The 401k Future

Coming changes in the retirement industry represent a seismic shift decades in the making.

Simply put, a comfortable and secure retirement can no longer be taken for granted by the vast majority of the population. Unlike the past, no single institution or corporation will come to the rescue with guarantees. Today, employees are largely on their own when preparing for the future, yet the extent to which most people will reprioritize to fund their own retirement remains to be seen.

With the looming threat of a flat-lining retirement industry, defined contribution plans like the 401(k) arguably act as a defibrillator—and a good one at that—but they’re far from a sure bet.

Step Back: How Did We Get Here?

No matter how unfashionable it might be to acknowledge past actions or inactions that have led to a current conundrum, every now and then, it’s worth a pause to consider the course of events that have led to where we are and where we’re most likely headed.

Historical Context

Rather than rehashing 50 years of history, suffice to say that globalization is largely to blame for much of the strife facing the retirement industry today. Looking back to the late 1960s, after Vietnam and before low-cost labor from Asia impacted worldwide pay scales, baby boomers became a driving force, both politically and economically, exerting significant pressure on both wages and benefits in the United States. Those were the halcyon days of labor unions, when employees, both skilled and unskilled, were given not only high wages but also high quality medical benefits and pension plans that would ensure a flow of income all the way to the grave.

The risks and costs of guaranteeing lifetime benefits didn’t escape the attention of the companies offering them, but there were no easy solutions. Some defined benefit pension plans were negotiated but then not properly funded. And others got creative with their actuarial assumptions, in some cases applying a discount rate of 8 percent or more in an attempt to deny or forestall the reality of the future cost of the guaranteed retirement plan.

When China decided to become a member of the world community, things went from bad to worse. Product production shifted into high gear in Asia at a cost that was substantially less than goods produced in the United States. And this sent U.S. companies scrambling to remain competitive, which meant reducing costs and overhead as much as possible. As a way of reducing labor costs, benefit plans were among the first expense categories that came under pressure.

Industry Context

Over the past 20 years, corporate America has increasingly done away with defined benefit plans to instead offer profit sharing plans in conjunction with 401(k) plans. Today, DB plans have all but evaporated from the landscape, with the exception of plans offered by local, state and federal governments. These employers have not felt the pressure of foreign competition, however tremendous unfunded liabilities and significantly longer life expectancies are beginning to take their toll. The strain on governments to properly fund these plans leaves few other options than to raise taxes.

Thus, the whole concept of a guaranteed lifetime benefit has gone the way of other impossible dreams. The 401(k), 403(b), and other similar plans are now the primary source of future retirement income to go along with Social Security. And employees are now largely responsible for their own retirements. So, where do we go from here?

The Much Needed Wake Up Call

Right off the bat, employees must be made to understand exactly what’s at stake. And the most effective way to make that point clear is by providing a personalized retirement readiness assessment. For some, this can feel much like a virtual ice bucket challenge, which is just what you want. The report should delineate how much employees should save for retirement, based on their specific needs, versus how much they’re saving currently. And if they’re not going to make it, they need to be told—in no uncertain terms.

Employees are not the only ones that need a wake up call. The responsibility also lies with plan providers. The new DOL ruling is an admonition to the retirement industry—that plan providers and advisors must act in the best interests of plan participants, which should mean helping to alleviate some of the retirement planning burden by providing the best possible services at fair and reasonable prices.

A Pill Worth Swallowing

Breaking the news to plan participants that need to save around 18% of their earnings can be difficult.  But there is good news to deliver as well. The key points to illustrate are the exponential benefits of even small increases in 401(k) contributions, the power of compound interest over time, and the tax savings that can be realized.

Another vital part of this conversation should be a discussion of the optimal asset allocation and investment choices based on the employee’s specific needs. When the advisor can illustrate savings growth, based on realistic rate of return assumptions, financial goals begin to seem achievable.

The employee education process is crucial to the success of the 401(k) plan. But the time and effort it takes to really get through to people—including group educational forums and one-on-one planning session—is substantial.

Increasing the Odds

No matter how much plan participants can discipline themselves to save, if they’re invested in inferior investment products, it could be all for naught. To make a real difference in people’s lives, plan fiduciaries must be hawkish when it comes to the quality of the investments options and the legitimacy of the fees.

Advisors should recommend benchmarking the plan on a continual basis, to determine the latest industry standard for investments and to identify and eliminate any excessive and unnecessary fee. This is at the heart of what it means to be a plan fiduciary—to act solely in the best interests of the plan participants, act in a prudent manner, diversify the plan’s investments, and ensure that the plan expenses are reasonable.

Through a diversified fund lineup, that includes both active and low-cost passive investment options, and by ensuring that providers are free of inherent conflicts of interest, the odds of achieving a desired level of retirement readiness can be well within grasp.

Tracking Progress

Once the right products are in place, it’s imperative to remain vigilant in ensuring that performance remains on course and individual plans stay on track. To that end, a process for the selection, monitoring and replacement of investment choices is imperative.

As those in the retirement industry for any length of time have observed, if the current course is left unchecked, the prospects are bleak. We’re trending toward a scenario where many, many people will find themselves struggling to make ends meet during retirement. That’s why, now more than ever, plans sponsors and their advisors have a duty to help.

If being in this businesses is worth doing, how much more satisfying to know that you’ve helped steer as many people as possible toward a more promising future. It’s a great challenge and it will take a concerted effort on behalf of everyone to see to it that no one is left behind.

