Wikinvest Wire

401k Death Watch

Thursday, November 13, 2008

As if retirement planning (in general) and faith in equity markets (in particular) didn't have enough working against them right now, it seems a small, but growing, number of businesses are foregoing their 401k matching contributions in order to conserve cash (and jobs).

Having left the confines of traditional employment almost two years ago, those year-end five percent matching contributions are sorely missed.

What is not missed, however, are the restrictions that most 401k plans impose along with the constant prodding to fill up those Morningstar style boxes with more U.S. equity funds.

How's that workin' for ya, as Dr. Phil would say.

It seems that the 401k industry is in a rough patch at the moment with world-leader Fidelity Investments announcing huge layoffs and a growing number of plan participants opting to scale back or stop contributing to their retirement account.

Those stable value funds may be their only saving grace in the period ahead.

News comes in this BusinessWeek story about the growing number of companies that are eliminating their matching contributions.

When times are tough, companies find cost savings wherever they can. Now some employers are doing away with the 401(k) match, a benefit once considered almost sacred.

The list of companies that have suspended or cut back corporate matching in their defined-contribution retirement plans this year is not trivial. It includes General Motors, Frontier Airlines, car-rental company Dollar Thrifty Automotive, broadcaster Entercom Communications, newspaper chain Lee Enterprises, and real estate brokerage Cushman & Wakefield. A recent study by benefits consultant Watson Wyatt of 248 U.S. companies found that 2% had already reduced or eliminated the match and another 4% expected to do so within the next 12 months. The national number could creep higher, however, if the economy continues to worsen. "It depends how long this goes on," says Pamela Hess, director of retirement research at benefits consultant Hewitt Associates. "In another year, you could have another 3% to 5% [cutting back on matches], or you could have 10%."
The trend away from pensions—many of which are now underfunded—leaves retiring employees increasingly reliant on their 401(k)s. In the Watson Wyatt study, for example, 11% of companies said they had frozen or closed their pension plans this year, and another 4% said they expected to do so in the next 12 months. That throws even greater weight on matching plans as part of the nest egg.

What does this trend signify for employee savings behavior? Academic studies show that the existence of a 401(k) match increases contribution rates among employees, but the research doesn't address what happens when a match is cut. Brigitte Madrian, a professor of public policy and corporate management at Harvard University, has studied 401(k) design and behavior. She thinks the end result will be a "small fall" in 401(k) participation as fewer new employees sign up and existing employees stick with the status quo, neither pulling money out of the plan nor adding to contributions. Says Madrian: "You will find the biggest effect on new employees walking in the door. Employees who were already signed on for the plan aren't going to drop out because there's not a match."
While private pension plans are inherently unsustainable in the new global economy and their demise was all but assured, it is public pensions that are worth watching going forward.

How are states and governments possibly going to fund all their retirement obligations?

[Note: For those of you looking to start up a new blog about your retirement hopes and fears, feel free to use the title at the top of this postas its name - according to Google, this is the only current reference.]


Nostradamus, apparently said...

The federal government has pushed retirement planning hard for the last 20 years or so via tax breaks to encourage contributions.

The reason was claimed to be concern for citizen's retirement security. The real reason may have been concern for Wall Street since most of the retirement money ends up invested and managed there.

This has caused stock price 'inflation' as too many dollars chase too few stocks. PE multiples have risen to ridiculous levels right along with the ever-increasing pension fund contributions.

So, as employers reduce matching contributions to retirement accounts, there will be less money going into Wall Street. If employees reduce their contributions as well, there will be even less money going into Wall Street.

This is just one more reason Wall Street has to worry. At some point, people can't or won't sink more money into the retirement plans.

If the markets ever lose their current appetite for Vegas style gambling/speculation and get back to fundamental valuations, Wall Street will be in serious, serious trouble. The fundamentals on many publicly traded companies are a joke. Dividend yields on the NASDAQ 100 average less than 1%:

72 of the NASDAQ 100 pay NO DIVIDEND at all. If you value these firms fundamentally, you'll have a very hard time buying stock in ANY of them.

Further, public employee pensions are in grave danger now, too, due to greatly reduced tax receipts. Contributions will flag here, as well and Wall Street will take another hit.

Overall, considering everything that's going on in the financial world, it is extremely risky to be 'playing the market' today.

dearieme said...

A young friend of mine works for a US law firm in London - they make no pension contributions for her. Their attitude is "We pay you lots. If you want to save, go right ahead. It's no business of ours."

Anonymous said...

Definition of 401k: Wall Street ripoff. Stock brokers pocket your hard-earned money and make millions; you worry about your retirement.

There are no guarantees investing in the stock market. You want money for retirement, hoard your cash.

Brunot said...

Nostra, nobody makes anybody allocate their 401k money to anything but a moneymarket income type fund. They did that to themselves. I was 100% income fund and didn't lose a dime. Now I'm out of it into an IRA I can direct completely and buying dividend paying oil and gold with two fists now that it's low and hopefully will pace inflation.

Anonymous: Hoarding cash for 30 years in this environment is a good way to retire, but to retire late and retire poor. Inflation is raging at 8-10% and you can earn 5% in cash type investments. You'll be falling behind.

It's like anything. It takes research, hard work, and intelligence. The problem is the govn't made people think that any moron could profit forever w/o even reading the financial pages.

Anonymous said...

A key factor in the sustainability of state retirements is an above-average return on their 'funds.' CALPERS sensing the need for more 'upside juice' plowed into commodities.

I would expect underfunded pensions to become a common headline in the first part of next year.

Anonymous said...

Brunot is wrong you are better off hording your cash in a cd and inflation is nowhere near 8-10%.

Nostradamus, apparently said...

I agree that CDs are the safest bet despite inflation. Inflation is different for everyone because it can, to some extent, be controlled by the individual depending on her wants/needs.

The less you follow the crowd, the less you'll consume and the easier it is to control your personal inflation rate.

If you are flexible, careful and thoughtful about your lifestyle, you can keep inflation under control and you can live off CD interest rates IF THEY ARE NOT RIDICULOUSLY LOW as they have been under Greenspan and Bernanke.

CD rates around 5-6% make it for me from a cash flow stand point but the jokers at the Fed have been punishing savers like me for years now.

Brunot is taking a speculative risk on commodities that may well pay off. Everyone's risk tolerance is different.

So, the risk of loss with CDs is lower and, if you can offset the inflation risk with CDs by living frugally, you can rest more easily at night.

Both approaches can work, of course. It's just a personal choice.

I also agree with Brunot that individuals make their own investment decisions and are to blame for going along with the crowd that has been chasing the market for the last 20 years or more.

My point was simply that the system is designed to encourage gambling at the Wall Street casino and it has worked fabulously well at that! If that ever ends, watch out below because there's nothing holding up many of the stock prices on Wall Street but hot air!

Anonymous said...

Great writing!

You might also love this site:

They give a good top down view of 401ks.

amanda said...

Yes, it's cool, and useful for me
Fidelity 401k

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