Is your retirement account suffering from Investment Paralysis

Boomers should take note of the seemingly robust economy around us as we head into the holiday season. The stock markets seem to be poised for what has been termed often as the "Santa Claus rally". Consumers, at least according to business surveys, are beginning to spend. And this is all occurring, while in the shadows, the economy or its numbers remain little changed. That and most of us are still suffering from investment paralysis.

Here we are, years after the fall of 2008, and the average middle class worker still has an account balance that is far from where it should be - if they plan on retiring. When most of us think is retirement age, we think in terms of what has been the generally accepted retirement age. This unfortunately is a failure on two fronts: yours and the plan sponsor.


Your responsibility is in the contribution.According to a Wells Fargo survey (pdf) conducted among 357 plans, middle class is defined as: "those aged 30 to 69 with $40,000 to $100,000 in household income or $25,000 to $100,000 in investable assets and those aged 25 to 29 with income or investable assets of $25,000 to $100,000." This group knows that they will need more than $300,000 to fund a basic retirement yet, on average those balances fall far short of that goal with $20,000. Is it any wonder that this group is increasingly buying into the notion that working longer is a fact of life in the post-downturn world?

Most of the middle class group contributes only about 7% of their pre-tax income to these plans. And if the survey is any indication, much of the fault lies in the employer's approach to these plans. The study suggests that employers are concerned about their legal liabilities in helping their employees even as they acknowledge the shared role in helping those workers.

These fiduciary concerns are widespread among plan sponsors who worry that should they provide advice, and that advice doesn't meet employee expectations, they will see the plan sued.

This has led these employers to look for plans that offer third party advice, shifting the liability to another player. What they fail to embrace is that using a TPA (third party administrator) doesn't lessen the liability. While 89% of the plan sponsors understand that there is a need for retirement help, only 71% (as of 2009) think that they should help those employees understand what the plan can do for them.

In order of importance, and in reality, employers do something else entirely and your defined contribution plan's ability to get you there is reflective of this lackluster effort. Only 35% of the DC sponsors surveyed think that education is important, 22% encourage greater participation and increased contributions, 9% think investment diversification is important while only 2% facilitate the planning process by pointing out what is need in retirement and helping their employees use the plan to achieve this.


Are more funds in the plan the answer? Some DC sponsors believe they are and are looking to increase their offerings. But often, plans with more than fifteen funds aren't necessarily giving the employee more choices that suit their needs. The new choices are often in the form of target date funds and other more conservative investment offerings. This is often done at the exclusion of more suitable offerings (such as aggressive mutual funds for younger workers). Once again, they fear retribution for suggesting anything akin to risk.

DC sponsors are worried about what the industry calls investment paralysis. Too many funds, studies have suggested, often have lower overall participation rates that those with 15 fund or fewer in their plans. Because there is a growing movement to offer auto-enrollment, choosing a fund for that new employee often requires the plan to carry a wide variety of target date funds to pinpoint a "potential" retirement year.


But understanding the need and acting on it, from both a participants point-of-view and that of the DC sponsor are often far from what they are actually doing. Plan sponsors need to understand more than just the investment array, plan design, distribution options, education and communication, and fees charged by the plan. It is their fiduciary responsibility, one that carries legal risks if mishandled, to measure their plan's impact. Only 15%, according to the survey do so.

The employer still offers matching contributions in many defined contribution plans. But how and what are a matter of debate. Many still offer matches that are tied to company stock, put restrictions on access to those matching funds, and use the auto-increase contribution system as a way to offset raises. Often, maintaining the 401(k) plans they might have, as many of the companies surveyed suggested, is done for the sole purpose of getting and retaining new employees. This, in light of less-than-robust private hiring, might come at a reduction of other benefit programs.


If you are still in a DC plan and your employer's match is not as adequate as it should be, this doesn't let you off the hook. You still need to save more, much more than you are presently doing. While it is true that 5% is the cut-off point where pre-tax contribution investments don't impact take-home pay, some sacrifice on the employee's end is needed. And this should be done,match or no match.

If your employer's 401(k) plan is not as robust as it should be or doesn't fit your age needs, open an IRA or Roth IRA on your own. Contributing to both plans (10% to your 401(k) and the maximum allowed to an IRA or Roth IRA) is your responsibility. While we still look to the company we work for for guidance, and even to the point where we believe they care about us and our retirement future, the facts are not bearing this fuzzy feeling out in the surveys I have read.

As Laurie Nordquist, director of Wells Fargo Institutional Retirement Trust said: "If people aren't willing to pay for advice they are going to get a more vanilla approach to planning," adding, "But a simple plan is better than no plan."

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

When Retirement Demands a Revolution

Boomers tend to be an attentive group. They have to be.  They have enormous amount at stake in every turn of the economic universe.

If you are paying attention, you or someone close to you is in serious financial decline.  And even if you have resources that you have now been able to calculate in both present and future terms, you can't help them.  But you feel their angst, understand their pain and feel very close to being in the same position.

This can be passed off to a number of different things occurring almost simultaneously.  It is difficult to pinpoint with any accuracy when a growing economy finally decides to grow faster. Is it relaxed regulation, political fair winds, exploitable tax bases or simply the belief that every man and woman, no matter who and where you enter into the system, can one day be wealthy? We knew what good times looked like and we liked what we saw.

So we acted wealthy. And with each of us acting in concert, we began the economic propulsion that became the "markets", an all inclusive term for everything from stocks to houses. Everything was marketable. And that's okay as long as all of the players in the game are playing fair.  Trouble is, no one told us that the rich don't really want us to be rich and therefore have no real interest in playing fair.  In my opinion, having us be middle class is about where they want us.

Les Leopold, writing in the Friday Huffington Post suggested that there is actually a class war in the making. "The wealthy may loathe hearing about "class struggle," he writes, "but we're in the middle of one -- and it's a doozy." He then explains the way the world worked prior to the creation of class so wealthy, their wealth no longer created jobs as it did in the past.  It simply was unimaginable in size and mostly unspendable. We hear of huge charity donations but not a single one creates a job trend. And that, Mr. Leopold suggests was where this whole breakdown began.

He's right to a point.  We do like the concept of blame. But as he suggests in a revolutionary lilt: "We just want to find a job, or keep the one we have, be with our families and cope with what life throws at us while enjoying as much of it as we can. We don't want to go to war with the richest people in the world, even though we greatly outnumber them. But we can't avoid this battle--it's coming to our doorsteps."  Or as Oscar Wilde writes: "It's not whether you win or lose, it's how you place the blame."

Perhaps it's just us.  We have a view of ourselves that even in this sort of economicsituation, refuses to alter itself. We still see us regaining what we had rather than embracing what really is. Could it be the color in the collar that keeps us from banding together?

White collar workers approached middle class as simply a staging area for something greater. Blue-collar workers tended to come to grips more with the realities of being middle class although they pushed their children to get away from the colored collar they owned. Now, we are, as Douglas Coupland described in his OpEd in the NYTimes titled Dictionary of the Near Future: "Blank Collar Workers - Formerly middle-class workers who will never be middle class again and who will never come to terms with that."

And that is a good thing. Combining the inability to be satisfied with what life has dealt you is far different than aspiring to riches and positioning yourself to get them. We have to be in it as one. As "blank collar workers" we can do what needs to be done and do it without taking it to the streets. How is the problem.  So its no wonder that last resorts be put first.

We can begin with being realists. This is the hand we've been dealt, we need to cope with it.  That is a huge hurdle but until we all make the same choice, that wanting is not the same as needing, instead it is sort of a balancing act between what needs to be spent and what doesn't. Some folks, those friends we talked about earlier are already there. You need to practice as if tomorrow you will be there to.

We have seen this sort of rebooting of the economy before and it takes time. Is it wrong to adopt the medical parlance of living every day like its your last and suggest you think of everyday on your job as your last. It is an admittedly harsh way to approach a plan. But it might be more effective than believing that things are going to get better sooner than they will.  Mr. Leopold is not alone in his thinking that it could be a decade or more before things get back to normal - whatever that may be.

