Recently John Bogle, founder of the Vanguard mutual fund group, said that future retirees face a coming disaster for the following reasons:
- Social Security is going broke;
- Defined benefit pension plans are underfunded; and
- Participants are not contributing enough to their 401(k) accounts.
Here's why Mr. Bogle's disaster isn't likely to occur.
Social Security - an easy fix
Very soon our legislators in Washington will implement means testing for Social Security and Medicare benefits. Means testing (using financial criteria to qualify beneficiaries) should have been in place with these programs from the outset. Those beneficiaries who have retirement income above a certain level will not be eligible for Social Security or Medicare benefits. These programs were meant to be safety nets and not the centerpieces of every Americans retirement program. It is also likely that the Social Security tax will be uncapped and applied to all earned income.
Defined benefit plan underfunding - making progress
Defined benefit pension plans were subject to the perfect storm after the crash - low interest rates and poorly performing equity markets. The lower interest rates are, the less income generated from the fixed income portion of the portfolio used to fund and pay benefits. Also, the lower the assumed interest rates used to calculate benefits, the more company contributions are required. Finally, the lower the value of the equity investments in the portfolio, the greater the plan is underfunded. This underfunding situation has been partially healed by stronger stock and bond markets and will fully correct itself in a few years as interest rates begin to rise and return to more normal levels.
401(k) plan contributions - embracing retirement readiness
There has been general agreement among plan sponsors, consultants and advisors that participants are not contributing enough to fund their retirements. The retirement readiness concept has emerged as a solution and been embraced by all. The higher account balances that will result from the implementation of retirement ready features will nudge participants onto the right track.
Hopefully, this summary of the facts can help you be an accurate source of information for your clients.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire. Mr. Lawton may be contacted at
