MIAMI-U.S. companies are retiring the idea of the traditional, defined benefit pension plan in favor of do-it-yourself IRAs and 401(k) plans.
As the burden of paying for retirement shifts from employers to employees, consumers will need good advisors and good retirement products to take the place of pensions.
"The Pension Protection Act of 2006 should have been called the Nails in the Coffin for Pensions Act,' because pensions will be all but gone in 10 years," said Thomas Rowley, executive director of Van Kampen Investments, at the National Investment Company Service Association's 26th annual conference.
This year's conference was held February in Miami with the theme "Cultivating Growth."
"If you're in the back end of the wave of Baby Boomers-if you were born in 1958 or later-your employer will not provide you with a pension plan or healthcare when you retire," Rowley said. "But the good news is you have plenty of time to plan for it."
It's also good news for fund companies and asset managers as the general public increasingly turns to them for help managing their assets.
In the past, employees typically spent their entire career at one company, right up until receipt of the proverbial gold watch. When they retired, they expected their employer to provide a secure, if not generous pension and pay for healthcare costs. Social Security provided a little extra income to help with expenses and also helped the disabled or people who did not work.
All that is changing, and it is changing fast.
As workers live 20 to 30 years after retirement or longer, the cost of supporting a whole generation of retirees is already beginning to break many U.S. companies.
To stay competitive globally, companies are dropping pension plans and turning control of retirement planning over to reluctant employees.
In IRAs, 401(k)s and other defined contribution plans, the onus is on employees to plan their own retirement strategy, often with a partial company match.
Ford recently announced a broad range of early retirement packages, offering its employees buyouts of between $100,000 and $140,000 to give up their health benefits.
General Motors and Chrysler are extending similar buyout options to their employees.
"All these plans will go up for bid," Rowley said.
Financially savvy employees will use these buyouts to invest and plan for their future retirement, while others will inevitably focus on more immediate needs and find out they have nothing saved for the future. A recent report from Fidelity Investments found that a 65-year-old couple retiring in 2007 will need approximately $215,000 to cover medical costs in retirement, a 7.5% increase from 2006.
PPA 06
It's inevitable that the government will raise the age at which citizens qualify for Social Security, Rowley said, though probably not for another decade, as most Baby Boomers are still in their prime, taxable-income years.
"There are more 48-year-olds this year than any other age group," Rowley said. "PPA 06 will change retirement planning for that second half of Baby Boomers."
Many Boomers who haven't saved enough think they will continue working in retirement, but they could have health problems that force them to quit early, Rowley said.
Also, as the younger workforce comes up, the ever-changing business world may not have the patience for some of the old ways.
"Someone who plans to work until they're 70 may find themselves downsized at 62 and forced into retirement," said John Davis, vice president of retirement plans for OppenheimerFunds, Inc.
Once advisors are able to get their clients to start saving, the next step is to get them to invest and stay invested, particularly in times like now when the market is being erratic.
"Investors are not running for the door, but they are concerned," Davis said. "Advisors should use this as an opportunity to reach out to clients and tell them, We said there would be market ups and downs.' This is an opportunity for good advisors to gain assets by comforting clients."
"Retirement and retirement income are very complex issues," said Shari Klahr, vice president of strategic distribution for PFPC Inc. "People are going to enter retirement in a variety of different ways. One misconception is that there will be a silver-bullet answer, one product they can buy or one firm they can go to that will take care of everything."
More people are entering retirement with financial responsibilities like mortgages and a need for health insurance, Klahr said, and they need more than an asset manager.
"They need you as a life coach," she said.
"There's a danger of losing a client because you've only been focused on accumulation and your client doesn't know you can do retirement planning," Davis said.
Advisors are going to need to have the education and flexibility to make sure the investor has the right level of exposure to different asset classes, said Daniel Besse, vice president of retirement products and services group for Fidelity Investments Institutional Services Company.
"People have a very low tolerance for figuring out retirement planning," Besse said. "How do you actually do it? How do you make this painless for the client?"
First, the American mindset will need to change from being debtors to savers, from savers to investors, and from investors to planners, Rowley said.
"Boomers as a whole need to become better consumers of retirement-income products," said Ben Norquist, president and CEO of Convergent Retirement Plan Solutions.
Americans will spend hours checking out Consumer Reports to make sure they get the best dishwasher, but they don't want to spend any time planning their future, Norquist said.
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