2008 Ends With Alarming Retirement Benefit Trends

Wondering whether to keep throwing money into the black hole formerly known as your 401(k) account next year? Your employer might just make the decision easier by cutting back on matching contributions.

A survey by benefits consultant Watson Wyatt finds that five percent of companies already have reduced their contributions this year, and another seven percent expect to make cuts in 2009.

The cuts in 401(k) contributions are coming from cash-strapped companies facing sharp downturns in revenue as the recession deepens. The timing couldn't be worse, with retirement savers already facing decimated account balances from this year's stock market collapse.

The Watson Wyatt survey shows two other trends that are very negative for long-term retirement security:

-- Almost 60 percent of employees have moved their 401(k) or 403(b) investment mix out of equities, compared with 53 percent in October. That's almost always a bad move, since it constitutes selling at the low end of the market and reduces the opportunity to benefit when the market recovers.

-- The number of employees taking loans from 401(k) accounts jumped from 19 percent to 27 percent in the same period. No doubt, the trend reflects the growing stress on household finances, but 401(k) borrowing can have devastating impact on long-term retirement account growth.

Unlike traditional pensions, employers have the flexibility to stop or start matching 401(k) contributions as they like. It's a relatively obvious target for cuts in a severe economic crisis, when cash gets tight. Today, only one-third of all U.S. employers still offer traditional defined benefit (DB) retirement plans-that is, plans with specific cash payouts that are promised to employees at retirement.

The pain associated with steep portfolio declines has some retirement experts calling for a return to traditional guaranteed retirement benefits. The looming cutbacks in employer matches likely will turn up the volume on this debate.

Comments

[WOW-Online]

Retirement savings is unfortunately a dwindling commodity in these tough economic times, and is already affecting those elders looking to retire now or in the near future. We all know the earlier you start saving for retirement the better you will be when you decide to retire, but people are now spending money, originally saved, and consequently losing their built up retirement security. Social security alone is not enough to sustain elders in retirement.
It is important to have a standard that measures what elders currently need to be economically secure so that those who are not can receive added income supports and services currently unaffordable to them. The Elder Economic Security Initiative at Wider Opportunities for Women provides the Elder Economic Security Standard Index, a tool that measures an elder"s economic security based on geographic area.
For instance, in Philadelphia County, PA the average social security payment is $12,031 for a single elder, and according to the Elder Economic Security Standard Index $17,363 is needed for an elder to make ends meet who owns their own home and $20,588 for an elder who rents.
For more information about the Elder Economic Security Initiative visit
http://www.wowonline.org/ourprograms/eesi
Share your thoughts about elder economic security at the Elder Economic Security Initiative blog
http://www.wow-eesi.blogspot.com

[eilish]

I feel very fortunate that my company did not endorse the 401k plan as the only retirement to which they contribute; the 401k was offered in addition with decent matching contributions. The sneaky trend of companies touting Wall Street as the only retirement out there - I cannot imagine the terror of the retirees who were forced to place their retirement money in such hands. GM has some support plans for their employees that the rest of Americans rightly envy - but why condemn them? If the blame for a company's financial trouble is based on its benefits to its employees rather than the uncontrollable greed of the wealthy corporation, why are Americans roundly denouncing GM?

[Mark Miller - Huffpost Blogger]

Couldn't agree with you more, eilish. The GM situation is ridiculous--I posted about it here last month -- see: http://www.huffingtonpost.com/mark-miller/let-them-eat-stock_b_152548.html

[MofoMojo]

"Almost 60 percent of employees have moved their 401(k) or 403(b) investment mix out of equities... That's almost always a bad move, since it constitutes selling at the low end of the market and reduces the opportunity to benefit when the market recovers."

You must be prepared for the very real possibility that the market will decline steeply in the coming year. The next wave of mortgage defaults will not crest until late 2009 and the economy is saturated with debt. Those who still have jobs will be attempting to pay down their personal debt, resulting in low levels of consumption. The downward spiral will continue.

When the economy does recover, beginning in 2010 or 2011, it will be a slow recovery. This is because debt servicing will still be dominant and the nearly unlimited credit of the past 30 years will not be available to pump up another bubble.

I protected my 401(k) accounts by putting the money into non-indexed funds, to the astonishment and occasional derision of friends and co-workers. Now I have to listen to them whine about the tens and even hundreds of thousands of dollars they "lost". For those of us who are more risk-averse, it's better to protect what we have now. There will be time to get back into the market when the fundamentals turn more solid and the potential for a second crash attenuates.

Good luck.

[marijam]

I don't know about you, but I have a problem with losing all value above my initial investment every 8 years. Twice is enough.

[cylindar]

Retirement trick acccounts no matter what form they take will become quite thin over the next few years. Social security will extend the retirement age even more and also the early retirement age. Younger people are looking at a very long and grueling work life at lackluster jobs that are left after the export of all the good positions.

[sonoffestus]

Anyone see Frontline's program on the looming retirement crisis? Once again the American worker gets played, ouch!

[rich misty]

Republicans are cheering this... Their goal is the demise of their number one enemy, America and Americans.

[kaukerc]

I wish the American people would wake up and recognize the 401k program for what it really is---- a glorified savings account. My company is one of those that reduced its matching contribution to a measely 1 percent. The 401k program was initially begun so that high earning individuals could shield additional money away ON TOP OF their pension benefits. It was never meant to totally replace people's pension plans---but I suppose with a good marketing campaign anything is possible, even shooting your own feet off.

[FightingTheRight]

Well said.

I've been pointing this out for years. but no one seems to listen.

[Sykon]

It doesn't take a half whit of sense now to see why privatization of Social Security was so high up on the Republican agenda. What a bonanza... what a coup... to suddenly turn all that money flowing into secured Treasury bonds and start pumping it into Wall Street.

Why, don't-cha know, the market would have just taken off... the Dow Jones index would have sky rocketed above 20,000... a thousand new investment banks would have been created... and five million new "investment adviser" and "retirement specialist" jobs would have been created. "Hah, HAH", would be the new cry of 250 million working men and women - all pumped, secure and cheered by fantastic returns on their invested retirement portfolios. Yes, far exceeding the measly returns of even the most conservative managers of other people's live savings... managers like Bernie Madoff, Ralph Bernanke and Henry Paulson to name a few.

When I first heard about this Social Security privatization scheme, I wondered why we didn't just move to each month take a small portion of the pooled Social Security money... let's say, 5.0%, and invest that under strict Oracle of Omaha rules of investing by a selected group of commissioners appointed to the newly created Improved Social Security Investment Return Commission.

Sure, let some wizards of Wall Street gamble a bit with a portion of our trust's funds, but not suddenly bet the whole bank on Wall Street. That would have been antithetical even at the best of casinos.

[HMDMSR]

Can you imagine, all those years ago, GM workers asking for good retirement packages. How selfish and ignorant. Every well educated person knows that 401k is the way to go.

[darker]

Republicans' CRUSADE for PRIVATIZATION of absolutely everything
has CRASHED THE WORLD'S ECONOMY. Now their MESS is
in everybody's backyard!

[BarryS]

better yet, now's the time to privitize the system and put everybody's money at risk. Maybe require mandatory investments with Bernie, after all, he go better than average returns consistently [for a while...]