News from the retirement front hasn’t been cheery for some time.
Study after study has depicted would-be retirees as financially ill-prepared to enjoy their golden years in leisure.
The market crash, the burst housing bubble, a lack of savings coupled with an inability to save for retirement, and the disappearance of defined benefit plans, largely replaced by defined contribution plans, have all been cited as factors in the “retirement crisis.”
Lately the retirement industry has been battling criticism on a new front — costs — since a “Frontline” documentary hit the airwaves in April.
According to the documentary, retirement is a “gamble”: high fees on many mutual funds within 401(k) plans cut yields, costing plan participants a substantial portion of potential retirement funds — a portion large enough to make the difference between comfortable retirement and the need to keep working.
The industry has not taken the slams lying down.
Several organizations have responded, challenging the documentary’s assertions. Among the reams of information that the industry is promoting is new research indicating Americans are better off for retirement than previously thought, according to mutual fund industry trade group the Investment Company Institute.
Its study concluded that, “on average, more-recent generations of households have higher levels of resources to draw on in retirement than previous generations.”
That runs counter to the statistics cited by the “Frontline” documentary that a third of Americans have “next to no retirement savings at all” and that half of Americans say they can’t afford to save for retirement.
But according to Brian Reid, chief economist at ICI, “By the time people approach retirement, 80 percent of people have some form of employer-based retirement savings.”
ICI’s website says those data are from the Survey of Consumer Finances, conducted by the Federal Reserve Board, indicating that about 80 percent of near-retiree households hold retirement resources in defined benefit or defined contribution plans or IRAs.
Reid also said 401(k) plans make up an important part of retirement assets, along with Social Security and home ownership — the two primary retirement resources for Americans.
He added that, while the documentary “seems to have suggested that retirement security has been declining over time,” in actuality “it’s the opposite,” with the passage of ERISA in 1974 weeding out “a lot of the bad plans” and the portability of the 401(k) plan “so much better a design for a more mobile workforce, since it can really benefit workers as long as they participate.”
Blog entries from ICI published since the documentary aired also highlight data that show 401(k) plans are popular with Americans and that they “appreciate(e) … the basic features of this form of retirement saving, including the opportunities for individual choice in investing, the ability to defer taxes on savings, personal control of retirement assets, and the ability to save automatically paycheck by paycheck.”
Another blog entry challenges the notion that the 401(k) plan became dominant as a retirement savings vehicle “by accident,” saying that such plans “have evolved to become an effective building-block in providing retirement security to millions of working Americans.”
It also says the documentary’s characterization of mutual fund fees in 401(k)s as high is mistaken, saying that plans provide “educational materials to participants through mailings, brochures, website information, and tools and calculators” that are “important and valuable.”
All this comes at a cost — though not as high a cost, it says, as the documentary indicated.
“I think the “Frontline” special raised some interesting points,” Alison Borland, vice president of retirement solutions and strategies at Aon Hewitt, said. “When we look at the marketplace and the organizations with which we work, there are actually a lot of things going very well.
“Employers are strong and growing, especially large ones, focusing on financial wellness, transparency, and maximizing what their participants can receive (in retirement). We’re seeing a lot moving in a positive direction.”
Aon, she said, has not seen “participants bailing out, or a lot of activity in call centers” as a result of the documentary.
“That said,” she added, “there’s certainly room for improvement. Some of what was highlighted was true for smaller plans, and we don’t generally operate with smaller plans — but those employers don’t have the resources and time to actively manage fiduciary issues.
“When we look at what our clients (larger employers with larger plans) are doing, they are taking great care in delivering high value to their employees.”
Dallas Salisbury, president and CEO of the Employee Benefits Research Institute, also took issue with the documentary.
“In keeping with our mission we spent hours with the ‘Frontline’ contractor on issues, and I was interviewed on camera for an extended period. Limited by time the ‘Frontline’ program was not able to present a full picture. … As the program showed, it is possible to have a low-cost 401(k) with solid low-cost investment options if you shop effectively. The data suggests that most participants are in such well designed and built plans.”
Whichever side of the debate wins out in the minds of employers and employees, one important takeaway — perhaps the most important message at present — is that participation in a retirement plan means, statistically, that participants will have more money set aside for retirement than nonparticipants.
As ICI’s Reid said, “We’re supportive of looking for ways to enhance the system, but to focus on the negative deflates people from actually enrolling and participating in 401(k) plans, and that’s the worst outcome. There are ways to enhance and build up what we have, but don’t dissuade employers from offering, or participants from participating. That doesn’t enhance retirement security.”