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The GRABot BAG
by Sherrie E. Grabot, CEO

August 2009
Another Day, Another Crisis

You probably remember the old joke about the country doctor. “Doc, lately I’ve been noticing this sharp pain in my neck,” it begins. The doctor looks thoughtful for a moment. Suddenly, he stomps on the patient’s foot. “Now, you don’t notice it anymore, do you?”

The emotional state of the American consumer may be in a similar condition. For the last year or so we’ve all been feeling pain and anxiety about our battered retirement savings. But with the heated debate about healthcare reform dominating the news, it seems as if we’re so anxious about the cost and uncertainty of medical care that we’ve forgotten about our account balances – for a while at least.

Given the stay-the-course nature of prudent long-term investing, that may be a good thing. (Although it reminds one of another old joke about ignorance and apathy...) In this office, however, we remain resolutely focused on retirement investing. And lately we’ve seen some interesting developments flying below the radar of public opinion. Several, I’m glad to say, are even cause for optimism.

Today’s top story: Attention-deficit policy disorder
If you follow mainstream news, you’d be tempted to think that the looming crisis of inadequate retirement savings – on the front page during the market meltdowns – has somehow disappeared. In its place is a looming crisis of healthcare costs.

On the other hand, today’s news media have been loudly accused of directing or creating popular opinion, rather than simply reporting it. A recent Schwab study indicates how true that may be. It found that 51% of investors think about their finances every day, up from only 27% before the market collapses of the last year. And 46% plan on paying closer attention to their investments. It seems healthcare is not the only thing on people’s minds after all.

According to a Schwab financial consultant, these findings indicate “keen interest in their financial health and a growing optimism that the economy may be turning around,” as well as “a much larger interest in understanding the many nuances of their finances.” The report recommends timely financial education to take advantage of these sentiments.

Thinking vs. Doing
We wish them luck with that education campaign, but we’re not optimistic. Another survey, also from Schwab, is not so sanguine about how thinking actually translates into doing. It found that only 39% of mutual fund investors had made any changes to their portfolios since the stock market began its decline. It’s been two years since then. They should at least have rebalanced at some point.

Perhaps they were pursuing a buy-and-hold strategy a little too seriously? Nope: only 31% spoke with a broker or advisor regularly. And 36% did not know which mutual funds they owned. This portion of the Schwab organization recommends greater one-on-one engagement, rather than education, as the best course to raise some of these numbers.

Mixed Messages from Employers
Both these studies involved mutual fund investors of all kinds, not just those in retirement plans. The news in the K plan world is likewise mixed. Another study, this time from Fidelity as reported in Workforce, found that while 3% of participants decreased their contributions during Q2 of this year, 4.7% actually increased them. A Fidelity spokesman indicates that according to their numbers, this represents the reversal of a longer trend.

Workforce went on to cite another study from Watson Wyatt from the employer perspective that found no net increase in contributions. Rather, it found a decrease in overall contributions among 30% of employers. This report also offered some really scary news: 36% of plan sponsors have seen an increase in hardship withdrawals, and 37% in loans.

Speaking of employers, the piece offered further indications that the employer match was out of the picture, and likely not to come back for a while – a subject discussed in this space recently. According to yet another study, from Diversified Investment Advisors, it’s not for lack of money: while matches are down, overall spending on employee benefits is up by 1.3%. But given the horror stories about health care costs driving employers out of business, it’s easy to guess where that money is going.

Old News
What do nearly all the employers and consultants quoted in these stories have in common? They recommend that this is a great time to provide better investor education. Or engagement, perhaps. Either way, they’re talking about approaches that depend on entirely active, voluntary change in behavior on the part of participants.

That hasn’t worked very well before, as we’ve been saying for a long time, so there’s little reason to think it will now. In the Workforce story Lori Lucas of Callan Associates offered an interesting reason why employers may not even try to increase participation: because those who still offer a match don’t want to spend the cash this year.

A Better Way
Fortunately, there is a better way. A report in Money Management Executive (quoting, you guessed it, one more study – this one from Deloitte) offers encouraging statistics on the adoption of various automated approaches to boosting participation. These range from the now mundane automatic enrollment, to generational segmentation of their plan designs (37%), retirement readiness audits (37%), and automatic contribution rate increases (42%). Recognizing how heavily employees’ futures have come to depend on employer-sponsored plans, 57% also make employees immediately eligible for matching contributions (if they’re still available, anyway).

All these numbers are significantly up from last year, which shows that there is indeed some news that isn’t about health care. And some of that news, at least, is good.

~~ Sherrie