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"I have some bad news for everyone in the room"
Tuesday, June 13, 2006
That's what John Winkleman of the Nebraska Retirement System said to a group of fifty year olds at a small retirement information and planning session in another excellent PBS Frontline documentary titled, Can You Afford to Retire?
Mr. Winklemnan went on discuss how Americans aren't saving enough money in their 401k plans and that a lot of people are going to be in for a nasty surprise in the next ten or fifteen years if they think they're going to be able to stop working, "How many of you have seen somebody of retirement age working at McDonald's or Burger King? Now, do you think their retirement goals are to supersize fries?"
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The marketing department is on our backs again. They demanded that the "blue pills" on this blog and on the Iacono Research website be replaced with something a little more "contemporary" - done. Then they demanded that a special welcome message be created over at the website with a free trial offer for readers of the blog - done (click on the new graphic or here).
They demanded a few more things, but were promptly told to bugger off.
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Many baby boomers are under the mistaken impression that they're going to be enjoying a life of leisure in their golden years - if not funded by their meager savings, then somehow financed by the wealth that has accumulated in their home.
Think again.ANNOUNCER: For the Baby Boom generation, there's trouble ahead.
Cue the cool Frontline music and the neat graphics. The entire program is available for viewing online - just one of many outstanding works by this group of documentary makers.
BROOKS HAMILTON, Corporate Benefits Consultant: Workers are going to retire into despair and run out of money.
ANNOUNCER: The reality of retirement is starting to sink in.
BESS CRABB: I thought when he retired, it was going to be a lot different.
PAT O'NEILL, Retired Mechanic, United: It's scary as hell.
ROBIN GILINGER, Flight Attendant, United: The hardest thing is not knowing that I'll be able to retire.
HEDRICK SMITH, Correspondent: Good morning. How are you?
ANNOUNCER: Tonight on FRONTLINE, correspondent Hedrick Smith explores the changing world of retirement, discovering how corporations are dumping old-fashioned pensions
Prof. ELIZABETH WARREN, Harvard Law School: Bankruptcy is a way to take legal promises and burn them.
ANNOUNCER: examining how the new 401(k) plans are working
Prof. ALICIA MUNNELL, Boston College: The idea that we should all be financial experts is a crazy idea.
ANNOUNCER: and asking, Can You Afford to Retire?
Prof. TERESA GHILARDUCCI, Notre Dame University: We're now shifting from lifetime pensions to lifetime work.
Can you afford to retire? That's a question that baby boomers are asking themselves in increasing numbers today.
The days of generous pensions are nearing an end and even if you do retire with a nice package from a large corporation, you never know how long you'll keep getting what's been promised to you. After years of underfunding their pension plans, bankruptcy now appears to be an increasingly convenient way for corporations to regain their competitiveness in a changing market place.
Lightening up during a Chapter 11 reorganization, now mostly accepted as just part of doing business, results in the jettisoning of high cost defined benefit plans that are then turned over to the Pension Benefit Guarantee Corporation (PBGC), whose check writers have a nasty habit of halving the amount that shows up on the monthly checks.HEDRICK SMITH: [voice-over] By exploiting those [pension funding] loopholes, corporate America has created a time bomb. More than 18,000 companies have underfunded their pensions. In five years, several large companies have dumped their pension debts onto the PBGC. Its deficit is now $23 billion and threatens to balloon far larger.
About the first half of the documentary is used to look at the United Airlines reorganization from the viewpoint of what it cost employees in retirement benefits, how company executives were affected, and how the bankruptcy lawyers fared.
BRADLEY BELT: The level of under funding in the system as a whole, which we estimate at $450 billion today, is substantially more than it was just four or five years ago. It was less than $100 billion.
HEDRICK SMITH: [on camera] Let me get this straight. You're saying that the current corporate pension system in the private sector today is underfunded by $450 billion?
BRADLEY BELT: That's if everybody were to try to terminate their pension plan today.
This is a sad tale for current and former employees, but a great success story for management. The hourly worker with thirty years in - all he ever wanted was what the company promised him. The executives and bankruptcy lawyers - they get stock options and a whole new growth industry.HEDRICK SMITH: Jamie Sprayregen, the lead bankruptcy lawyer for United Airlines, is the most visible edge of an entire new industry that has developed in law firms and Wall Street banks to move companies through bankruptcy.
