GuidePost

The GRABot BAG
by Sherrie E. Grabot, CEO

June 2009
Retirement is not optional. Neither is saving for it.

Economic hardship is forcing many people to make hard choices. Borrow a fortune to go to State, or stay at home and register for community college? Downsize the house and move into a condo? Or for those nearing retirement age, put your plans on hold and keep working for a few more years?

One “easy” target for cost-cutting is retirement savings. It’s bad enough when employees short-change their future by not funding their employer-sponsored plans or IRAs. It’s even worse when companies do the same by canceling their matching contributions. But that’s exactly what many employers are doing. The worst part may not even be about the money: it’s message they’re sending about the importance of 401(k).

Slashing costs, shaking confidence
A recent piece in Money Magazine leads off with a chilling statistic: as many as 25% of employers have eliminated matching contributions to their 401(k) plans since September of 2008. Of course, companies have been cutting virtually everything else as well – from office coffee, to travel expenses, to headcount – so it’s not exactly a surprise.

It’s also hardly new. In fact, employer matches seem to disappear every time the economy slides. But each time around, the state of American retirement is a little more precarious, making the loss of a match all the more troubling.

Kicked when they’re down
As the Money piece points out, the impact of employer cost-cutting is often magnified as employees respond by reducing or eliminating their own contributions. Times are hard, and it’s understandable that people are cutting expenses. (Although those losing a match are better off than many Americans almost by definition: at least they still have jobs.) A participant might even justify quitting with some sort of doubtful reasoning: “since my account has tanked, I might as well cut my losses and stop contributing.”

Whatever the logic, these decisions make matters even worse by violating the fundamental “buy low, sell high” rule of investing. Because equity prices are typically at their lowest during such hard times, these are precisely the moments when a dollar invested will be likely to earn the highest long-term return.
 
There’s nothing anyone can do about the state of the markets, apart from contemplating that historical averages will eventually even things out. This is small comfort to people who are planning to retire fairly soon. Those who have the misfortune to retire during a bear market may see their retirement income reduced by as much a third, which turns out to be a significant flaw in some target-date funds (and to be fair, virtually any other strategy with substantial market risk).

Two tough choices
Broadly speaking, there are two things a retirement investor can do to repair the damage done: delay retirement, or save more.

Working longer before retirement is perhaps the most obvious solution, if not the most appealing to many of us. A recent study argues in detail that adding just four years to the average age of retirement could have a dramatic effect on the numbers, changing the ratio of working years to retirement years from 1:2 to almost 1:3. Interestingly, bumping that age up from the current 62 to 66 would simply bring us back to the average for 1962, so perhaps the issue is at least partly one of expectations.

However, and an older workforce does raise concerns about declining health, decreased productivity, and a range of less tangible social issues. Choosing when to retire also depends on other factors besides financial planning. Plus, changing your long-term plan isn’t really an action. It’s more of an intention. Again, small comfort there.

Right here, right now
Boosting the savings rate, on the other hand, is a very concrete step that can be taken right now. It’s certainly not without pain, because the money has to come from somewhere. But it will have a real and fairly immediate effect on the growth of retirement savings. In our experience, raising the savings rate is by far the most common recommendation that GuidedSavings offers to participants to help them ensure adequate retirement income – in a recession, or otherwise.

Because any lost employer match is likely to come back when company performance improves, a higher savings rate will eventually benefit from a positive multiplier as well. Besides the loss of a few percent of pretax income, the main barrier to this solution may simply be confidence in the system.

Picking up the slack
Put on your communication hats and sharpen your pencils, because this is part where we talk about our responsibilities as professionals in this business.

Despite the fact that plan sponsors are cutting their matches, this is not the time to abandon our national commitment to 401(k). Despite what participants may be thinking when they look at their account statements, the concept of 401(k) hasn’t suddenly “gone bad.” And whether you call the mix of pensions, tax-deferred savings plans, private assets, and Social Security a “retirement system” or choose not to, it’s the only system we’ve got, and will likely stay that way for a while.

Tell the people
Those of us who deal with plan participants, therefore, need to deliver a gentle reminder: there really is no free lunch. You are responsible for your own financial well being, which includes retirement. If you hand this responsibility over to someone else – whether Social Security back in 1935, or employer-sponsored pensions in the following decades – problems inevitably arise. Costs go up and benefits go down. 

The risk in the long run is that no one else has your interests in mind. Government, by definition, must consider the best interests of everyone at once (including companies and lobbyists). Employers, by definition, have divided loyalties among shareholders, customers and employees. You are the only one looking out for you. So take heed and find the best way to save, match or no match. Usually that will still be the 401(k) plan, with its higher contribution limits and employer oversight.

Mind the message
Our concerns about cutting employer matches go beyond the money. The deeper problem is the message companies are sending to their employees: that saving for retirement somehow becomes optional when you feel you can’t afford it. For an employer, we see it as a regrettable breach of faith. For an employee, it’s a disaster.

To limit the damage, be careful with your messaging. You don't want to sacrifice employees’ long-term financial security for a short-term financial fix. If you have to cut, consider adding financial advice and/or managed accounts to help employees figure out what to do during this period of change. Encourage them to keep saving and emphasize the importance of doing so. (A reminder about “buying low” might help, too.) Keep on reiterating the message to boost employees' confidence in the 401(k) plan.

It is said that a recession reveals what accountants do not. It also tends to reveal other truths that people don’t like to think about. One of them is that the responsibility to save falls to participants – where, in truth, it’s always been. It’s in everyone’s interest to look at the situation clearly, and take it seriously.

~~ Sherrie