What Comes Next for Retirement Security?

Although most Americans are sticking with their 401(k)s, it does not solve the savings crisis in America.

While the savings rate is going up, the value of savings has gone down. Could the financial crisis present sustainable changes to American’s savings habits? That and other issues of retirement security were addressed at a panel presented yesterday by AXA Equitable in New York City.

401(k) Still OK

During the recent market turmoil, there has been no real safe haven for investors—most asset classes and money managers were affected, said Peter Brady, senior economist at the Investment Company Institute. “It wasn’t really a year that asset allocation would’ve solved the problem for you,’ he added.

However, despite the market downturn, participants stuck with their 401(k) plans, for the most part; ICI has found withdrawal rates and loans remained in line with history, he said. The question is therefore not whether the 401(k) as a vehicle is working, but whether the savings of Americans is working, Brady said.

Dallas Salisbury, president and CEO of the Employee Benefit Research Institute (EBRI), said that 401(k)s have met the objective public policy has given them: to provide voluntary savings. Providing coverage to everyone, for instance, was not an objective. “We shouldn’t judge 401(k)s and IRAs against something that they weren’t designed to do,’ he said.

Equity Risk

Salisbury said the 401(k) enables investors to save more and invest conservatively or save less and take on the risk. He said it is possible to choose to save early and time retirement correctly without equity risk or regulation, and was “not embarrassed’ to say that he has invested in a defined contribution plan for 30 years without putting money into equities, and yet putting away 20% to 22% of his income.

While Salisbury said that he does not believe the government or employers should tell people what to do with their money, he mentioned that individuals shouldn’t invest in equities they can’t afford to lose—for instance, by investing high in equities right before retirement.

For those who did lose a lot of money in the equity markets, he said EBRI research found they could regain those savings in one to two years, assuming 5% returns, if they keep up their same contributions. If they do not continue contributions, it’s a different picture. Working longer also makes a huge difference with Social Security benefits. “What we do or don’t do makes all the difference in the world,’ he said.

Coverage Dilemma

The problem is bigger than retirement, said Pamela Perun, policy director of the Initiative on Financial Security, The Aspen Institute. She noted that 20% of Americans are “unbanked’ or don’t save at all—not even owning a savings or checking account. She said the employer system plays a valuable role in closing the savings gap, and recent developments such as auto-enrollment into default funds has helped increase participation within retirement plans—but not every American has access to such a plan.

Brady said the approximately 50% of employers who don’t offer workplace retirement plans are not random—meaning, it is predictable that certain demographics of plans, such as lower income jobs, will not provide a retirement plan offering to employees.

The Aspen Institute proposes several changes to the savings system that would provide more coverage using a “lifespan approach.’ For instance, the institute recommends young adults start saving for a new home. In addition to proposals for voluntary savings programs, it also recommends that the government provide more financial incentives to save and a simplification of the system, Perun said.

Going through this kind of financial meltdown is the perfect opportunity for reform, Perun said. “We think it’s the best time in almost a century to get to work.’

Savings Rate

The savings rate is on the rise—but before there is too much celebration, panelists noted that a higher savings rate means Americans are losing wealth. Brady told attendees that the savings rate is not made to be a measure of how prepared Americans are for retirement.

Eric Chaney, chief economist at AXA Group, explained that as America’s net wealth increased, its savings rate decreased. It is not always intuitive for non-economists; basically, when people get wealthier, they become worth more and do not feel the need to save more. Now that net worth has dropped with the stock market and housing prices, we see a rise in the personal savings rate as people spend less to regain their capital, Chaney said. He predicted the savings rate could get as high as 8% or 10% in future years.

Chaney said that there has been a large imbalance between countries that save (e.g. Japan) and countries that don’t (e.g. the United States). “This crisis is likely to reduce considerably the imbalances of the world,’ he said. The savings rate is going up, but “the question is, is it going to be something permanent?’

Salisbury suggested there could be changes to the savings rate in the long-term. EBRI’s recent survey found that Americans showed motivations to save more, for instance using their credit card less (see “Retirement Confidence Plummets in EBRI Survey). Perhaps there is even some optimism in the crisis, he said: About half of Americans do not even know what they need for retirement, so maybe now they will care. “The American that has not paid attention…will say “I need to pay attention,’’ he said.