At least somebody is benefiting. If you can fund both your child's college education and your retirement, try to get little Johhny interested in bankruptcy law - it looks to be a good career path.
JAMES H.M. SPRAYREGEN: These days, every large law firm in the country has some sort of bankruptcy practice. We have around a hundred lawyers who do nothing but this. The practice has really moved to be a mainstream part of most big law firms these days.
HEDRICK SMITH: The business has mushroomed as bankruptcy lost its stigma and gained acceptance as a corporate strategy.
For most individuals these days, 401ks are the primary vehicle for retirement saving.
Since the advent of the 401k plan in the 1980s there has been a gradual shift of responsibility from the employer to the employee, something that has worked out well for some, but not very well for most. The whole idea of employee managed individual retirement accounts in lieu of company pensions seems doomed to failure for a number of very simple reasons having to do with your typical employee:
In general, the idea of managing money for employees, as in a defined benefit plan makes much more sense when considering the same points:
The idea that everyone should become a financial expert is indeed crazy - just getting people to manage their money a little better and not take on so much debt would be a huge step in the right direction. Asking them to also become good stock pickers is asking a bit too much.
Many companies go to great lengths to encourage and educate their workers - National Semiconductor in Dallas, Texas was singled out as an example of how a good 401k plan could be run. Attractive matching contributions and mandatory attendance at retirement workshops all help, but in the end it is up to the individual. The individual is in control of everything.
How's it going so far?HEDRICK SMITH: [voice-over] Of course, the test of any 401(k) plan is how well retirees are actually doing, so I went to call on some National retirees living nearby. One was a former customer tech rep, Gil Thibeau.
So, the engineering type seems to have done OK but the hourly worker is having trouble. Things would have been much simpler for the hourly worker if he could just put in his time and then collect a retirement check every month without having to think too much about it.
GIL THIBEAU, Natl. Semiconductor Retiree: Before I jumped into it, I did my own personal research on the computer and talked with other people who were in different plans and what was working best for them.
HEDRICK SMITH: Thibeau is the kind of employee 401(k)s are made for. An engineer with a master's in business administration, he was making more than $90,000 a year. Over 14 years, Thibeau built up a nest egg of $450,000.
GIL THIBEAU: My retirement was a half a million because I got a started late. I would have if I had started earlier, I would have set my target at a million, but I waited too long, like I think most people do.
HEDRICK SMITH: But not far away, I found another National retiree living a very different kind of retirement. Winson Crabb retired three years ago as a $50,000-a-year equipment technician. During 16 years at National, Crabb says, he faithfully funded his 401(k) plan.
WINSON CRABB, Natl. Semiconductor Retiree: My assumption was that when I got to be 65, well, there would be a large amount of money in there for me to take cash out to put in our bank to utilize for whatever. Well, that didn't work out.
HEDRICK SMITH: But Crabb's wife, Bess, remembers the market dropping sharply in the two years before Crabb retired. So what's your recollection about the maximum amount there was in your husband's 401(k)?
BESS CRABB: A hundred and twenty thousand. That was our goal, and that's what was there.
HEDRICK SMITH: And then the market fell.
BESS CRABB: That's right.
HEDRICK SMITH: So you lost about half of it.
BESS CRABB: Oh, we lost more than that because it went down to $45,000, and we built it back up to $64,000. And then when the day that he drew out the 401(k), it was $52,000.
HEDRICK SMITH: Fifty-two thousand.
BESS CRABB: Yes.
HEDRICK SMITH: Things got worse. Crabb had some debts to pay, and he got socked with a tax bill when he cashed out his 401(k) in a lump sum.
WINSON CRABB: I just went with the information that I had and thought I was doing the right thing, which I wasn't.
HEDRICK SMITH: So what'd you wind up with out of the $52,000?
WINSON CRABB: I think it was $26,000.
HEDRICK SMITH: So how do you manage financially? What do you do?
WINSON CRABB: Well, you do what you have to do, for one thing, you know? I had a couple jobs in between there, and my wife works.
BESS CRABB: Well, I thought when he retired, it was going to be a lot different, you know, money-wise.
