Performance Signal  
Step 1Step 2Step 3

Recent Articles

401(k) holders tend to work for more years

By Andrea Coombes, CBS.MarketWatch.com
Oct 6, 2003

SAN FRANCISCO (CBS.MW) -- While 401(k)s are often hailed as giving workers greater control over their retirement assets, that benefit also means they're likely to retire later, according to a new study.

Americans covered by 401(k) plans work more than a year longer on average than those in traditional pension plans, in part because of the increased investment risk they face, according to the study by Boston College's Center for Retirement Research.
And that extra 15 months worked by 401(k) participants likely has gotten longer: The study's findings are based on workers' behavior before the bear market, said Alicia Munnell, the director of the Center for Retirement Research and the report's author.

"They would have worked longer than someone covered by a defined-benefit plan under normal circumstances," she said. Then "they were hit with this shock to their portfolio, which made them revise their plans, to work longer."

Some say the findings highlight a glaring problem with the unexpected rise of 401(k)s as the dominant retirement-plan benefit: Most Americans aren't prepared to handle the investment risk.

"The 401(k) is both a blessing and a curse," said William Arnone, a partner in the human capital practice at Ernst & Young, an accounting and consulting firm.

"It's a blessing in that there's immediate value that an employee sees in a 401(k). Traditional pensions are so complicated, the formulas are so confusing," he said. With a 401(k), "it's easier to pay attention," he said.

But while 401(k)s may lead people to pay more attention to their retirement plan, that doesn't mean they know how best to manage it. "I've spent 25 years in the retirement-education business (and) it's still very hard to get people to understand all the responsibility that goes with managing their own investments," Arnone said.

"People are just not getting the key points," he said. For instance, most people understand asset allocation, yet few understand the idea of rebalancing their accounts, he said.

The 'retirement revolution'
The problem, Arnone said, is that defined-contribution plans were never intended to be workers' main income stream in retirement. Instead, the intent was that they would act "as a supplement to pensions and social security," he said. "It's the accidental revolution in retirement planning. A few people discovered it, said this is a neat way to save taxes. It has taken off and become the primary plan."

Retirement planning was originally based on a three-legged stool of social security, a traditional company pension plan and an employee's own savings and investments, including a 401(k), Arnone said. Two of those three legs were defined-benefit plans, ensuring retirees a set income stream each month.

But no more. Costly and complex for employers to manage, company pension plans are increasingly being replaced by 401(k)s.

Of workers with company-sponsored retirement plans, 60 percent are covered solely by a defined-contribution plan such as a 401(k), up from 20 percent in 1981, according to the study.

Many Americans' response to the investment uncertainty in 401(k)s is to build a bigger nest egg by working longer. Unlike the steady stream of payments provided by traditional plans, most 401(k)s are distributed in a lump sum at retirement. "You're afraid you might spend it too fast, or you might outlive it so you want an extra cushion for yourself" so you work longer," Munnell said.

Also, the risk associated with investing that nest egg enters into the retirement equation. Pre-retirees are unsure how much return they'll garner on that lump sum amount after they retire, and "you want a cushion there, too" to compensate for market downturns, Munnell said. So, again, you work more years.

Arnone agreed: "The lump sum takes that risk of dying too late and puts it right on the shoulders of the 401(k) participant. The longer you work, the fewer years of retirement, the lower the risk of outliving your retirement" income.

Stock-market swings make workers' retirement outlook gyrate as well. "Employees react very dramatically to downward movements" in the stock market, Arnone said. It's "like a seesaw. The balance goes down, my retirement date goes up."

To work we will be going ... and going
The increasing switch to 401(k)s is simply one element in a changing retirement picture that points to Americans working into their later years.

"We're entering a period where people's traditional sources of retirement income are going to be less generous than they were in the past," Munnell said, citing Social Security benefit changes that are leading to lower benefit levels.

"The answer to a secure retirement going forward is to stay in the labor force as long as you can," she said.

For instance, by 2011, the Social Security retirement age will rise to 67, up from 65 currently. Those who retire earlier will get lower benefits, while those who retire at 67 will receive fewer years' worth.

In fact, longer life spans, the prevalence of 401(k)s and changes in Social Security will necessitate a sea change in how Americans perceive retirement age.

"The idea that we're going to be able to retire at 61 and be able to support ourselves in retirement is an unreasonable thought going forward," Munnell said. "The money is not going to be there. The person who has prepared extraordinarily well, fine, but for most people it's not going to be a feasible alternative."

For some, a longer working life is nothing but good news. "At 62, you're going to live for 25 more years," Munnell said. "Only economists consider work bad. Sociologists (and) psychiatrists contend that work provides structure, a sense of fulfillment, companionship. Healthy people will probably be happier."