Source: 401k Solution Beirne Wealth

1 in 4 Americans 25-54 Not Working

A new chart from the minority side of the Senate Budget Committee shows a startling fact: By Daniel Halper

Almost 1 in 4 Americans between the ages of 25-54 (or prime working years) are not working.

Here’s a chart showing those in that age group currently employed (95.6 million) and those who aren’t (28.9 million):

Nearly 1 In 4 Americans In Prime Working Years Are Not Employed.preview

“There are 124.5 million Americans in their prime working years (ages 25–54). Nearly one-quarter of this group—28.9 million people, or 23.2 percent of the total—is not currently employed. They either became so discouraged that they left the labor force entirely, or they are in the labor force but unemployed. This group of non-employed individuals is more than 3.5 million larger than before the recession began in 2007,” writes the Republican side of the Senate Budget Committee.

“Those attempting to minimize the startling figures about America’s vanishing workforce—workplace participation overall is near a four-decade low—will say an aging population is to blame. But in fact, while the workforce overall has shrunk nearly 10 million since 2009, the cohort of workers in the labor force ages 55 to 64 has actually increased over that same period, with many delaying retirement due to poor economic conditions.

“In fact, over two-thirds of all labor force dropouts since that time have been under the age of 55. These statistics illustrate that the problems in the American economy are deep, profound, and pervasive, afflicting the sector of the labor force that should be among the most productive.” by Daniel Halper

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Networking for Introverts

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Networking can be enjoyable if you match it to your strengths and interests.

The night before a conference where I was scheduled to speak, I found myself in a crowded bar just south of Greenwich Village. The organizers had arranged a VIP reception, and — having just moved to New York — I figured I should attend. Indeed, I had good conversations with four interesting people whom I’ll probably keep in touch with. But when I walked out the door an hour later, I was thrilled with my revelation: I’m never doing that again.

It wasn’t the fault of the conference or the bar or the attendees. It was my realization that I’ve always hated socializing in noisy environments where you have to scream to be heard. As an introvert, I find it overwhelming — and that means I’m not at my best when connecting. In fact, many people find networking in general to be stressful or distasteful. But I’ve come to realize that networking is downright enjoyable when you match it to your strengths and interests, rather than forcing yourself to attend what the business world presents as archetypal “networking events.” Here’s how I’ve embraced networking in my own way.

Create your own events. If you’re game for any kind of networking, you don’t have to think too hard about which types of events to attend; as long as it’s the right crowd, you can make the connections you need. But if you prefer “minimally stimulating environments,” as many introverts do, others’ choices — from boozy harbor cruises to swanky after parties — may not be right for you. Instead, I’m increasingly trying to control my networking environment by creating my own events. In the next couple of months, I’m planning to bring together “interest groups” of colleagues whom I think would enjoy each other for dinner parties, from female journalists to business authors to fellow attendees of a conference I enjoy.

Understand when you’re at your best. My circadian rhythms are fairly normal, but I’m definitely not a morning person. Early in my career, I dutifully signed up to attend 500-person networking breakfasts, because “that’s what you do” as a businessperson. I eventually realized the shock of waking up at 6 a.m. to get downtown in time was making my entire day less productive, so I swore them off. (I gave up early morning exercise for the same reason.) For introverts, networking requires a little more cognitive effort: it’s fun, but you have to psych yourself up to be “on.” I don’t need to have the additional burden of doing it when I’m tired. I now stack the deck in my favor by refusing any meetings before 8 am or after 9 pm.

Rate the likelihood of connecting. Every networking event should be subjected to a cost-benefit analysis: if you weren’t here, what would you be doing, instead? Running the numbers is particularly important for introverts, because even if the alternative isn’t something overtly productive like writing a new business proposal, the cost side of the equation can be steep: you may be exhausting yourself emotionally for hours or days afterward. Ask yourself who’s likely to attend, and whether they’re your target audience (however you define that — potential clients, interesting colleagues, etc.). Then follow up by asking how likely it is that you’ll actually get to connect with them. Large, loud events hinder your chances. If it’s an intimate dinner, I’ll almost always say yes; if it’s a raucous roofdeck gathering, I’ll probably sneak out the back.

Calibrate your schedule. Athletes understand they need time for muscle recovery, so they follow up intense training days with time off. Introverts should do the same. As I write this, I’m in the midst of a “writing day,” where my plan is to bang out three blog posts; my only “meeting” today is with a repairman. Yesterday, on the other hand, I had three in-person meetings and two conference calls. Batching my activities allows me to focus, and alternating between social and quiet time enables me to be at my best when I do interact with people. Even if a networking opportunity appears interesting, I’m likely to decline if it’s on the heels of several busy days; I’ve come to understand I won’t be able to tap its full potential because I’ll feel emotionally run down. On the other hand, I’m more likely to say yes to an event, even if it’s just outside my wheelhouse, if the timing works and I know I’ll be fresh and open to engaging with new people.

Finding the type of gatherings that work for you will make your networking much more successful — and more enjoyable. There’s a reason so many events take place in noisy bars: some people love that. For those of us without that predilection, we need to start saying no to torturing ourselves in the belief that it’ll ultimately be good for us. Instead, we have to reclaim networking and do it our own way.

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by Dorie Clark Harvard Business Review