Pension Risk Matters : Pension Risk News & Analysis : Pension Governance, Inc. : Pension Risk & Investment

 

The other day, I visited our local Blockbuster store to rent a fun movie (anything for a pick me up with this gloomy market) and I noticed something missing. The trash can that I would ordinarily use in disposing of my weekend coffee cup was gone. In chatting with the video store manager, I was surprised to hear her say that the shopping center manager had deemed it a luxury and had it carted away. At $400 a month to empty, no more waste container. A true sign of the times no doubt but a bit disconcerting nonethless.

Retirement accounts have been likewise impacted by hard times. In "401(k)s Hit by Withdrawal Freezes" (May 5, 2009), Wall Street Journal writer Eleanor Laise describes what must be a horribly uncomfortable situation for plan participants. Unable to transfer their money out of funds invested in illiquid instruments such as real property or securities such as Lehman Brothers debt, individuals are confronted with lack of liquidity at the same time that they are watching the value of their holdings plumment. More than a few 401(k) plan fiduciaries are scratching their collective heads, wondering how otherwise "safe" alternatives could have been invested in "hard to value" securities or financial arrangements in the first place.

In defense of the asset managers, their claim is that unwinding positions to facilitate redemptionsfor some would place an undue burden on remaining investors. This is a familar theme. More than a few hedge fund managers last fall put the kabosh on redemptions by defined benefit plans, even when contractually permitted.

In "More People Tap Retirement Accounts" (May 7, 2009), Wall Street Journal reporter Arden Dale cites a recent Watson Wyatt study that chronicles an increase to 44% of the "number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans. Penalties for early withdrawal, taxes and the opportunity cost of not being able to earn interest on interest makes such requests expensive. However, if someone is laid off or asked to accept lower wages, it is no surprise that pull-outs are occurring now on a regular basis. Advisors suggest taking out a loan against defined contribution holdings if possible. 

Let's hope that financial woes are soon contained and that individual retirees are not asked to continue subsidizing decisions by others, over which plan participants had no control. The inconvenience of a disappearing trash can is one thing. Disappearing retirement accounts is a far more serious situation.

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Photo Source: Oakland Public Library

I put myself through college and graduate school. It was a tough road, strewn with bumps, potholes and lots of worry about what the future would hold. If someone can advance his or her career without the stress and uncertainty of bootstrapping, I say "go for it." Who needs the aggravation? That said, and in the spirit of searching for the silver lining in every situation, I like to think of myself as a survivor of sorts. Where others see failure, I see opportunity. Don't get me wrong. I've had a few pity parties but I try keep them as short as possible. Acknowledging that many of us are graduates of the School of Hard Knocks, where do you go with "woe is me?"

Tonight's blog inspiration (not necessarily tied to pension decision-makers alone) is a CNBC television show entitled "Finding a Job Now: What It Takes In This Economy." During this hour-long program, employment experts and commentators offered helpful tidbits for downsized executives including, but not limited to, saying yes to low-paying work, even if it entails underemployment for awhile.

In "Downsized Executives Forced To Take 'Survival' Jobs," Michael Luo (New York Times, March 1, 2009) provides a case in point, i.e. a former security manager who currently works at a friend's cleaning company. While there is no question that the dichotomy between career desires and reality can be punishing, financially and emotionally, one has to applaud this man's work ethic and sense of integrity. He gets a gold star in my book.

Countless headlines excoriate Wall Streeters for getting bonuses tied to sub-par performance. Yet others go about the business of life, quietly and without fanfare. That such noble folks take responsibility should bring a smile to everyone's face, don't you think?

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Bravo to Nathan Dungan and the person who hired him to teach seniors about the importance of saving. As shown in a recent Wall Street Journal video, this President of Share Save Spend asks students to think hard about "needs" versus "wants" as a way to better allocate scarce resources. According to "Teaching Money Values in School," only a handful of states mandate personal finance courses. For young people who live in the remaining 36 states, they are on their own, unless Mom and Dad practice thrifty habits at home.

As a former college professor, I was always aghast at the availability of credit to students who were barely of age. Easy sign-up tables with free gifts were a common sight on campus. Until about six months ago, money havens such as Greenwich, Connecticut were chock ablock with evidence of conspicuous consumption, even for toddlers.

Don't get me wrong. Parents with means have every right to spend their hard-earned money on whomever and however they choose. Yet one wonders. Will instant gratification as a youth challenge Generation X later on in life?

Someone told me recently that sales of board games are on the rise. Imagine. Spending time around the kitchen table playing Scrabble or Trivial Pursuit is seen by some as novel. As hard as things are for more than a few households, might some young adults benefit from having to learn the value of money and being encouraged to connect with others? (Don't get me started about the kids for whom the cell phone is an obsession. What ever happened to quietly reading on the train or plane?)

Editor's Note: Mark your calendars. April 21, 2009 is "Teach Children to Save Day." Until then, here are a few sites that provide information about teaching children how to save.

• Money Talks is a free newsletter provided by the ABA Education Foundation.
• It's a Habit, Sammy Rabbit and other books are designed for the 5 to 8 year old set.
• Contact the Consumer Federation of America for a copy of Teaching your children how to save & spend.
• Check out How Not to Be Your Child's ATM: Prodigal Sons & Material Girls by Nathan Dungan.
• The Jump$tart Coalition publishes regular news bulletins in the form of Financial Fridays.

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Dear Santa:

I've worked hard this year so I hope I get something other than a lump of coal or a pink slip. It's been a tough year, with market volatility, investment complexity and unexpected large-scale fraud making me nervous about allocating monies to anything other than cash and zero return government IOUs. What happened to the era of big bonus paychecks and change to spare?

I need a few goodies to keep me going. I'll won't forget you. The cookies and milk are waiting in the usual spot by the fireplace.

Here's my wish list.

1. Steady returns that don't cost me a fortune in terms of hidden fees or excessive risk

2. Independent service providers who take risk management seriously

3. Someone to help me plan for a retirement before I'm too old to enjoy it

4. Someone to help me figure out how to get a job at 70 if I can't afford to retire by then

6. Someone to explain why the U.S. national debt clock had to add extra digits

7. Lawmakers who give me the straight skinny on the financial health of national safety net programs

8. Matching contributions to my 401(k) plan

9. A meaningful chance to replenish my broken nest egg

10. An occasional chuckle now and then as a break from very somber economic and financial news

By the way, I heard that even the North Pole is cutting back. Maybe you can unfreeze the elves' pension plan when things rebound.

