Loading Please wait, logging in.
Join ALFA Member Login RSS Feed
Tagline Image
Bookmark and Share  

Aging Committee Holds Hearing on Economy’s Effect

Last week, U.S. Senate Special Committee on Aging Chairman Herb Kohl (D-WI) held a hearing on the economic downturn’s effect on retirement security, particularly for those who are on the brink of retirement. Witnesses at the hearing offered insight into the myriad factors that are affecting the ability of baby boomers to retire, including the weakened performance of 401(k) funds, the instability of housing values, and the challenges of the labor market for older workers, all of which are contributing to diminished prospects for a secure retirement.

The panel took a particularly close look at 401(k) target date funds, which are designed to gradually shift to more conservative investments as workers approach retirement. Kohl also unveiled findings from a Committee investigation of 401(k) funds designed for people planning to retire in 2010, which revealed a wide variety of objectives, portfolio composition and risk within same-year target date funds. The results of excessive risk can be devastating for those on the brink of retirement: one 2010 target date fund lost 41 percent in 2008. In conjunction with the hearing, Kohl is sending letters  to U.S. Secretary of Labor Hilda Solis and U.S. Securities and Exchange Commission Chairwoman Mary Schapiro, urging them to immediately commence a review of target date funds and begin work on regulations to protect plan participants.  

“Despite their growing popularity, there are absolutely no regulations regarding the composition of target date funds,” said Chairman Kohl. “With more and more Americans relying on 401(k)s and other defined contribution plans as their primary source for retirement savings, we need to make sure their savings are well-protected with strong oversight and regulation.”

Target date funds are designed to simplify long-term investing by automatically adjusting to more conservative investments as the fund approaches a set date. By authority of the Pension Protection Act of 2006, the U.S. Department of Labor (DOL) has issued regulations allowing target date funds to be used as a qualified default investment alternative (QDIA) in employer-sponsored retirement plans. However, under the Employee Retirement Income Security Act (ERISA) and DOL guidelines, there are no requirements regarding the composition of target date funds and the appropriate ratio of stocks and bonds as the fund nears its target. As a result of the decision to allow target date funds to be used as QDIAs, they are increasingly used as the primary investment option for millions of Americans. Target date funds only made up roughly 3 percent of defined contribution savings in 2006, but are expected to increase to 20 percent in 2010. By 2015, it is expected that more than one-third of all defined contribution savings will be in target date funds. 

The hearing’s lead witness, Jeanine Cook, testified about the difficulties Americans face as they head into retirement. Like millions of other Americans, she has experienced a decline in her housing and 401(k) investments in conjunction with diminishing job prospects. Dallas Salisbury, president and CEO of the Employee Benefits Research Institute, highlighted some of the findings about target date funds that will be released in their March 2009 EBRI issue brief. He also discussed some calculations about how long boomers will need to remain in their 401(k) plan to make up for the 2008 declines based on continued contributions and differing market scenarios. 

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), discussed the decline in savings and equity among young and older baby boomers. In conjunction with this hearing, CEPR released a new report on how the housing crash is affecting boomer’s retirement prospects. Ignacio Salazar, from SER- Jobs for Progress, testified about some of the challenges that older workers face in today’s workforce, and how Workforce Investment Act (WIA) one-stop career centers are not doing a satisfactory job in training seniors. Yesterday Kohl unveiled his agenda to make it easier for older Americans to either reenter or remain in the workforce.

Barbara Kennelly, of the National Committee to Preserve Social Security and Medicare, testified about how government programs, like Social Security and Medicare, are crucial to America’s seniors, especially in a stagnant economy. She also mentioned the rising bankruptcies among seniors and highlighted some of the government’s efforts in the stimulus to help older Americans as they retire.  Finally, Deena Katz, a certified financial planner and associate professor at Texas Tech University, gave an overview of boomer financial history, and described the challenges and risks facing boomers as they enter retirement and begin to spend down their savings. She also offered steps that boomers and policy makers might consider to help attain a secure retirement.

We have included below a table of some of the more interesting facts presented at the hearing 
*Below the table are links to the complete testimony presented at the hearing:

Facts Presented During Hearing

Source

Average Social Security Benefit - $13,800

National Committee to Preserve Social Security & Medicare

Two-Thirds of the Elderly Receive More Than Half of Their Income From Social Security

National Committee to Preserve Social Security & Medicare

Almost 50% of all Widowed, Divorced, and Single Women Age 65 or older Receive 90% or More of Their Incomes from Social Security

National Committee to Preserve Social Security & Medicare

Medicare Provides Insurance Coverage to 97% of Older Adults

National Committee to Preserve Social Security & Medicare

Those Who Had Retirement Account Balances With Less Than $10,000 Saw An Average Growth of 40% in 2008

Employee Benefit Research Institute

Those Who Had Retirement Account Balances With More Than $200,000 Had An Average Loss of More Than 25%

Employee Benefit Research Institute

401K Participants on The Verge of Retirement (Ages 56-65) Had Average Changes During This Period That Varied Between +1% to an Average Loss of More Than 25%

Employee Benefit Research Institute

According to 2000 Mortality Tables, A 65 Year Old Couple Have a 95% Chance Of One of Them Living To Age 91 Despite the Fact That Most Boomers Do Not Believe They Will Live To Age 90

Deena Katz, CFP

Many Boomers Expected To Follow In Their Parents Footsteps and Fund Their Retirement Years Using Home Equity But The Loss In Home Values and Equity That Has Occurred Has Seriiously Damaged this Theory

Deena Katz, CFP

Most Retirees Believe That a Safe Retirement Portfolio Should Be 100% in Bonds

Deena Katz, CFP

Boomers Don’t Need Income At Retirement; They Need Cashflow; That Is An Income Stream That Grows Regularly With the Inflation Rate

Deena Katz, CFP

The Median Household With a Person Between the Ages of 45-54 (Young Boomers) Saw Their Net Worth Fall By More Than  45% Which Includes Home Equity

Center for Economic and Policy Research

The Median Household With A Person Between the Ages of 55-64 Saw Their Wealth Fall By Almost 38% Also Including Home Equity

Center for Economic and Policy Research

 

Testimony Links

February/March 2009

02/15/2009


Additional Resources