01/31/2011 01:59 pm ET Updated May 25, 2011

Why Don't the Folks in Charge of Your 401(k) Plan Realize You Can't Retire?

How many times have you seen articles with the headline, "As Baby Boomers Prepare to Retire..." compared to articles entitled "Baby Boomers Aren't Prepared to Retire?"

As I've pointed out before, 90% of Baby Boomers in the private sector can't afford to retire because they are dependent on a 401(k) plan whose measly employer contribution rate of 3% of pay is so low most people won't have accumulated enough. (This is also true for their younger counterparts but the you-know-what hasn't hit the fan for them yet.) However, most Americans don't realize they're in a pickle because the folks who manage or advise you on your 401(k) investments aren't required to communicate this shortfall to you. Despite the passage of -- and multiple amendments to -- the Employee Retirement Income Security Act, not only has retirement security vanished in the U.S. but we're left spinning in the dark.

At the same time, while the mutual fund industry has rolled out investment products called "target date funds" that automatically shift from stocks to fixed income investments as participants get closer to retirement age, the folks that run the funds don't define a target AMOUNT as a multiple of your salary and how much you need to sock away to hit the bulls-eye. Last week the Investment Company Institute, the trade organization representing mutual funds, issued a report on a survey showing that households " were generally confident in these plans' ability" to help them meet their retirement goals, but there was no mention of what that goal should be based on an individual's pay check nearing retirement. As I've discussed in previous blog posts, the formula developed by pension actuaries is that you need to have accumulated a multiple of at least 10 times your salary at retirement.

Not only do these so-called stewards of 401(k) assets not know the formula for retirement adequacy, one of them censored my attempt to shed a light on this ignorance. After I submitted my column for an employee benefits publication in which a high-ranking official at a mutual fund admitted he had no idea how much 401(k) participants needed to save, the next day the company told my editor that they would withhold any future advertising in that publication if the publication published my interview with the official.

Even those outside of the mutual fund industry who are paid to advise 401(k) participants don't seem to know the formula. For example, the only advice Financial Finesse appears to give employees is to "shoot for 80% of your current income," as if 80% of one year's wages could magically last a couple of decades. (A Financial Finesse spokeswoman didn't respond to my query.)

As I testified before the Department of Labor in 2007, with the input of pension actuary James Turpin, assuming a typical employer contribution rate of 3% of pay, the only way to reach retirement adequacy without banking a huge chunk of your paycheck is to start contributing at age 25 and save 10% of your salary. The longer the participant postpones saving, the greater the required contribution. For example:

  • Waiting until age 35 increases the contribution rate to more than 17% of pay
  • Waiting until age 40 increases it to more than 23% of pay.
  • Finally, waiting until age 50 requires a nearly five-fold increase from the rate at age 25, to 48% of pay Needless to say, this over-50 requirement flies in the face of the meager current5,500 limit on "catch-up contributions" currently allowed by the IRS.

Senator Tom Harkin, chairman of the Senate Health, Education Labor and Pensions Committee, has said that he intends to make retirement security a priority in 2011: "Over the coming year, I plan to hold a series of hearings examining the crisis in retirement security from a number of different angles." Harkin has also supported requiring mutual fund companies to at least tell 401(k) participants what kind of income stream they can expect from their account balances. Since the typical Boomer has saved around $120,000 and a $100,000 nest egg will only produce an income stream of $333 a month, or around $82 a week, they're going to be hurting.

I'm urging readers to get Congress to take action this year, specifically by going to my website:, click on the link on the upper right hand side: "Stop the 401(k) Nightmare" and send the link to your Congressperson.