An article by Alicia H. Munnell, Center for Retirement Research at Boston College, was published on the MarketWatch website on February 27th.  As I’ve said before, I think that she and her team do an incredible job of presenting retirement-related research, and it is certainly one of my go to sites for information on our retirement industry.

The headline of her article was “It’s Harder Than You Think To Spend Down Your 401(k) In Retirement”, and she’s attributing this difficulty to the fact that there aren’t any easy drawdown mechanisms in 401(k) plans.  According to Ms. Munnell, innovation is being stagnated because plan sponsors fear litigation, while at the same time Congress is unlikely to mandate annuity-type product for defined contribution plans.

As a result, little is being done to help guide the employee upon their retirement.  Unfortunately, those individuals are being given an cash distribution upon retirement, which requires them to manage the future drawdowns – good luck!

I don’t disagree with anything that Ms. Munnell has stated so far.  However, I do disagree with her when she states that she is “more concerned about people hoarding their retirement savings than blowing them on a trip around the world.”

I don’t believe that a majority of Americans will blow their savings on a trip or a second home or the fancy pickup truck. What I do believe is that a significant majority of American workers will NOT save enough to have a “pile of cash” to hoard. By all indications, Americans across the age spectrum are saving far too little at this time to accumulate a meaningful retirement account.  KCS produced information in an earlier blog post today that highlights the significant percentage of American workers that have less than $10,000 in retirement savings.

Ms. Munnell points out that “recent studies show that people draw down their balances in retirement much more slowly than expected. But most of today’s retirees with a retirement plan have an old-fashioned defined benefit plan, so these studies have little to say about the likely behavior of those retiring entirely dependent on 401(k) plans.” That’s the rub! We are entering a new paradigm in which most Americans (>80%) in the private sector are not participating in a traditional DB plan.

The expectation that these workers would all of a sudden fund, manage, and then disperse a retirement benefit with little education is simply poor policy, and the social and economic impact will likely be quite grave. I’m much more concerned about the ability of Americans to save in the first place, which is proving to be a nearly impossible task for many workers, than I am about their “inability” to drawdown a retirement benefit fast enough. It really won’t be difficult to spend an account balance that is as meager as those that have been accumulated to date.