Adrift in a Financial Fog at Retirement

When people think about retirement, they tend to envision all the new adventures and experiences that they’re going to do with their free time: take the grandkids to Disney World, join a garden club, bust through 80 on their golf handicap, fish, take up the piano. In short, retirement is thought of as the antithesis of work. After all, you’re not getting paid anymore.

However, new retirees are finding out they suddenly have a new job in a field in which they probably have little experience: portfolio management.

Before you retired your employer acted sort of like a retirement  coach: Your company decided what type of retirement plan you would have, chose the investments in it and held meetings or provided materials to educate you about how much you should invest and how to choose the investments your money went into. Your employer probably also contributed some of its own money to your account.

On the day you retired, you didn’t get a gold watch, you got a rollover form. Thirty years of savings is now sitting in an IRA. Now, this money--along with whatever you get from Social Security--is all you’ve got. It’s your responsibility to figure out how to make it last for the next 30 or so years in this end-game called retirement. You’re on your own when it comes to choosing the investments, the investment vehicles and the withdrawal rate that will enable you to cover your expenses for literally the rest of your life.

Sure you could go out and find yourself a financial advisor, but who do you trust? How do you evaluate the advice? What if your account loses value? If you really want to play it safe, you could stick the money in a bank account or money market fund. But at today’s rates, you return won’t even keep up with inflation. In fact, it’s probably one of the riskiest strategies because pretty much guarantees you will run out of money before you run out of life.

Pretty scary, huh?

According to this year’s “Workplace Benefits Report” from Bank of America Merrill Lynch (NYSE:BAC), an increasing number of employees want advice on how to make the financial transition from working to retirement. And they would like their employer to help.

More than 70% of the 1,000 individuals surveyed say that the amount in their company retirement plan will be either their largest or second-largest source of retirement income. As in past surveys, the majority are worried about how to manage this much money--especially about making it last.

But this year’s survey revealed an important new dimension: “Employees are not just concerned about having guaranteed income for life,” says Kevin Crain, head of Institutional Retirement and Benefit Services. “They also specified they are willing to do something about that, such as [contribute] 5% or more of their salary.” A majority of workers age 50 or higher, say they would contribute twice that much.“In other words, they recognize that they have responsibility for this," says Crain.

He adds that historically, employer's have an attitude of: “I don’t have accountability after my employee retires.” While that’s beginning to change, don’t look for a massive move to add an annuity option to 401(k)s and other types of plans. As plan fiduciaries, “employers are nervous,” says Crain.

The roadblock is liability. For instance, say an employer carefully selects what it considers to be a reputable annuity provider so that upon retiring, employees can choose to convert some or all of their retirement plan balance into a stream of lifetime income. If the insurance company runs into trouble- well-known names such as AIG and Hartford come to mind- disgruntled retirees could sue their former employer, alleging it didn’t conduct adequate due diligence.

The solution? All three sides in this dilemma- employees, plan sponsors (employers) and the government- need to recognize that it’s in everyone’s best interest to resolve this. Ever since the 401(k) was introduced in 1974, American workers have been repeatedly told we need to save for retirement, that Social Security is only intended to provide a bare minimum of income. Millions of us have done exactly that: today there is more than $11.5 trillion sitting in defined contribution plans- 401(k), 403(b), 457, etc.- and IRAs. Employers who are willing to spend time and money in order to provide access to advice on what to do with this money, then- just as they did when the 401(k) was introduced- the government should provide a set of requirements that must be met in order for the company to avoid liability.

Other finds from the Bank American Merrill Lynch report:

  • Two-thirds of workers say they contribute at least 5% to their company-provided retirement plan. According to Crain, the rate ought to be twice as high;
  • 80% of employees believe they are not saving enough for retirement. Slightly more than half of pre-retirees think they will have accumulated $500,000 by the time they retire; 25% expect to have saved less than $250,000;
  • The No.1 worry of employees is the rising cost of health care: 8 out of 10 say they are contributing less toward their retirement account;
  • Although Health Savings Accounts (HSAs) were created as a way to allow individuals to invest and grow a long-term account to cover major medical bills, in the majority (74%) of cases, contributions are pulled out in the same year they are made.
  • Workers don’t just want information about retirement. They would also like their employer to provide access to financial advice- online or in person- no matter what their stage in life. Presumably, this includes budgeting, buying a first home, saving for a child’s college education, etc.