How to Help America Save for Retirement

America is facing several crises, both in the near and long term.

There's the debt crisis, fueled by rising health-care costs. That's a long-term problem.

There's the unemployment crisis, which threatens to leave an entire generation of Americans with low (or no) work experience. That's a short-term problem.

And then there's the retirement crisis, which is the simple fact that so few Americans have saved enough to fund even a spartan retirement. It's both a short- and a long-term crisis. 

What can we do about the lack of retirement savings? I've got two videos to put it all in perspective.

One is a fantastic documentary by Frontline called "The Retirement Gamble." It's an hour long, but well worth the watch. It is one of the most in-depth -- and shocking -- looks at retirement savings I've seen. You can find it here.

The second is a clip from a recent interview I did with Liz Ann Sonders, chief investment strategist of Charles Schwab (NYSE: SCHW  ) , discussing what employers and financial institutions can do to help Americans prepare, including what  (NYSE: SCHW  ) Schwab is doing. (A transcript follows.)

Liz Ann Sonders: There's not a lot of confidence of saving for retirement. I think that's as much to do with the environment we've been in the last 12 or 13 years versus the fact that it's a 401(k) structure now versus a defined benefit plan. I mean, some of it is that because we used to just know it was there; we didn't have to worry about it, so some of it is now I'm left to my own devices, but some of it is just the sheer pain of the last 12 or 13 years.

That said, I think one of the trends in the business of 401(k)s, and certainly Schwab is very involved in this, is upping the level of education that is provided to employees so that they do not feel that they are just out there in the cold trying to figure this out. Whether it's brining on a firm like Schwab or developing internal resources within a company, so that the individual has that resource to go to, to help them plan out the retirement and figure out what their risk tolerance is and their time horizon and how they should structure the portfolio and how active they want to be in managing it or whether they want a more automatic rebalancing, so I think the trend is in place to figure out how we equip individuals a little bit better with this retirement that's more in their hands right now than maybe it was the case when 401(k)s first became possible. Assuming it's a tool that people opt to use, I think it's going to be a very valuable tool.

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  • Report this Comment On April 30, 2013, at 10:37 PM, herky46q wrote:

    The Frontline show was really good. When it came time to start investing, I could not stand being uninformed. That is when I found the Fool and have been following this site since.

    Retirement saving plans should be modeled after the federal government's Thrift Savings Plan. It does not get better than that for simplicity. Now having the money to save in the first place is another topic all together.

  • Report this Comment On May 01, 2013, at 2:44 PM, DS31 wrote:

    Morgan,

    I'm appalled that you found the Frontline documentary "fantastic." The Retirement Gamble's focus was on the difficulties that a large majority of individuals are having in creating enough retirement income to cease their vocational career. The overarching reasons why this is the case, as presented in the documentary, were that employers have shifted from pension plans (defined benefit plans) to 401-k plans (defined contribution plans), and that fees from 401-k plans are too high.

    The shift from pension plans to 401-k plans is only negative if you assume that there was no cost to employees for this benefit. But most often, employees were required to defer a portion of their compensation to fund these plans. Where that was not the case, salaries were lower than they might otherwise have been in order for the company to provide these "free" benefits. Regardless of the funding arrangement, total employee compensation is little effected. I personally prefer my 401-k arrangement because it affords me portability and control…something a pension plan cannot do. But that means that neither arrangement is objectively better than the other. So the first reason that the documentary offers is not persuasive…and certainly not "fantastic."

    Fees in a 401-k plan are simply what the market will bear. If individuals weren't willing to pay expense ratios ranging from 1% - 2.5% then providers would not be able to charge those amounts. Jack Bogle's example is terribly slanted when he implies that earning 5% rather than 7%, compounded over 50 years, results in the financial services firm "taking" 70% of the return. His exact quote for the documentary is, "Do you really want to invest in system where you put up 100% of the capital, take 100% of the risk, and you get 30% of the return." This is not even close to true because there is no "70%" of the return that exists…that is, no one is getting the "extra" 70% because there is no 70%; the "30%" is the whole return. The 2% expense ratio does not get compounded year in and year out. It's fee…not an investment or appreciable asset. Later on, Bogle says that index investing is fair and good when a 1% expense ratio is applied. But if he used his same rationale, Bogle would have to recognize that while the client still takes 100% of the risk with 100% of the capital, the client only receives 68% of the return. Who's getting the extra 38%??? (By the way, FOOLX has a 1.47% expense ratio.) This second reason from the documentary, though pertinent, fails to make its point because the issue is the market's willingness to pay these fees.

    A much better documentary should have argued that the reason why a majority of individuals are failing in their preparation for retirement is because: they do no live far enough below their means, they make wealth destroying decisions (divorce, early withdrawals from retirement accounts for education expenses, overspending on housing, etc.), and they are willing to pay too much in investment fees because they are unwilling to handle their own finances (but, apparently, the trade-off is worth it because they continually do it). I'd call that documentary "fantastic."

    Dan

  • Report this Comment On May 02, 2013, at 1:40 AM, larryelford wrote:

    The title misrepresentation (salesman-advisor-broker) game along with the less than suitable or appropriate investment choices that result when a salesperson passes themselves off as an investment professional are approaching fraud. Clients should know that they can and should be taking steps to get their money back from such intentional deceit of the consumer......many clients are doing exactly this, but it is a closely guarded secret within the investment community: http://youtu.be/KH6XMXlfdBw

    I am a recovering ex-broker (in Canada) who has pointed my life in the direction of helping those who need help, and not preying upon them as a professional. I saw much too much of that while I was in the industry.

    Cheers and best

    Larry Elford

    Alberta Canada

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