Neglect that spells retirement ruin


Published: Monday, January 24, 2005 at 6:01 a.m.
Last Modified: Tuesday, January 25, 2005 at 2:34 p.m.

Just as President Bush and other Republicans are plowing ahead with plans for personal Social Security accounts and other individualized investment vehicles, employers operating 401(k)s and similar plans are becoming increasingly fearful that their workers aren't up to the job of managing those accounts.

A new survey by Hewitt Associates LLC, a big benefits consulting firm based in Lincolnshire, Ill., finds that only 18 percent of large employers are confident that their employees will retire with enough money to see them through.

And only 12 percent think their workers even understand their retirement benefits and are taking responsibility for their future.

"Many employees are just not actively using the retirement programs that are available to them. Either it's not a burning (issue for them), or they don't feel up to the task," said Lori Lucas, Hewitt's director of participant research.

Companies, having started down this path by terminating, freezing or never having offered a traditional pension, have little choice but to redouble their efforts to persuade workers to invest and to try to do it intelligently.

They see this as the key issue of 2005, Lucas said.

The employer approach, Hewitt found, is to put more emphasis on education, but increasingly, companies seem to be having doubts about its effectiveness. While continuing to talk up participation in 401(k) plans, many are simply making enrollment automatic unless the worker opts out. They are also looking at automatic contribution levels and automatic rebalancing to keep workers from becoming too concentrated in a particular investment area, as happened during the tech-stock boom.

Getting in early and getting a good return are the keys to making 401(k) accounts work.

"It's a question of having time," said David Wray, president of the Profit Sharing/401k Council of America.

Wray's group figures that the key numbers are 8, 8 and 40 - meaning that workers who contribute 8 percent of pay (which may include an employer match) and earn an average return of 8 percent for 40 years will be able to retire with a lump sum equal to 10 times their final year's pay. That sum, the group says, ought to provide for an adequate retirement.

"Ten times final pay gets it done," Wray said. "The issue is the 40 years. You've got to start at 25 to retire at 65."

"We definitely have a challenge," he added. "We've got to get those 20-year-olds in the plan."

The need is likely to become more acute as companies increasingly move away from traditional pensions.

Hewitt found that while most large firms that operate these pensions don't plan to change them this year, more than a quarter - 27 percent - said they will consider excluding new employees in the future. Similarly, 1 in 5 companies is considering switching to a 401(k) or other "defined contribution" plan only.

This means that many of Wray's 20-year-olds will never have a traditional pension.

That may not seem like much of a loss as they read the headlines about troubled older companies trying to "dump" their traditional plans rather than continue to fund them. But at those sinking airlines, steel companies, textile mills and the like, workers can take comfort from the fact that if their pension is $45,000 or less at age 65, they will get that money, thanks to the Pension Benefit Guaranty Corp., the government organization that backs traditional plans.

Of course, many higher-paid workers, such as airline pilots, will get far less than they were promised by their companies - but they will get something, and it will continue as long as they live.

Those who depend on 401(k)s may do very well. They may even have money left to leave to their kids.

But those who don't enroll at a young age, who withdraw their money and spend it when they change jobs, or who borrow from their accounts to pay for what seem at the time to be more pressing demands, will find the 8, 8 and 40 very difficult to achieve.

Today, about 22 percent of retirees get all of their income from Social Security, and about two-thirds get more than half. While there is little doubt that the system itself will be there for today's young workers, many of the proposals to "save" it involve reducing benefits from the levels promised by the system as it is now. Even the private accounts are not expected to prevent some reduction.

So in an era of reduced Social Security and vanishing traditional pensions, today's workers must save early and often to have any hope of a comfortable retirement. And if that means sacrifice now, then sacrifice is what workers have to do. The numbers are the numbers, and barring an economic miracle, there's no way around them.

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