For the retirement industry, there wasn’t much to gloat about in 2011. 401(k) account balances shot to record highs in the first quarter, and by the end of September, they retreated to 2010 levels – or lower.
Household net worth isn’t any better than it was during the financial crisis, yet perhaps the silver lining is that through all this, workers are still contributing to their 401(k)s.
Still, in order to move forward, we need to reflect on what’s passed. To quote Ralph Waldo Emerson, “Finish each day and be done with it. You have done what you could; some blunders and absurdities no doubt crept in; forget them as soon as you can. Tomorrow is a new day; you shall begin it well and serenely and with too high a spirit to be encumbered with your old nonsense.”
I hate to end the year on a sour note, and I know I'm not listing them all, but there are plenty of media missteps, lawmaker oversights, and plan misjudgments below:
1. Fuzzy math on tax reforms
Remember the Obama-backed “Gang of Six” and the subsequent run-up to the supercommittee epic fail? Somewhere in the midst of the country’s biggest embarrassment of 2011, lawmakers considered eliminating, or at least scaling back, one of the biggest savings incentives for 401(k)s: tax benefits.
Number crunchers at ASPPA estimate the real potential savings of slashing this so-called “tax expenditure” comes in at almost 75 percent lower than figures from “budget hawks.”
Brian Graff, ASPPA’s executive director and CEO says the association’s analysis, “takes the same long-term view that economists employ in evaluating other forms of investment,” and it shows that “the short-term window used in Washington budget scoring overstates the cost of retirement savings incentives – and therefore the savings that would result from slashing these incentives. 401(k) plans and similar plans are the best way for Americans to save for the future. If we reduce the incentives for workers to save through these plans, we will send millions of low- to moderate-income workers into retirement with little savings.”
2. Auto enrollment gets a bad reputation
As a journalist, I can’t stress enough the power of a headline. The Wall Street Journal’s July story, “401(k) Law Suppresses Saving for Retirement,” elicited an alarming angle based on the most pessimistic assumption of a highly researched topic.
The article suggests the Pension Protection Act of 2006 was a catalyst – a legislative side effect, if you will – for a savings shortfall. Though the law encourages companies to automatically enroll participants, the default 3 percent deferral rate traps investors into an inertia that undermines their eventual retirement income.
Still, “The headline of the article reports that auto-enrollment is reducing savings for people. What it failed to mention is that it’s increasing savings for many more-especially the lowest-income 401(k) participants,” says Jack VanDerhei, research director for the Employee Benefits Research Institute – the same think tank that WSJ sought out to provide research on the subject.
EBRI isn’t the only thought analysis that proves auto-enrollment is more of a boon than bust for participation, and in turn, for retirement security. Fidelity reports half of their 401(k) participants are now in plans that offer auto-enrollment, up from 16 percent five years ago.
And, let’s face it, most people wouldn’t be saving at all if it weren’t for their 401(k). Fidelity also reports 55 percent of plan participants wouldn’t save without it and 20 percent have no savings outside the workplace plan.
3. Walmart becomes a bellwether for fee disclosure
Walmart had a banner year for bad press, at least when it came to benefits. The largest private company practically eliminated health coverage for new workers and raised premiums for current employees. On top of that, the company just settled a $13.5 million lawsuit with employees over its slim 401(k) investment menu and unreasonably high fees.
Walmart, the suit claimed, failed to squeeze its plan administrator – Bank of America Merrill Lynch - for lower fees, according to AARP, which cost employees roughly $200,000 over the course of a career.
As fee disclosure becomes a game changer for 2012, plan sponsors should are taking note of the landmark lawsuit.
4. Is 80 really the new 65?
I’m all for raising the retirement age but at what point does the age debate become outright ludicrous? Wells Fargo’s “80 is the new 65” study crammed its way into retirement coverage for weeks, as the company reports 25 percent of middle-class Americans think they’ll need to work until age 80 to live comfortably in retirement.
But Steve Vernon, a CBSNews contributor argues, “While many Americans should be able to work into their late 60s to mid 70s, I'm afraid by the time most boomers hit their 80s, they'll be physically unable to work due to their unhealthy lifestyles. And most employers won't want them anyway, preferring to employ youngsters in their 40s, 50s and 60s. I think many people are simply using the ‘work to death’ solution as an excuse to avoid the necessary planning and saving they need to do now in order to have a comfortable retirement later.”
There’s a sensitivity factor that no investor or advisor can neglect, but are afraid to admit – it’s okay to have a retirement plan.
5. CLASS dismissed
I think we all saw this coming. The solvency time frame for this voluntary insurance plan had to be 75 years before it could be put into place. The federal long term care plan was betting on healthy beneficiaries to pay as much as $3,000 in monthly premiums, according to the Associated Press. LTC costs have long been underestimated, but no one will doubt it's hard to commit to such extraneous costs, healthy or otherwise.
The program’s ultimate demise was a setback for Obama’s health reform package and his promise to pay down the deficit by $80 billion using premiums collected under the CLASS program.
The LTC solution remains at large.