WASHINGTON May 25 Retirement planning almost
always seems to focus on "the number." Usually that's the
amount of money somebody thinks you need to retire securely.
But here is the real number to watch: $25 trillion.
That is a rough (and conservative) approximation of the amount
of wealth controlled by the baby-boom generation, based on
Federal Reserve Board data.
In the next five years, some $2 trillion will roll over
into personal individual retirement accounts, reckons FRC
Research Corp. That is a lot of money -- and every corner of
the financial services business wants a piece of it.
Some people fear workers will take that money and blow it
on early retirement expenses, leaving themselves with nothing
for their later years. The financial services companies that
manage all of those retirement savings have a different sort of
worry: They see a big pile of assets slipping away.
The realization that the boomer behemoth is going to start
cashing out soon, coupled with the new appreciation for risk
that followed the market crash of 2008-2009, has caused a shift
in the way experts are now talking about retirement, and
especially about 401(k)s and other defined contribution
"What's the purpose of saving for retirement? Is it
security or wealth building?" asks Steven Kreisberg, director
of collective bargaining for the American Federation of State,
County and Municipal Employees. "We've always viewed our
pensions as old age insurance; it's not supposed to be a wealth
producing vehicle for handing down wealth from one generation
But workers holding sizable assets in their retirement
accounts may not agree.
Kreisberg favors the traditional defined pension plans
which paid workers a regular amount monthly for as long as they
lived. Now financial services companies are introducing new
products aimed at making defined contribution plans behave more
like those pensions, at least during the withdrawal years.
Companies including Morningstar, Financial Engines and
Guided Choice have rolled out products designed to help 401(k)
savers keep their funds in those accounts after they retire.
They use different investment approaches to manage the accounts
while allowing regular monthly withdrawals.
Mutual fund powerhouses including Fidelity Investments and
Vanguard investments have created automatic payout mutual funds
especially designed for rollover money.
And insurance companies are pitching immediate annuities at
employers, in the hopes employers might offer them to retiring
workers within their 401(k) accounts.
This is a transitional phase, for sure. Here are some
thoughts for future retirees.
-- Washington will probably get involved. The Obama
Administration has expressed interest in the idea of offering
employers some kind of 'safe harbor' for agreeing to keep
retirees' money in their 401(k) accounts. For example,
employers could offer a low-fee annuity or other investment
management approaches that would make it attractive for
employees to keep money there. Why would employers want to do
that? It could indemnify them from lawsuits from retirees who
stay in the plan and then lose money, or save them from having
to offer early retirement packages to would-be retirees who
cannot afford to leave.
That is the same kind of thinking that created automatic
enrollment rules in which workers can be put into target-date
mutual funds during their accumulation years. But a federal
program like that governing 401(k) withdrawals is probably
years off, experts suggest.
-- We want it all. Workers want to take their lump sums and
have guaranteed lifetime benefits, says David Speier of
benefits consultant Towers Watson. "We get real mixed
messages." Workers surveyed by his firm want to retain control
over their money, though older workers say they're willing to
sacrifice more from their paychecks for a guaranteed lifetime
benefit. A compromise? Perhaps someday employers will put their
matching contributions directly into annuities or some other
-- Fees will really matter. Some employees have been
spending too much of their retirement money on fees hidden in
their 401(k) accounts, and it would be a bad idea to extend the
overpriced, hidden-fee traps into the retirement years. On the
other hand, employer-sponsored retirement plans have the bulk
buying power that individuals do not have. They could end up
offering cheaper, better annuities and payout plans than
individual retirees could find on their own. Starting in 2012,
Labor Department rules will require the clear disclosure of all
-- Monthly payouts may not be the right answer. "People's
needs in retirement are much more nuanced than a monthly
paycheck," says Matt Schott, head of the retirement income
practice at FRC Research. Retirees tend to spend money in a
different, and less regular, rhythm than that of workers. They
also tend to spend less as they age. Schott also points out
that most retirees do not even start drawing down their
tax-deferred accounts until they are required to at age 70-1/2.
If that pattern continues for the baby boom, that could provide
a really big number in about 15 years.
(The Personal Finance column appears weekly. Linda Stern can
be reached at linda.stern(at)thomsonreuters.com)
(Editing by Gunna Dickson)