Making sense of an uncertain environment


Greg McDermott, the President of FirstMerit Insurance Group, discusses retirement planning with Smart Business.

How has the economy affected future retirees?

The prospect of enjoying the Golden Years may seem more like fools gold to many Americans who have seen their retirement savings dwindle during the recent economic downturn. One of the immediate impacts of the downturn was the reduction or elimination of employer contributions to qualified retirement plans. In addition, a significant number of individuals lost their jobs and have had to tap into retirement savings in order to sustain them during this difficult economic period.

Perhaps the most significant barrier to the goal of retirement has been the loss in account values suffered by most retirement plan participants over the past few years due to market volatility and dramatic declines in stock values. The psychological fallout from the market meltdown has made many employees nearing retirement more risk averse and conservative in their investment selections, which may limit the future performance of their accounts.

All of these factors have combined to create a material reduction in retirement savings.

Many future retirees are worried about the future of Social Security.  Where do you see Social Security heading?

The future viability of Social Security is certainly a looming issue and one that has challenged our government for decades, but with little action. I think we are nearing a time in which changes are going to need to be made in order to sustain the system for future generations. Since the Social Security system was put in place in 1935, the average life expectancies of retiring workers have increased dramatically, which means benefits are being paid for many more years than originally anticipated.

Another startling statistic is that in 1950, for every Social Security beneficiary, there were 16 active workers helping to fund the system. Today, there are three workers for every beneficiary, and that ratio will be two workers for every beneficiary by 2050.

The logical conclusion from this is that the age to qualify for Social Security will need to be increased materially in the future. It is also likely that there will be a form of “means testing” so that higher income earners may receive fewer Social Security benefits. Lastly, there is considerable discussion today surrounding converting our current “defined benefit” approach to Social Security to a defined contribution approach for younger employees in the work force in order to limit the continued growth in the benefit liability.

There is a general awareness by our government of the added burden on future retirees to create additional personal retirement savings. The advent of the Roth IRA is a good example of the government’s desire to create incentives for individuals to build their retirement savings on a tax-favored basis and create greater financial independence from government programs.

Anything else interesting or timely regarding retirement planning?

In late 2010, as part of the financial service reform legislation, Congress focused on creating greater transparency in fees and expenses charged within qualified retirement plans. Beginning in 2012, plan sponsors and participants will be told — in dollars and cents — exactly how much they pay each quarter for the management of their 401(k) plan. Most participants believe they pay nothing.

Investment fees, recordkeeping and administrative fees will be published in the one document most participants actually open and read — their participant statements. As participants begin to compare these fees and expenses, there will likely be questions raised concerning the value of services provided. This will be especially true when selecting investment fund alternatives. While many 401(k) providers have been very disciplined and transparent in their pricing for services, those providers that have been more aggressive in their fees and expense charges and have not been transparent in disclosure will be at a distinct competitive disadvantage. Many industry analysts are predicting that this new disclosure will likely produce a tipping point, resulting in reduced fees and expenses by many service providers, accompanied by greater accountability by plan providers.

As an example of the impact of fees and expenses, a 1 percent annual reduction in expenses at the participant account level over a working career could result in an increase in the account value at retirement of as much as 25 percent. While plan participants will now have a greater awareness of the expenses being charged to their account, plan providers will have an enhanced responsibility to assure the reasonableness of the fees and expenses being charged to the retirement plans they sponsor.

Reach Greg McDermott at [email protected]

The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank, N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions.