Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
- Baby boomers in small retirement savings plans (SRSPs) face the risk of losing lifetime savings in the next stock market crash.
- SRSPs are like the “country” in the movie. Baby boomers are the “old men.” The next crash is the soulless villain.
- Pooled Employer Plans (PEPs) are starting to catch on but do not provide sufficient protection for baby boomers in SRSPs.
- Baby boomers should take control of their savings, move them to safety, and ensure they are informed about their investments and rights under ERISA.
The 2007 hit movie No Country for Old Men pits an “old man,” played by Tommy Lee Jones, who values justice, morality, and lawfulness against a younger vicious man who acts according to his own immoral codes, played by Javier Bardem. The “country” in the movie is the desolate desert plains Texas near the Rio Grande in the 1980s – wild and woolly.
The “country” in this article is the wild and woolly market of small retirement savings plans (SRSPs) that have less than 100 participants. The “old men” are baby boomers who cannot afford to lose their lifetime savings. And the villain is the next stock market crash.
This is a warning and guidance for 10 million baby boomers to protect their savings in SRSPs.
There are 20 million people in SRSPs with $1 trillion total assets, so 30 percent of 401(k) participants and 15 percent of the assets. Some SRSPs have joined Pooled Employer Plans (PEPs), but these have not yet fully caught on.
SRSPs are a dangerous “country”
Although regulated by ERISA, SRSPs operate largely undetected because they are too small for lawsuits or regulatory fiduciary enforcement. Many are created primarily to provide retirement savings benefits for owners. Most owners need to focus on running their business, rather than overseeing a retirement plan.
Baby boomers in SRSPs generally know their employers personally and trust them, which is good – “trust but verify” is even better. Baby boomers need to know how they are currently invested, and to move to protect their assets if they are exposed to high risk.
Academic lifetime investment theory is very safe for those near retirement, suggesting an allocation of 80 percent in “risk-free” assets. This safety reduces the sequence of return risk that can spoil the rest of life. Eighty percent risk-free is much safer than common SRSP practice.
The point is that baby boomers are at risk of suffering serious losses in the next stock market crash that could cause them to run out of money. The next stock market crash is like Javier Bardem’s villain in the movie.
If they have discretion, baby boomers in SRSPs need to move their savings to the safest option on the platform. If employers have discretion, baby boomers need to talk to their employers about giving them protection. They need to do this now.
Even if the next crash is years from now, most baby boomers will still be in the Risk Zone.
Pooled Employer Plans (PEPs)
Some SRSPs have joined together in order to simplify management, control fiduciary liability, and reduce costs. While Pooled Employer Plans (PEPs) are starting to catch on, they do not protect baby boomers, although they could – but that is another article.
Baby boomers still need to take back control of their savings and move them to safety.
ERISA requires the following that PEPs make easier:
- Plan documentation. Employers must provide a summary plan description detailing the plan’s features, eligibility requirements, and participants’ rights.
- Fiduciary responsibility. Plan administrators and employers have a fiduciary duty to act in the best interests of plan participants.
- Participant rights. ERISA grants participants the right to sue for benefits and breaches of fiduciary duty.
- Minimum standards. The law sets minimum standards for participation, vesting, benefit accrual, and funding.
Reporting and disclosure. Plans must regularly inform participants about the plan and its features. Baby boomers should know their account balances and how they are invested
Many believe that PEPs are the wave of the future, which has brought 165 pooled plan providers – P3s – to the market. There are currently 350 PEPs. One million SRSPs are the prospects.
Reform will be too late. The villain wins.
The majority of 401(k) plan participants feel they cannot make an investment decision, so they default their decision to their employer. The most popular employer choice is a target date fund (TDF). In the 2008 market crash, the average 2010 TDF for those near retirement lost more than 30 percent. It created an uproar – but nothing changed.
In 2008 there was only $200 billion in TDFs. Today it’s $4 trillion. The next crash will bring serious reform to TDFs, but it will be too late for current participants.
Conclusion
Participants in small retirement savings plans may feel like they are “family” so their interests are aligned with their employer’s interests. This may be true. But baby boomers are near retirement, which is a time when investment losses could ruin the rest of their lives by reducing the longevity of savings.
Because SRSPs are the wild and woolly “country” in 401(k) plans, “old men” baby boomers need to protect themselves now – before the next stock market crash. Baby boomers should not assume that they are protected because they probably are not.
The surprising end to the movie is that the villain is not in jail and survives to ruin another day. Stock market crashes are not going away. We can hope that the next crash is way in the future, but baby boomers are in the Risk Zone now.
Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show. Surz’s passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, “Baby Boomer Investing in the Perilous 2020s,” and he provides a financial educational curriculum.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
More Target Date Funds Topics >
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
