Robotics, automation, globalization, the Uber and gig economies have all captured the attention of anyone planning a career or their life over the future decades, but what is missing is the link between these new definitions of work and what happens when work ends.
It would be logical to assume that any fundamental change in the nature and tenure of work, including compensation and work-related benefits, would also force workers and retirement planners to come up with a new retirement planning model to accompany this fluid, non-committed 21st century workplace.
But that has not happened.
And that is a bad sign for the retirement industry since it is continuing to use outdated planning models and assumptions to advise investors that their retirement future will allow them to walk carefree along the beach as they collect pensions or drawdown their 401(k) portfolios.
One of the reasons for this major disconnect is that the major players in the retirement industry abhor change. It is anchored in a political and regulatory foundation that by design does not anticipate or welcome change.
The salaries, bonuses, and entire corporate structures of many insurance companies, for instance, trace their roots to the post-Civil War era when such practices as revenue sharing became common to sell commodity-like insurance policies to an unsuspecting public. To differentiate their policies, some insurance companies began to offer insurance agents an under-the-table commission to promote their policies over the competition. This practice of revenue sharing still continues today among some mutual fund companies and I is one reason why many in the industry have fought the conflict-of-interest, fiduciary and transparency rules proposed by the U.S. Department of Labor.
Romanticizing the Uber Economy
At the same time as the retirement planning industry adheres to out-dated assumptions and practices, the workplace has changed rapidly. For instance, job tenures in the U.S. are increasing due to older workers (those over age 60) are remaining in their jobs longer than younger workers. And possibly due to pensions, public sector workers (state and federal) have the longest job tenures of any occupational sector, according to the U.S. Department of Labor.
In contrast, the gig economy of holding a string of short-term jobs without benefits is now estimated to employ 17% of the workforce in a wider span of age groups.
What does this part-time, Uber economy mean for retirement? It is bad news across the board.
A new 2017 report from the National Institute on Retirement Security finds that the bi-partisan issue facing 76% of Americans is retirement financial security, with 88% of Americans agreeing that “the nation faces a retirement crisis, and the concern is high across party lines.”
This reflects results from an earlier report from the same group that found that 45% of working-age households have no retirement savings at all, while 92% of all households do not meet conservative retirement savings targets for their age and income.
The report notes that the collective retirement savings gap among working households aged 25-64 is staggering, ranging from $6.8 trillion to $14 trillion depending on which measure is used. When all households are included, not just those with retirement accounts, the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.
“The heart of the issue consists in two problems: lack of access to retirement plans in and out of the workplace – particularly among low-income workers and families – and low retirement savings,” said the NIRS report. “These twin challenges amount to a severe retirement crisis that, if unaddressed, will result in grave consequences.”
So how is the multi-billion dollar financial and retirement planning industry addressing the dire impact of the part-time Uber economy?
Basically, it is stressing the benefits of long-term investing, frugality, saving more, investing in down markets (as if working people have a surplus of investable cash), and giving investment managers access to their roll-over 401(k)s. In short, the industry is not offering anything new that reflects the dire political reality of wage stagnation and the high probability of rising federal taxes and more expensive medical care.
Formulating retirement plans in a non-political environment is naïve and unethical and does not serve unsuspecting investors.
If some intrepid corporations can take a public stand on Trump’s decision to pull out of the Paris climate accord, a small number of retirement planning firms should go public about the impending retirement crisis. It is not only ethical; it could also be good business.