Last But Not Least

AP - David Spade is the father of Playboy playmate Jillian Grace's newborn daughter, Spade's representative said Thursday. The baby girl was born Aug. 26 in Missouri, and Spade plans to visit her on his first break from filming the CBS sitcom "Rules of Engagement," publicist Meredith O'Sullivan said.

401K plans have become the default retirement plan for Americans. Most companies have transitioned away from defined benefit pension plans to defined contribution 401K-type plans. Americans are now mostly on their own for their retirement. Are they ready for it? Are they saving enough? Do they know how to invest successfully? These are all very important questions. On top of needing to rely almost exclusively on their own 401K plan for retirement American are facing declining odds that Social Security will be solvent enough to be of much benefit for younger people. Medicare is on an even more dire path towards bankruptcy. Because of the future fiscal problems with social security and Medicare it is very likely that benefits will be going down and taxes will be going up. Young Americans will have to fund their own retirement through their 401K-type plans, can count less on social security, and need to budget a healthy amount of money for rising healthcare costs and perhaps long-term care costs or coverage. Many people have virtually all of their long-term savings in their 401K plan which seems good until you retire and start taking the money out. At that point every dollar you take out is taxed at the high ordinary income tax rates. Thus, if you are retired and you want to take $4,000 per month out of your 401K or IRA for living expenses, you really have to take out close to $6,000 per month (assuming you are at the 33% marginal tax rate) to get your living expense money and to pay the taxes on the withdrawal. It looks like a difficult future for many people.

So what is the answer? Americans need to begin saving more, spending less, and investing smarter if they are going to make ends meet in their older years. The 401K industry has been making moves to improve and to help increase the odds of a "successful" retirement for more people. 401K plans have been changing for the better over the past few years, and costs and expenses for these plans have been coming down. Investors also need to do a better job of getting educated about personal finance and managing their own investments in their 401K's and IRA's. Many investors don't participate at all in these plans. The smartest investment people can make is usually contributing to their 401K plan at least up to the amount their company is matching. Those investments produce an almost guaranteed and instant 50%+ return depending on the match amounts. Other investors participate in their 401K's but they make many of the common mistakes such as having all their money in cash, chasing performance, trying to time the market, not rebalancing, taking too much risk, etc. So what are the trends in the 401K marketplace today that may help investors have a better chance at a comfortable retirement?

Current trends in the 401(k) retirement plan market:

Simpler plans. Simpler plans (fewer investment choices) result in higher participation rates and better investment choices by most employees. "Make it simple" and "Just do it for me" are two key themes in designing plans today. Simpler plans result in higher participation rates and higher investment rates for employees.

Employer contributions into 401(k) plans are increasing. The most common type of company match is $.50 per $1.00 up to a specific percentage of pay (usually 6% of pay).

Automatic enrollment. This is growing fast and increases enrollment rates and plan success measures. Default contribution rates are typically 3%+ of salary initially.

Automatic contribution escalation. Employees elect to have their contributions increase automatically over time (to target rates of 6%-10% of salary). This also results in higher savings rates into the plan which most employees need to make.

Increased use of diversified "target-risk" and "target-date retirement" funds. These are "do-it-for me" portfolios where the asset allocation is done for you. They make it easy and simple to invest.

Diversified target-date retirement funds are being used as the default option for employees rather than a money market or stable value option. This also increases the number of employees that are investing closer to at "appropriate" portfolio and increases their odds of successful investing.

Plan "success" is increasingly being measured as the percentage of employees that are saving enough for a comfortable retirement rather than just the participation rate. This is the bottom line and what really matters. How many are saving enough to be able to retire with 75% of their retirement age income levels? If we start to measure this and report it to companies and participants it should result in better and more informed outcomes.

Increased employer/owner concern about retirement plan costs and expenses and fiduciary liability (funds, fees, compliance, diversification, plan design, etc.).

Increased desire and ability to provide investment education and advice to participants by advisors and providers thanks to The Pension Protection Act of 2006. Companies are interested in getting more investment advice and education in person rather than from written materials, online tools or phone resources.

Earlier access to the plans. 49% now offer immediate eligibility to new employees (rather than requiring 1 year of employment).

Decreased use of the company's own stock as an investment option or match (ever since the Enron collapse and now the Bear Stearns Collapse).

401(k) plans are definitely improving and moving in the right direction to help people increase their odds of retirement success. Investors need to step up and increase their savings rates and education levels as well.

Keith Tufte
President
Longview Wealth Management, LLC.
http://www.longviewwealth.com