America, Welcome to the Poorhouse by White Jane

Author:White, Jane [White, Jane]
Format: epub, mobi
Publisher: FT Press
Published: 2009-09-16T05:00:00+00:00

• Waiting until age 35 increases the contribution rate to more than 17%.

• Waiting until age 40 increases it to more than 23% of pay.

• Finally, waiting until age 50 requires nearly a five-fold increase from the rate at age 25, to 48% of pay. Needless to say, this over-50 requirement flies in the face of the meager current $5,500 limit on “catch-up contributions” currently allowed by the IRS.

Mutual Fund Companies Are Unaware Their Clients Can’t Retire

Unfortunately, few pension advocates appear to have consulted pension actuaries to figure out what’s needed—and therefore they don’t appear to know how far behind most Americans are. Nor to my knowledge, have any mutual fund executives lobbied Congress to make 401(k) plans work—this is particularly outrageous because they are stewards of 401(k) participant assets—especially since reform would mean they’d have more assets under management. Nor has anyone proposed mandating that employers contribute more to each account so that the “co-pay” required by the participant isn’t unaffordable for those who have waited until their 30s or later to start contributing—that is, most of us.

In a November 2006 Wall Street Journal article titled “As the 401(k) Turns 25, Has It Improved with Age?” a spokeswoman for the Investment Company Institute offered the oblique assessment that “the 401(k) is hitting its stride” without offering evidence that participants are on track to achieve an account balance equal to ten times their final pay.

In addition, while several of the large mutual fund companies produce annual reports on the 401(k) assets under management with detailed statistics on account balances, asset allocation, loans, and withdrawals, I’m unaware of any report on whether their clients are on track to reach a nest egg goal of ten times final pay—or any goal. And while many of them have launched “target date” mutual funds that gradually shift the asset allocation of the participants’ accounts from stocks into bonds or cash equivalents as the participant gets closer to retirement, there is no advice to investors on the contribution rate needed to meet that target, nor is the target ever defined.

In a rare departure, Fidelity Investments issued somewhat of an alarm, albeit one that you had to dig hard to find, in its November 2007 report on corporate defined contribution plans. In the report, Fidelity introduced a “new measure of retirement readiness” called the Retirement Income Indicator, which “measures employees’ progress toward accumulating sufficient workplace savings to replace at least 40% of their preretirement income.” Why such a low replacement ratio? Because Fidelity assumes that participants can count on other sources of income such as a rollover IRA and/or a defined benefit pension for the rest of the income stream. Fidelity should know better, especially when it comes to the topic of shrinking defined benefit pension coverage, given that Fidelity froze the pension plan covering its 32,000 employees in March of 2007.

At least Fidelity attempts to use a measure of retirement readiness and acknowledges that a portion of its participants face bleak financial futures. In contrast,

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