48% Saving Less for Retirement
Be it the dismal disappointment of seeing their 401(k) balances fall, loss of a job or a wage cut, 48% of Americans are savings less for retirement, according to a Country Financial survey of 2,340 working Americans. Only 12% have increased savings, and it's status quo for 35%, according to the survey, conducted by Rasmussen Reports.
Although 41% have moved their portfolios into less risky investments, 41% are more confused about how to save for retirement after weathering the recession, and, perhaps unrealistically, 53% don't expect economic conditions to force them to delay retirement.
Only 30% believe it is possible for a middle-income family to save for a secure retirement, a five-point drop from 2009 and a seven-point decline from 2007, when the survey began.
"It's important to remember most families can build a secure future by taking actionable steps like developing a plan and updating it as their family's financial needs change," said Keith Brannan, vice president of financial security planning for Country Financial.
Hands-Down, Target-Dates Beat Balanced Funds
After one 2030 target-date fund lost 41% in 2008, legislators in Washington went up in arms against the fund category. One of the most controversial proposals would have limited equity exposure in such funds, but the industry fought back on the grounds the '40 Act gives asset managers leeway to determine holdings without interference.
A closer inspection by Morningstar found that target-date funds have actually outperformed balanced offerings across the board in the past three years. The average 2035 fund lost 1.93%, while the average balanced fund lost 2.77%.
Further, Morningstar's "2010 Target-Date Series Industry Survey," which analyzed the offerings of the 20 largest advisors, found that those companies that went ahead and answered calls to reduce equity exposure suffered steep losses in 2009.
Ironically, these "changes to the funds' equity exposure could leave the industry open to charges that it's fighting, [not riding] the market, and not positioning the funds correctly for the future," said Laura Pavlenko Lutton, editorial director of the mutual fund research group at Morningstar. "Some funds that were aggressively positioned in 2008 were whipsawed when they turned conservative prior to the market rebound in 2009.
"Target-date funds have been the subject of unprecedented regulatory, governmental and media criticism in the wake of 2008's market slide, but that has not deterred millions of investors from making these funds the centerpiece of their retirement savings," Lutton said. More than $45 billion in new cash flowed into these funds in 2009.
Morningstar also found that fund families have been lowering costs or introducing cheaper indexed series, and that fund complexes that populated their target-date funds with proprietary, rather than outside, funds showed no advantages in terms of costs or performance.
Areas for improvement, however, include far better disclosures on the holdings and risk levels in various target-date funds, as well as the fact that too few portfolio managers have their own money invested in the funds they run.
Momentum for Annuities In 401(k) Plans Builds
More retirement think tanks are getting on board with the idea of including annuities in 401(k) plans, but so far, only a handful of large employers have this as an option.
"They are complicated," explained Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "And [if] you hand over a bunch of your hard-earned cash and go out on the street and get hit by a bus, it's gone."
Further, investors are afraid an insurance carrier could go out of business, and plan sponsors don't like the administrative headache of switching annuity investments when workers change jobs, added Robyn Credico, a consultant with Towers Watson.
In addition, the Retirement Security Project at Brookings Institution recently spelled out a number of perceived problems with annuities among investors: "Annuities may not inspire confidence because they are not sufficiently transparent or simple to understand. Consumers find themselves mystified by annuities' complex provisions and worry that insurance companies are pricing their products unfairly. Comparison shopping between annuities, let alone between riders and lump-sum options, can be a lot more complicated than contrasting a Toyota to a Ford in an automobile showroom."
Nonetheless, the Obama administration recently came out in favor of annuities, and the Department of Labor and Treasury Department are gathering information on the feasibility of including annuities in 401(k)s.
Meanwhile, The Retirement Security Project recommends either automatic annuitization once workers reach age 45, with the right to opt out, or moving 50% of a worker's savings into an annuity upon retirement.
And the 401(k)helpcenter.com, which serves plan sponsors, advocates the creation of a federal insurance fund similar to the FDIC to guarantee annuities.
Educate Investors About Retirement Income: Cogent
Cogent Research says advisers aren't talking to their clients often enough about retirement income products. While investors are comfortable with annuities as accumulation vehicles, few are comfortable with, or knowledgeable about, annuitization.
"The situation here is that [financial services companies] have done a really good job of selling accumulation vehicles and saying 'Save with us,' but they're not doing a good job of saying 'When you retire, we have solutions for you," said Tony Ferreira, managing director at Cogent.
However, brand strength of the companies offering retirement income solutions is strong. Both inside and outside of annuities, investors are well aware of providers. Industry giants such as Fidelity Investments and Bank of America Merrill Lynch, both of which have packaged retirement income services to sell to clients, are household names. But ask investors to talk about those products and they're dumbfounded. When asked, 961 retirees and pre-retirees with a minimum of $100,000 of investable assets cited 30 different firms, but no single firm was mentioned by more than 10% of the vote. Fidelity and Vanguard were the most frequently mentioned brands, by one out of every six respondents.
Other well-known brands, including Ameriprise, Charles Schwab, Edward Jones, Morgan Stanley Smith Barney and Wells Fargo, were cited by 5% or fewer respondents regarding their retirement income products. Some 70% of respondents work with financial advisers.
One problem is how easily most investors are put off by retirement income solutions that tie up their money for years, if not the rest of their lives.
"The study highlights most people's reluctance of giving up access to principal," said Christy White, a principal and co-founder of Cogent. "Some products use principal to increase payout, but people don't like that," even though it means more retirement income.
To overcome investors' squeamishness about handing over the reins of their investments to a financial services firm, especially in light of the seemingly solid firms that have gone belly up in the past couple of years, Cogent recommends providers increase clients' access to principal, or at least loosen surrender penalties, and allow clients more control over how the assets inside those products are allocated. And advisers need to start having more conversations with clients surrounding retirement income strategies.
"Many advisers are still in the accumulation mindset," White said. "It's not that their clients aren't interested in retirement income products, but rather, they just don't know enough about them."
Citing Wages, TrimTabs Says Recovery Is For Real
This recovery is for real, according to TrimTabs. As cause for the optimism, the research firm points to a 3% increase in wages and salaries from a year ago and a 9% spike in online job postings. Year-to-date, job postings have surged a surprising 18%.
In fact, TrimTabs says the recovery may turn out to be stronger that estimated.
"This rebound seems to be the real deal," said Charles Biderman, chief executive officer of TrimTabs. "The key indicators we track suggest the economy will keep expanding over the near term."
He added: "The economy is performing much better than we realized just a few weeks ago. The benchmark revisions released by the Bureau of Labor Statistics in February revealed that we underestimated the size of COBRA health insurance reimbursements, and thus, growth in wages and salaries."
While the economy lost 30,000 jobs in February, TrimTabs expects employment to expand in March as the government hires more temporary workers to complete the census, as well as the continued benefits of low interest rates and government stimulus.
Retail investors are pumping a record $1.5 billion a week into bond mutual funds-enabling governments and companies to issue huge amounts of debt, TrimTabs added.
However, once the love for fixed income reverses, the economy will be negatively impacted, the company predicts. "Right now, investors starved for yield are eager to lend money at historically low rates," Biderman said. "If and when investors demand higher rates in response to accelerating economic growth or deteriorating sovereign creditworthiness, the consequences could be ugly."
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