According to a new Kiplinger survey, nearly 6 in 10 Americans withdrew or borrowed money from their 401(k) “retirement” funds. Of that 60%, 58% withdrew or borrowed from $50,000 to $100,000. These are shocking statistics! I’ve claimed for years that the transition that occurred in our retirement industry from company sponsored defined benefit plans to defined contribution plans was going to create a huge crisis, and here is the proof! Defined contribution plans are nothing more than glorified savings accounts masking as retirement plans. They were never intended to be anyone’s primary retirement vehicle, as they were designed to be supplemental to a traditional pension plan.
Not only did Americans withdraw huge sums from these plans, but many companies ceased contributing matching funds once the pandemic hit. This double whammy has about 1/3 of respondents to the Kiplinger survey contemplating staying in the labor force longer. In fact, 55% now expect to work beyond 65-years-old. However, according to AARP (2/19) only 20% of Americans 65-years-old or older are actually working or looking for work at this time, which is double from 1985. What is the likelihood that 55% of older Americans would be able to secure work to help supplement their retirement income?
Of further concern regarding the management of defined contribution plans is the fact that roughly 70% of those surveyed indicated that they had a least 20-years left of work until retirement. Yet the average asset allocation to stocks/equities was only 35.7%. Unfortunately, cash was the second largest allocation at 23.8% and bonds third at 17.3%. Federal Reserve policy has certainly crushed cash and bonds from providing meaningful returns. Furthermore, 41% of those polled changed their allocation to stocks during the pandemic, with only a small percentage indicating that they had increased exposure after the significant sell-off in March. Why should we expect any other outcome? Why do we think that these participants are going to be able to fund, manage, and then disburse this “retirement” benefit with limited education and experience in this subject?
At the same time that retirement dreams of those stuck with a DC plan are being dashed because of Covid-19 and the impact that has had on our economy and labor force, we have Congress neglecting to address the pension crisis within multiemployer plans, despite the fact that outstanding legislation passed through the House of Representatives in July 2019. What a mess. If you think that income inequality between the haves and have-nots is great today. Just wait to you see what it looks like when there are no longer any DB plans – public or private – and the only way to potentially retire is through a DC offering. Can it get any uglier?