WINSON CRABB: It was a jolt when we got to counting funds at the end of all that. You know, one day we had to set down and say, "Whew! This is not like what we thought," you know?
The current system is set up to favor someone like Gil, an engineer with a master's degree, over someone like Winson, who probably favors a cold beer over a spreadsheet. The following question asked of company executives, demonstrates how the current system is stacked against your typical middle-income employee.BROOKS HAMILTON: I used to ask the CEO, CFO of my major clients, often in an environment, a conference room some young employee would bring in coffee and all, and as they would be leaving, I would ask the CEO, "Fred, let me ask you, would you allow that employee to direct the investment of your account in the 401(k) plan?" And they always thought I was some kind of idiot. It's kind of like, "Don't they teach you anything down in Texas, Brooks? Of course not. I wouldn't let them touch my account with a 10-foot pole." And I'd say, "Well, but you force them to manage their own, and they are running their money into the ground."
What is sold as giving control to the individual, part of the grand "ownership society" of recent years, is really a burden to many employees. The "free money" in the form of matching contributions from the employer is just a small part of what the employer used to contribute for for each employeed under traditional pensions.
HEDRICK SMITH: The roots of the problem, some say, lie in how the 401(k) system was born in Washington. Originally, it was not set up to have millions of us managing our own retirement.
Prof. ALICIA MUNNELL: 401(k) plans were originally introduced as supplemental plans. No one ever said, "Oh, let's end these traditional pensions and replace them with 401(k) plans."
Since 1974 the total contribution to employee retirement savings has gone from 89 percent by the employer and 11 percent by the employee, to about 50-50 in 2004.
Naturally, the big winners are corporations opting for 401k plans versus traditional pensions since their overall costs have decreased dramatically. In a world of global competition, this cost savings is not that objectionable, what is objectionable is making individual employees manage their own savings - few do it well.
This documentary, as good as it is, doesn't touch on one of the worst aspects of 401k plans as they currently exist. While large pension funds such as CalPers are committing funds to investments such as commodities after the 20 year bull market in equities seems to have run its course, employees with 401k plans are generally restricted to stocks, bonds, and cash.
Sure, they get occasional non-advice during company seminars from the 401k plan manager's representative prodding curious workers to stay heavy on equities early in their career, diversifying over all nine Morningstar style boxes. But, this will be of little help to account balances if the coming decade for stocks turns out like the last bear market in stocks - so far this decade, that's where it looks like we're headed.
The lifecycle funds are an improvement, but if the last five years and the last five weeks are any indication, many employees who do everything in their 401k "by the book" in the coming years may be quite disappointed with the results.
20 comments:
Would you favor a system letting people choose a professionally managed plan and letting them manage their money themselves? What about a default plan putting everyone into a "Lifecycle" fund that's aimed at their retirement date; let the fools who think they can beat the market go ahead and try.
I think you're laying it on a little thick with the "poor average Joe doesn't know how to save money."
Also, self directed investment doesn't mean the individual must pick stocks for himself. He has the choice to hire professionals by buying units of a mutual fund. Also, the self directed plans usually come with lots of help and advice.
My take on the defined benefit plans versus defined contribution plans is that I prefer the latter. I think it is better to know how much savings you actually have, rather than know exactly how much a third party is promising to pay you when you retire. Those promises could turn out to be bullshit.
The reality of the situation seems to be that often those promises are bullshit because the executives running the corporation are motivated to underfund the pension and prop up the earnings statement. This isn't right, but the government sure as hell can't be trusted to efficiently police the situation.
However, when all the money is in a 401(k) there's no such problem. The individual knows exactly how much he has and he bears all the responsibility if he wants to underfund his own pension to bolster his own quality of life in the present time.
The key point that I got from this story was that instead of companies contributing $9 to every $1 that the employee pitches in, it's now $1 to $1. How do you bridge that gap? People are expected to invest in stock mutual funds and get that historical nine or eleven percent rate of return, then time their exit? Fat chance.
I don't think the hourly guy would have been bad off except for two things.
1) Cashed out their 401k - why??!! Why not take out what you need, pay tax on that, and let the rest grow!
2) Cashed out the 401k in the middle of the market halfing. This is mostly just bad luck, though the gains leading up to that bust should have signaled something. Even then, cashing it out at that point hurt them - If they left it in for another few years, they would have made most of that back.
