Saturday, February 18, 2006

Same Old Situation?

Benjamin Franklin once suggested that the definition of insanity is doing the same thing over and over and expecting different results. Our household was treated to a real live example of that over the weekend when our beagle/German shepherd mix got it into his head - - - and, I might add, for the second time in six months - - - that chasing a skunk was a smart thing to do. What troubles me most about the event (and there are MANY troubling aspects) is that at some level, I think, he actually LIKES his new smell!

Last week I was talking to a group of plan sponsors about strategies for boosting participation in their plans, and I was struck by how “traditional” our perspectives on saving for retirement were. Sure, we’re talking in a new way about some old ideas (like automatic enrollment), and we’ve reworked some old ideas so that they seem to be more effective (like lifecycle funds), and while we have added some new thinking to some of those old ideas (like contribution acceleration), all in all, we still seem to be doing the same kinds of things that we have been doing for a long time now.

One could argue, I suppose, that doing the same kinds of things differently, or in new combinations, constitutes doing something new – but I couldn’t quite shake the sense that we were really talking about new packaging for old ideas. In fact, to my way of thinking, the only “new” idea out there now – the notion that we need to take all these decisions out of the participants’ hands altogether – is, according to most proponents, merely applying a defined benefit philosophy to the defined contribution model. In other words, an old idea – but this time with THEIR money.

The apparent simplicity of these “automatic” approaches notwithstanding (and some aren’t as simple as one might hope), it seems to me that we’re still working within an existing, and somewhat limiting, paradigm. We start with a list of given assumptions – and to the extent that they don’t project out to the desired result, we tweak the assumptions. We assume that we will work longer, save more (eventually), invest better (or at least with better results), and live on less. The current arsenal of touted approaches gets people saving sooner, investing better, and saving more – taken in combination – than many otherwise would. Ultimately, however, I can’t shake the sense that all we are really doing is shoring up one leg of a three-legged stool that doesn’t really exist anymore. Getting people to save as they should have been saving in their 401(k) plans all along is certainly a good thing, but is it – can it be - enough to compensate for the disappearance of traditional defined benefit plans, the erosion of Social Security, and the paucity of personal savings? Can it compensate for the strains that extended mortgages, out of control health-care costs and, yes, an extended post-career life will impose on those savings?

I’m not sure, of course, but I’m concerned. And I think we should all be.

- Nevin Adams

Sunday, February 12, 2006

An Uncertain Future

Benjamin Franklin once observed that in this world, nothing is certain but death and taxes – and, certainly at this time of year, we’re all reminded in an up-close and all-too-personal way of the certainty of taxes.

What we’re not as certain about, of course, is the rate of taxation, and how it will be applied to our individual situation(s). And unfortunately, certainly for those of us who work with qualified retirement plans, we’re also increasingly uncertain about the prospects for the key provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 – EGTRRA.

The impact of that legislation on our business can hardly be overstated. In a single stroke, it boosted stifling contribution limits for defined contribution programs, lifted arcane limits on compensation and benefits, provided economic incentives for lower income workers to participate in these programs, and gave older workers a chance to “catch up” on missed opportunities to save for retirement. EGTRRA leveled much of the playing field between programs for private, public, and not-for-profit employers in terms of deferral limits, and provided savings portability for workers who move between those fields in the course of their working lives. Less widely appreciated, but no less significant to those of us who administer these programs, EGTRRA also made important regulatory simplifications, such as the repeal of the multiple use test and modification of the top-heavy rules. And while it did so belatedly, EGTRRA also provided the genesis for the new Roth 401(k).

Ironically, the introduction of the latter has served to remind many of us of just how short-lived EGTRRA’s provisions could be. Why go to the trouble to add this provision if it could all go away in just a few years, after all? That’s a valid point, but just think – without legislative action, much of the good that EGTRRA has done for the nation’s retirement savings security could be just as fleeting.

To its credit, the House of Representatives has passed pension reform legislation that would give these vital provisions permanency – but the Senate’s version has no such provision. Ultimately, if there is to be pension reform of any ilk in the near-term, those two must be reconciled, but as we have noted here previously, their primary focus has been driven by the pension funding crisis, not true retirement security.

EGTRRA’s work is not yet done, of course – and though we’re still years away from the 2010 sunset, with so much at stake, we can ill-afford to be lured into a false sense of security, IMHO. We may never have a better opportunity to press Congress to preserve the protections and incentives to save that EGTRRA provides. It’s time to finish the job.

- Nevin Adams

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Sunday, February 05, 2006

The Lure of Averages

A couple of weeks ago, Fidelity put out a press release highlighting the fact that Boomers turning 60 this year surpassed the $100,000 mark in average account balance, a figure based on Fidelity recordkeeping data. While there was something almost celebratory about that headline, I couldn’t help but be disappointed by that figure. Sixty-years-old and only $100,000 in their 401(k)? I’ve played with enough retirement planning calculators in my time to know that the odds of that sum providing a comfortable retirement – even with another five to 10 years of accumulation – weren’t very good.

Of course, the balance ($112,000, actually) was an average – and one ought always to be cautious in extrapolating too much from those combinations. Still, in the very next sentence, Fidelity projected that the older Boomers (those age 50-59, including those in the aforementioned average) are on track to replace 60% of their pre-retirement income. And while there was a cautionary tone in the press release about this finding (Fidelity cites 85% as a target), I couldn’t help but be reassured by that figure. Only $100,000 in their 401(k), and they are on track to replace 60%? That was a much better result than my mental math projected!

I found a clue to the dilemma just a bit lower in the press release – where it noted that 61% of older Boomers “expect” to receive a pension to help supplement their retirement savings, according to Fidelity’s Retirement Index (see Fidelity: Americans’ Retirement Savings Way behind Schedule). In fact, the folks from Fidelity were good enough to step through the high-level assumptions behind the projected replacement ratio, and – bearing in mind that these are averages – roughly a quarter of the 61% would come from a defined benefit plan, roughly a third from Social Security – and only the remaining 10-20% was projected to come from a defined contribution plan and personal savings.

The good news is that the math “worked,” at least in terms of averages. Fidelity’s $100,000 average is in line with projections I have seen in other surveys, and many of today’s retirees draw more than a third of their post-retirement income from Social Security. However, it was hard not to look at the rest of that projection – particularly the dependence on a defined benefit plan check - and wonder how realistic those Boomer expectations were.

In sum, the projections looked reasonable - but the assumptions they were based on looked more like wishful thinking.

- Nevin Adams