Rocky U.S. markets highlight retirement insecurity

NEW YORK (Reuters) - With Americans relying more heavily than ever on the stock market to fund their retirements, Wall Street’s slide has some starting to worry they will struggle financially in old age.

Even worse, the housing crisis has reduced what employees are able to sock away, and some are even tapping their retirement money for everyday expenses like food and gasoline.

All this has reopened a debate over 401(k) retirement plans offered by many employers in the United States, which give employees responsibility to save for their own retirements and also some control over their investments.

“The 401(k) system today in the United States has been an acknowledged failure,” said Alicia Munnell, director of the Center for Retirement Research at Boston College’s Carroll School of Management. “It transferred all the risks and responsibilities from the employer to the individual.”

The decline in the market has highlighted those risks. Share indexes on Wall Street have lost 14 percent of their value since hitting a peak in October. For someone retiring now with say, $500,000 in savings, that would translate into a drop of around $70,000.

Peter Mitchell, a 65-year old former mechanic, is the kind of person who normally wouldn’t give two cents about the market’s ups and downs. But, having retired to New York city from California late last year, he is stressing about the effect of market volatility on his nest egg.

“You’re going to see me out here on the street asking for change,” he said.

Millions of other Americans who are in or nearing retirement have similar concerns about their finances.

“It’s driving home to people that the market is volatile and it does move in erratic ways. You could be in a very different place six months from now than where you are today,” said Dean Baker, chief economist at the Center for Economic and Policy Research, a think tank in Washington.

Before 1980, workers relied on so called defined-benefit plans managed by their employers, in which the size of their pensions were independent of the performance of the investments in the funds.

Those have been gradually overtaken by 401(k) plans, also called defined-contribution plans because employees define how much they want to contribute to their retirement.

By 2005, 42 percent of employees were participating in defined-contribution plans, while participation in defined-benefit plans had fallen to 21 percent, according to the Bureau of Labor Statistics.


Of course, financial advisors, who make a living from giving people investment tips, say that the best strategy is still to hold one’s nose through the tough times and rest assured that, over the long-run, stocks tend to be the best performing assets.

“In times of market volatility, often the best move investors can make with their 401(k)s is to sit tight and do nothing at all,” said Greg McBride, senior financial analyst at in North Palm Beach, Florida.

“The cycles of the economy and the broader market are not a reflection of the long-term merits of a 401(k), any more than a winter snow storm heralds the next ice age.”

That may have been true in recent years, but skeptics say that theory is untested in times of extreme market stress or a prolonged economic downturn.

“Older workers, say over 45 to 50 years old, definitely miss the certainty of the traditional defined benefit plan,” said Geza Marx, managing partner at Malcroft Asset Management in New York.

“We always worry about inflation eroding our ‘real’ purchasing power, as well as if we are putting away enough money for the future,” said Marx.

Against the backdrop of the biggest slump in housing prices since the Great Depression, the historical trend of continuously rising stock prices becomes less reassuring for retirees: Between 1929 and 1933, the S&P 500 lost 86 percent of its value.

While few believe a similar downturn is imminent, there is plenty of cause for concern. Fidelity Investments, a mutual fund company, reported a 17 percent increase in emergency withdrawals from retirement plans in 2007.

That is backed up by other, more anecdotal evidence.

“There are areas in the country where economically things are more challenging, for example Michigan, and in those spots we think there is an increase in people taking loans or hardship withdrawals,” said David Wray, president of the ProfitSharing/401k Council of America, an association of employers in Chicago.

Great-West Retirement Services, a company that oversees more than $115 billion in assets, found a 20 percent increase in the number of people citing “avoiding eviction or foreclosure” as the reason for emergency withdrawals in January 2008, compared with the same month last year.


For less financially inclined individuals, the countless investment options in their 401(k) plans is of little comfort. In fact, some say that when it comes to retirement choices, less is more.

“A lot of people would be very happy to lock in a secure benefit,” said Baker, from the Center for Economic Policy Research.

Maryland and Washington are already considering setting up defined-benefit plans for people who live there, in which those states would take on some of the risks currently carried by workers.

The yearning for greater stability is not surprising given the rollercoaster facing soon-to-be retirees.

“401k plans are really too hard for individuals to navigate,” said Boston College’s Munnell. “People make mistakes at every step along the line. The balances that are showing up are quite small and are going to provide a grossly inadequate retirement income.”

Munnell, herself nearing retirement, added, “Even I look at the markets and am scared.”