Hang in there Santa!

HWP
Hard Working Person

P.S. If you want a bit of silliness, "elf yourself."

Editor's Note: Drop us a note and tell us what is on your wish list for 2009 and happy holidays!

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After taping an interview about pension issues for CNN Money, with about an hour before my next meeting, I walked the streets of New York. A great city at any time, Manhattan seems especially pretty around the holidays. So here I was, walking down 34th Street, about to enter Macy's for a bit of holiday shopping, and lo and behold, I see a bunch of tourists snapping photos. No less curious than the average bear, I walked over to take a peek at what held such appeal. To my surprise, a large dog with reindeer antlers affixed to his head, held the audience in awe. Don't get me wrong. The dog was adorable but I kept wondering why people stopped to watch. Wasn't it clear that this was a regular dog with an obvious holiday add-on? Yet a crowd had stopped long enough to watch, take photos and linger over this canine equivalent of Rudolph.

This furry trompe-l'oeil got me to thinking.  If a dog can entertain as a faux reindeer, can a troubled pension plan be seen as financially sound? Are optics more important than reality? Cosmetics (of the financial variety) was in fact one of the topics discussed with anchor Poppy Harlow. In response to her question about possible Congressional relaxation of the Pension Protection Act of 2006 - in order to provide immediate relief to underfunded defined benefit plans - I cautioned that short-term reporting often has little to do with the structural integrity of a plan. We might end up with lovely numbers, due in part to temporary "never minds" when a plan dips below a certain funding status.

Should retirees breathe a sigh of relief when "good" numbers are published and/or the rules are changed to forestall cash contributions or plan freezes when the funding status drops?

Unless you think that a dog is magically transformed into a reindeer by simply adding an antler cap, it is unlikely that a financially solid retirement scheme derives from a modification of Congressional mandates.

Instead, inquiring minds should ask about a plethora of influences such as cash on hand, the plan sponsor's operating cash flow, current asset allocation mix, the ability to identify risks and then act on them before things get out of hand. To repeat one of my favorite mantras, "process is everything" (good process that is). Change the rules of the game and you'll get a reindeer. Look close and you still see a dog. That's not necessarily a bad thing unless the dog bites.

Editor's Notes:

• This adorable photo was originally posted to "A Dog's Best Friend," a blog devoting to placement dogs in good homes. Bravo!
• If you like dogs, check out "It's a Dog's Life - Literally...Puppy Pension Slashed. How is Your Nest Egg?" (June 18, 2008) or "Pensions for Pets?" (November 25, 2006) or "Dogs Get the Blame" (July 31, 2006).

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According to "Some Firms Suspend Their 401(k) Match" by Wall Street Journal reporter Jilian Mincer (November 12, 2008), cash-strapped employers are moving quickly to decrease 401(k) plan benefits, shut down 401(k) plans or not create pension incentives in the first place. Ironically, several studies suggest that small companies are in a better position to attract and retain employees if they offer benefits, notably healthcare expenses.

As we tally the cost of the credit crisis, count 401(k) plans as part of the fallout. Healthcare benefits are on the chopping block too. On November 9, 2008, New York Times reporter Nick Bunkley wrote that General Motors is getting rid of lifetime health care coverage for those who had long ago assumed they were all set. In its place, the large auto manufacturer is said to be beefing up pension payments to help offset disappearing medical care goodies. (See "Some G.M. Retirees Are in a Health Care Squeeze.")

If the defined benefit plan is going the way of the dodo bird and now 401(k) plans and health care benefits are leaving town, what's left for the beleaguered employee? Is it possible that benefits will soon become passe? Will individuals be able to cope by quickly saving more, reducing their own costs or both? If not, how is public policy likely to be impacted by a growing class of persons who no longer think of retirement as the "golden years?"

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Launched earlier this year, our music video message about pension issues has been viewed by many. Given the rout in the market and recent comments made by House Education and Labor Committee Chairman George Miller ("Miller Declares 401(k) System Paralyzed," Defined Contribution & Savings Plan Alert, October 27, 2008), I'm republishing "Pension Tension Blues." My co-creator Steve Zelin (The Singing CPA) and I hope you enjoy it.

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In response to the October 20, 2008 post entitled "Happy National Save for Retirement Week," one reader captures the sentiment of many. Do you agree? Email your thoughts.

 "Let me get this straight. Congress, after voting to give bailouts to all the movers and shakers, now has the audacity to pass a meaningless Resolution admonishing We the Sheeple to SAVE for retirement?

With joblessness and debt encumbrances at an all time high, just how do these brain trusts up there on the Hill think there is going to be a lot of "saving" going on? Incredible!!!!"

Editor's Note: The House and Senate resolutions to formalize this holiday are dated late June 2008.

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Given the market rout of late, with 401(k) plans taking more than a tumble, this week's celebration of thrift is especially relevant. Supported with a U.S. House and Senate resolution to encourage financial independence, October 19 through 25 mark the "National Save for Retirement Week."

Expect to read and hear more about the dwindling retirement money pot for millions of individuals. The socioeconomic, political and regulatory ramifications are significant.

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According to a new study, retiring at age 67 may not be in the cards for many individuals, partly by choice. Tracking desires and expectations of American workers, a newly created Sun Life Financial Unretirement^SM Index suggests that 8 out of 10 persons want to continue working as a way to "stay mentally engaged." Other results are not surprising. Fewer than half of the respondents feel they can afford to stop working. One-third of survey-takers worry about the financial viability of Social Security. One coping mechanism, cited by 82 percent of the sample group, is to reduce their spending with about two-thirds of respondents saying they will lower their debt as a way to "improve retirement prospects" For more information about this attitudinal metric, click here.

Nice as it is to have choices about when to retire, the recent market rout makes it difficult at best for some to consider anything else but continued employment (assuming no layoffs by their employer). Yahoo! News references Congressional research that "Americans' retirement plans have lost as much as $2 trillion in the past 15 months." Making matters worse, economic conditions that result in lower wages make it difficult for some to keep saving for retirement, if they did so in the first place. Click to read "Retirement accounts have lost $2 trillion" by Julie Hirschfeld Davis, October 7, 2008.

In an interview with PBS, Peter Orszag, Director of the Congressional Budget Office, explains that "two-thirds of the assets that are in 401(k) plans are in stocks," exposing plan participants to fallout, just like institutional investors. He adds that economic problems are already impacting defined benefit plans. As the value of their asset portfolio drops, companies will need to "put in more money, and that will come out of either their shareholders, their workers, or they'll try to pass it along to their consumers." Click to read "Market Turmoil Puts Squeeze on Retirement Savings," October 9, 2008.

This blog has covered changing demographics and retirement angst for months. One can only hope that the current market malaise is short-lived and that individual savings goes up (or at least excess leverage goes down), to the extent that individuals can afford to put monies aside for post-employment consumption.

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In response to this blog's September 23, 2008 post entitled "Retirement Fallout - Breaking the Bank, Piggybank That Is," we received a link to an opinion piece, published in The Baltimore Examiner. Sent by editor Frank Keegan, the first part of the piece, entitled "Public pension panic," is shown below.

<< It’s pension panic time. Panic early. Panic often. Demand reform. Public employees must take control of their financial destinies. Politicians have made promises they never can keep. They and the union bosses who fleece workers don’t have to worry about it because they figured by the time the inexorable mill of reality turns up their deceit, it all will be somebody else’s problem. They counted on being long gone with millions – maybe billions. Well, the day of reckoning arrived a little earlier than they anticipated. >>

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According to GoEnglish.com, to "put your all your eggs in one basket" is "to risk losing all at one time." This notion is oft-touted in the mainstream press for the benefit of non-financial readers. Logically speaking, one would expect the maxim to resonate with investment banking staff who should, by the nature of their work, have a good command of diversification principles.

According to "Wall Street Lays Egg With Its Nest Eggs: Retirement Lessons of the Dumb Moves by 'Smart Money',"  it appears that the lessons of Enron and other costly examples of excess concentration have been lost on some. (Wall Street Journal, September 27, 2008). Pundit Jason Zweig regales readers with a litany of bad news bears, including the following:

• "At the end of 2006, Merrill employees had 27% of all of their retirement money in Merrill shares" with losses this year close to $400 million.
• Morgan Stanley employees have "lost some $500 million on their 401(k) holdings of company stock in 2007."
• "At Lehman Brothers Holdings, employees saving for retirement lost 'only' about $200 million on their shares" in the last 18 months.
• "Twelve out of every 100 people whose 401(k)s can hold company stock have at least 60% of their retirement money riding on it."

Generally speaking, employees should heed "excess" concentration that could take several forms, including, but not limited to:

• Company stock in 401(k) plan
• 401(k) company match in form of company stock
• Company stock as part of profit-sharing plan
• Company stock match as part of a dividend reinvestment plan ("DRIP")
• Company stock options
• Career risk tied to fortunes of employer
• Employee ownership via an ESOP
• Company stock in defined benefit plan ...

Wall Street firms are not alone in encouraging employee ownership and that is not necessarily bad, as long as everyone fully understands the risks.

According to the National Center for Employee Ownership, statistics updated in February 2008, suggest that:

• $1.5 million participants were tied to 748 401(k) plans that were "primarily invested in employer stock" with an estimated value of $133 billion
• 10,000 ESOPs and stock bonus and profit sharing plans were "primarily invested in employer stock," with an estimated value of plan assets exceeding $928 billion and impacting 11.2 million workers
• 3,000 broad-based stock option plans encompass 9 million participants
• 4,000 stock purchase plans cover 11 million workers.

What are you doing to track your diversification potential, or lack thereof, as relates to your current employment situation?

Omelette anyone?

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New York Times reporter Tara Siegel Bernard cautions that some money market funds do not represent a safe haven. Who would have thunk it? Several asset managers have now broken the buck, reporting Net Asset Values less than a dollar. See "Money Market Fund Enter a World of Risk" (September 17, 2008).

With everything else going on, perhaps it is no shock that the U.S. government has responded with a quick fix. In "Temporary Treasury Program to Support Money Market Funds," readers learn that this new measure seeks to "enable money market funds to maintain stable $1.00 net asset values." Click to access Notice 2008-81, effective September 22, 2008.

Details are still evolving though Deal Book adds that the U.S. Treasury Department will "use $50 billion to back money market mutual funds whose asset values fall below $1." Those who pay a fee are eligible to have their holdings insured. See "Treasury to Backstop Money Market Funds," September 19, 2008."

Federal insurance is likely to be good news for 401(k) plan participants who are busily shifting funds to what they hope are safer choices. The impact on taxpayers' wallets is yet to be determined.

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According to financial reporter Jennifer Levitz, a dismal trifecta accounts for recent retirement withdrawals. Rising unemployment, stricter credit conditions and a sagging equity market make defined contribution piggybanks a tempting target. Despite a 10 percent penalty for early withdrawals, participants are tapping into their post-employment savings to make ends meet. In addition, and not surprisingly, some employees are reallocating away from equities into money market funds.

Overall, "Investors Pull Money Out of Their 401(k)s" (Wall Street Journal, September 23, 2008) paints a gloomy picture of the retirement landscape. Keep in mind that traditional defined benefit plans are no longer a reality for countless individuals. A dwindling 401(k) plan balance spells real hardship since many participants will be unable to "make up" any monies taken out before they exit the workforce.

On the topic of 401(k) plans, ERISA attorney Stephen Rosenberg vents about poor plan governance as described in Fixing thte 401(k) by Joshua Itzoe (earlier reviewed by this blogger). Alleged excessive fees, poor investment choice selection and not controlling plan costs are a few of the ills he deems important yet beyond the reach of plan participants who "have neither the power, responsibility nor authority" to address fiduciary problems by themselves. Click to read the Boston ERISA & Insurance Litigation Blog.

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In response to our July 19, 2008 post ("Doris Day, Scarlett O'Hara and Financial Market Tumult"), a reader with thefinance_section adds "Freedom certainly isn't free. I think you are only truly free once you can live off your passive income, i.e. income from investments."

In response to general market volatility, the chief actuary of a major retirement services firm writes the following:

"The market will continue to find instruments to dampen the losses from the large bubble of speculative loans created over the past three years. Government will also act to smooth the market. Congress & the Executive Branch cannot allow the full chaos that comes from destroying the equity of so many lenders by forcing them to write off the bad loans quickly. This is similar in scope to the issues of the S&L crisis of a prior generation, and the market should be watching closely to see how the industry and govt will follow the old pattern or try another approach.

In some respects, this crisis follows the prior bubble problem with tech stocks. A large number of people who get paid for activity (commissioned stockbrokers) were guilty of pushing "POS" investments in the late 90's. A large number of people (mortgage brokers and bank loan officers) were guilty of pushing more loans through the system in this decade. Both were speculative bubbles in the classic Holland Tulip style of the 1700's but both also had regulators to punish the truly criminal operators. Who will emerge as winners?

However, the sharper investment managers will try to find the higher performing assets of firms that are less exposed to the losses. Are there enough quality investments for those who are running to quality? Will this create another surge to buy from the banks least affected by the loan crisis? Who will seize the initiative? Who will be able to make timely value-style investment choices? The swift and the brightest will continue to prosper, and may even pick up some bargains along the way.

What will be the new "due diligence" rules for pension trustees?" 

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July 4 marks the U.S. version of Independence Day, a celebration of America's break from colonial England. Click to learn more about Independence Day in other countries.

Naturally, the question arises. How many of us are truly independent when it comes to financial resources? A recently published study, courtesy of the American Association of Retired Persons ("AARP"), suggests that a significant shift is occurring in terms of financial distress for individuals. Entitled "Generations of Struggle," authors Deborah Thorne, Elizabeth Warren and Teresa Sullivan make some worrisome observations:

• "Americans age 55 or older have experienced the sharpest increase in bankruptcy filings.
• The average age for filing bankruptcy has increased.
• The rate of bankruptcy filings among those age 65 or older has more than doubled since 1991."

Factor in another weak element of the three-legged U.S. retirement stool - the huge economic drag due to ballooning post-retirement entitlements - and things look grim indeed. A soon-to-be released documentary entitled "I.O.U.S.A." sounds the bell clear and loud. This 232 year old nation is on the verge of a financial meltdown. Visit YouTube.com to hear what director Patrick Creadon says about the serious message of his movie. The expected impact on the younger generation is undeniable. (Read our April 2, 2007 post entitled "New Fiction Book Advocates Radical Solution to Pension Crisis" for a quick synopsis of Boomsday by Christopher Buckley.)

In "The State of the Union's Finances: A Citizen's Guide to the Financial Condition of the United States Government" (June 2008), the Peter G. Peterson Foundation reports that entitlement spending is on the rise, with a 213% increase in what they call "Implicit Exposures: Future Benefits," between 2000 and 2007 (i.e. $13 trillion to $40.8 trillion). Putting this in context, the "Size of the Individual Burden Imposed by Major Fiscal Exposures" is currently about $400,000 per full-time worker. Refresh the U.S. National Debt Clock site several times to see how quickly the number climbs in just a few seconds. (The reported daily average increase in the U.S. national debt is almost $2 billion.)

So while we all enjoy a hotdog while watching the fireworks, it is worth asking - How independent are we truly, when our collective debt obligations resemble a runaway train?

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According to New York Post reporter Dareh Gregorian ("Screw the Pooch," June 16, 2008), Leona Helmsley's furry friend will have to make do with a paltry $2 million trust fund. Allegations that Helmsley may not have had full faculties when she wrote her will, and a single stroke of the pen by Manhattan Surrogate Judge Renee Roth, takes $10 million away from Trouble's nest egg. The remainder goes to the former hotelier's charitable foundation. For pet lovers, don't despair. Apparently, this still leaves ample money to cover her annual expenses of $190,000 for the expected remainder of his life (10 human years or 70 dog years). By the way, the lion's share of per annum costs go for security ($100,000) and guardian fees ($60,000). 

If you are a member of the baby boom generation (and the Federal Reserve Bank of St. Louis counts "79 million Americans born between 1946 and 1964" in this category - plus countless others outside the U.S.), $190,000 per year looks mighty good. With fewer and fewer workers to support national safety net programs, private savings and employer-provided benefits take center stage. Ask yourself this. How "retirement ready" are you? Will you be living in style or struggling to make ends meet? Check out this online retirement calculator, courtesy of the AARP (American Association of Retired Persons).

For pension fiduciaries, a critical question is whether (and to what extent) you have responsibility for empowering your workers to sufficiently fill the piggybank. Even in the absence of legal mandates, how does an organization attract and keep good workers when talent is in short supply around the world? According to a March 2008 survey, conducted by Deloitte Consulting and the International Society of Certified Employee Benefit Specialists, "A shortage of skilled and talented workers has become the most pressing concern among employers." Other worries include "the cost of providing retirement benefits to employees" and the appeal of company reward programs to "attract, motivate, and retain the talented employees" needed to "effectively run" an organization. Click to read the "2008 Top Five Total Rewards Priorities Survey."

If you are a taxpayer, you may be putting money aside for your personal rainy days at the same time that you pay taxes to help finance public pension programs (state, county, city). And if Social Security, Medicare and/or the Pension Benefit Guaranty Corporation needs a bail-out, who ya gonna call? Tax Busters (taxpayers)! 

According to then U.S. Comptroller General, David Walker, "A tsunami is building and ready to hit future generations, but this one won't be set off by earthquakes or other natural disasters. Instead, it will be a fiscal calamity created by the failure of government and business leaders to deal with the financial drain of millions of retiring baby boomers." (Walker now serves as President and CEO of the Peter G. Peterson Foundation.)

So Trouble may be literally living a dog's life but her retirement plan, albeit reduced, will keep the furball cozy. We could all be so fortunate!

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According to 60 Minutes, some 80 million "millenials" are descending on Corporate America with aplomb. Tech savvy and self-obsessed, these 20 somethings are creating all sorts of challenges for button down HR departments. Key questions arise.

• What kinds of retirement plans make sense, especially if your workforce is an age barbell (with more younger and older workers and fewer in between)? 
• How does a manager motivate the "me" moguls in waiting? ("No, you won't be promoted by the end of the week.)
• What kind of financial education must a plan sponsor provide when the younger set overspends and believes in now power? According to acclaimed author of "My Reality Check Bounced: The Gen-Y Guide to Cashing In On Your Real-World Dreams," Jason Ryan Dorsey repeats what many surveys show. Few individuals under 30 think Social Security is a reality for them.
• For parents and their employers, how do you properly plan for looming retirement when grown-up children have returned home to nest for awhile?

Despite a job slump in some industries, the future is going to be grim for those employers who fail to recognize the coming demographic time bomb. Watch "The Age of the Millenials" (May 25, 2008, CBSNews.com) and learn about youth power in the workforce.

