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Why the Denial About the Retirement Crisis?

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The only thing more frustrating than the media's refusal to cover America's retirement crisis is that the trade group for the mutual funds who manage 401(k) assets continues to insist that the crisis doesn't exist. As reported by Reuters last week, the Investment Company Institute claims that in mid-2013 people between the ages of 60 and 64 had nearly $360,000 in their defined contribution accounts and IRAs, on average.

"When we look at data and near-retirement households, they have accumulated significant resources" Sarah Holden, senior director of retirement and investor research at ICI, told Reuters in an interview.

The ICI apparently lives in a different universe than that of the Federal Reserve System. According to its 2010 Survey of Consumer Finances, the median amount saved in 401(k) accounts and other savings for those age 55 to 64 was only $100,000. While the stock market has performed relatively well over the past few years there is no way that account balances for any age group would have more than tripled by 2013. What's more, given that the formula for adequacy is accumulating at least 10 times your salary at retirement, a $360,000 nest egg is only around half of what's needed, given that the median wage for those in their 60s is $65,000.

Then there's the contention that some of the retirement assets come from traditional pensions, that old-fashioned retirement plan in which employers bankroll the cost of retirement. Not only do nearly 60 percent of Americans work for a company that offers no retirement plan at all but even those working for Fortune 100 companies probably won't be covered by a pension: only 11 of the Fortune 100 companies offer a pension to new hires -- a precipitous drop from the 89 that did in 1985.

Bottom line: Most Americans are facing pension poverty. According to the Employee
Benefit Research Institute's 2013 Retirement Confidence Survey
, 57 percent of households reported that they had less than $25,000 in retirement savings, including 28 percent with less than $1,000.

What makes these empty nest eggs even scarier is that most Americans have bigger bills than their parents did. More than 50 percent of Boomers between the ages of 55 and 65 were making mortgage payments in 2007 -- on average owing more than $140,000, according to the Survey of Consumer Finances. That amount is nearly three times what was owed by that age group a mere 18 years earlier, when only 34 percent were making mortgage payments. Boomers aren't just paying mortgages on recently purchased homes but repaying home equity loans. A 2008 study by the Center for Retirement Research found that Americans between the ages of 50 to 62 in 2004 borrowed $380 billion during the 2001-2006 housing boom, according to the Retirement Income Reporter.

Retired Americans must also foot a huge chunk of their medical bills, which wasn't true a couple of decades ago, at least for those working for large employers. While more than 80 percent of large employers surveyed in 1985 provided health care coverage to retirees that figure shrank to 16 percent in 2010 -- a whopping 80 percent drop over a 25-year period. As a result, millions of retirees are likely on the hook for more than $6,000 year in Medicare and Medigap premiums, as this author knows firsthand. Given that the typical Social Security benefit is only around $23,000 a year, Attention Must Be Paid.

What's bizarre is not only that the ICI's optimistic findings not only contradict others who study retirement -- a report last week from the Center for Retirement Research at Boston College indicated that 50 percent of households will not be able to maintain their standard of living in retirement -- but flies in the face of research by one of the mutual funds they represent on Capitol Hill: Fidelity Investments, which released a study last week headlined: "More than half of Americans (are) at risk of not covering essential expenses in retirement."

Ronald O'Hanley, Fidelity's president of asset management, has proposed that lawmakers double the default automatic enrollment 401(k) savings rate to at least six percent as he pointed out in a speech to the U.S. Chamber of Commerce in April of this year, as reported by the New Hampshire Business Review. O'Hanley said we need to act now "to avert the looming catastrophe America faces if we don't get serious about addressing the inadequacy in our retirement savings system."

So why is the ICI creating the spin that their customers are doing just fine? According to Reuters, it appears that they fear that Congress will potentially remove the tax deduction for 401(k) plans in order to lower the budget deficit, which would discourage savers and lower assets.

A message to the mutual fund industry: you would be much more credible lobbying for preserving tax breaks by demonstrating they are vital to incentivize Americans to escape pension poverty, rather than pretending that the plans are working just fine.