By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Vanguard is out with their annual survey results accumulated from their millions of account holders. To listen to many in our retirement industry, you’d think that everything is just hunky-dory. They often cite the total amount of retirement assets that have been accumulated, while also referencing the “average” account balance within defined contribution plans. Well, the use of these metrics is dramatically hiding the truth of what the “average” American hoping to retire is facing.

According to Vanguard’s output, the median 401(k) balance is a paltry $35,000. They also indicated that 40% of the DC account holders had saved <$20,000. Sure, there is a subset of Americans that have accumulated tremendous wealth that will help them retire, but what about the significant majority of American workers who have very little to fall back on. These numbers reported by Vanguard are staggering especially when one reflects on the fact that we’ve had an incredible 40-year investing period driven by significantly falling interest rates and incredibly modest inflation. If American workers can’t save during that period, how bad will it be for them in an environment in which inflation continues to run unabated, US interest rates rise, and stocks and other assets, including real estate, get crushed?

The demise of traditional defined benefit (DB) plans is forcing untrained individuals to fund, manage, and then disburse their own retirement benefit with little knowledge on how to accomplish that objective. Why did we think that this transition from DB to DC was going to go smoothly? DC plans were never intended to be anyone’s primary retirement tool. They were developed to be supplemental to the DB plan. How has that gone? Lest we forget, these numbers from Vanguard are for individuals that actually have a 401(k) sponsored by their employer. There is a good chunk of American workers that don’t have access to a retirement plan through work. We know that most Americans ONLY save through employer-sponsored programs. Add together those with modest balances and those with no plan, and you have a crisis that will produce significant long-term negative consequences.

Workers who had accumulated some retirement savings as of 2007 witnessed their 401(k) becoming a 201(k) in a relatively short period of time. Worse, you were financially crippled if you had just retired because the sequencing of returns is particularly onerous for those stuck with only a DC option. For those still in the workforce in 2007, you were forced to work many more years just to get back to even. A successful retirement shouldn’t be predicated on when you retire! Trying to retire this year or next? How’s your target-date fund doing? These “conservative” options are anything but that! Both bonds and equities are being hammered at present. The toll could be devastating. We need to preserve and protect DB plans. Everyone should have the opportunity to retire with dignity. Not just the top 10% of income earners.