By MARY DEIBEL
Scripps Howard News Service
March 16, 2006
Yet with company after company freezing or ending traditional pension plans in favor of 401(k)s, workers confront a brave new world of retirement planning in which they should ask: "What do I have to save, and how should I invest it, to make up for the monthly check my pension was supposed to provide for life?"
The answer: You need to save lots and invest wisely, Temple University retirement expert Jack VanDerhei reports in a new study for the Employee Benefit Research Institute.
To be sure, the answer depends on individual factors including age, income, tenure with the firm, pension type, investment choices offered by its replacement and investment returns those options earn.
Still, VanDerhei illustrates the problem by pointing to a 50-year-old worker who has 20 years with a company and makes $70,000 this year, when the firm freezes pension coverage and replaces it with 401(k) accounts. So instead of collecting the $35,989 pension on retiring at 65, the freeze cuts that yearly pension benefit to $13,596.
To make up the pension shortfall, the employee's 401(k) contributions each of the next 14 years must be 12.7 percent of pay to produce a 401(k) balance of $299,536 to buy an annuity that will bridge the retirement income gap, VanDerhei calculates.
Yet few Americans save that much that regularly in their retirement accounts, and fewer still get that sort of return, to judge by the Federal Reserve's survey of consumer finances, the most detailed measure of Americans' family wealth.
According to the latest triennial Fed survey released this month, families who saved anything the previous year fell by more than 3 percent, to 56.1 percent of families, while their real before-tax income fell 2.3 percent on average from 2001 through 2003.
At the same time, the percent of families with 401(k)s and other retirement accounts fell 2.5 percent, while the number of workers eligible for these plans dropped as well, and workers ages 55 to 64 - those closest to retirement - had median balances of just $60,000.
"God knows what people will do if they're handed $60,000 at retirement," says Alicia Munnell, director of the Center for Retirement Research at Boston College and a former Federal Reserve and Treasury official.
It would be one thing if this were a new trend; but it follows on the 1998-2001 Fed survey that also found 401(k) accounts came up short even at the height of the 1990s bull stock market.
However, "these plans have shifted all the risk and responsibilities for retirement savings from the employer to the employee, and many employees make mistakes every step along the way," the Boston College center concludes in analyzing the Fed surveys.
Munnell says modest steps may undo some mistakes:
- House and Senate pension bills let employers automatically enroll workers in 401(k) plans with a starting contribution of 3 percent of pay in hopes of reversing the current situation where a third of workers don't participate.
- Also, employers will automatically roll 401(k) balances between $1,000 and $4,000 into Individual Retirement Accounts when employees quit. Currently, only balances of $4,000 must be rolled over into an IRA, so many job-hoppers cash out and have no retirement savings.
A third proposal bothers Munnell, however: The House-passed plan authored by Republican leader John Boehner of Ohio to let the same mutual-fund company that runs the 401(k) plan advise which funds individual employees should buy and sell and how their portfolios should be balanced so long as potential conflicts-of-interest are disclosed.
Boehner warns that the Senate's insistence on independent advisers "equals no new advice for America's workers" if it increases employer costs and red tape.
Senators led by Jeff Bingaman, D-N.M., have blocked the House version before and hope to do so again when House-Senate negotiations resume after the St. Patrick's Day recess. Instead, Bingaman would shield employers from liability if they hire and monitor independent 401(k) investment advisers to work with their employees.
Munnell considers independent advice and education essential if workers handling retirement security risks on their own are to invest wisely and avoid panic, something she confides she knows too well.
"I buy high and sell low," she says. "I do it when I see the Dow plunge even though I know better."
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