The downward pressure on 401(k) and other retirement plan balances over the past few years will mean problems for employers - but especially for the millions of workers who are ill-prepared to fund their retirement.
And that will put the fiduciary role of sponsors and providers in focus, as many people nearing retirement find they have less saved up than they need. Pressure for an entirely new retirement savings system may build as Social Security and 401(k) plans prove inadequate.
So says Donald B. Trone, president and founder of the Foundation for Fiduciary Studies in Pittsburgh, who was appointed earlier this year by the secretary of labor to represent the investment counseling industry on the Employee Retirement Income Security Act Advisory Council.
"First of all, the 401(k) was never intended to be a standalone retirement vehicle for the average worker," Trone said. However, many companies have phased out other types of retirement plans, and workers themselves are not saving enough either within or outside their 401(k)s.
"The average worker is not saving enough in [his or her] 401(k). They need to be saving four times more than they are currently saving," he said. He estimated that workers should be putting away about 15% of their salaries but that most workers with a 401(k) contribute about 4%.
Workers who do not prepare will find themselves working long past the accustomed retirement ages of 62 to 65, Trone said. These workers will discover "retirement is a privilege, not a right." Employers who sponsor plans, moreover, could also face problems once their retirement-age employees realize they cannot afford to stop working, he said.
"The liability basically comes down to the fact that you have a workforce that's now approaching retirement or at retirement, and they're discovering that they don't have sufficient assets to actually retire," Trone said.
"The liability that's coming back is whether a plaintiff's attorney is going to be able to sufficiently argue that either the participant was not adequately educated and prepared for retirement or that the investment program was inadequate [with] poor investment choices, unreasonable fees and expenses," he said.
In late June, the Department of Labor sued to try to recover losses suffered by employees of Enron due to the alleged mismanagement of the Houston energy trading company's two pension plans. Earlier this month, a federal judge ruled that another lawsuit, brought by employees against former Enron Chairman Kenneth Lay and the energy giant's pension plan administrator, Northern Trust, can proceed.
Enron filed for bankruptcy in December 2001. It had used its own stock to match employees' 401(k) contributions, then forbade them to sell the stock until they were 50 years old.
According to the DOL, more than 20,000 workers saw their retirement assets shrink - substantially for many - as Enron's stock fell from a high of $84 a share in early 2001 to less than a dollar.
"We need to move to a brand-new retirement plan system," Trone said. The best model for such a system is Australia's, he said, citing its mandatory retirement plan that feeds individual retirement accounts instead of a "trust fund," as with Social Security. "When you go to work, 7% of your salary is automatically put into a retirement account. That 7% is matched by the employer. It's mandatory. Your retirement account is fully portable, but you can't touch it," unlike the flexibility given to 401(k) participants in the United States, who can cash out if they are willing to pay a penalty. As Australian workers get closer to retirement, "catch-up provisions" let them contribute more than 7% to their accounts if they wish, Trone added.
Despite its simplicity, such a plan would be a hard sell in the U.S., Trone said. Employers and employees might get on board if they were told they would pay a lot less in FICA taxes, but this is unlikely because FICA taxes still would be needed to pay current retirees' benefits, he said.
And there is a huge industry that supports 401(k)s and other retirement plans, plus "a whole segment of law" that is devoted to ERISA, Trone said. These people would lose work if a mandatory plan were adopted, so they could be expected to fight it, he said.
As the financial services industry faces this potential crisis, the importance of the fiduciary role is highlighted, whether in recommending certain funds be part of a 401(k) plan or part of an individual's portfolio. Also, as employers realize they are liable for decisions they make about retirement plans, they may look to outside companies to act as fiduciaries.
Part of Mr. Trone's work has been to come up with a Fiduciary Handbook designed for bankers, brokers, certified public accountants, and other investment professionals, offering them a process for coordinating investment practices and making sure they are doing the best by their clients.
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