Defined contribution [DC] plans - 401(k)s, 403(b)s, 457s, much as they have grown to be dominant, have for many, been a failure. Recent statistics indicate 97 percent of Baby Boomers have not saved enough for retirement. Many, though not all people like the illusion of control, and seeing their balances — it makes the DC plan tangible, even if you don’t get what is really needed at retirement. Our cultural obsession with consumerism may keep us well dressed and living in nicely furnished homes, but it is quietly killing our financial future.
Retirement plan reform has to face three realities. First, people don’t know how much to put away for retirement. The general answer is, for almost all people, put away 15 percent of your gross pay. Next, most people don’t know how to invest, so should be handed off to advisors who will do it for you, being very mindful of costs. Finally, given that many people are poor investors or not interested in investing, offering a low cost annuity option at retirement makes sense as an option. Managing a lump sum on your own as you retire is not advisable for many. Annuitization currently is an option only for defined benefit [DB] plans.
Given the above changes and assuming heavy doses of mandatory participant education yield increased savings rates, this likely leads to much better results for plan participants. This is the sort of plan that would yield better results for most, given that DB plans are out of favor, and participant-directed DC plans lead to high expense/poor results. It may be time to consider a hybrid plan: A trustee-directed DC plan for accumulation and a DB plan for distribution.
In the meantime do yourself a favor and pay off credit cards every month. Put away 15 percent of every paycheck and take advantage of employer 401(k) matching plans. If you can, retain and use the services of an accredited financial planner to help you navigate the retirement investment landscape.
Christopher P. Blakely, CFP®, CTFA, CMFC 03/2012
