The current economic climate has brought a new uncertainty to the retirement plans of millions of Americans. New pressures, such as business failures, unemployment, reduction or elimination of 401(k) matches, and the freezing of defined benefit pensions, are endangering traditional, employment-based ways of funding retirement. At the same time, Americans are experiencing an ongoing decline in value of their largest asset, their homes, which may make a sale or reverse mortgage unattractive.
Social Security, the social safety net designed to help those who have inadequate retirement savings, is now largely accepted to be unsustainable at current levels, with a reduction in those benefits likely. For one-quarter of current retirees, Social Security is their only source of income, and for almost three-quarters, it is their primary source. That dependence is expected to grow as baby boomers retire. Demographic shifts are combining with the economic crisis of late to force a shift in the way Americans view retirement. Many retirees are returning to work, while “phased” retirement is being advocated as a way to ease workers into retirement.
Attempting to improve retirement prospects for Americans, Congress enacted the Pension Protection Act in 2006, which was designed to encourage retirement savings. Data from that year showed that, of the 64 percent of salaried employees whose employer offered a retirement plan, only 47 percent participated. The Act implemented changes such as automatic enrollment in 401(k) plans and automatic escalation of participants’ contributions, which are now in effect. New qualified default investment rules have resulted in a massive movement away from stable value assets and into diversified instruments. This shift has been evident in the popularity of “target-date” mutual funds, which are designed around a worker’s expected retirement date.
The feedback that members of Congress are receiving from their constituents regarding diminished retirement prospects may result in further changes aimed at helping retirees. Advocates of reforming the current system of voluntary retirement plans view the current economic climate as a chance to declare these types of plans “a failed experiment.” New proposals might include mandated or default savings plans to which both employers and workers would contribute. The changed approach could result in a greatly expanded (and possible mandated) market for personal finance products and services for employers and workers. The best outcome of the recent economic turmoil, for employees and for advisors, may be an increase in the American consumer’s interest in saving for retirement.