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March 03, 2009 |
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Advisors Advise Congress About Retirement |
Two members of the Financial Planning Association testified to Congress on the impact of the failing markets on the country’s retirement outlook. In separate congressional hearings last week, FPA Board member Deena Katz spoke before the Senate Special Committee on Aging about the financial issues facing baby boomers, while Andrew Keeler, former FPA government relations committee chairman, asked Congress to bolster a tax credit to help small businesses offset costs in setting up defined contribution plans.
Katz, an associate professor in the personal financial planning department at Texas Tech University and chairman of Evensky & Katz, a Coral Gables, Fla.-based fee-only planning firm, laid out ways to help improve the odds that people won’t outlive their assets. Among them: people will need to work longer and laws should be changed to make it easier to do that, planners need to design total-return portfolios, advice needs to be based on fiduciary principles and retirees should be encouraged to get financial education.
“The economic typhoon of the last year has seriously damaged boomer portfolios and even the gurus in Washington and on Wall Street have no clue how long recovery may take,” Katz said. “Although the risks of outliving one’s assets are present in any economic climate, the current crisis has unquestionably heightened those fears and caused professional advisors and their academic colleagues like myself to review how our investment strategies correlate with system risk in the marketplace.”
Katz cited mortality tables suggesting that a couple 65 years old would have a 95% chance of one of them living to age 91. “Boomers have an unrealistic view of their own mortality,” she said. “What keeps me up nights, and ought to keep you awake, is that you will outlive your assets.”
Two years of pummeled portfolios and reduced home values have devastated many portfolios, Katz said, at a time when the shift away from defined benefit plans to defined contribution plans has eroded the retirement cash stream. As a result, many boomers will work during their so-called retirement years, she added.
“The 2007 Annual Gallup personal finance poll discovered that 78% of the people surveyed will continue to work,” Katz said. “We have been seeing this trend in our practice recently. Of course, for many boomers, there may be fewer work opportunities and less flexibility in their choices. Unfortunately, with the myriad of financial risks facing us, neither working longer nor simplistic, safe-product solutions are likely to be a total solution to funding our retirement.
“The solution is to design a total return portfolio, one that focuses on the return and not fixed-interest payments. As planners, we can then help our clients implement a more flexible strategy by diversifying assets to generate higher investment returns over the long-term, and protect ourselves against inflation and the real risk of outliving our assets.”
Among Katz’ suggestions to Congress to boost boomers’ chances for a satisfying retirement is to insure that all financial advice offered to investors “be based on fiduciary principles; i.e., the simple and equitable concept that recommendations will be made based on the best interest of the client, that conflicts of interest will be minimized and that any remaining conflicts be clearly disclosed.”
“As in the case with ERISA,” she said, “hold all professionals who provide advice to retirees to that fiduciary standard.”
Katz also said Congress should encourage financial education for retirees that focuses on financial planning as a process, not one that promotes product-centric solutions.
Regarding the need and/or desire for some aging boomers to work beyond normal retirement age, Katz asked Congress not to hinder boomers’ ability to actively participate in the economy. “Revisit legislation that makes it difficult or impossible for us to continue working into our 70s or possibly 80s,” she said.
For his part, Keeler, a partner with Everhart Financial Group Inc. in Dublin, Ohio, spoke of the challenges small businesses face in funding and maintaining retirement plans during the economic downturn. To encourage small businesses to maintain their plans, Keeler suggested enhancing the current tax credit used to offset the startup cost and the cost of educating employees about the new plan.
Created under The Economic Growth and Tax Relief and Reconciliation Act, the credit is available to offset costs paid or incurred in tax years beginning after December 31, 2001, for retirement plans that first become effective after that date, Keeler said. The credit currently equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first three years of the plan. This credit is limited to those employers with 100 or fewer employees who received at least $5,000 in compensation for the preceding year; at least one participant must be a non-highly compensated employee.
“This credit should be broadened to include any employer with less than 500 employees, and it should also be broadened to offset employer contributions to a retirement plan,” Keeler said.
To see Katz's or Keeler's full testimony, click here.
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Discussion
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