Can Women Bridge the Retirement Savings Gap? - BusinessWeek Report

Ellen Hoffman, columnist for BusinessWeek writes, "Can Women Bridge the Retirement Savings Gap?" Let's go backwards first and visit the possible reasons listed for the aformentioned gap:

There are plenty of measurables, documented reasons for women's lower retirement savings. Women spend less time in the labor force, often because of care-giving demands, and/or are more likely to work part-time at some point. They earn about 80 cents on the dollar compared with men. And they're less likely to participate in some type of pension plan. The fact that, on average, women tend to live three years longer than men and live alone for more years intensifies the effects of the savings gap, making it even more crucial for them to prepare better for their golden years.

Two studies, one each from Vanguard and Hewitt are cited supporting the comparison of actual average balances for women and men:

Vanguard, a mutual fund company that also manages retirement plans, reported that in 2007 the average account balance of more than three million participants in their 401(k) plans was $56,723 for women, compared with $95,447 for men. More recently, Hewitt Associates consultants surveyed nearly 2 million participants in large-company 401(k) plans the company manages and found that women had an average of $56,320 in their accounts, compared with over $100,000 for men.

These are sobering statistics. Ms. Hoffman offers some common sense tips for improving women's savings rates (they basically apply to everyone):

• Start saving as soon as you begin working


• Design and follow a realistic budget that allows you to join your employer's retirement plan


• Contribute as much as you can to your company plan or


• If one is not available—contribute to an IRA


• Don't take money out of retirement savings to meet short-term needs

Ms. Hoffman also helpfully points out that this savings gap is an issue not just for low-earners:

Linda E. Katz, a financial planner in Huntington, N.Y., says she sees the same problem for women in middle management. Some of them, especially those who live in high-income areas, simply don't make enough money to save much. She also says that she sees quite a few clients who allow financial demands from their children and parents to trump putting away money for their own retirement.

Executives and professional women also need to pay more attention to their future, says Margaret K. O'Meara, a financial planner in Red Bank, N.J. For the high-income women she counsels, "the biggest things are the lifestyle and longevity issues," she says. Her clients may make $250,000 or $300,000 a year and still be behind on retirement saving. One of her clients in her 40s in this income range wants to leave her high-stress job to retire or downsize to part-time work, but she doesn't want to sacrifice the family vacation home or luxuries such as expensive wines and food to save for what could be as much as 40 or 50 years in retirement. Some women also lose a chance to catch up on saving by refusing to charge their college-graduate children for rent, cable TV, or other amenities.

Ms. Hoffman mentions a great reference for women savers: Women's Institute for a Secure Retirement, or WISER at http://www.wiserwomen.org/ which contains a wealth of helpful information.

401(k) Participant Experience May Hold Lessons for Consumer Engagement in Health Plans

MarketWatch.com (via PRNewswire) reported today on an important new study published by the Employee Benefits Research Institute (EBRI) that seeks to apply lessons learned from evaluating the behavior of 401(k) participants into similar issues with health care plans. The study by Jodi DiCenzo, Behavioral Research Associates, and Paul Fronstin, EBRI (download full study - PDF- here) is summarized on EBRI's website. The Executive Summary is reproduced below [emphasis added]:

• Retirement and health benefits following a similar evolution: The private sector’s shift away from “traditional” company-financed pension plans toward individual 401(k) accounts illustrates how benefit decision-making and responsibility have shifted from the employer to the worker. The current trend in health care design toward “consumer-driven” health plans illustrates the same trend with health benefits.

• Health plan design is encountering the same obstacles as 401(k)s did: Efforts to make workers more involved and responsible for their health benefits have run into the same problems that 401(k) plans did: Workers tend to delay or be disengaged from both retirement and health care decisions, these issues require long-term planning, and workers see both retirement and health care decisions as complex and difficult.

• Worker behavior is driving retirement plan design: Enactment of the Pension Protection Act of 2006, which encouraged the use “default” 401(k) enrollment and investment decisions and simplified choices, represents the strongest federal endorsement of retirement plan design based on worker behaviors.

• Behavioral research can help employers design health benefits: This report looks specifically at lessons learned in the retirement realm with respect to offering workers choice, financial incentives, and more information and education. This is compared with the early evolution of consumer-driven health plans, which are still being driven solely by the market and not by legislation.

