watch the Frontline program (along with some additional materials, and expanded transcripts of some of the program interviews) online here.

(1) The Frontline investigation also seemed to represent something of a voyage of discovery for correspondent Martin Smith, who apparently has dipped into his 401(k) several times over the years. In a moment of subtle irony, he notes that he runs a small company with a handful of employees, but was too busy to look at the “fine print” of his own company’s retirement plan, going on to express confusion as to how these funds got into his plan in the first place. Of course, as the business owner, he was likely either the plan sponsor, or hired/designated the person(s) who made that decision.

(2) EBRI provided all of the data referenced here—and much more—to the Frontline producers. In fact, Dallas Salisbury was interviewed on tape for nearly two hours, so we know they had the full picture on tape. That may be what makes the Frontline program the most disappointing, knowing that the program could have presented a balanced picture of “The Retirement Gamble” and the diversity of plans, fees, and outcomes, yet its producers chose not to do so. EBRI’s most recent report on job tenure trends was published in the December 2012 EBRI Notes, online here.

(3) As EBRI has repeatedly noted, the idea of holding a full-career job and retiring with the proverbial “gold watch” is a myth for most people. That’s especially true since so few workers even qualify for a traditional pension anymore (see EBRI’s most recent data on pension trends, online here).

(4) EBRI’s Retirement Security Projection Model® (RSPM) finds that for Early Baby Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs (see the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model”).

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