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Take Control of Your Retirement Future
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By Ted Benna
Creator of the first 401(k) plan |
It's essential to plan financially for retirement --
you've probably heard that before. But you may not be aware of some recent trends and
developments that make such planning even more important.
With an uncertain economy, it has become even more crucial
for every individual to develop and implement a savings plan for retirement. Don't expect
the government, or even a company pension and medical plan, to see you through retirement.
Better to err on the side of having too much, than to end up with too little.
Double Whammy
I recently spent seven weeks traveling across the United
States, speaking at seminars sponsored by mPower about the future of America's retirement.
(mPower provides independent investment advice to retirement plan participants, and
publishes this Web site.) Human resources officers of some of the largest U.S. companies
also attended the seminars. One common thread in their informal remarks was the pain they
are experiencing in trying to manage their companies' health and retirement benefits.
Clearly, large and small companies are worried. But it's
interesting to note that the issue of rising health care costs hasn't received the same
level of media attention as the recent slump in 401(k) investments, even though they are
equally serious problems.
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| "With an uncertain economy, it has
become even more crucial for every individual to develop and implement a savings plan for
retirement." |
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| Ted Benna, 401(k) creator |
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David Wray, president of the Profit Sharing/401(k) Council
(PSCA), spoke at six of the mPower conferences. He said employers that are PSCA members
are concerned that medical cost increases could adversely impact both employer and
employee contributions to 401(k) plans. Some employers that pick up all or most of the
cost of increased premiums may have to reduce their retirement plan contributions to help
offset these increases. Employers must also decide how much of these increased costs to
pass on to employees. If employees must significantly increase their health-care
contributions, they may reduce their own 401(k) contributions.
Defined-benefit pension plans, perhaps the last bastion of
retirement income security at many large employers, are also encountering rough times.
(Defined-benefit plans are funded and managed completely by employers.) Many companies
with defined-benefit plans had relied on the booming stock market and high interest rates
to increase the value of their pension funds. However, unfavorable investment performance
and declining interest rates have caused companies' unfunded pension liabilities (the
amount owed to the pension fund) to balloon. A recent report by Merrill Lynch projects the
unfunded liability of the 346 Fortune 500 companies that have defined-benefit plans to hit
$640 billion by the end of 2002.
Historically, significant pension plan underfunding has
involved a few employers in the auto, steel and airline industries. But the companies with
the highest level of unfunded pension liability currently go beyond these types of
companies. Underfunding of pension plans may be a more serious problem than we had
expected. Most, if not all, of the companies with this problem also provide medical
coverage for retirees. This is also a huge liability.
Social Security and Medicare
Social Security and Medicare are an essential part of just
about every worker's retirement security. Just two years ago, there was a perception that
some form of Social Security privatization was going to occur. Despite all the hype, not
one bill has been introduced to change Social Security. Social Security and Medicare
changes are now off the table, and will not likely occur until Congress and a future
President are forced by financial deficits to deal with these issues.
In the meantime, the increasing cost of prescription
medication will continue to generate political pressure from senior citizens for some form
of assistance. Social Security and Medicare changes will occur -- it's simply a matter of
what they will be, and when. There are only two ways to improve the financial soundness of
these programs: cut benefits, and/or increase tax revenues. The longer we go before we
tackle these two politically sticky areas, the more severe the changes will be when they
do occur.
Why the Gloom?
You may be wondering why I'm hitting you with all this
gloom and doom. At the time I wrote my second book, Escaping the Coming Retirement
Crisis, published in 1995, we had growing federal budget deficits that looked like
they would never end. In the book, I forecast a high level of conflict between generations
as we struggled to deal with unfunded retiree pension and medical liabilities at both the
corporate and governmental levels.
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| "Regardless of your stage of life,
your financial well being is dependent upon a robust economy and strong stock
market." |
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| Ted Benna |
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Within a few years of the book's publishing, a few things
happened to make my forecast seem irrelevant. The federal budget deficit was,
surprisingly, eliminated. Also, participant 401(k) accounts and corporate pension fund
surpluses swelled during the long bull market of the 1990s. We have, unfortunately,
returned to a state where future generational conflict over unfunded retiree liabilities
is again more likely.
The two big questions are:
- Will the large Fortune 500 companies that are guaranteeing
lifetime pension benefits and retiree medical coverage be able to fulfill their promises?
- Will the government be able to fulfill its commitments to
retirees?
The first large employer I helped to set up a 401(k) was
Bethlehem Steel, in 1981. I suggested during my first meeting with senior management that
it was time for their employees to start saving for retirement. I was politely told that
Bethlehem Steel employees didn't have to save for retirement because the company would
take care of them.
Today Bethlehem Steel is in bankruptcy, having entered
Chapter 11 in October, 2001. A major issue for the bankruptcy court to decide is the
extent to which pension and healthcare benefits will be reduced. The cost of funding these
benefits is one of the reasons why the company was forced into bankruptcy.
Living in Pennsylvania, I encounter retirees who spent most
of their career working for Bethlehem Steel. A large chunk of their financial security is
eroding at the worst point in their lives. I can't help but wonder how many employees from
companies with large unfunded pension liabilities will be in a similar position 20 years
from now.
Conclusions
I've come to several conclusions as I've considered these
issues.
One conclusion is that, regardless of your stage of life,
your financial well being is dependent upon a robust economy and strong stock market. Even
if you don't currently have money invested in the stock market, everything you have is
tied to some extent to our economy and the stock market. This includes your job, personal
investments, home, pension, 401(k), IRA, Social Security, and so on.
Neither the government nor Fortune 500 companies can
deliver promised retirement benefits unless our economy is strong. If the economy is
strong, the stock market will also produce favorable long-term returns. In my opinion, the
next couple of years could be critical. We need to move into a solid economic recovery
with positive stock market results.
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| "A financially successful
retirement requires a sound plan that is followed over most of an employee's working
life." |
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| Ted Benna |
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Another conclusion I have reached -- or perhaps I should
say reinforced -- is the importance of proper planning. Planning for retirement is a
long-term endeavor. Saving for retirement is not as easy as some people made it seem
during the stock market boom. The perception was that you just contributed a bit of your
income, picked the right investments, and became a 401(k) millionaire after a few years.
Some participants were able to achieve this result, but this was the result of luck rather
than a good plan.
A financially successful retirement requires a sound plan
that is followed over most of an employee's working life. Family members and friends I
know who have been retired for a few years and are okay financially had a plan. They
started saving early, and they kept at it regardless of what the stock market was doing.
They also obtained professional advice when they needed it.
I understand if you have become discouraged because the
value of your retirement savings has dropped during the past couple of years. But you must
not be shortsighted. You need to either stay the course or to make whatever adjustments
may be needed to your investments to make them suitable for the long-term.
And, if you have never formulated a plan for retiring, now
is the time to do so.
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The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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