GuidePost - Vol. 3, Issue 6 2007

The GRABot BAG
by Sherrie E. Grabot, CEO

August 2007
Back to School Special

Young people across the country are going back to school again, as they have since time immemorial. We all remember what that feels like: dismay that summer is ending; excitement about new people and places; and best of all, new bookbags and school supplies (including either a calculator or a slide rule, depending).

You probably also remember the first-week ritual of the summer-reading book report. Well, these days much of our reading comes from the email at work, and lately we’ve been seeing a lot of it. What follows is a roundup of the summer’s reports, surveys, and predictions. And if you’ve been on vacation lately, be forewarned: Some of it is scarier than the latest Harry Potter.

Crisis? What isn’t a crisis?

The title of a recent study asks “Is There Really a Retirement Savings Crisis?” The work is based on Boston College’s National Retirement Risk Index, and the answer is something of a foregone conclusion: the analysis found that nearly half of working Americans will be unable to enjoy their current living standards in retirement. This assumes they work until age 65 and then spend everything they have, including home equity, to maintain 65% to 85% of their current income.

The numbers include 35% of those born between 1946 and 1954 (up from less than 20% in 1992), 44% of those born between 1955 and 1964, and nearly half of those born later. There are plenty of arguments to be made about the details of this analysis, or any other. But the general trend is clear enough. “The Retirement Savings Crisis” is very real, so much so that it ought to be in capital letters instead of quotation marks, and in every newspaper.

One thing that has actually changed for the better is that those most at risk seem to be more aware of their predicament. According to a USA Today/CNN/Gallup survey, 46% of savers say they will have to postpone retirement longer than expected, and 44% expect to live less comfortably.

It’s not hard to find reasons. One is that despite the evolution of tax-deferred plans as most people’s primary source of retirement income, and the fact that total assets are at an all-time high of $16.4 trillion, participation is more or less stagnant. Among those who do participate, 44% of the survey respondents feel they are doing only a fair or poor job of managing their investments.

Target-date fund missing targets?
Potential solutions abound, but are many have been hitting some unexpected speed bumps. Target-date or target-risk funds, for example, have experienced a gold rush of sorts ahead of upcoming DOL guidance that is expected to approve them as default “safe harbor” investment solutions for automatic enrollment. However, they are not as golden as some would hope.

As some critics point out, target-date funds are commonly misused as one asset among many, which defeats their purpose as a ready-made, all-in-one portfolio. Also, they tend to invest too conservatively as the participant approaches retirement age – when a more aggressive strategy would better provide for the coming years or decades. They often depend too heavily on equities, ignoring a range of non-traditional assets. Finally, different target-date funds can use radically different formulas, and as one observer put it, “they can’t all be right.”

A professional advisor could make a case that any process which steers participants into one of a handful of target-date funds may not really be advice at all, in the traditional sense. Picture a slick online interface that asks exactly one question: “What is your current age?” – then out pops the recommendation. But it certainly is better than the alternative, especially if it promotes the spread of automatic enrollment.

Speaking of auto-enrollment, this concept has also run an interesting course lately. After a long wait for the starting bell, it went out of the gate at a gallop, but now seems to be stumbling. According to Fidelity’s annual report on the state of the 401(k) industry, only 2% of participants are now automatically enrolled. (The good news? That’s a 95% increase.) This is despite continuing, widespread optimism, the fact that when they get a chance, they really work: Fidelity also found that plans with auto-enrollment had 28% greater participation.

Fiduciary surprises
All in all, this summer’s 401(k) bestsellers leave one with a sense of “two steps forward, one step back.” This is especially true of fiduciary liability – that perennial elephant in the room in any discussion of retirement plans. Handing some responsibility for retirement to the employee was one of the reasons for the development of these plans in the first place. And yet, a recent study showed that there is still “an immense level of unnecessary risk” related to retirement, and that 59% of all labor-related lawsuits are concerned with ERISA issues.

Which only goes to show how critical it is that we get all the above problems figured out, and soon.

~~ Sherrie