Tag Archives: defined contribution

Retirement Planning is Still about Who You Are!

  By petillo | September 15, 2010 - 4:49 am | commentary, financial planning, personal finance, Repercussions: A Retirement Review, Retirement Planning Target 2025, Uncategorized, women and retirement
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If you are a white male age 25-59 years old, you get it.  You get access to the job that offers the 401(k) plan, you contribute to your retirement, and you are less likely to withdraw from that retirement plan.  Doesn’t necessarily mean you are doing better – but you have increased your chances of a more secure retirement than any other group, with the exception of Asians.  There are studies to prove these facts.

Now if white males are doing so well, why are they?  And more importantly, is there anything that can be done to raise the level of retirement planning needed among the groups that need it the most?

Let’s take a look at the reasons why white men invest more of their paychecks for the future.  The white men tend to work for employers who offer 401(k) plans (defined contribution plans) in greater numbers than women, blacks or Hispanics.  These groups are represented in those workforces but tend to be employed for shorter periods of time on average, earn less and borrow more from those plans in greater numbers.

Defined benefit plans, the pension commonly offered by unions and public sector employers is most often the type of retirement plan owned by women, blacks and Hispanics.  While the effect of working less during an average working career impacts those plans eventual distributions, they offer a stable retirement income that would otherwise be missing.  Trouble is that many of these jobs offered to these groups tend to be lower paying jobs.  Where there is no retirement plan at all, where any retirement investing must be directed by you alone, women, blacks and Hispanics are the most commonly employed workforce.

The Urban Institute recently examined these differences and found that these groups differed from white men in a number of different and significant ways, all of which lead to a greater chance that retirement will be more difficult and may even be impossible. While women have an increased presence in the workforce (recent numbers point to an even share of women in the current workforce and the gradual closing of the pay gap) the average rate of pay increases has slowed since 1995, even as more women entered the workforce.

What really impacted the account balances in DC plans was the very features that many folks who use them find the ost attractive – even if they never use them. DB plans are not portable and cannot be borrowed from although som do allow for early retirement benefits. DC plans on the other hand do offer the worker the opportunity to take the plan with them when they leave work.  But the temptation to simply take the money seems to have a negative effect on the balances of these three groups, especially for the black worker who has a 401(k) plan.

The current rules require a company disperse in cash any account balances below $1,000. Account balances falling between $1,000 and $5,000 must be rolled over into another employer’s 401(k) plan or directly into an IRA – unless the employee requests the cash in writing.  Employees are counseled on the ill-effects of cash withdrawals (penalties, taxes and potential loss of retirement benefits) but the UI found that blacks, more than any other group are more apt to take the money rather than reinvest it for their futures.

They are also more likely to borrow from those accounts in higher percentages than women and Hispanics.  Keep in mind that most employer plans do allow for withdrawals for the DC accounts for emergencies such as foreclosure, unreimbursed medical bills, postsecondary education costs and for the purchase of a principal home.  But most of these plans only allow these withdrawals to happen based on whatever the employee has contributed, not matching funds or even earnings on contributions.

Hardship loans are also higher among black workers than any other group, by almost twice.  According to Stephen Miller writing for the Society of Human Resource Management:

• Loans initiated over the 12 months ending June 30, 2010, grew to 11 percent of total active participants, up from about 9 percent during the preceding year.

• The portion of participants with loans outstanding increased 2 full percentage points, to 22 percent, in the second quarter of 2010 compared to the first quarter.

• The average initial loan amount as of the end of the second quarter of 2010 was $8,650, with an average loan duration of three and half years.

James M. MacDonald, president of workplace investing at Fidelity cautioned workers and employers: “We recognize that for some, taking a loan or a hardship withdrawal from their 401(k) may be their only option because it’s their only form of savings,” and warned plan sponsors of their fiduciary responsibility to  ”make sure that before workers tap their retirement accounts prematurely, they are fully educated about both the penalty that may be incurred and the long-term implications for their retirement.”

But the problem actually goes even deeper. For whatever reason, blacks and Hispanics are unwilling to risk their retirement investments in equities. Studies point to the increase in risk willingness as your economic status improves.  With these groups earning less, some suggest this as the reason for risk aversion.  Studies have found that men are more likely to trade during the course of a year than women – with a large percentage of women workers making no portfolio adjustments for over two years.

But the UI also acknowledges these differences as hard to fix in the short term. What has turned out to be good news for women in particular is the increase of retirement wealth in their own names. This si important in part because widowhood at any age can impact the retirement income of the woman, sometimes pushing them to the brink of poverty existence.

But a huge gap still exists between the accumulated wealth of women as they approach retirement and that of all other groups. the earnings curve is still skewed, even as it seems to be narrowing during the recent downturn.  Not narrowing in a good way with incomes rising across the board.  Instead, the greatest impact this recession has had has been on the paychecks of men, lowering the bar for pay equality and as a result, raising the income levels of blacks and Hispanics and that of women as well.  This doesn’t mean more pension wealth; just less for men.

