Saving for retirement is getting more complicated every day. As opportunities increase, so do pitfalls. Clients may need more help than ever in keeping their retirement plans on schedule.
Take the events of the past few months. Market losses, layoffs, company bankruptcies, and new legislation have added variables to the retirement picture. Advisors have a tremendous opportunity to assist their clients in the management of their 401(k) assets; they also may have new opportunities to play a more active role in 401(k) plans themselves (see related article on page 20). They can also exert influence and provide advice to their business-owner clients on their companies' retirement savings plans.
Surveys on Americans and retirement have produced some very disturbing data of late. According to the 2001 Transamerica Retirement Survey (available at www.ta-retirement.com), people are willing to cut back on their current lifestyles to increase retirement funding, and already contribute to retirement savings plans at work and on their own. However, 40% of the survey's respondents say they do not know how much money it will take to make them feel secure in retirement. Not only that, but nearly 40% say that they guessed at the figure they are using for a savings goal.
"A fairly significant proportion of workers feel they will be secure with modest amounts," says Matthew Greenwald of Matthew Greenwald & Associates, which conducted the survey. After pointing out that "retirement can easily last 20 or even 30 years," he notes dryly, "You're more likely to hit a target if you have one."
For most people, it's not beyond their abilities to save. Greenwald points out that in a separate retirement confidence survey, participants were asked whether they could save an additional $20 for retirement per week. "Most say they can. We then ask what they would give up," says Greenwald. "They'd do less entertainment, eat out less, smoke less. They'd do less fast food. If people saved more for retirement, the main thing they'd give up is cholesterol."
But they're not saving, according to a National Bureau of Economic Research working paper (7521) by Stephen F. Venti and David A. Wise, economists at Dartmouth and Harvard, respectively (see www.papers.ssrn.com/abstract=216449). Many Americans--across all wealth levels--just don't save, the researchers found. Windfalls such as inheritances and setbacks such as high medical bills don't account for this failure, they say. High-income people were not exempt from failing to save for retirement.
The bottom 20% of each income group in the study, except for the very highest one, reported no wealth at all or even a negative figure. Of those who did save, most saved little compared to their financial position. According to the statistics, the median level of assets in the highest income decile was less than $400,000; the mean level of assets for the same group was less than $600,000. Knowing that many families in the U.S. have assets much higher than those levels, these numbers point to a large quantity of families that, high-income or not, have few assets beyond their salaries.
In fact, even though nearly all had the opportunity to do so, only about half the households in the survey took advantage of savings opportunities in the form of 401(k)s or other vehicles.
Catherine Collinson, senior VP at Transamerica Retirement Services, finds the combination of guesswork and cluelessness revealed in its survey "terrifying." "Every provider out there offers tools and calculators to arrive at an amount [needed for retirement]," notes Collinson. "There's an abundance of Web-based tools, as well as collateral information, to help people. What we found is that only a third of the people have completed their worksheet or used one of those tools."
And that brings us to allocation. While people try to stay on top of what their 401(k) plans are doing (71% say they're currently very involved in monitoring their retirement savings, according to the Transamerica survey), the recent Enron collapse left thousands of Enron-stock-laden employee pension accounts empty. Says Greenwald of employees' claims that they check on their investments, "There's a fair amount of effort involved in checking, but taking a temperature doesn't cure your cold or the flu."
The Importance of Being Prepared
The good news, Collinson believes, is that people are aware of the need to save for retirement. But there's a caveat. The survey revealed that 57% would choose a job with excellent retirement benefits and a minimum salary requirement over a job with an excellent salary and poor retirement benefits. While not a negative approach in itself, it makes one wonder whether those who pick a job based on retirement benefits are fully cognizant of the ways they can save for retirement on their own--IRAs and other avenues are open to those with and without retirement benefits at work, yet according to the NBER working paper, many people fail to take advantage of them.
"Only 10% [of survey respondents] said they had consulted a financial advisor in calculating how much they'll need for retirement," says Collinson. She also calls attention to the fact that changes in the laws governing retirement plans apparently have not sunk in with the general public. "There are some fantastic opportunities under EGTRRA [Economic Growth and Tax Relief Reconciliation Act of 2001]. It's really important that we get the word out on catch-up contributions and the low-income tax credit."
Small businesses have something to gain, too, by implementing retirement plans. Not only will they benefit from the tax credit, but as Greenwald points out, "Employees would feel more valued."
The Transamerica survey reveals some interesting data on business owners' attitudes toward employee retirement plans. Seventy-four percent don't think retirement plans are all that important to their employees, though employees themselves rate them very highly. Employers also may not be zeroing in on the right factors when choosing retirement plans. The survey showed that the most important factor for employers in selecting a plan was "responsiveness of administrative services" (78%). Factors that might be expected to be important to employees, such as performance of the plan's investments, the variety of investment options available, and the quality of employee educational materials, were lower on the employers' requirement list, at 77%, 50%, and 46%, respectively.
How You Fit In
If you haven't already, educate your clients about the need for diversification. Employees whose company plans rely heavily on company stock need some kind of safety net; if it can't be inside their 401(k), it should be outside. Make sure your clients, both employees and employers, know about the options for retirement savings that they're not already using. Let them know about their tax benefits. And if they're turning 50 this year, make sure they're aware of the catch-up provisions of EGTRRA.
Make sure your clients caught on the wrong side of downsizing or in the midst of changing career paths know what to do with their retirement assets. Explore the opportunities for you or your firm to be involved in giving 401(k) advice, whether through pursuing education opportunities in seminars for prospective clients or in advising plan participants in partnership with plan providers. You can have a direct beneficial effect on many people this way, in addition to growing your business. People who need advice in selecting investments for their 401(k) plans will be glad to have a real advisor help them.--MYS
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