Sunday, May 21, 2006

Scared Straits?

Last week, PBS’ Frontline ran a program titled “Can You Afford To Retire?” For those of us in this business, the title was almost painfully rhetorical. After all, how compelling would a documentary about people actually living the kind of retirement depicted in those 401(k) education brochures be?

Still, it’s one thing to make casual references to the tenuous financial future awaiting tomorrow’s retirees, and another thing to actually see the reality. Without question, it was an eye-opener, along the lines of that PBS special that brought together hardened criminals and young toughs several decades ago (back when I was young), “Scared Straight.”

On the other hand, the Frontline piece suffered from a certain myopia. It spent an inordinate amount of time on the plight of workers at United Airlines, for one thing. As tragic as that situation has been for many workers there, IMHO, they have long enjoyed benefits and pay that many would envy. One of the workers featured – who, granted, had had to return to work driving a truck at age 58 – had chosen to retire at 55 the first time (ironically, to lock in free retiree health-care benefits, according to the program). Another, a 42-year-old flight attendant, was noticeably concerned about her retirement future – but then, at her age, one might argue that she still has time to do something about it. In sum, their plight was as much based on shattered expectations as anything else.

It was just as brutal on 401(k)s. Even at National Semiconductor, where they match dollar-for-dollar up to 6% of pay, trouble looms, apparently. The documentary highlighted something it termed “yield disparity” – a phenomenon that consultant Brooks Hamilton says is “observed in many 401(k) plans.” Basically, he claims that employees with higher salaries also see the best return on their investments – as though this was trading on some kind of inside information. The Profit-Sharing/401(k) Council’s David Wray, at least in the version that made it to the screen, was reduced to pleading that people hadn’t had enough time to let the 401(k) work for them. Of course, on the full transcript, you can see that he was talking about 50- and 60-year-olds.

The widely touted solution – automatic enrollment and contribution accelerations into asset allocation funds – will surely provide a better result, but do we realistically think we can auto-enroll people into true retirement security? (As a side note, I’m waiting for the documentary that calls to task the advisor/provider community for promoting devices like auto-enroll, contribution acceleration, and lifestyle funds – all of which, individually and in combination, greatly enhance their fees. Remember, you heard it here first.)

What I truly hate about pieces like the PBS report – and Time’s “Broken Promise” story last fall - and the progeny they spawn, is that they are inevitably in search of a villain, not a solution.
We need to acknowledge that our collective work patterns no longer support programs that are structured the way a traditional DB plan is – and that our traditional notions of retirement no longer fit our ability to fund them. We need to put more energy behind some of the creative solutions that are out there – be willing to give the current pension system a little breathing room – and continue to press hard on ideas like automatic solutions, but realize that they are, at best, a stopgap measure, not a real solution.

That solution will require that we first consider if retirement in the future will, or even should be, that cessation of paid employment that it was for our parents. Secondly, with that determination in hand, we need to adopt a realistic assessment of how much people actually need to live on in retirement. And thirdly – and most significantly, perhaps – we need to decide, collectively and as individuals, who will be responsible for attaining those goals. Our traditional model for retirement security was built on a three-legged stool, with contributions from our own pockets, help from our employers, and the support of the federal government. All of those sources today seem to be constrained at a time when their support is critical.
If there is good to come from the PBS coverage, it will surely be a heightened awareness by people – perhaps even the participants you speak with – about the seriousness of the issue. They say necessity is the mother of invention. It can’t get much more necessary than this.

- Nevin Adams

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