But auto enrollment has helped increase the chances that this gap will close even further.  Auto-enrollment in IRAs for workplaces that have no retirement plan (and these same places also have a disproportionately high employment of blacks and Hispanics along with women) will also bridge the gap in pension wealth. But auto-enrolled IRAs, even while deducting 3% and doing so with no match from the employer, won’t change the retirement landscape for these groups unless they see the value in contributing on their own and begin to have faith in the markets.

The UI also suggests that pay for these groups will continue to lag behind that of white working men.  This puts additional pressure on the ability of the currently in-place safety nets, such as Social Security, to be solvent and available until this disparity changes for all groups.  While we have come a great distance in the last several decades, we have not come far enough.

Retirement Planning: More than Luck

  By petillo | May 12, 2010 - 7:03 am | 401k, IRA, Repercussions: A Retirement Review, Retirement Planning Target 2025
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When it comes to a retirement plan, luck may have something to do with how well you do, how much money you have and whether you will outlive your cash. Of course, getting to retirement requires a little bit of good fortune as well.

Those who believe that retirement will be close to what they envision have had some sort of plan in place, either by default or by chance. An inheritance will certainly fall into this category, be it cash or property or even a business venture. If you have been fortunate enough to come into this sort of gifted nest egg, lucky you.

But luck can be something ingrained as well. The determination to see your mortgage through to the last payment, to not burden your finances with unwieldy debt and to have begun early as an investor set you apart from your peers. You have the benefit of knowing, to some degree what your net worth is in terms of equity. You will have several more options available to you when and if you need to exercise them.

Pension participants also fall into this category. While fewer Americans have these sorts of defined benefit plans (about 23%), those that do can expect a steady stream of income (even if the plan fails). Currently about a third of all retired Americans rely on pension income.

In what could be a throwback to post Depression era thinking, only about 20% of the people who are focused on the retirement believe the stock market is the way to get to where they are headed. Of all of the sources of income that people will tap as a way to grow retirement dollars over the course of career, the stock market is probably the best method to generate outsized income. On the flip side, the risk involved has soured any potential. That’s unfortunate.

The stock market, more specifically the use of stock mutual funds, even more specifically, the use of actively traded mutual funds and to a lesser degree, index funds, offer the single best way to make more money that you might have ever been able to do with any other method. Turning away from this risk is understandable.

Embracing it can really only be done if you come to these investments with some sort of financial order in the rest of your life. Risk needs to be tempered. For instance, it would be unwise to invest solely in the stock market if you are burdened with debt, have no financial emergency plan in place and are trying to play a game of catch-up for years of non-participation.

But then again, savings accounts and other ultra conservative investments such as CDs will not sustain you in the years after work. Annuities are not cost effective and although they offer an insurance product married to an investment product, it is far cheaper to buy them separately.

So what if you have ambled through life doing none of this – no savings, no investments, no pension, no equity – what are your options? Work and Social Security. It may not sound very appealing but polls are uncovering some scary statistics about these sources of retirement income. It is now believed that over a third of all Americans who are or will soon be retired are counting on SS for their retirement income.

And while work is always an option, few really see it as a sustainable one. About 20% of future retirees plan on doing some sort of work in retirement but dues to a variety of reasons (lack of available work, health) only 4% actually succeed in doing so.

The combination approach is the best way to wrangle any sort of retirement from what seems to be, at least in the near-term, a very sketchy possibility. As always, working on debt and your health play a major role in any success in retirement. These two free up a whole spectrum of possibilities.

Once those items are dealt with (improving one’s health and getting a plan in place to pay off what debt you have are long-term efforts), you should not ignore the potential in the stock market. If you have a defined contribution plan (401K) at work, participate with at least 5-6% of your pre-tax income. This will have little or no impact on your net income, allowing you to keep your debt reduction plan on track. If you don’t have a plan at work, find $25 a week, open a separate savings account that can be funded through payroll deductions and send the cash to an IRA. A harder option but no less important.

Once your debt is handled, build a savings account using the money you paid the debt off with. It may not help in retirement, but it will help should your life be derailed through job loss or injury or some other of life’s little mishaps. Those little mishaps need funding and your retirement shouldn’t be jeopardized as a result.

Retirement does require some luck and all of us have some. Some have more than others. But even as the old Swedish proverb suggests: “Luck never gives; it only lends”, you can help your ability to be lucky in retirement by being focused on believing it doesn’t exist.

The Changing Face of Your 401(k)

  By petillo | March 18, 2010 - 12:21 pm | 401k, Mutual Fund Investing, Profitable Investments, Retirement Planning Target 2025
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2008 will simply not go away.  It’s unfortunate really and although I have suggested over the years that our long-term memory could stand an upgrade, the reasons for what occured in the financial markets is unlikely to happen for another five years (although the potential fallout in 2012 in the bond markets is definitely troublesome).  So why should your employer worry now, after the fact and after you have lost a great deal of what you had investing in your retirement future?

