| Rethinking retirement in tough times |
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Ironically, the good news is that American attitudes toward retirement savings may have turned a corner -- as a result of the bad news all around us. Hebeler says that as the national attention is focused on the credit crunch, failed mortgages and the souring economy, many of us are starting to ask more questions about saving.
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| Retirement attitudes |
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"There's a wakeup call out there right now, and I believe a lot of people will heed it," he says. "People are going to be much, much more dependent on personal savings in the future."
Reardon adds that baby boomers may be ushering in a new period of austerity where ditching McMansions and SUVs for a downsized lifestyle will have "more to do with our current savings rate than anything else."
He predicts the future may hold a progression toward more federal programs and higher Social Security payments, as well as a spike in households with three generations under one roof.
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're offering to employees and provide better education about how to choose investments based on individual retirement goals.
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 automatic enrollment trend continues to grow
among companies offering defined contribution plans,
with nearly four out of 10 companies participating
in the poll now offering this feature -- one in five
introducing it in 2008 alone.
Studies have shown that automatic enrollment does increase plan participation. For example, 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 to increase 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, 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."
Trammel predicts the emergence of custom
retirement plans that will no longer be 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 says. "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 planned goals."
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