Adjusting retirement thinking in tough times
There is increased chatter about
the need to revamp how defined-contribution
plans such as 401(k) and 403(b) plans are
administered. Employers may have to take a
look at the types of retirement plans they
offer employees and provide better education
about how to choose investments based on individual
A recent survey Charles Schwab
& Co. conducted shows seven of 10 respondents
plan to continue working during retirement
-- 26 percent of those part-time and 40 percent
alternating between periods of work and leisure.
Only 29 percent of respondents said they never
wanted to work again.
Some changes in the way retirement plans are
administered have already been felt. Even
before the Pension Protection Act was passed
in 2006, many companies had adopted automatic
enrollment, in which new employees actually
have to take action to opt out of their retirement
plan to avoid saving money. An informal poll
by Plansponsor.com in May 2008 found that
the auto-enrollment trend continues to grow
among companies offering defined contribution
plans, with nearly four out of 10 companies
participating in the poll offering this feature
-- one in five introducing it in 2008 alone.
Studies have shown that automatic
enrollment does increase plan participation.
Prior to automatic enrollment, 26 percent
to 43 percent of employees with six months'
tenure at three different companies participated
in their respective plan. Under automatic
enrollment, 86 percent to 96 percent of employees
participated, according to a study cited in
a 2007 report on private pensions from the
U.S. Government Accountability Office.
Another idea that's gaining
momentum is increasing the default contribution
setting on employer-sponsored 401(k) plans.
"The default settings determine to a great extent what people end up doing," says Stephen Horan, Ph.D., Chartered Financial Analyst, or CFA, and head of private wealth and investor education at the CFA Institute in Virginia. "Suppose you join a company 401(k) plan and they say 'we're going to put 5 percent of your salary into a 401(k), but you can change that if you like.'
"Those default settings have a dramatic effect on what people ultimately do," Horan says. "If the default is zero, participation is far lower than if the default is 5 percent."
Susan Trammell, a New York-based CFA, predicts the emergence of custom retirement plans that are no longer geared toward how you're doing against an index fund like the S&P 500. Instead, she envisions plans that take into account your specific situation, where you are in life in terms of time horizon, liquidity needs and so on.
"You'll have the creation, the
bundling and the packaging of products that
are really very much tailored toward you,"
she predicts. "This may come from people who
will understand what your needs are in terms
of saving, long-term health care and disability
-- and you will actually be able to see from
month to month where you are in terms of your