Critique: Retirement Plans

In a post by Zach, he discusses retirement plans and how it is still necessary to save for retirement despite the current problems in the economy. Zach explains that many employees are often worried about problems with their retirement funds supplied by employers and now that fear seems to be happening. He gives details about some companies that are now liquidating their retirement funds to maintain operations in the current economic climate. Zach also notes that Fidelity Investments still seems to be doing fine, with only a 1% drop in overall retirement funds.

Zach’s Blog

I found his blog to be quite interesting because I had the opportunity to intern at Mercer consulting this past summer as an actuarial intern within the pension/retirement department. I was able to see the variety of different retirement plans available – and worked with defined benefit and defined contribution plans. However, in reading the article Zach mentions, it notes that the changes being made are simply to the matching of funds by employers. With an ever increasing switch from defined benefit plans to defined contribution plans, where employees are more liable for their own investments, employer contributions are a key thing. Therefore I agree with Zach that this is definitely a problem and I am not surprised at the fear this causes employees.

DB vs. DC Retirement Plans

However, on the other hand there are a vast amount of laws protecting employees from unfair changes in retirement plans. The Employee Retirement Income Security Act has been implemented since 1974. ERISA does a great job at protecting the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire. ERISA does set limits for employees such as how long the must be employed to become a participant or what rights their spouses have for being a part of their 401K plan, among many other things. However, it also requires that those employers who establish 401K plans meet certain minimum standards, so employees are well protected.

401K Regulations

I also strongly agree with Zach’s suggestion that individuals should prepare for their retirement outside of one’s employer and the government. In looking at statistics about retirement savings, it is quite shocking and unnerving to see some of the numbers. For example, two in five workers say they are not too willing or not at all willing to cut back on their spending in order to save for retirement. Additionally, four out of ten people aged 55 or older have less than $100,000 saved toward their retirement. The problem is that many people don’t view retirement saving as an important enough thing and are more focused on their current situation, often times saying that they are willing to work longer if they have to. But, pair this with the fact that four in ten retirees end up having to leave the work force earlier than expected due to health problems, disability or company downsizing. So, even though an individual feels that they don’t need to save up, and will just work more years, this doesn’t always work out like planned. People need to view retirement saving as a more important thing, as it determines what their quality of life will be once they finish working.

Retirement Statistics

Overall, I think that people need to be more aware of saving for retirement at an early age. I realize that there are many other aspects of an individual’s life that may seem more vital at the current time, especially given the current economic circumstances, but this is definitely something that should not be ignored. Often times individuals rely too much on government and employer aid, and this is not right. Though I think it is unfortunate that some employers are lowering their matching contribution for defined contribution retirement plans, it almost seems necessary given current circumstances. Given the choice of layoffs to save money, or lowering retirement plan funds, I think most employees would choose the later. Especially given the fact that there are many laws protecting employee defined contribution plans, and a great deal of this is also set in employees contract upon their hire. So, with a little more savings on the part of individuals for their retirement, they will be much better off.