Data from a new study of the recently retired prepared for Putnam Investment underscores the need for employees to invest more aggressively before retirement, as Social Security, traditional defined benefit and cash balance plans remain the largest source of income for households. This is true despite the fact Social Security is in jeopardy, DB plans are on the wane, and cash balance plans face uncertainty because of litigation.
The biggest surprise for recent retirees, the study states, is having insufficient income and high expenses. Fifty-nine percent of the nearly 2,000 respondents wished they had started saving earlier, while 70% regretted not saving more through their employee-sponsored retirement plan or via an independent plan.
According to a chart assembled for Putnam by Brightwork Partners LLC, a research-based consultancy focusing on retail financial services, the majority of respondents were dissatisfied with how well their employer encouraged them to save. Jan Jacobson, director of retirement policy for the American Benefits Council in Washington, says that's why it's important for Congress to pass bills like the pending Retirement Security Advice Act, which would limit employer liability in providing investment advice to employees. Jacobson expects lawmakers to take another stab at passing the bill in the new legislative session in 2005.
The study also shows Social Security makes up less than 10% of income in households making $125,000 or more per year, but it remains the lion's share of income in households earning $50,000 or less. The largest chunk of income for the upper brackets comes from money saved in defined benefit or cash balance pension plans, both of which have declined greatly as offerings to employees, especially with the legal uncertainties engulfing cash balance plans.
One "practical" solution put forth by Dalbar in a letter to Congress would be to have employees voluntarily forgo their future Social Security benefits in exchange for putting 20% of their Social Security payments into an invested retirement plan. Employees making more than $87,900 would fund the shortfall by making payments for a full year to the federal system.
While Dalbar entered the debate at a time when the Bush Administration is ready to overhaul Social Security, the American Benefits Council asserts that the $87,900 threshold is too low and is politically unattractive. "People have talked about [the $87,900 threshold] a lot," says Lynn Dudley, the Council's VP & senior counsel. The problem is, she says, "you undermine support for the program. People feel it is a tax to have to pay all year rather than after the maximum contribution per person of $4,550 is reached. "
President Bush isn't in favor of raising payroll taxes to fix Social Security, anyway, as has been widely reported. Asks Dudley: Who would voluntarily give up a benefit like Social Security?
Independent Fiduciaries For Retirement Plans
A group of independent fiduciaries recently created The ERISA Fiduciary Guild to help promote the services of independent fiduciaries to plan sponsors and investment advisors in the wake of scrutiny by the Department of Labor (DOL) into conflicts of interest by corporate executives also representing the company's retirement trust.
The ERISA Fiduciary Guild was organized as a nonprofit in October and sells no investment products, has no broker-dealer relationships, and members must have a masters degree or the equivalent. The Guild functions as "a type of 'seal of approval' for a pool of professionals with high fiduciary standards," says co-founder Matthew Hutcheson, who owns Matthew Hutcheson LLC, and independent fiduciary firm outside of Portland, Oregon. "Members must operate under, and agree to, a charter and higher ethical standards than any other profession," he says.
"An independent fiduciary does not have any ties to any parties-in-interest to [any plan governed by ERISA standards]," says Stephen Lansing, president of Sentinel Fiduciary Services, Inc. in Orlando, Florida, and a fellow Guild director. "All too often 'company' and 'fiduciary' business get intertwined in the (company officer-fiduciary) meetings, posing potential conflicts of interest."
The Guild currently has seven members with more "on the way," including the former Western States Regional Director of the Pension & Welfare Benefit Administration, Hutcheson notes. Lansing owns both a co-fiduciary advisory practice and a named fiduciary practice but will " never serve as both at the same time," his colleague Hutcheson notes.
"We get phone calls every day from people--large brand-name manufacturing companies, hospitals, oil and gas companies, professional firms, and lots of law firms--looking to retain my services to be an independent fiduciary for their plan," Hutcheson says. He believes independent fiduciaries are the way of the future, once the professional pool gets sufficiently large enough, and the DOL has indeed mandated use of an independent fiduciary in some instances. Hutcheson says the DOL is aware of the Guild but he has not received any specific comments from the agency.
Find a Guild membership application at www.Fiduciaryguild.org.