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 New York Times reporter Alina Tugend ("Pick a Planner Who Can Spell ‘Fiduciary’," April 26, 2008) writes about the importance of doing proper homework when it comes to selecting an investment advisor, stockbroker or financial planner (consultant). Her rule? Ask someone you are thinking of hiring - Are you willing to wear the hat of fiduciary? Since not everyone is required by law to embrace the fiduciary mantle, and some do so only in exchange for additional compensation, the question is far from trivial. She quotes Sheryl Garrett, author of Personal Finance Workbook for Dummies (John Wiley & Sons, 2007) as urging individuals to document agreed-upon terms, including those that relate to the discharging of fiduciary duties such as care and loyalty. Fees and conflicts of interest are other considerations. For example, a compensation structure that includes commissions may encourage the sale of unsuitable securities to small investors.

As more employees migrate (by choice or force) to defined contribution plans, investment literacy is critical. Interested readers may want to check out the following resources:

•  "Final Report on Financial Planner Standards of Conduct" by the FPA Fiduciary task Force, June 1, 2007
• Investor Protection Trust library
• "SEC to continue assault on fiduciary protection in 2008" by Diahann W. Lassus (Investment News, January 7, 2008)
• "Can you trust your financial advisor?" by Liz Pulliam Weston (MSN Money, date not given) - Cites 2005 complaint count against advisors with almost 4,000 taking the form of "breach of fiduciary duty" 

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As companies and government employers shed their traditional defined benefit ("DB") plan offerings, defined contribution schemes become absolutely and proportionally more important to individuals. In two new papers published by the National Bureau of Economic Research ("NEBR"), authors James Poterba, Steven Venti and David Wise conclude the following:

• Self-directed retirement assets will outflank DB plans by 2010, "even though defined benefit plans remain the most important source of retirement assets for federal, state, and local employees."
• The growth in self-directed retirement assets are influenced by a number of factors. These include (a) expected stock returns and bond yields (b) number of employees permitted to participate (not currently enrolled) and (c) asset allocation mix.

Citing data from the Survey of Income and Program Participation ("SIPP"), the research trio reveals that "only 5.8 percent of 44-yers old had 401(k)-type accounts" some 20 years ago. In 2003, that number had escalated to 44.3 percent. In 2000, per capita retirement assets for individuals about to exit the labor pool, and in their mid-60s, averaged nearly $30,000. A decade from now, available assets are projected to rise to $90,000 (in terms of year 2000 dollars). In 2040, the prediction is that nest eggs will topple $269,000.

Click here to order "Rise of 401(K) Plans, Lifetime Earnings, and Wealth at Retirement" (NBER Working Paper 13091) and "New Estimates of the Future Path of 401(K) Assets" (NBER Working Paper 13083).

Wall Street Journal reporter Jennifer Levitz offers a competing, albeit grim, reality. In "Americans Delay Retirement As Housing, Stocks Swoon," she writes that graying Americans favor longer work lives for a variety of reasons. Preservation of health benefits is one factor. Sagging equity returns in 2000-2002 didn't help, especially for those employees who had allocated a big chunk of their savings to stocks. Of course, no trend exists in isolation. A delay in retirement means younger workers will face more competition for promotions or even jobs though the impact is uneven across industries. Skilled workers are nearly always welcome, being indispensable for many knowledge-oriented businesses. Though written on April 1, her description of a brave new world is no April Fool's joke. Companies are fast being forced to reckon with changing demographics and altered employment patterns.

As a colleague aptly bemoans, the retirement trifecta (Social Security, juicy defined benefit plan payouts and hefty salaries, let alone a job) is a fantasy for most everyone still in the work force. For those who expect to live as well as your grandparents or parents, good luck. Start pinching those pennies hard and often.

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According to Money Magazine, retirement planning is tough going. In "Can't save? Blame your brain," new research supports the notion that individuals are loathe to think long-term when it comes to investing. The lure of a large short-term payoff is hard to resist.

Citing three recent neuroscience studies, reporter Jason Zweig explains that instant gratification arouses the brain. Only the "promise of a much bigger reward" later on has a similar impact. As Professor George Loewenstein (Carnegie Mellon University) offers, "When our emotions are charged, we have a hard time waiting."

An already low savings rate and longer lifespans (resulting in the need to stockpile dough) add to the ill effects of any emotional resistance to put away for a rainy day. The current credit crisis has prompted some individuals to withdraw funds from their 401(k) accounts in order to avoid foreclosure. In "401(k)s tapped to save homes," USA Today reporter Christine Dugas describes this technique as expensive, once taxes and penalties are taken into account. Some employers prohibit participants from contributing to their accounts for six months thereafter, another deterrent to saving.

The message is clear. Whether hampered by an emotional reluctance to plan ahead or an urgent need to tap their post-work piggy bank to pay bills, the number of individuals who are retirement-ready is low.

Editor's Note: In 2002, the Nobel Prize in Economic Science was awarded to Professors Daniel Kahneman (Princeton University) and Vernon L. Smith (George Mason University) for their work in pyschological and experimental economics, respectively.

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Unfortunately, few of us are ready to retire. Savings rates are low. Credit card debt is large. A pronounced migration away from traditional pension plans puts more responsibility on the employee to save early and often.

As you plan what we hope are your golden years (as opposed to financial struggles), consider mogul Bill Gates' fictional last day in the office. The video is a lighthearted look at this Microsoft superstar's transition into retirement.

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There is something for everyone when it comes to U.S. national debt. Unfortunately, that "something" is a gigantic IOU to the banks, insurance companies, mutual funds and international investors who buy our government bonds and bills. Click here to access statistics about ownership of U.S. government securities. According to "National Debt at Record $9 Trillion" by Associated Press International reporter Martin Crutsinger,  "It took the country from George Washington until Ronald Reagan to reach the first $1 trillion in debt."

Zowie!

Lest you confuse the deficit with debt, the U.S. Treasury offers Frequently Asked Questions that describe the deficit as "the fiscal year difference between what the United States Government (Government) takes in from taxes and other revenues, called receipts, and the amount of money the Government spends, called outlays." In contrast, the total debt includes accumulated deficits "plus accumulated off-budget surpluses." Click here to read other factoids about our crushing economic situation.

Ignore the finger pointers in Congress who explain why U.S. debt is racing past $9 trillion (that's 12 zeroes). Focus instead on the school of thought that taxpayers (especially younger ones) are on the hook. According to the U.S. debt clock site, "the estimated population of the United States is 303,509,977 so each citizen's share of this debt is $30,036.47."

