Retirement Fears Rise During Weak Economy

Retirement used to be a good word. It conjured thoughts of leisure time, traveling and enjoying the rewards of a lifetime of work.

But for many who saw their retirement savings dwindle during last year’s market crash, the word now evokes fear.

“Individuals approaching retirement are scared,” said Braden Hill, a financial adviser with Pinnacle Hills Financial Group in Rogers.  

According to Hill, 89 percent of workers with some kind of retirement fund lost money in the past year. The average loss, he said, was 28.3 percent.

While younger workers will have time to recover from the losses, many workers who were approaching retirement now have to reshape their plans for the “golden years.”

Hill said there are likely a lot of people who had a retirement date in mind but have chosen to continue working in order to boost their savings.

“The plans people had two years ago are probably not the plans they have now,” he said.

According to a survey by the Employee Benefit Research Institute, 28 percent of workers said the age they expect to retire has changed in the past year. Of those, 89 percent said their expected retirement age has increased. Their primary reasons for delaying retirement are the unstable economy and to make up for losses in the stock market.

But even before the financial crisis, many Americans did not have sufficient retirement savings.

According to a March 2009 report by the Center for Retirement Research at Boston College, the average 55 to 64-year-old should have a 401(k) balance of $320,000. However, at the end of 2007, the average 401(k) of a person nearing retirement was about $78,000.

Before 401(k) plans became the primary source of retirement funds, they were mainly viewed as a supplement to employer-funded pension plans.

In 1983, 62 percent of workers with retirement coverage had a traditional pension only, while 12 percent had 401(k)’s.

Today, about 20 percent have a traditional pension and two-thirds only have 401(k)’s.

Unlike the employer pension plan, the 401(k) requires employees to make their own investment decisions. But research shows employees are not always good investors.

401(k) Mistakes
According to the Employee Benefit Research Institute, 82 percent of employees are confused about where to invest or which funds to use.

Hill said most individuals do not have the knowledge or the time to manage their investments.

“Employees need some help, they need some guidance,” he said.

Even through the market turmoil, Hill said employees only made an average of three changes to their asset mix and they probably did it at the wrong time.

Since 2001, the average 401(k) balance has only increased 13 percent, he said.

Stan Eden, of the Eden Financial Group in Fort Smith, said 401(k) participants need to be reevaluating their investments.

“A lot of people come in and they’ve been doing the same thing for several years,” he said. “There’s this old school of thought of buy and hold, and that’s just not the case anymore.”

Buying and holding is not the only mistake employees make with their 401(k)’s.

Eden said some people don’t contribute as much as they should and therefore don’t take full advantage of the employer match.

“You should always contribute up to the company match,” he said. Otherwise, employees are leaving money on the table.

But many companies, including, J.B. Hunt Transport Services Inc. of Lowell, Regions Bank, Kennametal Inc., Washington Regional Medical Center and Stephens Media, minimized or suspended their 401(k) matches during the recession.

Eden said employees should continue to contribute to their plans even if the match has been suspended.

“It’s still beneficial to be putting back,” he said. “This is not the time to stop contributing to your 401(k).”

Eden advises his clients to reallocate their investments based on their risk tolerance.

 “The closer to retirement you are, the more secure you should be with your investments,” he said.

When planning for retirement, Eden said the general rule of thumb is that a person will need about 70 percent of their annual income.

“If it’s not going to be around 70 percent, you may need to work longer,” he said.

Retirement Reform
The fact that millions of Americans do not have enough retirement savings has sparked a debate over 401(k) reform.  

The Obama administration recently announced a package of initiatives aimed at increasing savings.

Automatic enrollment plans, in which employees are automatically signed up for an employee-sponsored 401(k) plan unless they explicitly ask not to participate, are one way the administration is trying to encourage employees to save for retirement.

The U.S. Government Accountability Office released a report in August analyzing how various policies could prevent “leakage” from 401(k) accounts.

The main forms of leakage are hardship withdrawals, cashouts of account balances at job separation and loans.
To help participants recover from a hardship situation, the GAO recommends Congress consider changing the requirement for the sixth-month contribution suspension following a hardship withdrawal.

To educate participants about their plan benefits, the GAO recommends the Secretary of Labor encourage plans to include information on their Web sites about withdrawals, loans and cashout provisions, including the long-term consequences.

Another recommendation is to provide participants with a projection of their account balances under different scenarios.

Some experts argue that the 401(k) plan should be scrapped altogether or at least reduced to a supplement to a different plan.

The Center for Retirement Research report concludes that “the time may have come to consider returning 401(k) plans to their original position as a third tier on top of Social Security and employer-sponsored pensions.”

Hill said he doesn’t agree that 401(k) plans have failed.

“I think the reason people think that is because they’re not getting proper advice,” he said.

Hill said he thinks employers would lay off more workers before going back to the old school pension plans.

“I just don’t see how that would work right now for a couple of reasons,” he said. “One is life expectancy and two is the cost of it.”

With people living longer than they used to, it’s become much more expensive to provide them with a portion of their income until they die.

Since the 401(k) plan takes the fiduciary responsibility off the company, employers should provide employees with the proper advice on how to manage their accounts.

“That’s what they truly need,” he said. “They need more than just a computer program that spits out a pie chart that says this is your asset allocation or a hypothetical return that estimates how much you’re going to have at retirement.”