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Retirement Planning: Perhaps Not so Bad… But Then Again March 25, 2009

Posted by retirementwithaplan in retirement.
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There are several things coming to light that may offer some encouragement to those who are embracing the negative narrative that has been playing out in the news and popular media. We may not have had the knee-jerk reaction to the economic downturn that many have feared – although good concise figures for the first quarter of 2009 are still not available, year end 2008 numbers are – and our defined contribution plans, while down, are certainly not out.

According to the Investment Company Institute, the public arm of the mutual fund and investment world, “only 3.7 percent of DC [defined contribution] plan participants stopped contributing to their accounts in 2008 (up from 3.0 percent reflecting changes from January through October 2008 data).” This they point out may have been the result of having reached a contribution limit.

The report, dated March 9th also found, among the 22 million accounts it surveyed, “Most participants maintained their asset allocations: 14.4 percent changed the asset allocation of their account balances, and 12.4 percent changed their contribution mix (up from 13.5 percent and 9.1 percent respectively in October 2008 data).


Even better news was the lack of loan and withdrawal activity increases that many saw as the most problematic outcome in this current economic climate. The ICI reported that “During the course of 2008, 3.9 percent of DC plan participants took any withdrawals, with 1.3 percent taking hardship withdrawals (up from 1.2 percent through October). In addition, 15.3 percent of participants had loans outstanding at year-end.”

What Got Us Here
There were some rule changes enacted in 2006 – yes, under that president – that it made it easier for representatives of investment companies who sold products to you via your 401(k) to advise you on where to put your money. On the surface, this may have seemed like a good idea. But like so many “good ideas” from that administration, it had the net effect of blurring the lines between what is ethical and what is not, what is a conflict of interest and what is done in the investor’s best interest.

These outgoing rules have yet to implemented and before they do – they are not scheduled to take hold until May 22nd after the Labor Department delayed them from taking force – the House should strike them down. According to an article by Jeff Plungis in Bloomberg on march 24, “The Labor Department previously had restricted plan administrators to general education about investments without making specific recommendations, in part to limit conflicts of interest.” The Republican led Congress thought otherwise.

Fidelity’s president of workplace investing Scott David disagrees with the rollback of the rule. 032709_ed_2009
Although Mr. David has chosen not offer individual investing advice to plan enrollees he has been pushing employers to keep adding additional incentives to their plans to keep and retain workers as well as garner increased participation.

The key is participation and Fidelity’s efforts at coaching employers offers a look at how successful plans should be run and how employees should encourage their employers. Fidelity outlines some basic strategies for employers as follows:

    To get the maximum savings rate with no match, employers should make the plan available immediately to new hires, with auto increase and auto-enrollment at a 6 percent deferral rate.

    To get the maximum savings rate with a match, employers should make the plan available immediately to new hires, match at least 50 cents on the dollar, and enable workers to be vested immediately, with auto increase and auto-enrollment at a 6 percent deferral rate.

    Before moving to a full match suspension, employers may want to consider alternative cost savings approaches such as:

  • Change the match formula
  • Limit the population eligible to receive the company match, (e.g., limit participation to specific groups, such as lower-compensated employees, etc.)
  • Redefine what it means to be eligible for the match. (e.g., include an annual “hours” requirement, such as “must work at least 1,000 hours each year” to receive the match, or be “employed on the last day of the year” in order to receive an annual match)
  • Consider moving to a discretionary match for more funding flexibility. This enables employers to change the match at any time
  • Modify the frequency of the company match contribution (e.g., contribute to employee plans on a quarterly basis instead of monthly or weekly)

Charles Jeszeck, acting director of education, workforce and income security at the U.S. Government Accountability Office, believes that plan administrators have competing interests that can “cause them to breach their duty to act solely in the interest of plan participants,” And while advice is necessary, it should come from a source other than the company providing the products.

For those of you unfamiliar with what the ICI does, their mission statement reads: “The Institute engages in three core missions: encouraging adherence to high ethical standards by all industry participants; advancing the interests of funds, their shareholders, directors, and investment advisers; and promoting public understanding of mutual funds and other investment companies.”



1. kim murray - June 15, 2009

I started my insurance business becasue my corporate advised me to put my saving in 401k plan and my results of earning for over 5 years was -1%. How will I retire off that.

retirementwithaplan - June 16, 2009


One percent is not as bad a some but still not great. If you had assumed that you would be able to save enough in five years to retire, that is not good news. But if you are planning on a much later date, you are off to a good start provided you continue to channel money into the plan and you are taking the appropriate amount of risk. These market issues will come to pass and after some corrections, I think you will find your plan doing much better in five years.

Good luck and keep investing!

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