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More Baby Boomers’ 401(k) Plans Not Financially Ready for Retirement

6 min read

No surprises here: While many, even most, baby boomers haven’t saved enough for retirement, those who are clients of financial advisers are in much better shape.

In the late 1970s, the shift began from government and employers’ pension plans to employees controlling their retirement accounts through tax-deferred 401(k)s, said Andy Eschtruth, a spokesman for the Center for Retirement Research at Boston College.

“There’s nothing necessarily wrong with that,” he said. “What really matters is what people do with their 401(k) plans and how much they save.”

Baby boomers between the ages of 55 and 64 haven’t squirreled away that much money for retirement, Eschtruth said.

“The typical household in that age group … has a total 401(k) retirement saving combined with their IRA saving of $110,000,” he said. “And $110,000 is not that much in the grand scheme of things. It would be able to produce roughly $500 in monthly income.”

But not all money mangers are worried. A handful of money managers in Arkansas told Arkansas Business recently that their clients mostly will be financially ready for retirement.

“I have people coming to me five to 10 years before they’re ready to retire,” said Cindy Conger, CEO and president of Conger Wealth Management in Little Rock. “If they’re seeking the help of a financial adviser, they’ve already been pretty good at saving.”

Pat Miller, president of Millennium Capital Advisors LLC of Little Rock, also said that the baby boomers with whom he deals with are in “pretty good shape.”

But he added that people in general don’t save enough for retirement.

The Center for Retirement & Research at Boston College also made that finding.

“Half of today’s working families are ‘at risk’ of not being able to maintain their standard of living once they retire,” according to the center’s July report, “How Much Should People Save?”

“The result is not surprising given that half of private sector workers do not have an employer-sponsored retirement plan and that many who do have a plan save relatively little.”

A study by the Employee Benefit Research Institute of Washington also found troubling news: Employees “in all income brackets — including the highest — may run short at some point during their retirement,” according to a June news release.

Eschtruth, of the Center for Retirement, said there is hope because more employers have established automatic enrollment policies for 401(k)s.

A report issued in June by Vanguard of Valley Forge, Pennsylvania, which has nearly $600 billion of defined contribution assets under management, said 40 percent of its participants solely invested in an automatic investment program, compared with 22 percent at the end of 2008.

That’s good news for Eschtruth because to get out of the automatic investment programs, an employee has to opt out. Without the auto enrollment, many employees had the good intention of participating in a 401(k) plan, but never got around to signing up for one.

But “those types of automatic plans will set a default contribution rate for the employee unless the employee changes it,” Eschtruth said. “If the employer also automatically increases that default contribution rate over time, that could be a very powerful tool for boosting savings.”

The Decline of the Pension

For years, pensions were the top retirement vehicle for employees. In 1979, 28 percent of private-sector workers had a defined-benefits pension plan and 7 percent had a defined-contribution plan, such as a 401(k), according to the Employee Benefit Research Institute. But by 2011, 31 percent of all private-sector workers participated only in a defined contribution plan while the number of private-sector workers with defined-benefits plans had plummeted to 3 percent.

“Pensions are rapidly becoming a thing of the past,” said David Lee, the CEO and founder of Mach-1 Financial in Bella Vista. “Unless you’re retired from the military or certain government jobs, you’re not going to have a pension.”

The 401(k) plans were first seen as supplemental savings accounts to pensions, Eschtruth said.

In the 1980s, though, new companies were choosing 401(k)s for their employees instead of pension plans. Both the employees and the employers seemed to like the move, Eschtruth said.

Employers didn’t have to worry about the risk of a pension plan. “They were no longer having to provide a certain benefit based on their workers’ earning history, regardless of what the economy was like for them,” Eschtruth said.

And employees liked the portability of the 401(k), which could follow them from job to job.

“And the stock market did very well between 1982 and 1999,” Eschtruth said. “It made it easy to see rising balances in your account.”

Failure to Participate

But there were several problems with employees controlling their own 401(k)s, Eschtruth said.

While a majority of employees participate in a 401(k) plan, between 20 and 30 percent don’t bother to contribute, he said.

For those who do participate, the rate they invest probably isn’t sufficient. Some employers might think that contributing the full employer matching contribution would be a good start, but that won’t cover employee needs in retirement, Eschtruth said.

“Our analysis will show that a typical employee would need more than you would get just from maximizing your employee match,” he said.

The Center for Retirement Research found that a savings rate of about 15 percent of income would be enough to reach retirement income targets.

Lee, of Mach-1 Financial, said people have to do a better job of planning for their own retirement.

“It’s going to be important for most people to seek out qualified advisers who specialize in retirement income planning to make sure they can adequately handle challenges,” he said. “It’s going to be a challenge for a lot of people, especially if they have not done a good job of accumulating funds in their 401(k)s in their working years.”

The Great Recession also buffeted account balances. In 2007, the average account balance of a 401(k) was $65,454, according to EBRI. The value dropped 30.4 percent in 2008. It has climbed since then, but at the end of 2012, the latest figures available, the total value was just $63,929.

Even for those who have saved money, the temptation to tap their 401(k) accounts early proves irresistible, Eschtruth said.

When employees switch jobs, they can cash out their 401(k) accounts. “They can take out hardship withdrawals for true emergencies or things that might not be such true emergencies but they didn’t plan well for,” he said.

They can also take loans out from their 401(k) accounts, which is “another way in which some money leaks out of the system,” Eschtruth said.

The center’s research showed that by the time an employee is 60, early withdrawals from 401(k) accounts can erode about 20 percent of the assets.

Coming Up Short

When people realize that they won’t have enough money to keep up their standard of living in retirement, some options remain.

Those in the lowest-income quartile brackets are most likely to come up short, especially in the first year of retirement, according to the June news release from the EBRI.

The EBRI study found that 43 percent of the people in the lowest-income quartile would run short of money in the first year of retirement, if they retired at the age of 65. But by the 10th year in retirement, 72 percent of that group would run short of cash.

But of those in the highest-income quartile, only 2 percent are projected to run short of money within a decade of retirement.

Those facing a shortfall can do a number of things to save their 401(k) accounts, including working longer.

“That’s what I’m seeing more than anything else is that people are not retiring as early, simply because they don’t feel old yet,” said Conger, the Little Rock money manager. “I’m almost 66 and don’t plan to retire for at least another 10 years.”

Eschtruth agreed that working longer would be better for employees’ nest eggs. The monthly Social Security check for an individual retiring at 70 rather than 62 will be 75 percent higher.

But others who might not be able to work past the age of 65 will have to revise their retirement dreams.

“It’s not as if they would starve or even be below the poverty line,” Eschtruth said. “What we’re talking about is a situation in which people are disappointed and frustrated because they envisioned a certain life for themselves in retirement that … they’re not able to sustain. But people can adjust.”

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