Wednesday, May 17, 2006

The Retirement Apocalypse

PBS' Frontline did a special called 'Can You Afford to Retire' focusing on the retirement disaster for so many. I only caught parts of it, but it really drove home how underprepared so many are for the challenge of retirement. (The full video should be available online on Thursday here. I was horrified to hear that the average family balance on a 401(k) account was $29,000. How on earth do people expect to retire with that kind of paltry sum?

Some of the best insight came from Brooks Hamilton, founder of Brooks Hamilton and Partners, a firm that designs 401(k) plans for large clients. Here was one excerpt where Hamilton challenges the notion that employees can manage their own 401(k) plans:
I should have seen it sooner, but my gut told me that forcing novices ... to direct their own investments was not really a good thing to do. I used to ask the CEO, CFO of my major clients, often in an environment, conference room. Some young employee would bring in coffee and all and as they would be leaving, I would ask the CEO, "Fred let me ask you: Would you allow that employee to direct the investment of your account in the 401(k) plan?" And they always thought I was some kind of idiot. It's kind of like, "Don't they teach you anything down in Texas, Brooks? Of course not. I wouldn't let them touch my account with a 10-foot pole." And I said, "But you force them to manage their own! And they are running their money into the ground. They are novices. They don't know what they are doing. They don't know a stock from a bond. They don't know the Indianapolis 500 from the S&P [Standard & Poor's] 500."

Here was an interesting fact Hamilton points out:
The Department of Labor pointed out that when ERISA went on the books, of all contributions that were being made to plans, the worker put in 11 percent; the company put in 89 percent. That was in 1974. Fast-forward to 2000, and the same source of data, the Department of Labor, the same said that of all contributions being made, workers are putting in 51 percent, companies 49 percent. The contributions have also gone down. We're not putting in 6 and 8 percent of payroll anymore; we're putting in far less, maybe half of that, most of it by the worker. So the companies are putting in 1 or 2 percent of payroll, as a general statement, to a 401(k) plan.

And then there was John Bogle, founder of Vanguard, who pointed out that a hypothetical $10,000 investment compounding at 8% annually grows to $140,000 in 65 years, while an expense ratio of 2.5% means that at the end of those 65 years, you'll have made $30,000 while the fund company would have made $110,000! (Bogle calls it the tyranny of compounding costs)

This is a real concern. As a young graduate student, I feel guilty about not contributing to a Roth IRA. Imagine my shock when I discover several staff members at the university who have never heard, let alone contribute to a Roth. An incredible number of people are underprepared, relying on faith of time or a solvent pension plan to see them through. And yet, state and corporate pension plans are phenomenally underfunded. I am often tempted (and have been guilty of) coaxing especially older employees to be more aggressive with retirement investing, but I suspect it often falls on deaf years (plus it means I'm not a particularly popular fella these days!).

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