Recession raises questions over retirement plans

There are a number of ways to describe the effect the economic collapse that started last year has had on the lives of normal people. Call it a domino effect, ripples on a pond or a chain reaction, but the fact is there are few aspects of everyday life that haven’t changed at least a little bit since the start of the recession.

Not the least of which is how people save money; and for those trying to put money away for retirement, 2009 has not been kind.

More than 300 American companies have reduced or suspended their 401(k) matching programs in the last year and a half, according to the Washington, D.C.-based Pension Rights Center.
Many workers rely on their employer’s match to ensure they end up with enough money when it comes time to retire.

With those matching plans drying up, many employees feel caught between two difficult choices: up their personal contributions and shave more off their take-home pay, or leave them alone and slow the growth of the nest egg.

And those in households where one breadwinner has been laid off are wondering whether they can afford to continue contributing to their retirement plans at all.

Karen Freidman, policy director at the Pension Rights Center, said the dilemma is not only a result of the floundering economy, but also reflects the fallacy of a personal investment-based retirement savings account.

For the last two decades, companies have steadily changed their retirement benefits offerings from traditional pension plans based on seniority and salary to plans that allow workers to decide how much of their money is saved for retirement and how it is invested.

Friedman, whose group is working with major labor unions to lobby for reforms in the traditional pension system, said while 401(k) plans looked attractive to employers and workers when the market was high, its times like these that prove they aren’t the best bet.

“Individuals started to think their 401(k) plans were the next best thing to sliced bread, so when companies started to cut back or stop their defined benefit plans and replace them with 401(k) plans, there were few complaints in the 1990s,” she said.

“With the full market crash in the last year and a half or so I think everybody is beginning to recognize 401(k) plans were never meant to be retirement plans, they were always meant to be supplemental savings plans,” Friedman said.

Dover financial planner Tom Leary said the argument against 401(k) plans resurfaces whenever the market slides.

“That’s the bad market, sour-grapes approach,” he said. “I’ve seen the same arguments made in the 1990s, I saw the same argument made in 1987, that’s just psychology feeding on itself and people need to overcome that.

“I think there are people who for years and for political reasons have been down on 401(k)s and who were basically ignored, and now since the market has been sour, those people, in a new political environment, are being listened to.”

Other industry experts say the 401(k) is still a good option for retirement saving.

Sarah Holden is senior economist at the Investment Company Institute, a Washington, D.C., trade group representing a broad swath of personal investment firms. She said 401(k) plans offered through an employer also allow for enough flexibility in terms of the level of risk contributors want to engage in with their money.

“401(k) plans are designed so they offer a range of investment options with a range of risk and return, and the plan sponsors take a great deal of care in selecting the lineup of funds for their participants to make sure there is that range,” she said. “People get a lot of education around the decision they’re going to be making.”

Holden also said her group’s data shows the recession hasn’t sent 401(k) participants running to raid accounts funds for a quick loan.

“Despite the fact that we’re in a period where the financial markets are going up and down, and we have unemployment and all of these things going on, we find that ongoing 401(k) participants didn’t turn to their 401(k)s to get a loan any more than at any other time in history,” she said.

Those with 401(k) plans aren’t making big cash withdrawals either. Just 1% of active 401(k) contributors made hardship withdrawals in the first half of this year, Holden said.

“It’s a safety valve that exists in the system, but it’s not one that people turn to with any frequency,” she said. “There are penalties, you have to pay the income tax and typically a 10% penalty.”

While the idea of losing a substantial amount of what’s been contributed to taxes and penalties might have kept some from cashing out, Holden admitted that her figures aren’t comprehensive, since they don’t include 401(k) holders who have lost their jobs and therefore are no longer enrolled in a plan.

But ICI is highlighting statistics it has showing 401(k) participants still are saving, even though more and more companies aren’t matching.

“What we see from our recordkeeper survey is 4.6% of the participants stopped contributing in the first six months of the year, but 95% of them kept at it,” she said. “We’re finding that participants keep at it, paycheck by paycheck they keep contributing. Some of these participants have seen their match reduced or eliminated, but from what we’re seeing, for the most part 401(k) participants have the discipline to keep on contributing.”

Leary said he’s been reinforcing that discipline with his clients.

“Whether there’s a match or not, whether the match is going up down or sideways, a 401(k) still remains a valid savings vehicle; you’re putting some of your own money aside without it hitting the clutches of the Internal Revenue Service,” he said. “Right there that should be a sufficient enough reason to put the money aside.”

• $14.4 trillion: Total U.S. retirement assets
• $3.6 trillion: Total assets held in employer defined-contribution plans
• $2.5 trillion: Assets held in 401(k) plan

*As of June 2009
Source: Investment Company Institute

Email Doug Denison at doug.denison@doverpost.com.