• Among the behavioral lessons learned from retirement plans:

--> More choice is not always better: Behavioral research, particularly with 401(k) retirement plans, has shown that increased choice can have negative consequences: More is not always better and may even be worse in some cases. Many people remain disengaged from matters they do not have an immediate need to address, and by the time the need becomes immediate, it is often too late. Many, if not most, workers are probably not capable of making the most appropriate retirement planning or health care choices—it is simply too difficult.

--> Education and information are not enough: Research has shown that education has resulted in little to no improvement in workers’ knowledge of retirement saving and investing. In addition, empirical evidence suggests that even when “educated” employees know, most of them fail to act on their knowledge. The heavy investment that many employers have made in retirement education and information programs often fails to produce the desired results.

--> Financial incentives don’t always work: Financial incentives, such as an employer match in a 401(k) plan and tax breaks, also fall short of motivating optimal behaviors. Despite the tax-favored status of contributions and the existence of employer matching contributions, a significant portion of eligible workers still do not contribute to a 401(k) plan.

• Careful plan design more likely to succeed: Employers can effectively overcome many of these challenges with effective retirement and health plan design. Research has shown how default choices, simplification, framing, and requiring active decisions in 401(k) plans can go a long way toward improving the decisions that workers make. Similar design factors can be applied to employment-based health plans, and plan sponsors are well advised to determine these potential effects ahead of time.

Older Workers Rethinking Retirement

Bob Moos of Dallas Morning News (via AARPBulletinToday) reports: "Older Workers Rethinking Retirement". This article draws the spotlight on to the troubling ways that older Americans are trying to cope with the exposure of their retirement nest eggs to declining market conditions. The article quotes three 60-65 year olds, who for one reason or another tied to market conditions have chosen to continue working. Their stories are a troubling reminder for what lies in store for millions of Baby Boomers facing retirement over the next 10-15 years.

The first story is about Neal Ator of McKinney, Texas, does not sound so bad:

...the 65-year-old McKinney resident has since taken a part-time job as a loan officer to supplement his retirement income.

Drawing on his experience as a credit counselor, he sells reverse mortgages out of his home. He hopes the paycheck will offset the losses from his investments and pay for some travel with his wife.

"Many of my neighbors have also come out of retirement," Mr. Ator said. "Besides the satisfaction we get from our jobs, we're all trying to make sure our nest eggs last as long as we do."

The second story is about Scott Daily of Carrolton, Texas. Now things start to get interesting. I will hold my comments until later:

Scott Daily of Carrollton figured he had had enough of the corporate world last year after going through his fourth downsizing. He was looking forward to kicking back, riding his motorcycle and tinkering with old cars.

"I talked to my financial planner, who thought I could afford to do those things, even though I'm only 60," he said. "I'm debt-free -- I don't even have a mortgage. And I've been able to save for my retirement."

Then the market took a nosedive, slashing 30 percent from Mr. Daily's portfolio and sending him in search of a job again.

"I'm not hurting, but I'm wondering whether the economy will deteriorate further," he said.

Over his career, Mr. Daily managed dozens of construction projects across the country, traveling more than 3 million miles. He's now trying to find an employer who values that hands-on experience.

My comment for Mr. Daily: Who is giving you financial advice that is causing you to lose 30% of your portfolio at age 60? Or did I miss the boat on something - is 60 the new 30?

The next and final story is about Peter Laux of Plano, Texas.

Peter Laux, who's 65 and lives in Plano, works as a management consultant four days a week because he believes he can't afford to take much from his shrunken nest egg, which has lost 20 percent in a year.

"If the market were better, I wouldn't work at all," he said. "But my cardiologist tells me I may live to be 95, and my mutual funds certainly aren't giving me the kind of returns I'll need to last that long."

Mr. Laux, who took an early retirement package from Texas Instruments Inc. (NYSE:TXN) , intends to draw Social Security when he reaches 66. But his consulting income lets him enjoy a more comfortable lifestyle.

"Because I don't see myself sitting at home and eating cat food, I will keep chasing consulting jobs," he said.

My comment for Mr. Laux: (essentially the same as for Mr. Daily above) Who is giving you financial advice that is causing you to lose 20% of your portfolio in one year at age 65? Or did I miss the boat on something - is 65 the new 35?

Three stories of retirees or near-retirees from relatively well-heeled suburbs of Dallas, Texas are not a statistically significant sample of individuals in order to represent what the vast majority of Baby Boomers are going to be facing over the next decade. However, these are cautionary tales at best - with coded messages for both retirement savers as well as policy makers. Social Security by itself is not enough, guaranteeing in some locales around the country barely a poverty-level monthly benefit payment, and a purely market-based defined contribution savings system that is too volatile to give savers peace of mind in their sunset years.