I found it ironic that Mr. Leopold would invoke an old union song asking the question which side are you on. Perhaps that is the answer we are avoiding? We all need to be on the same side.

Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer

When Analysts Get it Right, They Might be Wrong

If you were to open your third quarter statements, and I hope that you do, you will find that your balance in your retirement plans has jumped significantly from its lows from the year ending 2008. This would, to the untrained eye, point to a recovery led by the stock market.

And the stock market has recovered - to a degree. Yet, expecting this to reflect into the economy that we experience day in and day out, is not there. And may not be for months. Why is this?

The Norm
When markets recover from their bottom, they do so based on what many of us like to feel is a fundamental improvement in the businesses that our retirement plans invest in. Those businesses offer forecasts to analysts who in turn predict how what the company expects its future to be, how they plan on growing or simply maintaining market share, and how they see the consumer's reaction to their efforts.

These analysts then parse this information. In doing so, they offer clients of their firm an outlook on what these companies are most likely to do and whether their positions reflect the strategy. Using terms such as overweight (meaning that more of a particular company's stock should be owned relative to their total portfolio), underweight (a suggestion that exposure to the stock should be had but not so much so that it could jeopardize the overall holdings), neutral (a reference to keeping a company's stock would neither hurt or benefit the client any better than if they didn't own the company at all, suggesting that it be balanced based on a variety of measures such as overall risk) and of course the buy/sell that signals you should, if your were a client to move in a specific direction regardless of your current position.

For the most part, analysts have been right about the stock market. Of the 344 companies that have reported their earnings so far, 85% have handily beat expectations that these analysts have reported. Is it simply the result of a command performance or is it the result of pessimistic outlooks provided these folks?

In all likelihood, it is the later. Businesses have begun to recover but are doing so without the help of the workers they would have needed in the past. Taking advantage of extremely low rates for borrowing, they have shored up their books to give the appearance of profitability, they have cut costs across their businesses and have done so without hiring workers to meet demand.

Better is Not Best
This cash hoarding has done wonders for the balance sheet. In fact, Standard and Poors company has found that the industrial companies in its index of the 500 largest cap companies has increased to by $684 billion as of June 30th. Using low interest lows to refinance debt is not the same as using low interest money to increase spending. This is also reflective in the ratings many corporate bonds have received, driving the risk of default lower.

And this is driving your retirement plan balances higher as a result. The question is: can it go on? The short answer is yes. The analysts are still giving investors false hope with lower estimates of performance in the near-term. Even without domestic hiring, companies are beginning to expand overseas. Labor is cheaper and many see the demand for consumer goods increasing offshore at a faster pace than here at home.

The long answer is no, it can't go on indefinitely. The American economy is still driven by consumers. How much of it will be in the future remains tied to the ability to borrow (still low despite the historic low rates available to even the smallest borrower, although with higher than expected requirements to access that credit remain problematic), the unemployment rate (which is expected to top the 10% mark, with even more people dropping form the ranks of the measured as their search for employment simply stops being recorded), and the bottoming of overall prices (a relative measure of how well a company can sustain profitability in the face of lower overall sales).

The Better Idea
For now, staying invested seems like a better idea than not. The problem is whether the economy's recalcitrant attitude will prevail over the business plans and the analyst's forecast. You can expect mid-caps to remain a focus in the coming months as small caps still struggle with funding their operations. Many in this space rely on research and development money to stay on track and some even look to the merger and acquisition markets to help. Neither seems very promising at the present.

Does that mean we are headed for another correction? Yes and no. Yes, we will see some result of the weak dollar having a negative effect on our investments, both equities and fixed income. No, in that it will not be as bad as the one we just experienced. The only way to take advantage of this volatility is to stay invested and doing so in a steady stream of contributions, the way your 401(k) provides, will end up in a better result than following the gyrations of the market that are bound to take place.

Paul Petillo is the Managing Editor of the BlueCollarDollar.com and a fellow Boomer.