Baby boomers' retirement savings are under assault on all fronts. Let me count the ways our savings get undermined. I'll start with a microcosmic view, go macro and end with a scary fact.
Number one: 401(k) fees erode our savings. A new report from Demos, "The retirement savings drain: The hidden & excessive costs of 401(k)s," calculates that fees from workplace plans can consume as much as 30 percent of the typical couple's investment returns over a lifetime of working and saving. The study shows that without fees, a couple earning median incomes could amass $509,644 over 40 years, but average market fees slash off a whopping $154,794 of these hypothetical savings, leaving the couple with a diminished amount of $354,850.
Next month, for the first time ever, we will finally be getting an accounting of the 401(k) fees we pay after many years of delay. And it should be an eye-opener. But fee disclosure alone will not solve the problem, argues Demos.
The think tank advocates getting rid of 401(k) plans altogether and replacing them with a plan to which employers and employees would contribute, a plan that would be overseen by a government regulator. (Sound familiar?) This plan would be devoid of market risk and longevity risk, among other problematic perils.
Add such risks to the list of retirement-savings robbers.
Dissenting point of view
Following the release of the Demos report, the American Society of Pension Professionals & Actuaries, or ASPPA, came out with a scathing response, criticizing the report's analysis as "based on irresponsible and unrealistic assumptions including the assumption that the average fees for mutual funds in 401(k) plans are almost 200 basis points (2 percent). The only thing proven by this report is that if you use ridiculous and biased assumptions you can reach ridiculous and biased conclusions," said Brian Graff, CEO and executive director of ASPPA, in a press release.
ASPPA has every reason to try to discredit the report, since it represents the private retirement industry. One of its main missions is "to preserve and enhance the private pension plan."
Robert Hiltonsmith, a policy analyst with Demos, in turn refutes ASPPA's claims, saying the assumptions used for mutual fund fees and trading costs were based on figures provided by respected industry sources: the Investment Company Institute and Brightscope, respectively. "We certainly stand by our numbers, which were vetted by independent experts including those at the preeminent independent retirement research organization in the country, the Center for Retirement Research," he says.
In truth, the annual expense fee assumptions fall within a reasonable range. ASPPA is blowing smoke. In its analysis, Demos uses a weighted-average expense ratio of 0.95 percent for the stock fund and 0.72 percent for the bond fund. It also factors in trading costs of 0.95 percent for the stock fund and 0.5 percent for the bond fund.
Trading costs are one of those things you can't readily find in a fund prospectus or annual report. Greg Carlson, a senior mutual fund analyst at Morningstar, says you have to look hard to find an accounting of trading costs.
"Commissions are always buried in the fund's SAI," or statement of additional information, a thick addendum to an already dense prospectus, he says. Some firms will cite the commissions for each year as a percentage of the fund's assets, Carlson adds, but most provide totals for the last three fiscal years and "make you do the math yourself, in my experience. And yes, they're taken right out of fund assets."
But there are other costs involved in trading besides commissions, including market impact and opportunity costs. Add these to the tally of nefarious forces working against retirement savings.
Other ways your retirement gets robbed
OK, so I'm not in favor of eradicating the 401(k) plan in favor of a government-run plan that runs in tandem with Social Security. Why not? I don't trust our government to run it well because of its inept handling of Social Security. The most recently released annual report by the trustees reveals that Social Security will suffer a shortfall of $53 billion in 2012, following a $45 billion shortfall last year. (Yes! Let's cut the payroll tax again next year!) And the trust fund reserves will be exhausted in 2033, three years earlier than had been predicted previously. And Congress isn't bucking up to fix any of this.
Add Congress to the list of worrisome raiders of retirement savings.
And of course, the economy looms as a large threat to retirement savings. Consider this frightening fact: 25 percent of people age 50 and up have exhausted all of their savings, according to a survey from the AARP Public Policy Institute.
That survey of 5,027 people age 50 and older, released in May 2011, reveals 43 percent of respondents lost their jobs at some point over the previous three years.
This is just a partial list of threats to our retirement planning. There's much more to worry about. But we have to focus on what we can control and go from there.
What do you think is the worst threat to retirement security?
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