In retirement land, this slice of Uncle Sam's spending frenzy hurts. With more than a few companies, and state and local plan sponsors, cutting back on benefits, taking on more debt has as much appeal as getting a tooth pulled, without novocaine. Click here to see how quickly national debt is mounting. Refresh your screen several times to appreciate the speed with which we are being pushed into an economic hot zone.

For companies seeking to grow, increased national debt crowds out other borrowers. This in turn has the effect of raising the cost of capital which typically means lower profits and decreased share price. Why is this important to plan participants?

Simply put, the probability of payout at current benefit levels critically depends on the plan sponsor's financial health. Additionally, troubled companies are not likely to hire. For those retirees seeking a return to the workforce, that's unwelcome news indeed. Don't forget the pension asset-liability management challenges associated with excess leverage. To finance its funding gap, the U.S. government issues more bonds and/or raises taxes. The former impacts the shape and magnitude of the yield curve, which affects a plan sponsor's ability to manage interest rate risk. The latter impedes new spending and truncates growth, dragging corporate earnings downward.

The bottom line is that none of us escapes this problem. What a mess!

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Did you know that Congress has officially mandated a national weeklong holiday devoted to saving for life after work? Click here to read the June 21, 2007 press release that earmarks October 21 through October 27 as a time to "put those pennies away."

According to the Boston College Center for Retirement Research, anything to encourage saving for post-employment comes none too soon. Their National Retirement Risk Index suggests that "43 percent of households sampled in 2004 will not be able to maintain their standard of living in retirement even if they retire at age 65, which is later than the current average retirement age." Authors Alicia H. Munnell, Anthony Webb and Francesca Golub-Sass point out that early retirement and "reluctance to annuitize 401(k) balances or tap housing equity" increases the number of persons who are unlikely to be able to sustain a decent post-retirement existence. 

Click here to read "Is There Really a Retirement Savings Crisis? An NRRI Analysis" by Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass (August 2007). 

For this holiday, celebrate by not going out. Focus instead on how much money you are not spending.

 

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You can probably never start saving soon enough for retirement. Estimated longer lifespans and competition for scarce disposable dollars are critical factors. Making matters worse, countless "Career Builders," fresh from college, are deep in debt. According to the American Association of State Colleges and Universities, "the average borrower graduating from a public college owes $17,250 in debt" while "one in four finishes school owing at least $22,822. Particularly worrisome is that the number of college graduates with at least $40,000 in student loan debt has increased 10-fold in the past decade." The problem is worse for those who do not earn a degree.

For financial advisors, the challenge is significant. Busy with work and families, how do you get the attention of 25 to 34 year olds?

Enter the American Institute of Certified Public Accountants (AICPA)and state-level CPA societies. In partnership with the Ad Council, they have created a new website called Feed the Pig™, replete with videos that convey the importance of thrift. The main character, Benajmin Bankes, even has his own My Space page.

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Some things never change. On November 27, 1994, I wrote an op-ed piece for a local newspaper entitled "A prescription for Social Security" in which I warned of the entitlement mentality and the crushing debt load soon to be foisted upon young people everywhere. According to the editor, my suggestions for funding reform were not well-received, as evidenced by a flood of letters with the same message. "Keep your hands off my federal piggybank" and let someone else pay the price. (Like many others, I am an advocate of phased-in privatization for those who prefer to save on their own.)

Recognition of big problems ahead is certainly not unique to me. In his 1993 book, Generational Accounting: Knowing Who Pays, and When, for What We Spend, Dr. Laurence J. Kotlikoff warns of the great divide between the young and old. In their 2005 book, The Coming Generational Storm: What You Need to Know about America's Economic Future, Kotlikoff and co-author Scott Burns tell a grim tale of what has been chronicled many times before. A disproportionate number of persons are retiring from the work force, leaving those who remain to bear the staggering burden of a "pay as you go" system in the form of Social Security and Medicare.

Published last May, the 2006 Social Security Trustees Report states: "Over the 75-year period, the Trust Funds require additional revenue equivalent to $4.6 trillion in today's dollars to pay all scheduled benefits. This unfunded obligation is $600 billion higher than the amount estimated last year."

New York Times reporter Steven R. Weisman writes that Federal Reserve chairman Ben S. Bernanke is worried too, asserting that "Recent positive trends on the budget were a 'calm before the storm,' to be undone by huge deficits in federal entitlement programs. In "Fed Chief Warns That Entitlement Growth Could Harm Economy" (January 19, 2007), Weisman describes Senate testimony that sounds downright gloomy. "The longer we wait, the more severe, the more draconian, the more difficult the adjustment is going to be."

Unfortunately, as we know too well, attempts at entitlement reform are political folly and so the problem festers with little hope of short-term remedy

There are plausible solutions (hard ones but they do exist) IF only people would give up the ghost of an actual retirement piggybank in Washington, emblazoned with their names. In this case, Virginia - there is no Santa Claus.

Sorry kiddo!

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According to the Census Bureau, U.S. population now exceeds three hundred million people. In contrast, the headcount was roughly two hundred million in 1968.

Additional numbers are noteworthy. With one birth every seven seconds, a death every thirteen seconds and one net international migration occurring every thirty-one seconds, it's easy to see that population will continue to grow.

Shades of Thomas Malthus, the English economist who warned that more mouths would deplete the available food supply, or an opportunity for innovation due to additional brainpower?

It likely depends on whether you see the glass as half full or half empty. However, one thing is clear. The population is graying at a rapid rate and there is real concern about the economic well-being of seniors who exit the workforce and younger persons who will be called upon to support them.

According to William Poole, president of the Federal Reserve Bank of St. Louis, "Changing demographics make it impossible both to maintain that traditional retirement age, with the level of benefits defined in current law, and to maintain the current level of taxation on the working population to support the retirement system." Global Action on Aging provides a vast collection of country reports about pensions. The message is the same sobering sentiment. Fewer and fewer people are going to have sufficient funds for their later years.

News from the federal front is equally grim. In "Status of the Social Security and Medicare Programs, A Summary of the 2006 Annual Reports", the Social Security and Medicare Boards of Trustees report that "The fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions. Social Security's current annual surpluses of tax income over expenditures will soon begin to decline, and will be followed by deficits that begin to grow rapidly toward the end of the next decade as the baby-boom generation retires."

My friends and I have this discussion often. Our conclusions?

