Preparing for the future Featured

10:05am EDT April 27, 2006
One of the recruiting tools companies used to use to attract talent was the promise of a nice pension at the end of a productive career. A worker felt confident knowing there would be money already set aside to live comfortably on after the regular paychecks stopped.

In today’s market, companies are forced to run at a much leaner rate and one of the first expenses to be eliminated is the company-funded pension plan.

“In 1980, 83 percent of workers were covered by pension plans,” says John Charicki, a financial adviser for MB Investment Services in Chicago. “As of 2003, only 41 percent of workers were covered by pension plans and that number continues to shrink each year.”

Smart Business talked with Charicki about the importance of being involved in the investment of your 401(k) plan.

How have 401(k) plans changed over the years?
The plans have changed because the plan administrators and the companies offering the 401(k) plans have changed the architecture behind the plan. For example, when 401(k) first hit the market there were a handful of investment options available to you. Then, all of a sudden, you had maybe 100 options; at one time there were as many as 700 different investment options. Now it has come back down to reality with a more manageable 15 to 35 investment options. The open architecture provides custom-designed retirement solutions to help meet specific goals.

Is it a good thing that control of 401(k) plans has shifted from the employer to the employee?
As companies moved away from pension plans, they switched to defined contribution plans, which are essentially 401(k) plans. By doing so, companies pass the responsibility for retirement planning on to the workers. In many cases, the workers aren’t prepared to handle that and, in general, don’t like to save money.

The average American has between $25,000 and $50,000 in a 401(k), and that may not be enough to retire on. Most employees don’t know how to invest the money they are putting aside. When you give them too many options, many of them do nothing but go with the low risk, low return default options.

Financial advisers can assist the company in setting up the plan; how to select, monitor and modify the investment options.

Does the 401(k) program have any effect on Social Security?
The contributions to a 401(k) plan do not affect Social Security benefits. The 401(k) is a personal savings retirement plan intended to supplement Social Security. As individuals we are able to defer up to $15,000 a year into the plan, although most people don’t know that and many can’t afford it. This year, the catch-up contribution has increased to $5,000 for workers who are over the age of 50.

Financial advisers determine what the clients’ retirement financial goals are and then direct them by providing a financial road map.

Is there a common thread of advice that you give to all clients?
Most 401(k) plans offer employer matching funds. That’s free money you have to take advantage of to get the full benefit of the plan. Even before we sit down to talk about where to invest the funds, I make sure that the client has contributed the maximum amount allowed to gain the employer match. By contributing to a 401(k) plan you also get immediate tax savings on invested money, and you defer paying taxes on savings until retirement.

Are clients more inclined to be aggressive or cautious with their investments?
Most clients are cautious with their investments. Some clients, because they may have waited too long to start saving for their retirement, think they should put their funds in an aggressive investment without considering the higher risk associated with higher returns. The closer you are to retirement, the less you want to risk your savings.

Financial advisers will ask clients how many more years they plan to work before retiring, what standard of living they want, and how healthy they expect to be. Based on their answers, investment options can balance risk and reward to help achieve their goals.

Is it accurate to say the baby boomer generation will be the first not to retire?
It’s very accurate. The retirement age keeps getting pushed back; people are working later in life and, unfortunately, they aren’t saving enough money. Many from my client base are working longer out of necessity. A lot of companies are starting to attract the older workers who still have a lot to contribute. The skilled labor force is shrinking, and there are a lot of skilled workers that have come into retirement age.

JOHN CHARICKI is a financial adviser for MB Investment Services. Reach him at (773) 782-3773.