Hewitt Associates, the human resource professionals, annually surveys employers about the future decisions they will make concerning their 401(k) plans.  Because the field of human resources is simply code for risk management, revamping your 401(k) plan might be seen as a way to help you.  In truth, it is the other way around.  And judging from the respondents of the survey, that help will be centered on fewer and less risky options, more weight put on the employee to understand what is happening to their plan and getting more people involved in the plan through auto-enrollment.

Blame Game

Believe it or not, many employees saw the declining balances in their 401(k) as part their fault and part the fault of the employer.  Perhaps we still believed the employer cared enough about how and where we invested our money, had some grasp of their fiduciary responsibility or because they were offering the plan at all, understood the underlying offerings, fees, and overall structure.  Many were matching contributions and we all made assumptions that because of that, it must be good.  What business would throw its own money away?

They seem to be asking that question more these days as they look at where their plans are headed.  Many believe that the new face of the 401(k) will have more employee focused responsibility.  If you knew not how to invest before this, you need not worry.  The employer will try to educate you.  But failing that, you will fund increased auto-enrollment for new hires, better auto-balancing features that will take some of the control out of your hands to provide less risk, and plans that are more streamlined.  This is a move in the wrong direction but it could be worse.

Sign Us Up

Auto-enrollment in concept is a good idea.  How it implimented is up to the company that hired you.  Many businesses plan on creating a more competitive 401(k) plan in the hope of luring better talent, a potential sign of optimism in a recovery economy.  But often auto-enrollment means target date funds.

This is sort of like a pension plan with better PR and less of a track record.  The company basically picks the fund for you, based on your age of retirement and begins investing for you.  Okay, they use your money and many do offer a match, but the concept is still in its infancy.  Some businesses are using this auto-enrollment feature to channel raises into future retirement plans rather than into your pocket first.

One of the biggest downside to auto-enrollment is the cost.  The employer will have more folks in the plan and because of the increased participation, more matches to contend with.  This will come at the expense of other benefits.  Lower employer health care benefits are one way to cut those costs.  Streamlining the overall plan to include fewer choices at a lower cost is another.

The Balanced Approach

Auto-rebalancing seems like a good idea.  Enough retirement professionals still suggest a regular review of your investment portfolio to adjust for too much growth in one area, funds that have grown or lost too much over the previous quarter or year or even too much or too little risk.  Will having your plan administrator do this for you be for your benefit?  Or theirs?

Some have likened the action to the same sort of concern that brought safety belts to automobiles.  Initially, you pick the funds that best suit your needs.  This assumes you have a firm grasp on what those needs are.  Most simply require that they have enough money to retire on and that they never run out of it as long as they live.  This is sort of a pining for the old days of a pension.  And these employers can assure you that those days are not returning any time soon.  (Pensions do still exist with many employers – about 74% – still have a plan even if it is frozen but the vast majority have shifted focus to the defined contribution plan structure.)

Employers now feel as though auto-rebalancing is key to offsetting their employee’s poor investment decisions. In light of how much these folks lost in 2008/2009, this seems like an idea whose time has arrived.  Unfortunately, over half of the plans already had just such a feature.  There is little mention in the survey about how this feature could be improved or whether it works at all.

Boiled Down to Contributions

At the heart of any solid plan is the contribution.  Too little and you will not have enough to retire.  To that end, contribution escalation seems like a good idea.  Employees can opt out if they choose.  And perhaps this is also a telling sign of the recovery economy: employers don’t see this as a benefit worth offering in the near future as they revamp their plans.

The good news is that many employers do not plan to offer annuities as part of their plan offerings.  The bad news is many employers are not planning to offer more education, increased matches (although many claim to be reinstating matching contributions in 2010) or work at suggesting the employer’s stock as not the best option for employees.  This last piece of bad news suggests that any effort at changing how you direct your contribution is half-hearted at best.  Far too many employees believe that investing in the business is still a good idea and employers are not about to discourage this practice any time soon.

While 80% of the employers will attempt to do a better job at communicating the downfalls of borrowing against the plan or cashing the plan out, only 43% plan on reviewing how well their plan serves the needs of all employees.  If anything, they are looking at thier costs and the fees charged for administration of the plan.  This means fewer chocies in the future and less risky investments.  This conservative approach may defeat any effort at increasing the chances that the participant will reach their goals.

Many firms believe their plans offer good communication about risk and fees.

The future of your 401(k) plan still relies on your continued contributions, increasing them over time and using risk in the earliest years to grow account balances.  If the future of the 401(k) as seen by this sort of survey are any indication, you will be required to do more monitoring (of how the company and plan adminstrators conduct their business) than less.  It still remains your plan and ultimately, your responsibility.