When I first saw that excellent documentary, I had another thought about 401K's that they didn't really get into. These plans are a great benefit to Wall Street. Not in the sense that they get the money; they would have gotten that anyway from the old fashioned pension funds. Now however, when the "smart" money feels that it's time to go into distribution mode (like now perhaps), they have a handy, ready-made source of blind and dumb money flowing in into which they can distribute their over-priced shares. The whole thing is very sad.
I thought the idea that 401(k)s are fine for engineering types to be laughable. Even he ended up with less than half what he needed for a comfortable retirement. He blamed it on starting late, while others will blame it on bad investments, not staying the course, bad luck, mistakes, when the problem has much more to do with the system.
The hourly employee was very foolish in cashing out and paying all that tax, but it is apparent just leaving it alone would not have solved his problem. If he lost that much, it is clear he was invested in the riskiest tech area during the boom. He simply didn't know enough about investing.
Defined benefit plans that can be so easily trashed aren't much better. The best solution is a government backed mandatory contribution plan like that in Australia.
In America, the "government backed mandatory confiscation plan" is called "Social Security." Unfortunately, the government can't keep it's hot little hands off the money once it's close by, so they've raided the cookie jar and there's nothing left for the workers.
A big problem here is that people are living beyond their means via debt. If we force them to put aside more, they would just go deeper into debt and make up for it.
The issue in the article above is that it used to be the responsibility of the employer to provide, over and above the current salary of the employee enough to fund his retirement. I feel sorry for those planning on retiring in the next ten years. With returns of any sane asset class (with the possible exception of precious metals of commodities) running about even with inflation, the worker thus has to save up one year's salary for every year he expects to live past retirement. Putting aside even 10% a year, that means working for 200 years to fund a 20 year retirement! Plainly undoable.
- Pete
What is most disturbing about all of this is that corporations promised pensions as a benefit, and then ripped this away. This is a clear violation of the terms of employment. It's like working for an employer who promises to pay you $100,000 a year and then pays you $60,000. It's one of the simpler ways that corporations have been allowed to steal from their employees.
It is also a hidden pay cut. In real terms, wages are stagnant over the last 40 years. If you add in the reduction of benefits (health care, pension), American employees have been losing ground like like crazy.
Add in the fact that these same employees are now at the mercy of charlatans, and their own ineptness, and corporate Wall Street is making a killing. Sure, no one who reads this site would cash out their 401Ks, but most people don't know anything about investment strategies.
In a similar way, most people don't understand insurance (one of the reasons the recent drug bill was such a flop). If I can't sort through the 40 page insurance guides written in self-contradictory legalese using terms with non-intuitive definitions. I know "Joe Sixpack" can't.
This contributes to a society where you make more money by gaming the system than providing an actual good or service. So does the wristslapping that white-collar criminals get, as does the "ownership society" where everyone must be an expert on everything to maintain their standard of living.
I'm not in favor of a nanny state, but some regulation is necessary. Some policing is necessary. A lot of simplification is necessary. The government has provided less and less of this over the past 50 years.
Yet another argument for gold or silver currency. You earn it, save some away in safe storage, pull it out when you need it. If you want to lend some out for a return, you can do that too. It's easy to understand and manage.
Social Security is fine if government pays it's debts.
Infortunatly Republicans want to unload a huge part of the general debt onto those who make wages under a certain amount so that the wealthy can get further benefits without paying.
Thus they claim that unlike other bonds the government has no responsibility to wage earners.
SS will not pay all expences and real payouts might have to be reduced far from eliminated the fed takes responsibility.
Note it is Republicans who consistently drive the debt on the general fund up to extremes. Note on balance Republican states recieve far more in federal fnds than they pay in taxes while the capitalist states such as California and Ne York often only get back 75 cents on the dollars.
Then the Republicans lecture about responsibility.
I would propose distribution of federal income on the amount payed in taxes. This would stll result in the capitalist states subsidizing the feudal unless the feudal states are charged for the vast sums of social services their millions of economic refugees cost, but this can be worked out.
States such as California would also be alowed to buy parts of the feudal states and govern them.
> Sure, no one who reads this site would cash out their 401Ks.
