401(k)s Still Fall Short As A Retirement Strategy
Aircraft mechanic Jere Herr of Indianapolis prepares for work. - Aircraft mechanic Jere Herr of Indianapolis prepares to go to work while seated in his recreational vehicle, parked in a lot at the Los Angeles International Airport. He lives by the airport to save money for the future. One-third of Americans will have to rely on Social Security benefits — not pensions — in their retirement years. (Kevork Djansezian / Getty Images)
Most American workers were woefully unprepared for retirement before the financial crisis struck. The stock market crash that followed made things even worse.
"The financial crisis certainly laid bare how inadequate our retirement savings system is," says Alicia Munnell, the director of the Center for Retirement Research at Boston College. She points out that one-third of all workers will likely end up depending on Social Security for all of their retirement income.
That's partly because only about half the U.S. workforce is covered by some type of employer-sponsored retirement plan. And most of those are 401(k) plans, which usually require employees to contribute and make investment decisions.
Low Balances In Retirement Funds
Even before the financial crisis, the average balance in 401(k)s for workers nearing retirement was just $78,000. After the market plunged, that average was reduced to about $56,000, according to Munnell's calculations. That's just not enough for a comfortable retirement, says Roger W. Ferguson Jr., president and chief executive officer of TIAA-CREF, the financial services company that offers retirement plans for employees in the academic, medical and nonprofit fields.
"Many families, at this stage, are short $250,000 from what they're going to need," Ferguson says.
To help meet the challenge, President Obama wants to require businesses that don't offer pensions or retirement savings plans to automatically enroll their workers in Individual Retirement Accounts (IRAs). The plan would also provide tax credits to partially match the workers' contributions.
Mandated Retirement Savings?
In recent years, the limits on contributions to IRAs and 401(k)s have been raised. In addition, the government has encouraged businesses that do offer 401(k) programs to enroll workers automatically, unless the workers specifically decline. Ferguson says it's a good first step. But Munnell believes these initiatives aren't enough.
"I also think we need a whole new tier of retirement income, both for those people who have to rely solely on Social Security, and for those people who have 401(k) plans," Munnell says.
She thinks it should be government-mandated savings, but she says it would likely need to be managed by the private sector to be politically palatable.
"Her critique is absolutely right," says John Bogle, who founded the Vanguard Group, one of the nation's largest mutual fund companies.
Bogle says the government would have to set the structure of any new program and ensure that the fees charged by fund managers are reasonable. Retirement money managers should have a fiduciary responsibility and a legal requirement to act in the investor's best interests, he says, adding that this is something in short supply today. Bogle also says that it shouldn't be easy to withdraw funds from retirement savings.
Planning For The Future With More Education
TIAA-CREF's Ferguson is skeptical of constructing a new tier of retirement savings.
"I think it's very hard in this day and age to talk about another government mandate," Ferguson says. He believes a serious effort at education, coupled with nudging people in the right direction though automatic enrollment and automatic saving increases, could solve much of the problem.
Ferguson says many people don't realize that they need to save between 10 percent and 14 percent of their pre-retirement gross income to have a reasonable income replacement when they retire.
"If we talked much more about it, people would wake up and recognize how much they have to do," Ferguson says.
Finally, he says, more attention should be paid to getting people to convert at least part of their retirement nest egg into a guaranteed lifetime income stream so they don't outlive their retirement savings.
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STEVE INSKEEP, host:
Over the past couple of days, we've been considering how the financial crisis has affected retirement savings. Many people, of course, have been joking about how they'll never get to retire now. Some people are not joking. But even before the market crash cracked many nest eggs, the U.S. retirement system was in trouble. NPR's John Ydstie reports.
JOHN YDSTIE: Most American workers were woefully unprepared for retirement before the financial crisis struck. Now they're even worse off.
Ms. ALICIA MUNNELL (Director, Center for Retirement Research at Boston College): The financial crisis certainly laid bare how inadequate our retirement savings system is.
YDSTIE: That's Alicia Munnell, director of the Center for Retirement Research at Boston College. Munnell points out that a third of all workers will likely end up depending on Social Security for all of their retirement income.
Ms. MUNNELL: Only half the people are covered by any type of employer-provided plan.
YDSTIE: And most of those are 401(k) plans which require employees to contribute and make investment decisions.
Even before the financial crisis, the average balance in those 401(k)s for workers nearing retirement was just $78,000. After the market plunged, that was reduced to about $56,000, according to Munnell's calculations. That's just not enough for a comfortable retirement, says Roger W. Ferguson, Jr., president and CEO of TIAA-CREF, the financial services company.
Mr. ROGER W. FERGUSON, JR. (President/CEO, TIAA-CREF): Many families, at this stage, are probably going to be short maybe $250,000 from what they would need, ideally, for retirement.
YDSTIE: That number comes from a study done by the consulting firm McKinsey and Company.
To help meet the challenge, President Obama wants to require businesses that don't offer pensions or retirement savings plans to automatically enroll their workers in IRAs, Individual Retirement Accounts. He would also provide tax credits to partially match the workers' contributions.
In recent years, the limits on contributions to IRAs and 401(k)s have been raised. And in addition, the government has encouraged businesses that do offer 401(k) programs to also automatically enroll workers, unless they specifically decline. Ferguson says it's a good first step. But Alicia Munnell believes these initiatives aren't enough.
Ms. MUNNELL: I also think we need a whole new tier of retirement income, both for those people who have to rely solely on Social Security, and for those people who have 401(k) plans.
YDSTIE: Munnell thinks it should be government-mandated savings, but she says it would likely need to be managed by the private sector to be politically palatable.
Mr. JOHN BOGLE (Founder, Vanguard Group): Her critique is absolutely right.
YDSTIE: That's John Bogle, who founded the Vanguard, the big mutual fund company.
Mr. BOGLE: Among the things we need, if we get the government to set the structure, is a government agency that says you can only participate in the -you, the money manager - if your fees are reasonable.
YDSTIE: And, says Bogle, retirement money managers should have a fiduciary responsibility, a legal requirement to act in the investor's best interests. That's something we fall short of today. Plus, he says, easy withdraw from retirement savings shouldn't be allowed.
But TIAA-CREF's Roger Ferguson is skeptical of constructing a new tier of retirement savings.
Mr. FERGUSON: I think it's very hard in this day and age to talk about another government mandate.
YDSTIE: Ferguson believes a serious effort at education, coupled with nudging people in the right direction though automatic enrollment and automatic savings increases could solve much of the problem.
Mr. FERGUSON: Many people don't realize that they need to save between 10 and 14 percent of their pre-retirement gross income to have a reasonable income replacement when they retire. And I think if we talked much more about it, then people would wake up and recognize, you know, how much they have to do.
YDSTIE: Finally, Ferguson says, more attention should be paid to getting people to convert at least part of their retirement nest egg into a guaranteed lifetime income stream so they don't outlive their retirement savings.
John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright National Public Radio.
