Private retirement plans falling short

The majority of younger Americans will reach the end of their
working careers ill-prepared for retirement, a study undertaken by
the US government’s General Accounting Office has revealed. The
solution may, however, come as an even bigger blow to the private
retirement planning industry. Charles Davis
reports.

A US government study promises to stir debate by casting serious
doubt on the ability of the linchpin of the private retirement
plan, the 401(k), to provide for the retirement needs of younger
Americans. Disturbingly, the study by the General Accounting Office
(GAO), the investigative arm of the US Congress, found that
17-year-olds finishing high school in 2008 have about a one in
three chance of having any money at all in a 401(k) or similar plan
by the time they reach retirement.

For low-income workers, who are less likely to save, the outlook is
even bleaker. According to estimates made by the GAO, 63 percent of
those in this category will have no money in a 401(k) or similar
plan.

The study found that while 401(k) plans give participants the most
freedom to secure their future, they are being vastly underused by
a very large segment of young workers. According to the GAO report,
some economists and financial advisers consider retirement income
adequate if it replaces 65 percent to 85 percent of pre-retirement
income.

The study found that 401(k) plans already are having problems
making inroads among middle- and lower-income workers. The GAO used
data from the Federal Reserve Board’s 2004 Survey of Consumer
Finances and found that the median account balance for all workers
in 401(k)-style plans was a mere $22,800. For workers between the
ages of 60 and 64, the figure was just $60,600 – a mere fraction
required to meet a middle-class retiree’s needs.

Need for training and assistance

The study’s findings suggest companies should step up training and
assistance for employees, and already have re-ignited the
possibility of a national 401(k) plan, partially funded at birth by
the government. Senator Jeff Sessions has suggested legislation
establishing such a plan, which would be a huge blow to the private
retirement planning industry.

The pension reform bill signed into law by President Bush in 2006
makes it easier for companies to automatically enrol employees in
401(k) retirement savings plans and select investments for them.
But more education is critical, especially for young people, about
the need to save, to save often and to save for their entire lives.
The GAO report highlights the huge gap between what Americans, who
have seen the old pension plan model shrink significantly, need and
what many are able to save on their own.

Retirement savings accumulated by today’s young workers will be
able to replace just 22 percent of their pre-retirement income five
decades from now, the report found. A typical worker will be able
to replace only about $18,784 of annual income, with the
highest-income workers able to replace about 34 percent of
pre-retirement income and the lowest-income workers only about 10
percent, the GAO estimates.

Prepared for the House Education and Labor Committee Chairman
George Miller, the GAO study projects that 37 percent of workers
born in 1990 will have not have any funds saved in 401(k)-style
accounts by the time they are prepared to retire in the 2050s. The
report follows a series of hearings by Miller’s panel into the
401(k) system, including inquiries into boosting participation
rates and lowering service fees.

Miller is the primary sponsor of H.R.3185, the 401(k) Fair
Disclosure for Retirement Security Act, which would require service
providers to disclose any potential conflicts of interest and that
plan administrators make annual disclosures of fees charged to plan
participants.

Senator Rob Andrews, chair of the panel’s Health, Employment, Labor
and Pensions Subcommittee, suggested in a briefing that Congress
may examine new steps in 2008 to boost 401(k) participation, with
possible options including potentially eliminating eligibility
waiting periods, making automatic enrolment programmes mandatory
for employers, or offering governmental matches to lower-income
workers’ contributions.

“Today’s GAO report is a clear indication that a large portion of
Americans are heading toward retirement insecurity,” Andrews said
in a release. “With projections showing almost 37 percent of
workers reaching retirement with zero plan savings, the need for
action is imperative.”

The GAO found the percentage of workers without any retirement
savings decreased from 36.8 percent to 17.7 percent when those
workers were granted instant eligibility to participate in a 401(k)
plan, and from 63 percent to 30 percent among low-income workers.
Just 8 percent of workers in the lowest-income quartile currently
participate in a 401(k)-style savings plan, the GAO found.

“Unless we act now, too many workers just starting their careers
today will unfortunately face a less secure retirement than did
many of their parents,” George Miller, chairman of the House
Education and Labor Committee, said in a statement. “Today’s
workers will more likely struggle to make ends meet during
retirement than previous generations.”

Insufficient savings

The study found that savings levels often are not sufficient to
finance retirement. The typical account balance rises to $50,000
for workers between ages 55 and 64. But a 65-year-old who bought an
annuity with this amount could get just $4,400 a year in
income.

Making matters worse, the study found that pre-retirement spending
often reduces account balances. Of the 21 percent of plan
participants who had received lump-sum distributions from a former
employer, 47 percent cashed out completely and 4 percent spent part
of the money. Ending such leakage could push up retirement income
by about 11 percent, according to the study.

The GAO report also outlined other possible actions to boost
savings, including an automatic individual retirement account in
which employers make payroll contributions to retirement accounts,
and expanded tax credits for saving. It also noted that several
states are exploring the idea of setting up low-cost retirement
savings plans that states would make available to employers that do
not sponsor plans of their own.

“The bad news is that unless patterns change, this is very bad news
for tens of millions of people,” said Andrews, who is chairman of
the House pensions subcommittee. “The good news is that we have
time to do something about it.”