Well, we did - several years back. Used the money to pay off the mortgage. The few who know that call us idiots; we don't really care. We have both slept soundly ever since - totally debtfree is a truly marvelous condition. I strongly suspect there are hidden health benefits to this.
We simply do not trust our Federal Government enough to keep serious sums of money (from our POV) in dollar-denominated paper assets. If you subscribe to the thesis that the US economy is headed for a train wreck, physical ownership of precious metals seems to be the only sensible course right now for a savings vehicle.
In a full-blown financial crisis, do you really want your money in a place that the Government knows about? They already know where your 401(k) money is, and how much you have in there. Those gold coins you've been discreetly stashing away, on the other hand..
I read this whole discussion. Some people propose some type of government invlovement with 401ks and pensions, others not. But nobody suggested that workers should simply be allowed to put a little of their pay each week in a sound bank and when they retire they'll be fine.
There was once a time when you COULD do this. Then in 1913 they created the federal reserve, and mandated government led inflation of the money supply. This inflation is so bad, that bank deposits, or even 90-day t-bills (both liquid and dollar-denominated guranteed), have declined in real purchasing power over the last few decades (if you take tax into account). Meanwhile, over the last decade we've become so much better at creating things of value: crop yields up big time, computers, internet, manufacturing. it takes less labor hours and less physical resources to build just about everything of value: cars, planes, rail-roads, corn, yet for some crazy reason, even if earning interst at teh bank or in a money market, you can't buy more of these items.
This is the fault of the federal reserve printing an unbacked currency. Period. In a fixed monetary supply world, the productivity gains of the economy that they all talk about, translates into lower prices in general. See UK 19th century.
401ks, pensions, social security. All invented after 1913. They are labors way of trying to keep up with the printing press. All would be unneccessary if we had a sound currency, responsible banks, and FIXED MONEY SUPPLY!!!!
"In a full-blown financial crisis, do you really want your money in a place that the Government knows about? They already know where your 401(k) money is, and how much you have in there. Those gold coins you've been discreetly stashing away, on the other hand.."
I bury my gold right next to my brass, which I horde in the form of AMMUNITION.
Gold should hit resistance and come in for a nice soft landing at about $400. Maybe less.
Oh how far Frontline has fallen! What is the common denominator here? Government! Even the reference to the Nebraska study - if defined benefit plans fund nearly 9 to 1 of course they will exceed returns of 401K - that is, until the go bankrupt.
Since 1913 (tx Pete) the government has been lulling Americans to sleep regarding their retirement. Now they are waking up as the car is careening over the bridge.
the government sure as hell can't be trusted to efficiently police the situation.
They could if successive Republican administrations since 1981 hadn't eviscerated any regulatory body that favored workers over corporations.
Since 1913 the government has been lulling Americans to sleep regarding their retirement. Now they are waking up as the car is careening over the bridge.
I retired in 1985 (post-1913 for those of you math-impaired), and I'm doing just fine, thanks to Social Security, Medicare, and my government-guaranteed pension. Why shouldn't today's workers have the same deal?
How much time did these people spend sitting in front of the TV?
How much time did they spend on thier fantasy NFL and MLB teams?
How much time did they devote to educating themselves about the most important part of thier financial lives? Reading books, magazines, newsletters?
How about paying money for professional advice? Even if just to do a sanity check on thier own plan?
Do these people ever hear about setting goals? periodic check ups? Risk analysis?
Or were they distracted by something else?
Bottom line: you can only save yourself. I was lucky to have parents who sat us down a financial "birds and bees" talk after high school. I can't say that about some of my friends though. Sad.
Re: "I retired in 1985 (post-1913 for those of you math-impaired), and I'm doing just fine, thanks to Social Security, Medicare, and my government-guaranteed pension. Why shouldn't today's workers have the same deal?"
Your benefits are being paid for on credit. Some day the credit bill will come due.
With the coming onslaught of the 'boomers, and the relative scarcity of those younger souls in the working class, it has been asked of those boomers who planned to sell their homes for some retirement funds -- "To whom will you sell, and for how much?"
The same thing might be asked of all the pension funds tied up in stocks and bonds right now... Will $1 Million in savings mean much of anything? or will it become equivalent in 10 years to $50,000?
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