WSJ Journal Report - When 401(k) Investing Goes Bad

Jennifer Levitz reported in the Wall Street Journal's Journal Report [subscription required] last week, "When 401(k) Investing Goes Bad - Teachers in West Virginia offer a valuable lesson for what not to do".

Ms. Levitz chronicles the story of how West Virginia's school districts jumped on the participant-directed defined contribution bandwagon 17 years ago with disastrous consequences for employees.

"It was horrible," says Judy Hale, president of the West Virginia Federation of Teachers union. Most felt poorly informed, and they invested too conservatively, putting the largest sums of money into a fixed-rate annuity, a safe but low-yielding option that typically is inadequate for building a nest egg.

As employees began to retire, most balances were pitifully small."

Of course the solution to their problems was an "old fashioned" pension plan!

So on July 1, after a vote authorized by the state legislature, 14,871 school employees, or 78%, switched to the old-fashioned pension plan.

Trouble with AIG VALIC:

The West Virginia plan initially offered stock and bond mutual funds, a money-market fund, and an annuity, in this case from Variable Annuity Life Insurance Co., or Valic, a unit of American International Group Inc. In addition to the Valic annuity, current offerings include funds from Capital Group Cos.' American Funds unit, Federated Investors Inc., Fidelity Investments and Franklin Resources Inc.From the start, most employees favored the annuity. Some say they were swayed by Valic's sales force, which included former educators and school employees who went into the schools during the workday to talk about the option. "These people came during your lunch or during your planning period basically to sell the program," says Debra Elmore, a third-grade teacher in Ansted, W.Va.

Ms. Elmore acknowledges knowing little about investing. "Oh, Lord no," she says. "I had no idea." She set up her account so that 85% of her contributions would go into the fixed-rate annuity. "I just thought, 'Well, these are safe. Let's stay there.' "

We will come back to Ms. Elmore's comment in a minute...

AIG spokesman John Pluhowski says the insurance company hires former school employees to sell its products to schools "because the education market is important to us; educators know the needs and concerns of educators." He says the representatives were "not authorized or directed to give investment advice; they were only authorized to sell a fixed-annuity contract."

Anne Lambright, executive director of the state's retirement board, says that the board offered "some general education" about investing to employees, but that "not everyone took advantage of it." She acknowledges that advice was limited and that much of the information employees received was probably from the companies selling the products. "I'm not sure how much information they got in terms of comparison between products or stocks and bonds," she says.

At one point, about two-thirds of all assets in the plan were invested in the fixed-rate annuity, according to the board's annual reports. For the first two years, the annuity offered an annual return of 8.5%, but then it dropped to 4.5%, according to a state official. Mr. Pluhowski says the 4.5% is the guaranteed minimum return, while the higher percentage was based on then-market conditions.

By 2005, complaints from employees and the union about low balances in the defined-contribution plan had mounted. State officials closed the plan to new participants and reopened the pension plan to new hires. The following year, school employees voted on whether to end the defined-contribution plan, but a state court later deemed the vote unconstitutional because those satisfied with the plan would have been forced to return to the old-fashioned pension plan. This spring's election was couched differently: Workers voluntarily could elect to transfer their account into the old pension plan, provided that at least 65% of current employees wanted the transfers to be permitted.

The threshold easily was cleared -- in part because as of April 30 the average account balance in the defined-contribution plan was $41,478, and of the 1,767 employees over the age of 60, only 105 had balances of more than $100,000. "Our members were going to run out of money five or six years into retirement," says Ms. Hale of the teachers union.

Some retirement experts say another problem that surfaces in 401(k) plans is the "red-truck syndrome": Plan participants use some of their nest egg at retirement to buy something they always dreamed of having. Teresa Ghilarducci, an economist at the New School for Social Research in New York, says many workers take their 401(k) in a lump sum and have difficulty making it last. She says the West Virginia case "shows the nation what is wrong with everyone's 401(k)," including a lack of investment knowledge and fiscal discipline.

Long-time readers would recognize Ms. Ghilarducci who we noted on July 7th when she appeared on NPR's Fresh Air program promoting her new book, When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them."


Back to our main topic today, needless to say, there's a state investigation into whether VALIC made misrepresentations to induce state employees to invest into its annuity...

