"Wake Up" - Arcade Fire (Live at Reading Festival 2010)
This type of performance is why I am so moved by this band -- it gave me chills the first time I watched it.
Back in town after another road trip -- finally caught a flight that wasn't full. On Southwest, an empty middle seat is the equivalent of first class. Of course the flight was an hour and a half late and I rolled in around midnight on Friday night. Ah, the glamorous life of the road.
I was reading this article in the New York Times yesterday about whether 401(k) plan sponsors should be required by law to provide low cost index fund options in addition to actively managed funds with higher fees. Earlier in the week USA Today featured an article trumpeting the rise in the average 401(k) balance to $74,900. Of course, this is an average -- I'd be more interested in seeing the median amount in accounts since, as the same article notes, 56% of workers have less than $25,000 saved for retirement. Articles like these add to my continued skepticism about the 401(k) as the primary vehicle for the funding of retirement, skepticism based on a host of factors, including 1) the inability of people to defer an adequate amount of wages, especially when left to their own discretion; 2) the dubiousness of entrusting amateurs to make their own investment decisions; 3) the high fees and lack of transparency associated with this model of having individual accounts largely invested with active managers; 4) the excessive accessibility of these assets during one's working life either through termination benefits, hardship withdrawals, and loans, all of which undermine long-term retirement goals; 5) excessive risk concentration for employees whose plans include the option of buying company stock; 6) the lack of guaranteed benefits and the ability to take benefits in the form of lump sums; and 7) the fact that all of the risk associated with these vehicles, both in terms of market performance and life expectancy fall on the individual participant -- the market can crap out at a crucial point in your career or you can live to 95 -- either way it's on you to deal with these exigencies. Ultimately, people lack expertise in both investing and in analyzing the kinds of savings they will need to generate decent income in retirement, while investment managers and record keepers have an incentive to steer participants into higher fee vehicles.
Another Times article from last fall and a study to which it links lay some of these failings out with some very stark numbers. About 72% of plan participants are currently not on track to meet the retirement goal of 70% income replacement; instead the average participant is on track to achieve about 55% income replacement, with the bulk of that money coming from Social Security, not the 401(k) account.
This survey also seems to be skewed in a way that might make the picture actually look better than it is. Data appeared to be drawn primarily from large employers, many of whom have more sophisticated programs that actively encourage participation in a way that is not true in many smaller businesses. The median income of those covered by the survey was $53,852, which is more in line with the median household income in the country. Average income was in excess of $65,000. Consistent with the USA Today article, the study found an average account balance of $77,464. but the median account balance was a meager $29,390. The median annual contribution to a 401(k) was about $2,700 per participant or roughly $1.35 per hour, a number that is simply not adequate to fund a decent retirement.
The median projected retirement income in the survey was $33,500, with Social Security anticipated to provide $19,800 of the income and the 401(k) plan providing about $13,700. This was providing the median participant about 55% of their pre-retirement earnings. Obviously, these figures do not really add up to a very comfortable retirement -- especially if it is going to occur in an environment in which out of pocket health care costs are likely to rise.
So what should be done about this problem? Sadly, I don't think we re going to see the renaissance of the traditional pension -- although any employees who have them should fight like hell to keep them. In the absence of such pensions, the government should encourage -- nay, mandate -- more retirement savings. I would suggest the creation of a national 401(k) plan as an adjunct to Social Security. I would set it up as a required contribution of 5% deduction from gross wages for all employees who are not putting at least that amount into an employer sponsored program. I would have the money invested only in index vehicles with age appropriate allocations triggered automatically. I would not allow any access to this money prior to age 62 unless the individual had been deemed totally and permanently disabled by Social Security.
Absent a program like this, I foresee a really grim retirement picture for a huge swath of Americans.
What do you think? Also, feel free to add anything else that has grabbed your attention on this rainy Sunday.