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Weak Economy Slaps 401(k)s

The release of the Federal Reserve’s 2010 Survey of Consumer Finances (SCF) is a great opportunity to reassess how families are doing with their 401(k) plans. The SCF is a triennial survey of a nationally representative sample of U.S. households, which collects detailed information on households’ assets, liabilities, and demographic characteristics.  The 2001, 2004, and 2007 surveys showed some improvement in terms of 401(k) participation, contribution levels, investment choices, and cashing out.  But median holdings of those approaching retirement remained low even at the peak of the market in 2007.  Not surprisingly, the picture is bleaker in 2010.

401(k) plans shift the responsibility for retirement saving from employers to individuals.  An individual must decide whether to participate, how much to contribute, how to invest those contributions, whether to roll over or cash out balances when switching jobs, and – at retirement – when and in what form to withdraw the funds.  People tend to make mistakes at every step along the way.  In response, Congress enacted the Pension Protection Act of 2006 to make 401(k)s work better through automatic enrollment, automatic increases in the default contribution rate, and default enrollment in balanced funds, which are typically Target Date Funds that automatically reduce equity holdings as participants approach retirement.

Whereas, in the wake of the Pension Protection Act, the 401(k) system was starting to function better, the 2010 SCF suggests that progress has slowed in the weak economy.  Despite the increase in auto-enrollment, the percent of eligible employees not participating ticked up.  At the same time, contributions slipped and leakages through cash outs and hardship withdrawals increased.

Combine these trends with financial turmoil, and it is not surprising that median 401k)/IRA balances have changed little since 2007, despite the likelihood that members of the new cohorts have spent more of their working lives covered by a 401(k) plan.  A typical household approaching retirement (age 55-64) had only $120,000 in 401(k)/IRA holdings.  (IRAs are included because these balances consist primarily of rollovers from 401(k) plans.)

Households 45-54 actually had lower balances in 2010 than in 2007 – $70,000 versus $75,000, and younger households held only $35,000 in 2010 compared to $44,000 in 2007.  These numbers are not adjusted for inflation. With prices rising more than 5 percent between the 2007 and 2010 SCF, balances have fared even worse in real terms.

The 401(k)/IRA balances of $120,000 for those households approaching retirement will produce only a modest supplement to Social Security.  If a couple purchases a joint-and-survivor annuity, they will receive $575 per month.  This $575 is likely to be the only source of additional income, because the typical household has virtually no financial assets outside of its 401(k) plan.  Many participants are likely to be surprised and disappointed when they find out how little their 401(k) plans provide.

The answer to the 401(k) challenge is twofold.  First, 401(k) plans need to function better.  Despite the Pension Protection Act, the share of plans with auto-enrollment appears to have stabilized at around 40 percent.  And employers typically auto-enroll only new employees, so the effect on participation is very gradual.  Moreover, auto-enrollment only works if it is combined with auto-escalation in the default contribution rate.  Unfortunately, only 34 percent of plans with auto-enrollment have automatic escalation, which means that many who are enrolled stay at low contribution rates.  Hence, the best way to make 401(k) plans work better is to make auto-enrollment and auto-escalation in the default contribution rate mandatory.

Second, even with automatic provisions, the combination of 401(k) plans and Social Security is unlikely to do the job.  The time may have come to consider returning 401(k) plans to their original position as a supplement on top of Social Security and employer-sponsored pensions. Given the demise of traditional employer pensions, such a rearrangement would require a new tier of retirement accounts.  This additional protec­tion would be helpful to those reliant solely on Social Security and to those with 401(k) plans where – for one reason or another – balances end up being very modest.


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    • the full interview, refer to this YouTube clip potsed here last night (and you can avoid the minute-long commercial that the CBS website makes you suffer to

    • he sent a check directly to me, then pikecd up his meat, and no check. He finally said he didn’t like the price of the meat, didn’t like the way the processing was done and he was not paying. I just got done taking him to small claims court and won when he didn’t show up. I received a judgment, obviously, and have a lien on his house at the present time, and the sheriff actually hauled him into court to give us information on his assets, which we are in the process of garnishing his bank account and wages (this is a person who can easily afford to buy 3 steers, and is just being stupid). While I have had to outlay to date $115 to collect, I will get that amount back plus some as my judgment includes costs and interest.Next year, we aren’t selling to this friend or any of hers while she usually sells 2 steers for us easy, it’s just not worth the headache, although, if the individual buyers from previous years calls me directly and gives a deposit of $100 for a half of a half or $200 for a half, I might consider it, as most of the buyers have been very good.Guess it’s just a chance you take and most people, when receiving a summons from court because they didn’t pay, would up and pay before actually getting to the hearing date (in Ohio, its $25 to file in small claims which is not bad). I just happen to have a person that thought we would drop it. You just need to make sure in the Complaint you fill out that you ask for court costs, fees and interest.Sorry this was so long, but we learned a valuable lesson this past fall.Kris

    • The plain truth is that most Americans don’t begin to appreciate what their retirement needs will be until it’s too late. As to why that occurs, it’s far more complicated than some of those posting here would suggest. It’s easy to say that they’re just being irresponsible. Many simply will not have sufficient assets to get themselves to a healthy position as far as retirement assets are concerned. They’re dealing with the pressing financial needs of the day and suddenly, or so it seems, retirement’s staring them in the face. Someone here posted about putting three kids through college, and being left with the scraps. Whatever the reason, more and more folks are coming up short after having done what they considered to be the right things.

      And there’s this. What serves as our educational system doesn’t begin to adequately teach Americans the concepts of personal finance and money management, the compelling reasons for early and regular saving, the ins and outs of investing, or the wonders of compounding and what it can do for your future. These are not folks who are likely to be posting on a WSJ blogsite. Indeed, most of them won’t even really have a clear understanding of what’s meant when they hear the term “retirment portfolio”. It’s a bit more complicated than simply assigning the phenomenon to personal irresponsibility.

    • Low interest rates on bonds.. CDs.. Look I am retired. Barely getting by.. With intertest rates this low and no where to turn to increase this as income. I am dipping each month into my principal.. At this rate I will have no bonds Cds left in four years. I will have to turn to public assistance to live.. Bernanke and the Federal reserve is creating another group of people that are going to need assistance.. With his policy he is robbing us blind.. keeping interest rates near zero.. and rewarding people to take risk,, At 80 I am not in this position to take risk.. We will need the bail out…I am sorry to say..

    • A comment about the small amount of savings for people 55-65.. Well there are things as importanr as Children.. College for our three children was 240K We paid for..You know what you have to make before you net this out to pay for thiS.. That is the reason..for us..

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  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.