Happy Ever After?

As the US population gets older and lives get longer, having a plan for retirement is increasingly important. HRM sat down with Mike Scarborough of Scarborough Capital Management and Brent Walder of Prudential to hear what must be done to be ready for the post-work world.

“Most participants are not equipped to be effective investment managers”
-Brent Walder

HRM. With an aging population of Baby Boomers approaching the end of their working lives, there is a growing focus on planning for retirement. What options are available for both employers and individuals with regards to retirement planning?
Mike Scarborough. There exists a huge assortment of options for retirement planning; options that either the plan sponsor can provide or the individual can access on their own. The internet has been a big driver in providing access to retirement planning tools. Articles and calculators are everywhere.

Unfortunately, I’ve always believed that the majority of people out there, who are investing through their company’s defined contribution plan, just don’t have the interest in learning about the fundamentals of retirement planning and investing. I don’t blame them. I have no interest in learning how to repair my car. Is it essential to my life? You bet. Could I learn to repair it if I needed to? Probably. Does it cost more to send it to a qualified mechanic? Absolutely. The best option that’s available is one where the individual can select a qualified advisor to help put in place the retirement plan roadmap, make adjustments along the way as necessary, and provide information to the individual as it relates to their specific situation.

Brent Walder. It is not just the Baby Boomers approaching the end of their work lives that is causing the growing focus on retirement planning, but also the shift from traditional pension plans to 401(k) plans as the primary source of employees’ future retirement income. Compared to traditional defined benefit pension plans, with the 401(k) plan the individual bears not only more risk, but more of the responsibility in managing his or her retirement plan. Plan sponsors are starting to see new options become available to help their pre-retirees plan for retirement. These options include managed advice plans and flexible guaranteed income options that are made available within 401(k) plans.

HRM. Is the current economic situation having an impact on attitudes to retirement planning? If so, how is the market responding to the situation?
BW. The impact has been great. And we should expect nothing different as individuals have suffered greatly in their 401(k) plans with a stock market drop of nearly 56% (as measured by the S&P 500) over a very short 17-month period. Many individuals responded by locking in losses and moving their money into more conservative investments. In fact,  the Hewitt 401(k) Index reported for the first time in March,2009 that more money is in fixed income investments than in equity investments. This is understandable.  But it’s a real concern when interest rates are so low and individuals can easily expect to live three or more decades in retirement. Unfortunately, investors do tend to be driven by emotion and often buy high and sell low.

MS. When I hear someone say, ‘I guess I won’t be able to retire now,’ or ‘There goes my nest egg,’ I know they didn’t start with proper retirement planning. The current economic situation is where qualified financial advisors really earn their money. Their most important role is calming the nerves of retirement plan participants. Internet articles and calculators can’t do that.

There is a comparative study out there, including data from Dalbar and Morningstar, that shows that over a 20-year period from 1986 to 2006, the average equity mutual fund returned 10.7 percent. Over that same period the average investor, as defined by Dalbar, achieved an average return of only 3.7 percent. The difference can only be attributed to investor behaviour. Individuals tend to move in and out of the market as fear and greed dictate.

Certainly plan participants and sponsors can pay an advisor to give appropriate allocation advice. However, my feeling is that advisors really help managing the participant’s behavior. 

HRM. How important is education and access to the right information when making decisions about retirement planning?
MS. The right education and information is critical to success. When I talk to participants and hear them repeat information they heard on CNBC the night before, I know they’re losing sight of their retirement goals and focusing on the short term market movements. That’s because so much of the information out there is focused on the short term.

Proper educational information constantly needs to remind participants that what the market does today, tomorrow or next week will have little impact on their success or failure as a retirement investor.

BW. It depends. Individuals who need to tack action on their own do indeed need help with decisions such as how to draw income from a 401(k) plan and when to start receiving Social Security benefits. So access to education and the best information is very important for this group. Yet, there is a strong movement --- that we wholeheartedly endorse --- that says individuals left on their own will too often make poor decisions. And therefore individuals should be defaulted into a participant “glide path” --- from the moment they join a company, to the time they die, in ordert to help them save enough, invest appropriately, and guarantee that they have lifelong income through old age. Individuals should always have the option to opt out of this path, but most individuals would have their retirement plan created for them. By staying in their 401(k) plan for life, they would have access to lower-cost investments resulting in a higher likelihood of retiring securely.

HRM. What can be done to ensure that individuals take advantage of the options available to them to guarantee an income after retirement? Do you think employers and providers are doing enough in this area?
BW. I’m not sure that sponsors are aware of the choices open to them. Now, not all sponsors will agree that helping a participant make sure their 401(k) assets generate a lifetime income is their responsibility. But we know from talking to plan sponsors that many indeed do care and want to assist as much as they can. Most sponsors today have a default solution in their 401(k) plan that sends their retiring employee out into the world with a lump-sum check which is often in the six figures. Unfortunately, the newspapers are filled with stories every day about how many of these seniors have lost their retirement wealth and have to return to work or cut back on their lifestyles. Most participants are not equipped  to be effective investment managers, and they are unable to generate income for multiple decades. If sponsors want to help their plan participants enjoy a  secure retirement, they should give them access to institutional funds that make it possible to generate guaranteed lifetime income. Handing them a check as they head out the door has been disastrous for hundreds of thousands of the first generation of 401(k) retirees. This needs to change. It has to change.  And I am quite convinced that it will change.

MS. I don’t believe enough is being done, but I really can’t blame employers or plan providers. There’s so much focus on fiduciary responsibility for the plan and participants; and I think the real term is fiduciary liability. Companies are scared to provide their employees with education and advice when it could potentially come back to bite the employer.

I want to see more emphasis being put on responsibility. Someone has to take responsibility for seeing that Americans are preparing for a retirement income. Whether that’s the individual, the employer, the government, the provider, it has to be made clear.

Right now, the onus is clearly on the individual. However, everyone else keeps getting in his or her way. Providers make it difficult for an individual to get advice from anyone but the provider; employers make it difficult to get advice for fear of potential liability; and the government won’t make it clear that companies have nothing to fear for helping their employees. I don’t blame human resource managers for feeling frustrated.

Mike Scarborough is President and CEO of Scarborough Capital Management Inc. As one of the leading pioneers on 401(k) management and advisory services, author and entertaining speaker, Scarborough travels the country advising 401(k) participants and plan sponsors on proper 401(k) account management.

Brent Walder is Senior Vice President and Director of Prudential Retirement’s Institutional Income Innovations group. Previously, Brent was vice president of Business Finance for Prudential Retirement’s full-service retirement business. Before joining Prudential, he was a business financial officer for CIGNA’s retirement business, and has held several financial roles as a member of CIGNA’s Financial Leadership Program.