Marijoyce Ryan, The Daily Record Newswire
When Ida May Fuller received the first Social Security check ever issued, check #00-000-001 for $22.54 on Jan. 31, 1940, the average life expectancy was about 62 years. In fact, while the program was just beginning to issue benefit payments, our country already had a good history of retirement plans where the contributions were made solely by employers.
Going back to 1875, the American Express railroad company established the first ever private pension plan in America. On the heels of this action, a host of other industries, including banking, utilities and manufacturing, quickly took similar actions by instituting employer-funded pension plans for their employees.
Many of these plans required 20 to 30 years of service with retirement mandatory at age 70. These requirements reduced turnover and helped to remove older employees in a humane manner. Eventually, most states and municipalities followed suit. By 1926, the Revenue Act allowed employer contributions to pension plans to be tax deductible. This act made establishing a retirement plan a valuable benefit for both employees and employers.
Fast forward to 1978. By amendment to existing code, Congress passed section 401(k), whereby employees are not taxed on income they defer into a retirement plan. Up until this time, retirement plans were funded by employers with a monthly benefit promised during retirement years. However, now employees could begin to augment their retirement savings.
By the mid-1980s, traditional pension plans were being altered to provide less in benefits while 401(k)s were becoming an integral part of retirement benefits. Subsequently, numerous actions were taken to make employee deferred savings more accessible to all workers, including higher limits, pre- versus post-tax savings, and of course, employee-directed investment choice.
This enormous shift from employer-sponsored pensions to an employee savings-based program is not yet 30 years old and the baby boomers are the first group to face this new retirement era. The problem is that the boomers are living longer and they have to save enough and invest properly to be able to generate about 70 percent of their income in retirement. Also, they have lived through two of the most challenging economic environments in the history of investing: the dot-com bubble and the great recession of 2008.
Why are we asking employees to be experts in investing their retirement savings? Legislation, regulations and a preponderance of available investment research materials will not change the fact that investing is difficult, time-consuming and requires skill, patience and discipline. Asking employees to manage their allocations among cap ranges, investment styles, equities vs. fixed income, diversification, risk, duration, etc., is simply not going to happen for the majority of 401(k) participants.
As a trustee of a qualified 401(k) plan, one should look at their plan critically to determine if they are offering investment choices that are simple and clear. Are the employees being educated on the basics of asset allocation, risk, reward and diversification? Are the employees making informed investment decisions and staying with their allocations, only making changes to re-balance or reduce risk as they get older? Taking this one step further, why not consider the plan’s balanced fund option for employer matching and profit-sharing contributions?
It is not surprising that most 401(k) participants, on average, have an account balance of $89,200 in 2014. Individuals on the verge of retirement, aged 55 to 64 years old, have an account balance of $165,200. These amounts are woefully insufficient to sustain them in retirement — especially as we are living longer and healthier lives. As someone who educates 401(k) participants, I focus on two points: save as much as possible and invest it appropriately for your age and risk tolerance. The rest should be left to the investment professionals.
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Marijoyce Ryan, CPP, is vice president of Fiduciary Services for Karpus Investment Management.
