Retirement in uncertain times

The current turbulence in the financial markets, prompted Motley Fool a financial advisory firm, to republish an article they ran a year ago on the more and more elusive goal of a secure retirement. Along with the article they had a link to a Frontline PBS television show on the perils of do it yourself retirement investing. Here is the link: http://www.pbs.org/wgbh/pages/frontline/retirement/view/

The Frontline story on retirement investing focused on the major shift from defined benefit plans to defined contribution plans and the increased risk that poses to employees that are in these programs. Bottom line is that corporations have shifted not only the cost of retirement cost burden to employees, they have shifted more of the risk to employees. As the Frontline story emphasizes, the 401k plan was originally intended to be a supplemental retirement investment vehicle along with the traditional retirement plans that offered a defined monthly benefit. What has occurred over the last 25 plus years is a massive shift by corporations to make 401k's the only method to save for retirement. Why is this? Corporations found they could save enormous amounts of money by shifting more of the costs to employees. The study cited in the Frontline program stated that corporations went from funding 89% of employee pensions to only 48%. The employee contribution jumped from 11% to 52%.

The state of Nebraska did an exhaustive study of defined benefit plans vs. defined contribution plans and found that the former plans provided a much greater pension to employees that defined contribution plans. One key problem with defined contribution plans is that the average employee is no match for the financial expertise of state pension programs like CALPERS which employ hundreds of expert financial advisors to manage their $ 250 billion dollar fund. In another study, it was found there was a huge disparity in how individual employees did in managing their fund. The difference in annual investment increase ranged from a low of 4% to a high of over 30% on average. And it was the higher paid employees who did the best job of managing their 401k's. What this means is that many lower paid employees will find it more unlikely that they will have enough saved for retirement and will depend even more on Social Security as their primary income after retirement. Compounding the problem is that employees treat 401k's as rainy day savings account's and periodically raid them for other expenses which draw down the funds and also incur penalties. Also employees are not even taking advantage of the maximum contributions that they can make and they miss out on the matching funds their employers make.

Several retirement financial advisors consulted for this story advised saving a minimum of 15-18% annually split between the employee and the employer. The actual rate of savings is about half that. This is not good news for millions of American's who will find they don't have enough money to retire and will be forced to work longer then they had planned.

Other disturbing points made in this documentary were the ease with which companies like United Airlines can go into Chapter 11 bankruptcy and unload their employee pension obligations on the Federal government. This hurt the United employees since their monthly pensions were reduced by an average of 1/3. Plus they had to give massive givebacks to United to even keep their jobs - Salaries for United flight attendants were also reduced by 1/3. Capping this story off is that many fortune 500 companies have underfunded pension plans, so the promised they have made to employees about their future pension benefits are in question.

What can employees do to be financially secure: Contribute the maximum amount each year to your 401k plan. Study the financial options available within the plan and discuss them with other employees who may be more knowledable about finances, or pay for a financial advisor on a hourly rate to look at your financial portfolio and advise you on your options. Resist the temptation to withdraw funds early. Save outside your plan where ever possible using the Roth IRA option and/or regular IRA option depending on your employment situation. A financial advisor can tell you in more detail the IRS regulation governing such investment vehicles. Good luck.