Despite the best efforts of the federal government and of governmental agencies, most Americans in the workforce today really have no idea how they are going to retire or if they are going to be able to retire. Disclosures are much more comprehensive than they were in earlier years. Opportunities for tax-favored savings have grown. Plan designs that truly encourage savings have become common.
So, where did things go wrong?
To consider this, let's look at a brief history of retirement plans -- very brief in this case.
In the beginning (Genesis in this case is known as ERISA), most American workers who were fortunate enough to have company-provided retirement plans were in defined benefit plans. In fact, Section 401(k) had not yet been added to the Internal Revenue Code. So, while some industries tended to favor thrift plans (after-tax savings plans that often also provided for an employer match), university systems and certain other tax-exempt organizations tended to have 403(b)s, and professional corporations often had money purchase and profit sharing combinations, lots of workers had DB plans as their backbones.
And, the workforce model fit with DB plans. Likely, the company that you worked for at age 30 would be the one you would retire from. As a retention device, there were lots of goodies that came with staying with that company until at least age (usually) 55. Another wonderful device known as subsidized early retirement, sometimes combined with early retirement windows, allowed companies to manage their workforces without the need for layoffs. In DB plans, there is no such thing as leakage if you stay with the same company.
So, a worker really didn't have to know all that much. What they did know is that when they retired, they would have a combination of their pension and their Social Security and that between them, that felt like enough to live on.
As the Old Testament evolved, so did the landscape change. Gradually, DB plans were replaced by 401(k) plans until we were faced with the New (world) Testament where the bulk of American workers were no longer accruing defined benefits. And, in a 401(k) plan, as we all know, it's really difficult for a participant to figure out exactly what he can buy for the rest of his life with an account balance.
And then there were disclosures.
Now, we get disclosures about the level of fees being charged against our accounts in a plan. I'm in this business. I can't read them. While the wording is not bad, those disclosures are so boring that even if I try, I am unlikely to make it through the first paragraph.
And, there are proposals that will require my employer (through a TPA) to tell me just what my 401(k) may grow to and how much per year that will be worth in my retirement. But, those all use assumptions.
I can understand those assumptions. If you are reading this, it's likely that you can as well. But, how about the poor participant who doesn't know if 6% annual investment return is reasonable? How about the poor participant who doesn't know whether retiring two years later is worth very much in terms of leading to a more comfortable retirement?
Savings plans are a good supplement, but with the current level of communications, to me, they are not the answer. Computer-based models might help, but even then, they would be dependent upon the assumptions underlying the modeling. If plan sponsors choose them, those assumptions might be reasonable in the aggregate, but very rarely for any given individual. If participants choose them, then they need more education than they can ever expect to get on those selections.
From where I sit, there is no easy answer.
Perhaps it's time to return to Genesis. When plans were funded responsibly, costs were controllable and participants who retired under a DB system with some amount of voluntary savings are generally doing pretty well in retirement.
But, will you?