Retire2Enjoy : 401(k) Failings, Findings from the Employee Benefit Research Institute, Retirement USA, and Census Bureau

More 401(k) Failings

Critics are pointing to several key 401(k) failings of the patchwork system of 401(k), 403(b), ESOP, Keogh, IRA and other plans in the alphabet soup of retirement investing.

Too little invested

Workers don't start saving early and don't save enough. For a 401(k) plan to provide significant retirement assets, financial planners say workers need to contribute 10 percent of their salary, plus any employer match, for most of their careers and starting as early as possible to compound their gains.

Workers don't put in enough money to claim all of their employer's matching contributions. Typically, an employer may match 50 percent of a worker's contribution up to 5 percent of the worker's salary. Not contributing up to that level is the equivalent of passing up free money and a guaranteed 50 percent return on the worker's investment.

The wrong investments

Workers are on their own to make investment choices from limited plans with big hidden fees, often making bad decisions.

Many 401(k) investors last year bailed out of stocks, often the day after big market drops, Hewitt found, with nearly 20 percent of investors switching their assets — all getting out of stocks. This means they locked in losses, selling low after buying high during the run-up of previous years.

Money leaks out

Workers consistently erode their savings through loans and withdrawals before retirement. When workers change jobs or are laid off, they may cash out of a plan with a small balance after only a few years, or some plans send a check instead of rolling the money into a retirement account that would preserve the money's tax-deferred status. At other times, workers who've hit hard times tap their accounts to stay financially afloat. Loans from 401(k)s also lower returns, financial planners note, because the money is taken out of stocks and put into low-interest loans to the account holder

Bad luck Can Contribute to 401(k) Failings

Workers who have the misfortune to retire at the wrong time in a business cycle can lose as much as three-quarters of their account value by retiring in the wrong year. A study from the Brookings Institute found that a worker who saved for 40 years in stocks could have retired and replaced 90 percent of his income — if he quit in 1999. But another 40-year hand retiring in 2008 would barely replace 25 percent of his pre-retirement income.

Employee Benefit Research Institute: Retirement Confidence Plummets

The Employee Benefit Research Institute has conducted a retirement confidence poll. It found such confidence plummeting at a pace "unmatched in the 18 years of the survey." The results: Only 18 percent of workers are "very confident" that they'll have enough money for a comfortable retirement, against 27 percent the previous year.

Retirement USA

The Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, the Pension Rights Center, and the Service Employees International Union have formed Retirement USA to research other alternatives for providing retirement money.

Retirement USA is collecting proposals, but wants to see reform built around key principles that it says should guarantee:

Universal coverage

 Every worker should be covered by a retirement plan in addition to Social Security. A new retirement system should include all workers unless they are in plans that provide equally secure and adequate benefits.

Secure retirement

Retirement should not be a gamble. Workers should be able to count on a steady lifetime stream of retirement income to supplement Social Security.

Adequate income

Everyone should be able to have an adequate retirement income after a lifetime of work. The average worker should have sufficient income, together with Social Security, to maintain a reasonable standard of living in retirement.

Median Retirement Age

The median retirement age is 62 according to the Employee Benefit Research Institute.

You May Still Be Working after Your Retirement

Many retirees rely on paid labor for a good portion of their retirement income. Job-based earnings account for approximately 30% of the average U.S. retiree's income and more than 40% for those in the highest income quintile, according to Social Security Administration figures.

In 2008, 37.8% of 65-and-older workers were working full-time year-round, according to the Census Bureau. The percentage ranged from 51.6% in the District of Columbia to 27.4% in Wisconsin. Read "Work Status of People 65 Years and Older: 2008 American Community Survey."

Census Bureau: Population Growth over 65

The U.S. Census Bureau estimates that there will be twice as many people age 65 or older in 2030 as there are today.

The NEW Retirement

Phyllis A Belak and Patricia M Dorris-Crenny, writing in the CPA Journal, provide answers to the question: What Do You Do Now?

They contend that the current economy demands that retirement plans and investment strategies be adjusted. After a client's initial painful assessment of their losses, goals must be re-evaluated, and, in some cases, retirement may have to be delayed to allow for a rebuilding of the nest egg. Others may cut their current spending to increase their contributions to their retirement accounts. Some may decide to downsize their retirement expectations by either purchasing a smaller retirement home or relocating to a part of the country where the cost of living is lower. Others may decide to take on post-retirement employment to mitigate financial pressures.

