Let us resume where we ended last time, with our discussion of the Bipartisan Policy Center’s (“BPC’s”) 146-page report on the future of retirement security (the “Report”). Today we will start to address the six challenges for retirement security and personal savings we mentioned last time.
I. Too Many Americans Lack Access to Workplace Retirement Plans—
- Traditional pensions were defined benefit (“DB”) plans, guaranteeing covered employees (who met a minimum-service requirement), a specified portion of their salary from retirement until death, requiring the employer to properly fund and manage the DB funds.
- Traditional DB plans benefitted individuals who worked for an employer for many years, retired and qualified for benefits based on their last few years’ earnings levels.
- This equation disadvantages workers who are laid off or leave their employer years before they are eligible to retire or whose DB plan is closed by their employer mid-career.
- Their benefits are significantly eroded because they do not include the wage gains between the ending of participation and the actual retirement.
- DB plans were by no means perfect, but they placed the responsibility in the hands of the employer, not the employee.
- 401(k) plans were defined contribution (“DC”) plans that were introduced in 1978 to supplement (not replace) DB pension plans.
- Employers saw that 401(k)/DC plans provided employees an opportunity to accumulate significant sums for retirement, without the cost and risk to the employer of DB traditional plans. The onus shifted from the employer to the employee.
- The assets in private DB plans have dropped since the early 1980s to $2.9 trillion, while DC plan have ballooned to $6.7 trillion. [Report].
- Many state and local governments still provide their employees with generous DB plans, but many are severely under-funded, raising issues as to how they will be paid.
- Only about two-thirds of private sector employees have access to an employer-sponsored retirement plan of some sort, and, of those, three-fourths participate, for an overall 50% participation rate. [Report].
- Many workers in the service industry, in part-time or low-wage jobs or at small firms, lack access to DC plans. A 2012 study found that 71 percent of employees in large (100+ employee) private sector firms participated in a plan, versus 42 percent at smaller firms. [Report].
- Workers who do not have access to workplace plans do not usually open and fund IRAs instead. In 2012, contributions to private-sector DC plans were ten times the size of those to IRAs. [Report].
- The lack of retirement plans is likely due to the complexity and expense to the employer of managing them.
- Much of this burden has been alleviated in the last ten years, through changes such as automatic enrollment, requiring those who do not wish to participate to opt out, and automatic escalation of deferrals, up to a certain limit.
- The nostalgic story of the college graduate going to work for a corporation, moving up the ranks, and retiring forty years later with a full pension, has all but disappeared. Today’s success story is transient, working in numerous situations during his/her career. Rules have placed the responsibility for funding the retirement plan on the employee, with the employer potentially matching deferrals. The retirement assets are housed in a 401(k) plan that can be moved from employer to employer during one’s career and eventually rolled over to an IRA upon retirement. Employees have been given portability of their retirement assets in exchange for the obligation to fund them. This is more consistent with today’s mobile work force, but not necessarily consistent with our cash flows needs during retirement.
II. Many Americans Lack the Resources to Save for Short-Term Needs
- An emergency fund serves as protection against unexpected shocks, but nearly half of individuals polled said that they could not come up with $2,000 in 30 days without selling possessions or taking out payday loans. [Report].
- Section 529 savings plans assist with higher education expenses and health savings accounts assist with health insurance deductibles.
- Leakage from workplace retirement plans, from plan loans, hardship withdrawals and cash-outs, remain significant issues.
- As a general rule, workers who are able to accumulate retirement savings and keep them intact during their working years are FAR more likely to be living well in retirement.
Discount these scary statistics any way you wish, but it seems inevitable that at some point in the near future there will be innumerable Baby Boomers retiring without adequate savings to provide for themselves during their remaining years. How will we fund this additional financial strain?
We will address more challenges in our next submission. Until we meet again… SAVE!
Remember, it’s not what you make that matters…it’s what you keep!
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.