'Nothing' Doing

If you’ve been asked in the past two weeks what to do about the market (and who hasn’t), I’m sure your response has been something along the lines of . . . “Nothing.”

There are, of course, more eloquent ways to express that sentiment. And, let’s face it, when it seems that everyone is asking that question—it’s generally well past the time when it is prudent to try and do—well, anything.

Still, it seems that throughout my professional career, every time the market plunges (even when it stays down for an extended period), the pundits all seem to say the same thing; “the fundamentals are sound,” “we’re going through a period of short-term volatility,” or “we were due for a correction” (sometimes all of the above). Granted, this period seems unusual—there is a non-financial cause (the coronavirus outbreak) that is projected/anticipated to have a financial impact of unknown size and duration. That it has emerged at the outset of what is likely to be one of the more contentious election cycles in memory will, of course, only fan the flames of uncertainty—which is, at its core, the heart of all market volatility.

As for the admonitions to “stand pat,” while we’d all like to believe that we don’t need to do anything (and it’s generally too late anyway), there’s something to be said for a timely, comforting voice of reassurance. Better yet if that reassurance comes from someone knowledgeable in such matters—and better still when that reassurance comes from someone familiar with the particulars of our investment portfolio and financial needs/aspirations.

Plan sponsor fiduciaries are generally appreciative of those messages. They bear responsibility for the prudence of such investments, after all—and the reassurances of experts that prudence has been manifested in their decisions (or their non-decisions) is understandably welcome. Most are only too happy to pass along those reassurances to the retirement plan participants on whose behalf their decisions (or non-decisions) have been made.

Indeed, it’s a rare 401(k) enrollment meeting or education pamphlet that doesn’t remind us all that 401(k)s are long-term investments, that they continue to benefit from the on-going benefits of dollar-cost averaging, and perhaps increasingly that their investment in a diversified asset allocation “solution” like a target-date fund or managed account means that they needn’t concern themselves with those kind of interim swings.

Tough times can engender resentment and, in extreme cases, litigation, after all.

But they can also foster an appreciation for expert counsel, and that current reassurance that the inevitable “storm” has been anticipated—and that tough times can bring with them, opportunity.

- Nevin E. Adams, JD

Crisis "Management"

Rarely a week goes by that a headline, survey or academic paper doesn’t proclaim the reality of a retirement crisis with the certainty generally reserved for topics like the existence of gravity, or the notion that the sun will rise in the east.

And certainly based on the data cited, there would seem to be a compelling case that trouble lies ahead for many. That said – as was pointed out by Andrew Biggs at the recent Plan Sponsor Council of America conference – the reality is that good, reliable data is hard to come by. Indeed, many of the reports cited in those headlines rely on what you would expect to be a reliable source; the Census Bureau’s Current Population Survey, or CPS.¹ Unfortunately, that reliable source turns out to be not-quite-so-reliable. It suffers from relying on what people tell the survey takers, but perhaps more significantly, Biggs, resident scholar at the American Enterprise Institute, pointed out that the survey only counts as income in retirement funds that are paid regularly – like a pension. “Irregular” withdrawals from retirement accounts – like IRAs and 401(k)s – aren’t included.

In fact, when you compare what retirees report to the IRS with what they report to the Census Bureau, only 58% of private retirement benefits are picked up, according to Biggs. Now, who do you suppose gets a more accurate read; the IRS² or the Census Bureau? And yet, the CPS data serves as the basis for a huge swath of academic research on retirement savings.

Social ‘Security’

Biggs noted that IRS data also draws into question some of the “common wisdom” on things such as dependence on Social Security. Consider that the Social Security Administration – who arguably has “skin” in the game – claim that a third of retirees are heavily dependent – to the tune of 90% or more of their income – on Social Security. However, a study based on IRS data found that only 18% of retiree households are heavily dependent on Social Security, and just one in eight retirees receive 90% or more of their income from Social Security. Don’t get me wrong – Social Security is clearly a vital and essential component of our nation’s retirement security – but the IRS data indicates that, for most, it isn’t a primary source at present.

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but data suggests that most retirees aren’t exactly burning through their retirement savings. Not that some aren’t drawing down too rapidly, mind you – and that’s a valid concern. But many, perhaps most – aren’t.

Data suggests that today’s retirees are actually in pretty good shape. In addition to the IRS data cited above, that sentiment is borne out by any number of surveys (perhaps most notably the Retirement Confidence Survey, published by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald Associates) that continue to find that those already in retirement express a good deal more confidence about their financial prospects than those yet to cross that threshold. And certainly, the objective data available to us suggests that today’s retirees are better off than previous generations, though their retirement – and potential health issues – may at some point take a toll.

Still, in 2014, EBRI found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers — between 83% and 86% of them, in fact — with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold — and that’s making no assumptions about the positive impact of plan design features like automatic enrollment and annual contribution acceleration.

Not that there isn’t plenty to worry about; reports of individuals who claim to have no money set aside for financial emergencies, the sheer number of workers entering their career saddled with huge amounts of college debt, the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work (though not as enormous as some claim)…

That said, I shudder every time I hear an industry leader or advisor stand up in front of an audience and proclaim that there is a retirement crisis – because, however well-intentioned – they are almost certainly providing “aid and comfort” to those who would like to do away with the current private system as a failure, not a work in process.

What seems likely is that at some point in the future, some will run short of money in retirement, though they may very well be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels.

However, what seems even more likely is that those who do run short will be those who didn’t have access to a retirement plan at work.

- Nevin E. Adams, JD
 
Footnotes

1. Nor is that the only shortcoming in that widely utilized source. The nonpartisan Employee Benefit Research Institute (EBRI) has pointed out that a change in survey methodology in 2014 has produced some questionable plan participation results from the CPS – a finding subsequently validated by the Investment Company Institute. ↩
2. Not that IRS data can’t be misapplied. ↩