GuidePost

The GRABot BAG
by Sherrie E. Grabot, CEO

January 2009
Looking forward, looking back
The New Year and the new administration have us all looking forward with varying degrees of fear and hope, uncertainty and resolution. But at the same time, many people are also looking backward to do some second-guessing, and possibly a little prognostication.

The first instance is a case of what one might call ‘401(k) buyer’s remorse,’ driven by a belated realization that what goes up will also go down. The second involves today’s nervous tendency to look over our shoulders at the Great Depression. That’s too vast a subject to do more than merely touch on – but surprisingly, it offers a glint of optimism.

Shrinking balances, shifting attitudes
According to a new survey conducted by the National Institute on Retirement Security (NIRS), Americans are deeply concerned about retirement, with 83% worried about the economy affecting their nest egg, and 70% saying it’s harder to retire today than for previous generations. For nearly half, the very idea of a secure retirement has been reduced to “simply having enough money to pay bills or meet basic needs.”

The study also found a significant shift in Americans’ attitudes about a subject we’d all but forgotten: defined-benefit pensions. 87% of people surveyed believed all workers should have a pension of some sort, and among those without pensions, 55% said that having one would ease their anxiety.

Be careful what you wish for
Ah, nostalgia. Way back when DB pensions were going out of style, employees were clamoring for the choice, control, earning potential, and especially the portability of defined-contribution vehicles. (In fact, the accounts’ portability through job changes and layoffs was one of the reasons 401(k) was created.) Sure, not everyone got on the bandwagon immediately, but 401(k) was clearly the Next Big Thing – like flat-screen TVs or smart phones.

Now it seems they want their pensions back. But according to the survey, they also want them to be portable. Plus, they want them government-sponsored in some way, despite the disastrous example provided by Social Security. And it gets more confusing: while Americans want “responsibility/control over their retirement savings and trust themselves most,” they’re less interested in actually managing their own investments, and often see 401(k) plans as a “gamble.”

Contradictory, perhaps, but that’s nothing new – when they’re given control, as well as tools, education, and even managed accounts, participants still don’t use them. What they really want is a little more certainty, and a lot more help.

Good, better, and way out there
One area that could help with both is a major government commitment to strengthen Social Security. Restoring the system to provide a reliable constant in people’s retirement calculations, rather than a variable, would make the inevitable ups and downs of the market more palatable to retirement investors. No wonder fixing Social Security is at the top of the respondents’ wish list.

The next major element is what we’ve been trying to do all along: “fixing” 401(k) so that it truly is a system, rather than an ad-hoc collection of features and capabilities. Bundled advice, automatic enrollment, fee transparency, and true portability for all participants are some key ingredients for a comprehensive solution. (See last month’s modest proposal for a “401(k) Bill of Rights.”)

Thinking way outside the box, former Fed governor Robert Heller proposes that we create a new, parallel financial market just for retirement investors. This “Prudent Investor Exchange” would curb extreme volatility by banning program trading, short sales, margin buying, derivatives, and a host of other market-distorting schemes. The result would be a sort of financial slow lane, allowing ordinary savers to travel toward the same place as the financial daredevils, but with much less risk of a horrible multi-car pileup on the way. Other, equally bold ideas are no doubt on the table, or will be soon.

The phones are still ringing
In the meantime, these remain dark times for the investment advisory business. What’s an advisor to do? As consultant Kenneth Kehrer puts it in a recent article, advisors “are still sticking to the theories, the experience and wisdom of the profession, while clients are losing confidence in them.”

Author Howard Stock points out that the true needs of investors haven’t changed just because the market has. This is especially true for retirement investors, most of whom are still looking at a pretty distant horizon. But in an investment climate dominated by acute uncertainty about nearly everything, and driven far more by emotion than logic, the toughest challenge may simply be to get people thinking rationally again.

Depression or decoupling?
For those who do keep their heads, there might just be some good news on the way in 2009.  An opinion piece in the Economist suggests that investors are positioned for “a rerun of the 1930’s Depression,” pushing equities, bonds, and commodities down all at once. But unlike the 1929 crash, governments have responded quickly, radically, and massively. If some of these efforts work and consumer demand picks up a bit, commodity prices may rise and drive an equity rally.

It wouldn’t take much to beat today’s dismal forecasts. It’s even possible for the markets to decouple from the underlying economy entirely (in a positive direction, rather than our current hysteria). In fact, two of Wall Street’s best years in the 20th century were 1933 and 1935, as the Economist notes with its usual long-term sensibility.

It won’t be easy to convince 401(k) participants that 2009 is a buying opportunity. But judging from the NIRS survey, maybe we won’t have to. Retirement investors seem to have lost their taste for tinkering with their own accounts. Barring a massive shift back to traditional pensions, that may give professional advisors the chance to bring a little more sanity back to investing.

~~ Sherrie