Courtesy of Pam Martens.
Only one in five employees in private industry today has a defined benefit pension plan that will pay a fixed amount in retirement. The rest of the private workforce is left to the volatile markets of the 401(k) plan and other savings to supplement their Social Security benefits. Adding to the dilemma, less than half of private industry workers are participating in any form of employer-sponsored plan at any moment in time. This is shaping up as a disaster for the next generation of retirees.
A study conducted by the Center for Retirement Research at Boston College using data from the Federal Reserve’s 2010 Survey of Consumer Finances found that the typical household approaching retirement is ill prepared financially. (The Survey of Consumer Finances is conducted every three years and will be updated again this year.)
The study found that 401(k)s have been battered by the financial markets. As a result, median 401(k)/IRA balances for households approaching retirement remain at $120,000, roughly the same as in 2007. (IRAs are included because these are mostly rollovers from 401(k) plans, according to the study.)
For those not immediately approaching retirement, account balances declined. According to the study, “households 45-54 actually had lower balances in 2010 than in 2007 — $70,000 versus $75,000, and younger households held only $35,000 in 2010 compared to $44,000 in 2007. Those figures are not adjusted for inflation. “With prices rising more than 5 percent between the 2007 and 2010 Survey of Consumer Finances, balances have fared even worse in real terms,” notes the study.
Boston College researchers found that the $120,000 available for households nearing retirement would provide only $575 in monthly income, assuming a household purchases a joint-and-survivor annuity. Even that $575 in monthly income is likely too generous, as a large segment of the public does not even know such a thing as an immediate annuity offering joint and survivor benefits exists. The average household would likely simply draw down on the $120,000 to survive in retirement until it was depleted, leaving themselves in financial straits in later years.
Adding to roller coaster markets, another dangerous feature of 401(k)s is the offering of company stock. According to the Boston College study, in 2010, ten percent of all assets were invested in company stock. As we discussed in the personal financial column last Friday, investing one’s life savings in a concentrated position is the perfect recipe for disaster. Investing in the stock of the company upon which you also depend for your livelihood, means that if the company fails you likely lose both your investment in the stock as well as your wages. I know many people who felt it would appear disloyal not to put some of their savings into the company’s stock. To that I would say, company management at Enron and dozens of others did not share this feeling of loyalty to their workers.
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