Friday, October 4, 2013

The Lost Retirement Generation?

Maggie McGrath of Forbes reports, Are Millennials The Lost Retirement Generation?:
Another day, another depressing label for Millennials. They’ve been called lazy, entitled, narcissistic and much more. Now, a new study has added yet another dubious distinction to the list: Millennials are the lost retirement generation. Not only are they not meeting income-replacement goals, but they’re not even running retirement calculators to find out how much they should be saving.

A study conducted by Financial Finesse (a Forbes contributor, it should be mentioned) found that just 29% of the Millennial respondents had used a retirement calculator to figure out just how much money they’ll need in retirement, and 17% say they’re on track to retire with 80% of their income in retirement.

“[Millennials] are the generation that are the least likely to be on track for retirement. They’re the generation that will have the most changes with retirement programs changing, pensions going away, taxes going up, and they’re ignored,” says Erik Carter, a certified financial planner with Financial Finesse. “People aren’t paying as much attention to them and they are falling behind and falling further behind.”

Carter says that this situation has been caused by a perfect storm of factors: this is the generation who came of age during huge market downturns, who is burdened (if not crippled) by student loan debt, and who — worst of all — feels too young to even worry about retirement in the first place.

“I do think a lot of times people just think retirement is so far away. It’s something I’ll think about when I’m 40,” Carter says. “Maybe people are scared. They don’t want to run the [retirement] calculator and see the huge numbers — but you wouldn’t know the number is big unless you’ve run the numbers.”

While Pew research indicates that roughly 40% of Millennials have student debt, Carter noted that previous studies have shown that Gen Y is better with managing cash flow than Gen X, so he believes Millennials’ lagging retirement savings has more to do with not even knowing how much they need to save. Or severely underestimating how much they need to save: Financial Finesse cited a Pentegra Retirement Services study that found that 62% of adults ages 18 to 34 think they’ll only need $500,000 in retirement.

Are they delusional, or just unaware?

“They’re delusional because they’re not aware,” Carter says. “Part of the problem is this lack of awareness. Everything keeps coming back to that: Not knowing how much they need, not understanding the need to save now. All of that is interconnected.”

The obvious take-away from this survey, if you’re a Millennial, is to run a retirement calculator so you can at least see how much you’ll need to save. If you’ve already done that and are looking to kick more of your funds towards savings, Carter has two tips. First: auto-escalate your 401k, either by enrolling in the auto-escalation option (if your plan offers one) or by making a deal with yourself that you will increase your savings rate by 1% per year (or even better, every six months).

“What we find is usually people don’t even notice the difference in their paycheck,” Carter says of slow, gradual, 1% savings increases. “By slowly escalating, you may not even feel it.”

Carter’s second tip is for anyone who feels like all of their funds should be going towards paying off student debt: “Understand the options for reducing payments. A lot of people are eligible for extended repayment plans,” he says. “Interest rates are low; it’s almost like a mortgage. It might be better off to get the match, rather than paying off as fast as possible.”

Ultimately, despite the bleak headlines, Carter has hope for this lost generation.

“There is a lot of hope and the thing they have on their side is time,” he says. More time to save, more time to grow and compound.
Are Millennials the lost retirement generation? I submit to you that baby boomers aren't doing that much better. They enjoyed a nice bull market in stocks and bonds that began in the early 80s but got slaughtered in the 2000 tech crash and especially in the 2008 financial crisis. Most have not recovered from their 401(k) nightmare and are now facing the dire prospect of pension poverty or having to work till they die

But Millennials face serious economic obstacles that their parents didn't experience: crippling student debt, lack of jobs, and the decline of defined-benefit plans taking place all over the world as companies race to de-risk pensions, shifting retirement risk entirely onto their employees.

And what is the solution to America's ongoing retirement crisis? According to the Wall Street Journal, it's to follow Australia's lead and keep shifting private and public sector workers out of defined-benefit plans into defined-contribution plans. Everyone fend for themselves in this wolf market. If they're lucky, good for them, if not, let them eat cat food.

The article above quotes Erik Carter, a certified financial planner, who rightly notes Millennials aren't saving enough. But he fails to understand they can't save much because they're working at low paying jobs and paying off huge student loans.

