NEW YORK - Millions of aging Baby Boomers heeded the reassuring words of their financial advisers and remained heavily invested in equities throughout 2008, only to watch in shocked disbelief as 40% of their life savings disappeared.

Regaining their confidence and support in the economy and in the financial industry is crucial for everyone's recovery, but it won't be easy.

"People are demanding reassurance about their nest eggs and what might happen to them," said James Cornell, senior vice president and chief marketing officer for Prudential Retirement, at Prudential's 2009 Economic and Retirement Outlook briefing held last week at the Affinia Hotel in Manhattan.

"Plan sponsors are demanding more transparency," he said. "Not all news is good. I think the current economic crisis will be one of the defining moments in our history."

Last year was "a year most investors would rather forget," said Edward Campbell, vice president and portfolio manager of Quantitative Management Associates. "2009 is likely to be pretty gloomy, but we're not likely to see a replay of the 1930s because of the unprecedented fiscal and monetary stimulus."

Campbell noted how public spending is set to soar under the Obama Administration, in additional to increased lending directly to the private sector.

"There is no shortage of options for policy makers," he said. "They will do whatever it takes."

Too much stimulus spending will undoubtedly have future repercussions, but "when your house is burning down, you're not worried about the firemen causing water damage to your furniture," said Edward Keon, managing director and portfolio manager of Quantitative Management.

Risky assets are already pricing in a lot of bad news, Campbell said, and many measures now show equities as being obscenely undervalued and many fixed income sectors a "discount armageddon."

"Corporate bond markets are pricing in a depression scenario," he said. "It makes sense to increase risk in fixed income. It's time to dip a toe into the water of high-yield bonds."

This is a crucial time for financial advisers to communicate with participants, regain their trust and help to make sure investors are positioned to recover their losses when the markets rebound.

"The best year in the stock market was 1933," Keon said.

Investors need to have a balance between risk and safety, he said. The economy has caused many investors to shun all risk, but "you can't obtain prosperity with absolute safety," he said. If investors shed their risky assets, they will hurt themselves and the economy.

"In the quest for safety and protection, you don't want to choke off the ability to innovate," Keon said.

"Over past decade, Americans have gotten used to retiring in their early 60s," Keon said.

The U.S. would face major worker shortages if Baby Boomers all decided to retire when they reached their 60s, Keon said. Having Baby Boomers work longer may be better for the economy, though an older workforce will create problems of its own, he said.

Early retirement may no longer be possible for most Baby Boomers, due to a lack of savings. The markets in 2008 certainly contributed to this shortfall, but many studies have shown for years that Boomers weren't saving enough.

A recent EBRI Retirement Confidence Survey found that 51% of workers had less than $50,000 in retirement savings and 22% of workers had no savings of any kind. Nearly a third of participants over age 55 had less than $25,000 in retirement savings, EBRI found.

"People are not saving enough money to support any significant retirement," said Mike Falcone, senior plan consultant at 401(k) Advisors, during a conference call last month. "Participants get a little skittish when things go wrong. They tend to make the wrong decisions at the wrong time."

Participants tend to overreact to market conditions, Falcone said, noting that a lot of people have been shifting their assets to stable value funds after they hear bad news. This may make sense in the short term to preserve assets, but stable value funds can't provide the long-term growth that most individuals need, particularly younger investors who have much more time to make up any losses.

"Automatic enrollment and advice can really enhance the participant experience," he said. "The best way to get somebody to respond is to tell them how they're doing. A lot of people are willing to listen and have somebody help them."

The best time to invest is at the bottom, when most people have lost confidence. Ironically, now may be the perfect time to convince spendthrift Boomers to start saving.

"The savings rate in America has gone from about 10% to zero," Keon said. "We need to get back more to the way the generation before us saved."

Automatic enrollment into 401(k) plans has helped millions of investors start saving for retirement, and nearly half of all plans with auto enrollment include automatic increases over time, Cornell said.

"We would like to see the autopilot program increase further," he said. "Congress will look for ways to expand retirement plan coverage," including more age-appropriate default options and income guarantees.

Cornell said he is disturbed by the growing number of defined benefit pension plans that are freezing, but he is even more disturbed by the increasing number of firms that are suspending their 401(k) matches.

While the majority of organizations halting their 401(k) matches are smaller firms, there are some bigger names like Motorola and General Motors, he said. Employer matches usually start after an employee invests a certain percentage, but cutting the 401(k) match could hamper efforts to get more employees to increase their savings, he said.

"I don't expect most companies to suspend their match, but this does bear watching," he said.

(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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