Retirement: Dream or Nightmare?
Thinking about a fun retirement when you turn 65? Dream on. With so many questions about the financial health of the Social Security and private pension systems, working at eighty may be a reality for more than a few people. As I explain in "Pension Risk Management: The Importance of Oversight" (Risk Review, March/April 2005), ineffective leadership is far from trivial. According to the U.S. Department of Labor, there are approximately 730,000 private sector pension and 401(K) plans that cover 102 million individuals. Factor in the millions of people in state and city plans and it becomes painfully clear that a failure to meet retirement promises will put family and friends at risk.
One of the biggest problems is the extent to which people in charge may not know enough to ask the tough questions that allow them to properly carry out their duties on behalf of plan beneficiaries. These "fiduciary persons" frequently think they have completed their work once they hire outside companies to manage money or provide advice about self-directed plans. Nothing could be further from the truth. Even a non-lawyer knows that continued monitoring is paramount.
Experts are right to worry. Several years ago, the U.S. Department of Labor launched a training program called Getting It Rightafter discovering that many ERISA fiduciaries have other job responsibilities, leaving them little time or energy to focus on retirement plans. In some cases, they did not even identify themselves as fiduciaries.
Another problem is complexity. Someone who is uncomfortable with basic investment concepts is unlikely to know when and how to ask probing questions of a consultant or money manager. This is disturbing. Pension funds are increasingly investing in "alternatives" such as managed futures, hedge funds and venture capital. This may make perfect sense but only if decision-makers fully understand the risks. (To be fair, fiduciaries need to demonstrate due diligence for any type of investment. Moreover, funds are not created equal. Their riskiness depends on strategy, internal controls and market sensitivity, to mention a few factors. It's just that some investments are harder to value and less liquid and arguably require more care and feeding.)
One of the biggest problems is the extent to which people in charge may not know enough to ask the tough questions that allow them to properly carry out their duties on behalf of plan beneficiaries. These "fiduciary persons" frequently think they have completed their work once they hire outside companies to manage money or provide advice about self-directed plans. Nothing could be further from the truth. Even a non-lawyer knows that continued monitoring is paramount.
Experts are right to worry. Several years ago, the U.S. Department of Labor launched a training program called Getting It Rightafter discovering that many ERISA fiduciaries have other job responsibilities, leaving them little time or energy to focus on retirement plans. In some cases, they did not even identify themselves as fiduciaries.
Another problem is complexity. Someone who is uncomfortable with basic investment concepts is unlikely to know when and how to ask probing questions of a consultant or money manager. This is disturbing. Pension funds are increasingly investing in "alternatives" such as managed futures, hedge funds and venture capital. This may make perfect sense but only if decision-makers fully understand the risks. (To be fair, fiduciaries need to demonstrate due diligence for any type of investment. Moreover, funds are not created equal. Their riskiness depends on strategy, internal controls and market sensitivity, to mention a few factors. It's just that some investments are harder to value and less liquid and arguably require more care and feeding.)