An even bigger problem with the article above is that it fails to examine the failures of 401(k) plans to provide adequate retirement security and coverage. Monique Morrissey and Nathalie Sabadashi of the Economic Policy Institute wrote an excellent research paper explaining how the 401(k) revolution created a few big winners and many losers. I quote the following:
In theory, the shift from traditional defined-benefit (DB) pensions to 401(k)-style defined-contribution (DC) plans could have broadened access to retirement benefits by making it easier and cheaper for employers to offer benefits. However, participation in any employer-based retirement plan declined over the past decade (Figures 2 and 3) even as defined- contribution plans became prevalent in the private sector (Figures 4 and 5).2 And as pension coverage declined, older households delayed retirement and increased their earned income (Figures 6 and 7) (Morrissey 2011).

Retirement-income inequality has grown in part because most 401(k) participants are required to contribute to these plans in order to participate, whereas workers are automatically enrolled in defined-benefit pensions and, in the private sector, are not required to contribute to these plans. Thus, higher-income workers are much more likely to participate in defined-contribution plans. In addition, higher-income workers have more disposable income and a higher investment-risk tolerance, receive larger tax breaks, and are more likely to work for employers that provide generous matches (CBO 2013; Morrissey 2009). Thus, even if participation had not grown more unequal, disparities in retirement preparedness would have grown with the shift from defined-benefit to defined-contribution retirement plans.

The shift to a retirement system based on individual savings also means that workers’ retirement prospects are increasingly affected by shocks to stock and housing markets and broader economic trends. Much of the 401(k) era coincided with a long bull market propping up household wealth measures even as traditional pensions became scarcer and the savings rate declined. This house of cards collapsed in 2001, and then again at the end of 2008. Though the share of households with any savings in retirement accounts has trended upward with the shift to defined-contribution plans and an aging population, it declined in the wake of the Great Recession (Figure 8). Nevertheless, aggregate savings in retirement accounts continued to grow faster than income even after the Great Recession (Figure 9), though median account balances declined (Figure 10) and retirement savings grew more unequal (Figure 11).
And that's not the only problem with 401(k) plans. A Los Angeles Times article discusses how small-company employees pay much higher fees than their large-company counterparts and a fight is now brewing at Fidelity -- yes, Fidelity! -- where some employees are suing the mutual fund giant:
The lawsuit strikes at the heart of what employers have to provide in their 401(k) plans. At first glance, Fidelity's 401(k) plan seems to be relatively generous, with a dollar-for-dollar match of up to 7 percent of employees' salaries. Moreover, the plan includes more than 150 different fund options covering just about every type of investment available to investors generally.

But the employees in the lawsuit argue that every single one of those 150 funds is managed by Fidelity, and many of them carry higher fees than comparable funds from outside providers. In particular, the plaintiffs pointed to new Fidelity funds without established track records as well as poor-performing funds as being inappropriate choices. It also suggested that using an institutional asset manager could have produced cost savings of 72 percent compared to certain target-date funds made available to employees.

Plaintiffs' attorney Gregory Porter described the Fidelity plan as "being run like a small company plan. Instead of investing in low-cost institutional funds, the plan's fiduciaries have put the plan in dozens of expensive mutual funds." Yet a Fidelity spokesman described the suit to Investment News as being "totally without merit."
What does this lawsuit mean for employees at other companies? It means they need a reality check on pensions because far too many people are getting eaten alive by fees which take a serious bite out of their gains over the years. And keep in mind, most mutual funds underperform low cost index funds, so if they're paying high fees for underperforming the market, they're really getting screwed.

All this tells me it's high time politicians get serious on tackling the looming retirement crisis. The old saying "if it ain't broke, don't fix it" doesn't apply here. The retirement system is broken and the solutions being put forth will only make the looming retirement crisis that much worse.

In Canada, a proposal to boost the retirement benefits for the middle class from the Canada Pension Plan through increases in contributions is rekindling momentum for pension reform ahead of a key December meeting with Finance Minister Jim Flaherty. There is vigorous debate over forced savings but I can only hope finance ministers expand the CPP once and for all, improving the retirement security of millions of Canadians.

Below, a 2010 PBS report on the struggles of Millennials to find work. I empathize as this is a brutal job market and worry that many graduates are not going to find work easily. Without good job-paying jobs with benefits, they can forget about saving for retirement. For this reason and others outlined above, they truly are the lost retirement generation.