1. We will work for a long time, perhaps well beyond the "typical" retirement age.

2. An increasing number of people will move into poverty as national benefits are cut, taxes are raised and private pensions are reduced or terminated altogether.

3. Taxpayers will struggle to fund troubled municipal plans while trying to save for themselves.

4. Fewer companies will offer benefits to new employees, forcing a lifestyle change that requires diminished spending, increased use of debt or both.

5. Health care problems will soon dwarf the pension crisis.

6. There is a perverse incentive for politicians to ignore making unpopular changes that might help in the long-run but hurt voters now. (Besides which, when is the last time a legislator had to worry about his or her retirement account?)

7. Individuals must get smarter and better about taking responsibility for their financial well-being.

8. Effective financial education is paramount.

9. Many individuals favor immediate consumption in lieu of systematic saving.

10. No particular individual or organization seems to "own" the issue.

You get the picture. It's a veritable challenge to be upbeat about what is fast becoming a global retirement crisis.

Is there a sunny side?

Yes but only if one is receptive to making changes. There will be winners and clever investors who identify them early on will do well. Some industries are already showing continued robust growth as our population ages in both absolute and relative terms. Health care is an example. Some see the forced move towards economic individualism as a return to the "get up and go" attitude of our forefathers. (Self-employed persons are already familiar with paying for their own benefits.)

According to an ancient Chinese proverb, "Many grains of sand piled up will make a pagoda."

It's time to get started on a serious savings plan.

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CNNMoney.com reports its 2006 picks for "best places to retire." Geographic lovelies such as Walla Walla, Washington and St. Simons Island, Georgia top the list. If your tastes run counter to editorial wisdom, you can find the best locale by clicking on favored attributes such as climate, job growth, commuting time and cultural activities and then pressing the Search button.

While I'm the first to say "have at it" and "enjoy", it strikes me that dreams of a halcyon retirement, especially one at a relatively young age, are simply not a reality for most folks.

Consider some recent headlines and ask yourself - "How ready am I?"

"Ford Offering 75,000 Employees Buyout Packages"
(New York Times, September 14, 2006)

"DuPont to cut pension contributions by two-thirds"
(CNNMoney.com, August 28, 2006)

"Tenneco Freezes Pension Plan"
(CFO.com, August 23, 2006)

If hammocks, hobbies and fun trips with friends await you, congratulations on a job well done with respect to planning.

Everyone else?

Working during the golden years may be unavoidable. Is there hope of catching up? Well, that depends on many things, not the least of which is how much time remains until the paycheck stops coming on a regular basis.

If you aren't saving yet, start giving it some thought right away.

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Once our blog is upgraded in four to six weeks, we'll be able to include permanent links to other blogs and websites. For now, here are a few places you may find worth a visit. As always, please decide for yourself. These comments are not meant to be official endorsements of any particular site. We cannot guarantee the accuracy of the content or appropriateness of policies.

Thanks to a reader, Harold, I learned about another website for seniors, @Prime! The site describes iteself as "one of the leading age 50+ webservices designed to serve the more than 77 million Americans with the largest purchasing power of any single group in America today". Its creator, Mr. David J. Tananbaum "has been closely associated with the pre-retirement and, retirement industry for more than 35 years, and, is currently President/CEO of National Retirement Programs, Inc." and "a founding member of the American Society of Pension Professional and Actuaries." A nice feature is the array of articles about financial empowerment.

And speaking of which, Mr. Rick Meigs agrees with the view that people are saving too little and are in for a rude awakening when they finally decide to retire. (I had opined in the August 29 post that an average 401(k) account balance of $102,000 seemed meager at best, especially considering longer life spans.) President of 401khelpcenter.com, LLC, Rick and I had a long conversation about possible pension litigation trends in the aftermath of the Pension Protection Act of 2006. (Our sister company, Pension Governance, LLC wil be launching a pension litigation database in early fall.) You can go to the home page to sign up for a free newsletter that is chock full of links to other websites and timely articles.

An interesting site that looks at the impact of health habits on age is www.RealAge.com. A "consumer-health media company and provider of personalized health information and management tools", RealAge, Inc. features a calculator to determine your "real age" versus your biological age. Their Scientific Advisory Board Members have written extensively on topics having to do with health. After all, expected life spans of employees have a direct bearing on a plan sponsor's financial obligations.

BenefitsLink.com is another good site. Geared to "the people who administer, give compliance advice about, design, make policy for, or otherwise are concerned with, employee benefit plans in the United States sponsored by either private or governmental employers", you can likewise subscribe to a complimentary newsletter about either welfare or retirement plans or both. A prominent feature is a benefits job center that seems rather comprehensive.

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Early August 2006 saw the launch of a new website, Eons.com. According to their press release, "Eons.com has interactive games to build brain strength, news on entertainment and hobbies for older people, a personalized longevity calculator and tips to live longer." A great idea from the founder of Monster.com, this networking community for the over fifty set boasts a section devoted to building a retirement dream list.(Thank you to the anonymous blog reader who sent us the URL. I later saw an article about this new site in Investment News.)

In stark contrast, a new study, courtesy of the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), suggests that retirement dreams may be hard to achieve for the average person. In particular, Figure A6 paints a downright dreary picture, reporting an average 401(k) balance of only $102,000.

While some individual retirees will receive money from a defined benefit plan and/or Social Security, $102,000 is not much at all when you consider that large numbers of people are living well beyond fifty. While enjoying a short vacation in Arizona, I met several people who said they simply cannot afford to retire and are making adjustments. House-sharing, working more years and scaling back expectations are some of the options.

Eons' founder Jeff Taylor challenges seniors "to see how many friends and family you can inspire to live the biggest life possible. Be loud and be proud about your age." I hope people have the financial wherewithal to do what they dream, for as long as they can.

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A recent article caught this author's eye because it speaks to why the pension "problem" is likely to be with us for a long time.

The Associated Press reports that an official suggestion to cut back vacations in order to satisfy rising health care and pension costs has been soundly rejected by German workers. (See According to "Less Vacation? Germans Say 'Nein'", August 18, 2006). Apparently, Germans average twenty-four vacation days per year.

A related survey suggests that twenty-seven percent of more than 6,000 respondents take a vacation once a year while more than 1,400 persons claim to rest only once every two to five years.

Vacations provide a great way to recharge and return to work, refreshed, productive and happpy. However, five or six weeks of vacation is arguably generous by most standards and even more so, when funding gaps exist. (Of course, Americans are often accused of "living to work" versus "working to live" and there is certainly a lot to say about living a well-balanced life.)