Financially, near-retirees must personally reassess their "risk comfort zone." This can be tricky. Some will now be overly risk-adverse as a reaction to recent losses, while others may opt to take on too much risk in a misguided effort to regain lost dollars quickly.

All Americans need to become familiar with the various traditional retirement income resources. The benefits of each retirement resource must be carefully weighed against any restrictions, and the optimal retirement wealth accumulation plan determined and implemented. These include:

• Tax Deferred Accounts
• Pension Plans
• Home Equity
• Social Security

When to Retire? The longer a client's time horizon until retirement, the longer he or she has to recover from recent losses and increase retirement resources. A delay in retirement of a few years may be the prudent option for many clients.

A delay in retirement can also provide financial advantages to the monthly Social Security check.

Another advantage to deferring Social Security benefits until the full retirement age is the ability co collect unlimited earned income while still collecting Social Security benefits without reduction. For years before a client reaches the full retirement age and for the year he reaches full retirement, there are maximum monthly earned income amounts. For 2009, if a client is under full retirement age for the entire year, his Social Security benefit would be reduced $1 for every $2 he earns above the annual limit for earnings of $14,160. A client reaching full retirement age in 2009 would receive benefits reduced $1 for every $3 he earns over $37,680 for the portion of that year before reaching full retirement age.

Stick with Stocks

A 401(k) plan is still the ideal way to invest for the long term, says Richard Peace, CFP, a financial planner in Colorado Springs, Colorado. "By investing periodically, you're dollar cost averaging, so you buy more shares when prices are low." If you invest $200 a month, for example, you'll buy eight shares of a mutual fund when they sell for $25, but 10 shares if the price drops to $20. You'll wind up with a lower cost per share and higher profits when the share price goes up to higher levels. Most financial advisers are still telling young investors to stick with stocks, despite feeling psychologically scarred from the last year.

Look at history: An investor who bought stocks at the worst possible time - the start of 1931 - lost more than 43% that year but still had an 8.2% annualized return at the end of 1951 and a 10.8% average annualized return through 1961, according to Morningstar company Ibbotson Associates. Despite the substantial losses of 1931, investors who remained in the markets regained all losses by 1935. If the stock market can provide that kind of a return through the Great Depression, World War II, and the Cold War, investors may anticipate similar growth from their investments over the next 20 or 30 years.

Drastic Measures

The economic downturn has caused many 401(k) participants to take drastic measures with their retirement accounts. About one in seven cash out of a plan after a job change or loss (without rolling over the money to a new account), take hardship withdrawals, or borrow against their portfolio, according to the GAO report.

A Hewitt Associates study has found that hardship withdrawals increased by 18 percent in 2008, meaning workers pulled money out of their accounts, even though they had to pay taxes and a 10 percent penalty. Another 23.1 percent of 401(k) savers had to borrow money from their accounts.

Behavioral Strategy

Kenn B. Tacchino, JD, director of the New York Life Center for Retirement Income at The American College, is a fan of behavioral finance. That field focuses on the emotional dimensions of people’s attitudes and actions around money. He urges financial planners not to rely on technical savvy alone. Rather, they "would be well-served by listening to sociologists, psychologists and social workers.” In working with clients on retirement planning - or, for that matter, any other financial goal - CPAs typically scratch the surface of behavioral finance with a rudimentary assessment of clients' risk tolerance. "But money has many meanings beyond risk tolerance."

Josh Wiener, head of the Department of Marketing at the Spears School of Business at Oklahoma State University, adds: "I know it will sound peculiar to a financial person, but if you think of retirement planning simply as a financial problem and take a mechanical approach, odds are it isn't going to work."

For one thing, Wiener said, if the numbers are too daunting, clients will simply throw in the towel. "It's like telling someone they have to lose 100 pounds. They'll say, 'Forget it.' They have to work their way up in manageable steps." Instead, financial planners should focus on the importance of helping clients gain "a sense of control, confidence in their ability to reach a positive outcome." And that positive outcome probably is not a number.

Rather than definitively predicting a financial outcome based on a fixed course of financial action, advisors should emphasize the need to monitor progress regularly.

Hence, keep the numbers as simple as possible.