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Oct. 19, 2006 • Volume 15 Number 4

Alicia Munnell

Retirement Center Report Cautions on 401(K) Plans

By Reid Oslin
Staff Writer

Holders of private 401(K) retirement savings plans need to keep a sharp eye on their investments, suggests a recent report published by Boston College's Center for Retirement Research which indicates that 401(K)s have underperformed traditional benefit plans by one percentage point per year.

The new report, co-authored by CRR Director and Drucker Professor of Management Sciences Alicia Munnell along with Senior Research Associate Mauricio Soto, Research Associate Jerilyn Libby and student researcher John Prinzivalli '09, suggests a shift in forecasted benefits that could have a sizeable influence on long-range retirement investments.

"A one percentage point difference is not significant in any given year," says Munnell. "But over a 40-year worklife it translates to 20 percent less at retirement."

The report also indicates a substantial growth in Individual Retirement Accounts, another investment avenue that requires close attention to maximize holdings.

"What this report underscores is that the world has moved away from traditional pension plans, and that other self-directed accounts, such as 401(K)s, are where the action is," says Andrew Eschtruth, the center's associate director for external relations. "Those accounts put the risk and responsibility on the individual to achieve retirement security.

"With traditional pension plans, you didn't have to think about anything. You just worked at your company and collected a monthly check at retirement.

"Now we are in a world where it is up to the individual how well their employer pension is going to do. For example, investment choices can have a significant impact on portfolio performance," he says.

The report suggests that returns from some 401(K) and IRA accounts are reduced by management fees. "Fees for those individual investment accounts are generally higher than fees for a traditional employer plan," notes Eschtruth.

"A key lesson for 401(K) and IRA participants is to pay attention to what is going on in your portfolio. People should consider lower-cost investment choices and select a well-diversified portfolio, so all of their eggs are not in one basket."

The CRR report is available at /centers/crr/ib_52.shtml.

In addition, CRR has published a National Retirement Risk Index indicating that nearly 45 percent of working-age households in America are "at risk" of being unable to maintain their pre-retirement standard of living in retirement.

Munnell says that "unless Americans change their ways, many will struggle in retirement. There is no silver bullet, the answer is saving more and working longer."

The National Retirement Risk Index is based on data from the Federal Reserve Board's Survey of Consumer Finances. It is a comprehensive measure of household finances that includes Social Security, employer-sponsored pensions, non-pension financial assets and housing.

The complete report is available at: www.bc.edu/crr/nrri.shtml.

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