Now back to Ms. Elmore's comment. In a letter to the editor in the Journal today, Ernest Jordan writes from Florida:

All employers should learn from your article "When 401(k) Investing Goes Bad -- Teachers in West Virginia Offer a Valuable Lesson for What Not to Do" (The Journal Report on Investing in Funds, Aug. 4) the need to focus on employee education and employer fiduciary oversight. There were ways to stave off these issues years ago.

It is shameful that AIG's Variable Annuity Life Insurance Co., or Valic, takes a hit to their reputation for doing exactly what they were contracted to do by West Virginia: provide the conservative investment option in the defined-contribution plan.

This all sounds like sour grapes to me. I only have 401(k) investments for my personal retirement. It is up to me to contribute enough and invest the money in a way to ensure that I have what I need to retire. People today spend more time planning a vacation than they do taking responsibility for planning their retirement. The employees were charged with making prudent investment decisions, and West Virginia was charged with ensuring that there was proper oversight to the plan and that proper education was provided to their employees. At the end of the day, West Virginia was asleep at the wheel and should be embarrassed.

Ernest Jordan

Wellington, Fla.

Not to be outdone, Matthew Mehdi Rafat delivers our acerbic, sarcasm-laced punchline for the day from Cambell, California:

We are entrusting our children to people who can't handle basic investing and, somehow, we wonder why we end up with financially illiterate adults.

Matthew Mehdi Rafat

Campbell, Calif

BusinessWeek Report Rebuttal - How to Disqualify a Pension Plan

No sooner than I had posted on the BusinessWeek article from last week (see my previous post), I spotted this posted on CFO.com, effectively a rebuttal of the BusinessWeek article explaining why spinning off a pension plan to a Wall Street firm for the specific purpose of off-loading the plan's liabilities is a bad idea from the tax qualification perspective.

Robert Willens who writes a weekly tax column on CFO.com opines in the immediately attention grabbing headline: "How to Disqualify a Pension Plan":

Unfortunately for companies to hang on to their tax benefit, the Internal Revenue Service in Revenue Ruling 2008-45, has indicated that such a transaction would result in the disqualification of the pension plan, a result which renders these transactions completely untenable.

First though, a word from Mr. Willens on how such transactions would potentially be structured:

The transaction being contemplated is a sort of rescue operation that involves a transfer of the stock of a "shell" subsidiary to the financial institution, after the plan sponsor does two things: transfers sponsorship of the plan to the shell subsidiary, and injects sufficient assets into the plan to cure the underfunding.

The shell subsidiary's stock would then be sold to a financial institution which would more astutely manage the plan's assets and profit from the surplus the plan would generate over and above the amount needed to pay the accrued benefits to the plan participants and their beneficiaries.

The major benefit of the transaction, however, hinges on the pension plan remaining "qualified" in the eyes of the Internal Revenue Services. Indeed, qualified plans are tax-deductible and the plan's earnings can accumulate free of any tax consequences.

A-ha, but Mr. Willens is applying logic based on current tax law. The BusinessWeek report by Mr. Goldstein specifically suggests that the Congress is being actively lobbied to change tax law presumably in favor of the Wall Street firms (whatever it may be) and I would venture a guess that specific provisions may need to be amended/enacted to preserve the tax qualification of such plans in order to create a market for such services to be rendered. I would encourage the reader to go through Mr. Willens article in its entirety in order to gain a better understanding of the points raised (which I will not go through with in detail here).

The gist of it if I understood correctly is that the tax qualification is premised on the basis of there being an employer and the plan being established by the employer for the exclusive benefit of the employees - where/how is this relationship being preserved (and thereby the tax qualification of the plan) if a plan is spun off to a Wall Street firm in a structured transaction?

Could the tax code be amended to make this palatable to all sides of the transaction? You betcha...

BusinessWeek Report: Now Wall Street Wants Your Pension, Too

Matthew Goldstein reports this week in BusinessWeek: "Now Wall Street Wants Your Pension, Too".

The basic idea presented here is that major Wall Street firms want to take over frozen (DB) pension funds from companies, in order to help the sponsoring companies clean up their balance sheets. Mr. Golstein is clearly skeptical about the whole scheme, as he writes:

The folks who brought you the mortgage mess and the ensuing hedge fund blowups, busted buyouts, and credit market gridlock have another bold idea: buying up and running troubled corporate pension plans. And despite the subprime fiasco, some regulators may soon embrace Wall Street's latest scheme.

