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Tuesday, March 29, 2011

TEXPERS in the News; Retirements in Question

For the record, we need to make note of a few media stories of interest: one about TEXPERS, one about our members investment performance, and one about the prospects of a looming retirement crisis.

Yesterday, we distributed a press release about our annual conference, which is wrapping up tomorrow. You can read the entire release here on a “Financial Content” website.

Also, Pension & Investments picked up on our release and asked us for the Performance Study mentioned. We provided them with it and I had a brief conversation with the reporter. That story is located here. It describes the average investment performance achieved by our funds in the last few years. It’s a testament to good management at the local levels.

And finally, the story “Retirement May Be Out of Reach” appeared yesterday in Baseline magazine, about a survey from the Employee Benefit Research Institute indicating that “many workers say they aren’t at all confident about their retirement prospects” and “are dipping into their retirement savings to pay for day-to-day needs.” We’re going to be saying a lot more about retirement security based on some other research we are privy to right now. And we also are going to look into the EBRI report to see whether it breaks down the responses from people in 401(k)s and those in defined benefit programs. Stay tuned to this channel. – Max Patterson

Wednesday, March 9, 2011

401(k)s – Not a Public Policy Panacea

Our readers know that this blog has asked its readers to examine closely and impartially the evidence about the value of 401(k)s in the face of political claims that these retirement vehicles are the only feasible public policy solution to city and state budget shortfalls. In fact, there is very little real evidence that 401(k)s are all that they are claimed to be, either in terms of delivering retirement security to employees or closing government budget shortfalls.

Legislators would do well to look closely at recent articles in the New York Times and Wall Street Journal that provide evidence 401(k)s are falling short in meeting the retirement needs of generations of Americans previously employed in the private sector. Why would we want to saddle public employees with similar failed policies?  

Consider some excerpts from the Feb. 19 WSJ article “Retiring Boomers Find 401(k) Plans Fall Short”:

The 401(k) generation is beginning to retire, and it isn’t a pretty sight….

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for the Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings….

In general, people facing problems today got too little advice or bad advice. They didn’t realize that a 6% annual contribution, with a 3% company match, might not be enough. Some started saving too late or suspended contributions when they or their spouses lost jobs. Others borrowed against 401(k) accounts for medical emergencies or ran up debts too close to their planned retirement dates.

Initially envisioned as a way for management-level people to put aside extra retirement money, the 401(k) was embraced by big companies in the 1980s as a replacement for costly pension funds. Suddenly, they were able to transfer the burden of funding employees' retirement to the employees themselves. Employees had control over their savings, and were able carry them to new jobs.

The New York Times on March 3 ran a story “Making the Most Out of Less” in their Retirement section. A few excerpts:

Retirement specialists say a cascade of unhappy factors has dimmed retirement prospects

¶Not only do fewer than half of private-sector workers participate in a pension or 401(k) plan, but corporations are moving more workers from traditional pensions to the considerably less generous 401(k). At the same time, public-sector workers, many of whom still have generous defined-benefit pensions, are seeing those plans come under attack in New Jersey, Wisconsin and other states.

¶Even many Americans with 401(k) plans face problems because workers have a median of about $30,000 in their accounts, while the 55-to-64 age group just before retirement has a median of $78,000, not much to live on in addition to Social Security if you retire at 65 and live 20 more years. As a result of the stock market’s slide during the recession, 401(k) plans lost $2.8 trillion in value, tumbling by more than 40 percent — though Wall Street’s recent rise has allowed them to recoup more than half that loss.

Alicia H. Munnell, director of the Center on Retirement Research at Boston College, said 401(k) plans were far from ideal for retirement, not least because they are so complicated and many Americans have little investment expertise. Workers, she said, have to decide whether to join their employer’s plan, how much to contribute, how to invest their contributions, when to rebalance, what to do about company stock, whether to roll over accumulations when changing jobs and how to withdraw the money in retirement.

“Every step along the way, a significant fraction of participants make serious mistakes,” she said.

In many corners, there is such knee-jerk antipathy toward public sector employees that the counsel of many third-party observers, to be very careful about mid-game changes to mostly successful defined benefit programs, are going unheeded. It’s our hope responsible legislative officials will dig in deeper to the dynamics now exhibiting themselves with regard to the performance of 401(k)s. They aren’t delivering the promised benefits to a whole generation of people and shouldn’t be considered the primary fix to budget problems for state and local government employee pensions. – Max Patterson