A Fable from T. Rowe Price

The T. Rowe Price Group Inc. contends that it's possible for a 55-year old with no savings to build more than $400,000 in tax-deferred savings before age 65.

In its study, T. Rowe Price focused on a 55-year old who has no retirement savings and makes $80,000 a year. The analysis compared saving just enough (6% of salary) in the worker's 401(k) program to receive the 3% company match versus saving the maximum allowable amount to the 401(k), or $16,500 each year. The study also analyzed the impact of the so-called "catch-up" provision that allows those 50 and older to save an additional $5,500 per year.

The worker who saved just enough to get the company match was able to build a nest egg of $147,000 after 10 years, not even two times salary. But saving the maximum possible, including the catch-up provision, or $22,000 built a nest egg of $447,000.

There are at least two problems with this study. First, the worker would have to set aside about 21% to 27.5% of salary the first year and benefit from a 3% contribution from the employer for each of the next 10 years. More typically, workers with a 401(k) now contribute on average just 7% per year to their plans.

The other problem is that the study assumes an 8% return on investment per year, more common among portfolios where 60% is in stocks and 40% in bonds, a mix considered too risky for folks nearing retirement.

Senate Committee on Aging

U.S. Senator Herb Kohl (D-WI), chairman of the Senate Committee on Aging, has responded to a Request for Information (RFI) from the U.S. Department of Labor (DOL) and U.S. Department of Treasury (Treasury) on the topic of promoting retirement security, sharing with the agencies a report by the U.S. Government Accountability Office (GAO) examining the options retired Americans have for converting retirement savings into postretirement income. GAO also studied how pensions, annuities, and other retirement savings products are regulated.

“As more Americans rely on defined contribution plans, the choices they have to make in order to achieve a secure retirement have grown more complex. Not only do they have to make the proactive decision to save, but then they must decide how much to save, where to invest their savings, and how to make the best use of it when they retire. We’re trying to make this process a little more user-friendly,” Kohl said.

Kohl also shared with DOL and Treasury a bill he sponsored alongside Senators Jeff Bingaman (D-NM) and Johnny Isakson (R-GA) to help Americans translate their retirement savings into retirement income. The Lifetime Income Disclosure Act (S. 2832) would require 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance.

The measure is patterned on the Social Security Administration’s annual statements, which are mailed annually to working Americans to inform them of estimated monthly benefits based on their current earnings. Congress mandated annual Social Security statements in 1989, and they have proven to be very useful to workers in preparing for retirement. By providing similar information for 401(k) plans, the Lifetime Income Disclosure Act would give American workers a more complete snapshot of their projected income in retirement.

On June 16, Senator Kohl will hold an Aging Committee hearing on turning retirement savings into lifetime income.

CICA Is Improving the Canadian Retirement System

Canada's Chartered Accountants believe it is imperative for the Canadian government to assess the country's retirement income system even though it is recognized as one of the best in the world.  More specifically, the Canadian Institute of Chartered Accountants (CICA) recently made a submission as part of the federal government's consultation on "Ensuring the Ongoing Strength of Canada's Retirement Income System".

The CICA believes that opportunities to improve the current system can be found should it be determined that Canadians are failing to save enough for their retirement. Reforms might include:

• Reducing or eliminating the income tax on personal savings - increasing the contribution limits for Tax Free Savings Accounts and
• Registered Retirement Savings Plans (RRSP) would be a step in this direction
• Modifying RRSP and Registered Retirement Income Fund rules to allow greater tax deferrals on retirement savings
• Developing savings incentives, perhaps through enhanced credits, to encourage younger Canadians to start saving earlier

ILAC Recommendations

The Investment Industry Association of Canada (IIAC) stated in its submission to the Department of Finance that the existing retirement system works well for most Canadians. But the IIAC identifies several policy measures to strengthen the caliber of the retirement system.

Recommendations include:

• Developing a national strategy to increase financial literacy among Canadians
• Reforming the RRSP and TFSA contribution limits to assist middle income Canadians in bolstering their retirement savings, and to help alleviate the inequality between Canadians who save in RRSPs and those who have access to defined-benefit pensions
• The removal of mandatory withdrawal amounts for RRIF accounts to provide retired Canadians with more flexibility to manage their savings

Input from the U.S. Chamber of Commerce

The U.S. Chamber of Commerce has sent a letter to the Department of Labor in response to the request for information from the Administration regarding lifetime income options in retirement plans. The request solicits information from plan participants, employers and other plan sponsors, plan service providers, and members of the financial community, as well as the general public.

The letter details the Chamber's top priorities surrounding lifetime income products. First, it explains the importance of defined contribution plans in the current retirement landscape and urges the agencies to not underestimate the security that they provide in their current form to millions of participants. The letter then details a number of issues including low take-up rates among participants, concerns about increased liabilities on employers, incentives for employers to provide information on lifetime income products, and suggested changes to the minimum required distribution rules. Above all else, the letter urges the agencies against requiring lifetime income products as a mandated distribution option in defined contribution plans.

Trillions in Retirement Assets

Americans held $16.0 trillion in retirement assets at the end of 2009, accounting for 35 percent of all household financial assets in the United States, the Investment Company Institute (ICI) has reported.

The Annuity Boom

The annuity industry is experiencing strong growth. Sales increased from $164 billion in 1999 to $264 billion in 2008.

Concentrations of Wealth

Assets in individual account retirement plans are concentrated in families with higher net worth, higher family income, higher educational attainment, with older family heads, and with white, non-Hispanic heads, according to a study released today by the nonpartisan Employee Benefit Research Institute (EBRI).

The analysis finds, though, that retirement plan assets are less concentrated than overall financial assets in many of these same categories. For example, families with white, non-Hispanic heads owned 85.1 percent of active employment-based individual account retirement plan assets, compared with 91.9 percent of all financial assets. Families in the top 10 percent of net worth held 50.0 percent of these active employment-based retirement assets, compared with 72.3 percent of all financial assets.

Guaranteed Income

The American Council of Life Insurers has issued a formal response to an Obama administration request for information on how annuities could be used to bolster Americans' retirement options. The group advocates that guaranteed income become a routine part of the employer-based retirement plans. It also asks that the federal government apply a "limited tax incentive" to annuities to encourage their use.

A Mother’s Day Celebration

In celebration of Mothers Day The Women's Institute for a Secure Retirement (WISER) and The Financial Services Roundtable have partnered to raise awareness of personal retirement security for women. A McKinsey & Company study shows that nearly a third (32%) of women do not feel prepared for retirement, and they are becoming more anxious about their personal situation.