A cracked nest egg

New federal pension rules are expected to help Americans save billions more for retirement while making it easier for businesses to help.

Companies across the Inland Northwest have taken notice and are rethinking how they can encourage employees to save more.

Empire Health Services is freezing its traditional pension plan and fortifying a tax-deferred 403(b) plan with automatic enrollment and a more generous match.

Avista Corp. is considering changes to its 401(k) plan to boost enrollment.

Even government agencies and smaller companies are looking at changes designed to give employees more money for their 401(k)s as well as more control over how it’s invested.

Such changes, though, do little to ease a couple of worrisome truths about most Americans, retirement experts warn. Bigger, better 401(k) plans don’t ensure the sort of guaranteed retirement income that traditional pension plans do. And research shows that’s partly to blame on the fact that Americans acting on their own are lousy money managers.

A look at 401(k) assets bears this out, according to the nonpartisan Employee Benefit Research Institute, a Washington, D.C.-based nonprofit public policy center.

More than half of all 401(k) accounts are either overloaded with stocks or don’t have any, EBRI studies have found.

In some cases this poor diversification is coupled with a tendency toward holding an unusually high amount of an employer’s stock — creating a dangerous over-reliance on one company. A second concern of retirement watchers is that employees cash out their 401(k)s when they leave a job, treating the cash as a departure bonus, rather than rolling it over into an Individual Retirement Account or into a new employer’s plan.

Though there’s no simple gauge for determining how much a retiree should have tucked away to maintain a familiar standard of living, retirement planning research finds that even among those who are saving for retirement, the amount needed is daunting. Especially considering the likelihood of diminished Social Security benefits and fading pension plans.

Some financial planners say Americans should aim to pay themselves in retirement an amount equal to about 75 percent to 90 percent of their pre-retirement income. To earn about $70,000 a year in retirement, and assuming that Social Security will pay between $14,000 and $24,000 a year, the amount needed is the range of $50,000 a year.

Using those assumptions, Chris Codd, a senior associate with benefits consulting firm Mercer, said a conservative investor would need $600,000 to buy an annuity today that would guarantee a $4,000 monthly payment – or $48,000 a year – according to a quote from Symetra Life Insurance Co.

“You talk about a wake-up call,” Codd said. “Wow. How many people do you suppose have that kind of money set aside for retirement?”

The pension freeze

It used to be that companies offered pension plans as a way to induce employee loyalty.

Today pensions are viewed by many companies as an albatross.

In a report published by the Center for Retirement Research at Boston College, many large, financially fit companies have frozen or plan to freeze their pension plans for several reasons.

First, companies are seeking ways to trim employee benefit expenses at a time when business competition is coming from across the world, not just the United States. The CRR estimates that companies can save 5 percent on their benefit spending by dropping pension plans in favor of a 401(k) plan offering a 3 percent match.

Second is the rising cost of providing health insurance for employees. For some companies, the choice comes down to maintaining pay or retaining a pension benefit.

A third possible explanation is that the market and fiduciary risks of pension plans make them less appealing than an employee-controlled offering such as a 401(k).

And lastly, the CRR report touches on the steep climb of chief executive officer salaries. The high pay of top executives has made traditional pension planning irrelevant since they participate in retirement plans that far exceed those of rank and file employees.

EBRI reports that about 60 percent of retirees that took part in a February survey collected a pension payment, but that number is expected to dwindle as companies continue to replace pensions with 401(k) plans.

Since 2004 many corporations with household names have frozen their pensions, including Coca Cola Bottling Co., IBM Corp., Verizon Communications, Sears Holdings Corp., Nissan Inc., and Circuit City Stores Inc.

Kootenai Medical Center in Coeur d’Alene dropped its pension plan 15 years ago and offered its employees the equivalent of a 401(k) plan, called a 457 plan, said Tom Legel, chief financial officer at the hospital.

Legel, who sits on the hospital’s retirement committee, said the move was designed to give employees more say in their retirement savings. Almost all of the hospital’s 1,600 employees are automatically enrolled. The hospital puts the equivalent of 2 percent of a worker’s pay into the 457 plan. It then matches up to 3 percent more if an employee contributes at least 6 percent of their pay. The hospital’s contribution is vested after five years of employment.

“We think it has worked quite well,” Legal said.

Not for everyone

Despite the decline in traditional pensions, the EBRI reports that some eligible workers are not taking full advantage of 401(k) plans, to the detriment of their financial future.

Why?

Some are too poor and can’t afford to save.

Younger workers don’t view retirement as a concern. Just 31 percent of those working at companies offering a 401(k) participate.

Some are ignorant.

A few simply reject government and company-sponsored financial planning as intrusive or threatening.

Others are simply apathetic.

It even happens at well-established companies.

At Avista, for example, about 87 percent of the employees in the company’s utility division participate in the 401(k) plan, even though Avista offers a 75 percent match for the first 6 percent that an employee contributes.

Mary Prince, Avista’s corporate benefits manager, said the company is considering changes that may offer automatic enrollment to capture the remaining 13 percent of employees who aren’t saving. Avista Corp. also offers a traditional pension plan.

New rules encouraging

The federal pension reform bill signed into law last October is expected to boost retirement-savings rates.

Most notably, the new federal law should make it easier for employers to automatically enroll workers in 401(k) plans, boost contributions and steer the money toward suitable funds.

By some estimates, the rules could push participation in 401(k)s for eligible employees above 95 percent.

Right now about 15 percent of companies with 401(k) or similar plans offer automatic enrollment.

Companies are encouraged to become more aggressive by the safe-harbor protections offered in the new law, said Codd, of Mercer.

Having enough money for retirement is the difference between enjoying life after work, and just getting by.

“There are those people who want the last check they ever write to bounce,” Codd added. “But that’s not what most people think of retirement.”