The U.S. Social Security Administration reports less than ideal conditions.

Sluggish economic growth, high unemployment, and worsening demographics are burdening Germany's public pay-as-you-go pension system, which currently claims monthly government expenditures of about 15 billion Euros (US$19 billion). The Social Affairs Ministry estimates that the pension system will have a deficit this year of 1.5 billion Euros (US$1.9 billion). Continued economic performance next year could result in not only a benefit freeze but additional actions being taken to fill the funding gap that the government estimates will reach 3.5 billion Euros (US$4.5 billion) in 2006.

Without massive reform, there is no way around reduced benefits, higher taxes or both.

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Americans will celebrate Independence Day on July 4 with patriotic tributes, picnics and parades. Wouldn't it be wonderful if some time was spent ruminating about financial self-sufficiency as well?

According to the national debt clock website, U.S. IOUs are growing by roughly two billion dollars each day. (Keep hitting the Refresh key for the full effect.)

Personal debt levels are staggering. In a report to Congress, the Federal Reserve cites credit card outstandings in 2004 at $644.8 billion. UK statistics are no less sobering with an estimated fifty-two percent rise in indebtedness over the last five years.

Eilene Zimmerman describes the adverse impact of debt load for Workforce Management, stating that "debt problems cause stress and anxiety that sap workers' productivity, cause health problems and increase the likelihood they will leave a job in search of better pay". Moreover, employees may tap into their 401k accounts prematurely just to stay even with bills.

What role do employers play? Besides plan design, educating employees about retirement choices and personal finance overall can boost morale and enhance a company's return on benefits spending. However, doing so puts companies between Scylla and Charybdis. In its survey about corporate-sponsored financial education programs, Ernst & Young reports that some employers worry about the liability of providing financial education while those that abstain do so for the exact same reason, fear of increased liability.

According to the U.S. Department of Labor "Some plans, such as most 401(k) or profit-sharing plans, can be set up to give participants control over the investments in their accounts. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives" and "must be given sufficient information to make informed decisions about the options offered under the plan."

Whether an employer provides broad-based financial training or not, employees still bear the responsibility of paying their bills on time and arguably planning for their own future.

So enjoy the fireworks and picnic today. The debt diet follows.

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I agree with Professor Paul Secunda, author of WorkPlace Blog. People have to start getting more serious about retirement planning. Relying on one source of capital is ill-advised. In its newly published "Reimagining America: AARP's Blueprint for the Future", a cogent argument is made in favor of supplementing traditional sources with income from continued employment. This opens a Pandora's box of issues for individuals, companies and governments.

1. Will people want to work late into their 60's and beyond?

2. Will individuals need retraining to maintain a competitive edge in an ever increasingly sophisticated world of technology and global pressures?

3. Who should provide resources to retool and retrain?

4. What industries are likely to welcome older workers?

5. How will taxpayers be affected by changing demographics and work patterns?

6. Will productivity be impacted by career mobility?

7. What are the policy implications for people who cannot work past a certain age?

These and many other important questions will soon climb to the top of the priority list for corporate leaders and policy-makers alike.

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Diversify, diversify, diversify! No smart investor should do otherwise, right? Well suppose individuals are not even saving enough, let alone investing wisely. What then?

Sad to say, financial illiteracy is reaching crisis proportion. In a recent release, the Bureau of Economic Analysis (part of the U.S. Department of Commerce), reported a continued negative savings rate. This means that individuals are spending more than they earn. Not surprisingly, personal bankruptcies are climbing higher. According to the Administrative Office of the U.S. Courts, "bankruptcies filed in the twelve-month period ending December 31, 2005, totaled 2,078,415, up from the 1,597,462 petitions filed in the 12-month period ending December 31, 2004", reflecting a whopping 30 percent increase. Similarly significant, they report that "this was the largest number of bankruptcy petitions ever filed in any 12-month period in the history of the federal courts".

A faint glimmer of hope comes in the form of a new study from the Jump$tart Coalition for Personal Financial Literacy. High school students showed a tiny improvement in their understanding of topics such as budgeting and credit cards. Survey designer Dr. Lew Mandell acknowledges the gain but stresses the need for much more work in the area of pecuniary preparedness.

Couple these alarm bells with pension safety nets that are in serious disrepair around the world and the fact that many employers are rescinding or reducing benefits, if offered at all, and we are about ready to enter a maelstrom of unprecedented proportion.

What do you think? Crisis or not? Take this five-question survey and see what others think.

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Welcome to Oz, a magical land of make believe. Citizens everywhere have plenty to eat and lots of money in the bank. Life after work is a halcyon time. People fish, travel and otherwise enjoy recreational activities and peace of mind.

Sadly, life does not always imitate art and so it is with retirement.

According to just released Retirement Confidence Survey results, the Employee Benefit Research Institute reports an astonishing disconnect between retirement expectations and reality. Now in its sixteenth year, this study of attitudes of American workers and retirees suggests a continued gap between what people need and what they have, with two out of every three workers citing a savings balance of less than $50,000. At the same time, respondents acknowledge a longer post-retirement life span of twenty-five years or more. "Nearly 6 in 10 (58 percent) of current workers say they and their spouses do not expect to receive any health insurance from their employers when they retire", validating the need to accumulate even more savings along the way. Adding fuel to the fire, approximately sixty percent of respondents professed a desire to enjoy a comparable life style to what they have now yet have done little to determine how to achieve their financial goal.

Couple these findings with the fact that an increasing number of employer-provided plans are being frozen, terminated and/or replaced with lower-yielding defined contribution plans, if offered at all, and visions of the yellow brick road come to mind. Unfortunately, we don't have an Auntie Em to make up the difference. Trustees report that the Social Security program fails to meet a "long-range test of close actuarial balance by a wide margin" and that "Medicare's financial difficulties come sooner--and are much more severe--than those confronting Social Security".

So what now?

It is virtually impossible to fix a problem if you don't recognize its existence. Like the lion, we need courage to save more and spend less today. This is easier said than done. Record debt levels reflect a consumer preference for immediate gratification.

Individuals are not alone in their false sense of security. Federal and statehouse leaders are similarly in denial. Witness the agonizingly slow pace of retirement system reform that would promote savings, encourage investor literacy and enhance safety net solvency.

Where is the wizard when we need him? By the time the blame game starts, millions of individuals will be out of luck.

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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.)

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