You can blame the news reports for wanting to sensationalize what has become the new normal. In a post-Great Recession world, where risk seems like some sort of cancer, all financial products have become suspect. If an investment touts too much risk, the average person becomes so wary of it, it must be renamed. Changing the name of junk bonds to high-yield is just one example of a way to attract dollars where dollars wouldn’t normally go.
How did we get to this point in time?
Let’s first examine where we are. We are for the most part distrustful and with good reason. We were led to believe one thing (our retirement plan, even if it was haphazardly constructed and void of any methodology or reason would do well forever) and found out that things can go awry, quickly and without discrimination. This affected a wide swath of the investment public, from those just beginning their journey to those who have been eyeballing retirement landfall for several years. Paper wealth was real wealth and risk was just another word for nothing to lose.
Young people who had never invested or hadn’t invested much were thrown into this new world where conservative investments were thrust upon them. Target date funds became the default investment – if you didn’t make any choice on your own. Vesting periods were longer than they had ever been and matching contributions were all but a thing of legend. Your parents lamented about times as they knew them and you, listened in horror. It is wholly understandable. Retirement was now illusory for those who had been scrimping and saving and banking on it for years – so what was the point you asked?
Middle aged people for the most part are the first generation to stretch their investment legs with the defined contribution plan. The 401(k) was first introduced in 1980 (the Tax Revenue Act of 1978 actually allowed for it but Ted Benna saw it for what it actually was) and came at a perfect political moment in time. Thirty years later, and most of this group never had any other sort of retirement plan to choose from. They didn’t necessarily do what they should have with it, some invested barely enough to make the matching contribution. But it was destined to be the new investment plan for millions of Americans allowing businesses to jettison costly pension plans.
Older workers, those in their fifties and sixties may have been on the cusp of that change, seeing pensions gradually be replaced by the 401(k). They also saw first hand, the effect of letting millions of people into the stock market via their own retirement plans and the resulting bull market. From 1982 to 2000, no one it seemed could do wrong. And from that pivotal point in investment history, no has been able to do right consistently.
From these three groups, we have one outlook emerging as we head into year three of this investment malaise: return with no risk. Where the old mantra may have been more risk means more returns means early retirement. This embrace of protectionism is now squeezing all workers equally.
When I read article such as the one by Gail Marks-Jarvis, a piece with the word could peppered so frequently I wondered how anyone could conclude anything from it. I also wondered if this low return rate environment profiled really is the problem. She looked at the rate of return on certificates of deposit and how soon-to-be retirees look at them. A 2% return, which is below inflation and well below the inflationary items that are excluded from the Fed’s basket of goods used as a measure, and the fear of finding a place where money can be safe and grow at the same time has become the conundrum of those who are or plan on retiring soon.
It is true, rates for short-term savings instruments such as CDs are low (you can find some in the 2.4% range with a five year commitment – which is bit long for most folks). It is also true that the Fed has no problem with this low return on saved dollars, even if the group impacted the most are those who have already retired or plan to do so soon. It is also the only way to get investors back to investing which is one of the ways to get the economy growing. It is also true that with any sweeping plan, there will be victims.
What is clear is that this low-interest rate for no risk environment will remain this way for the foreseeable future. What is also clear for every age group, those close to and those well distanced from retirement is importance of making concrete decisions. There should be long-term plans for money if you are younger and short-term plans for those that are older. One thing both groups can expect -and should expect – safe doesn’t have returns. It never really did. We can be forgiven for not noticing.
Only risk, measured and researched will provide any real returns. So the world hasn’t changed all that much in the last three or four decades: we have though. We have to find a way to get our “risk-on” again and when we do, we will have learned a lesson from those heady days before everything went awry. Skepticism is healthy. Asking questions is good. But recoiling in fear won’t build the retirement plan you think you want.
Related posts:
Excellent post. As an advisor to individuals, 401(k) plans, and 401(k) participants I have seen the conversation shift away from required return and focus more on risk of loss. This is not a bad thing to the extent that many folks were too heavily invested in equities (either directly or via Target Date Funds).
None the less, in order to fund a desirable retirement, investors of all ages need to take some risks. The key is to balance downside risk with the level of potential return they need to reach retirement and maintain purchasing power throughout.