Great graphic:

The concept of off-loading pension funds sounds great. For businesses it's a chance to rid themselves of struggling plans, which can weigh down a balance sheet. It's especially good timing now. New accounting rules take effect in the next year or so that will require companies to mark their pension assets to prevailing market prices each quarter—a change that could devastate some companies' profits. Meanwhile, many companies no longer want to pay for pensions, troubled or otherwise. A recent report from the U.S. Government Accountability Office found that most companies freeze their pension plans merely to avoid "the impact of annual contributions to their cash flows."

But the gambit to turn pensions into for-profit enterprises raises troubling questions. Critics, including some on Capitol Hill, worry that financial firms don't have workers' best interest at heart, which would put some 44 million current and future retirees at risk. "We think it's just a terrible idea," says Karen Friedman, policy director for advocacy group Pensions Rights Center. "In the wake of the subprime crisis, it would be crazy to allow financial institutions to manage these plans."

The biggest fear appears to be that these plans, if left in the purview of Wall Street firms, would end up as being a dumping ground for toxic securities such as CDOs and asset-backed securities, and 'who knows what else' that might be manufactured in the future:

Historically, pension funds have been managed conservatively, in keeping with the broad goals of long-term wealth accumulation. Alternative investments such as hedge funds, derivatives, and asset-backed securities represent less than 25% of pension assets. If financial firms get involved, exotic investments could swell to 50% of pensions assets by 2012, predicts McKinsey. The biggest fear is that Wall Street could use retirement portfolios as a dumping ground for its most toxic and troublesome investments. It's not unlike what regulators allege UBS officials did with its stockpile of risky auction-rate securities by trying to off-load them to wealthy clients.

Then, there is view from the PBGC perspective:

If Wall Street gambles with those pension assets and loses, U.S. taxpayers would probably foot the bill. When a company with a pension goes belly up today, the PBGC, under federal law, has to take on the fund's obligations and dole out money to its beneficiaries. It's a costly burden: The PBGC currently runs a $14.1 billion deficit.

BUT there appears to be an army of opinion makiers lined up to help pave the way for this to happen anyway:

Former PBGC director Bradley Belt argues that pension buyouts could actually strengthen the agency. If financially strapped companies could dump the plans rather than ponying up money for them, they might stay out of bankruptcy. That would mean the PBGC wouldn't have to step in and pick up the pieces of the pension. "While there are legitimate regulatory and policy considerations, much of the criticism is misplaced," says Belt, who two years ago teamed up with private equity firm Reservoir Capital to form Palisades Capital Advisors, a pension buyout boutique. "This is really in the public interest if it's done correctly."

The federal agencies that oversee the nation's pension system are expected to weigh in on the issue—potentially paving the way for big firms that have been pursuing it, such as Aon, Cerberus Capital Management, Citigroup, JPMorganChase, Morgan Stanley, and Prudential. JPMorgan has been particularly active in this crusade, sending a letter in September 2007 to several federal agencies with its own "guidelines for pension transfers." The Government Accountability Office, which began studying the proposal at the behest of the Congress, plans to issue a report later this year.

The regulatory point of view is "dim":

The biggest regulatory kink that needs to be ironed out is a tax one. Under federal pension laws, an employer can deduct part of its pension plan contributions. But it's unclear if banks or private equity firms that buy the plan would get the same tax break since they don't technically employ the workers. Squashing that perk could make such buyout deals less appealing to Wall Street. Sources familiar with the situation say the Internal Revenue Service is expected to offer a dim view of extending the current tax break to purely financial buyers. The Bush Administration is likely to take a different stance, favoring such deals in certain circumstances.

"How they do it across the Pond":

Although any restrictions by the federal government could dampen the spirits of the buyout brigade, Wall Street are likely to simply follow the lead of financial firms in Britain. Companies there off-load their pension assets by purchasing a group annuity from an insurer. That market took off 18 months ago when the country's regulators instituted more onerous pension accounting rules. Since then, nearly a dozen specialized insurers have opened up shop to offer the products. Many of the new players are backed by Goldman Sachs, JPMorgan, Cerberus, Warburg Pincus, and Deutsche Bank—some of the same names that are trying to import the concept to the U.S.

Another battlefront appears to be opening up between Wall Street firms and insurance companies:

U.S. companies already have that avenue of escape thanks to the federal pension rules. But the high costs associated with such insurance products have limited their use. That's already changing. A dozen U.S. life insurers, including John Hancock, Prudential, and MetLife, now offer a way for companies to get rid of the pension burden. And though the market remains small, insurers sold $2.88 billion worth of such policies last year—triple the amount three years ago. Those figures could rise if Wall Street decides set up insurance units to offer those types of annuities.