In 2013, the current industry standard when providing financial advice to individuals is to adopt a holistic approach.
Advisers commonly ask their clients about their financial and estate planning goals, risk tolerances, tax situations, income expectations, claims on existing assets, retirement plans, even medical-related questions about how long they expect to live.
But when providing advice to 401(k) participants, advisers should follow this holistic financial planning protocol, but in the contemporary workplace, advice providers also must focus on all of the basic issues cited above, but they must also include the unpleasant issues of age discrimination and stagnant real incomes.
While these are sensitive issues, 401(k) advice providers must acknowledge these realities since they affect their participants’ workplace reality.
Addressing Sensitive Issues
What makes these discussions prohibitive, however, is that 401(k) advice providers are paid by plan sponsors. These employers have the power to eliminate both of these deep, sensitive problems, but since employers–not employees–pay the advice providers, these discussions do not exist in the current 401(k) advice marketplace.
This disconnect between providing critical, objective advice designed to advance the financial goals of participants versus the prohibition against discussing negative issues related to age discrimination and wage stagnation taints the 401(k0 advice marketplace.
In both instances, wage stagnation and age discrimination affect the financial futures of millions of 401(k) plan participants. Without addressing these issues, 401(k) advice can become dishonest, selective and incomplete.
Here are some specifics.
Wage Stagnation A Reality
Wage stagnation, and how it is reflected in per capita disposable income, has shrunk by 0.4% at an annualized rate over the past five years, according to the Wall Street Journal (“Income Sinkhole Hurts Consumer Spending,” March 29, 2013, C1). This article states that the 0.4% rate is “the worst such reading since this data series began in 1964.” In comparison, the average rate has been an increase of 2.2% annualized.
Worse, consumer spending is still being fueled by a decrease in savings. The (savings) rate in January 2013 fell to 2.4% of after-tax income which was the lowest rate since 2011, the Journal article reported. This 2.4% compares to an average savings rate of 7% which has existed since the 1950s, according to the article.
Declines in the savings rate and disposable incomes have been accompanied by the failure of employers to pass along their productivity gains to workers in the form of higher wages. A recent report from the Economics Policy Institute (EPI) finds that the gap between employee’s hourly compensation and their productivity is the highest it’s been since after World War II.
The EPI report found that productivity increased 80% between 1973 and 2011, compared to an 11% growth in median hourly compensation. This contrasts to the period between 1948 and 1973, when productivity and compensation grew together. This tandem growth is a main reason why the quality of life for the boom generation was higher than it is today. (Productivity is a measure of goods and services generated per hour worked.)
This data confirms an earlier study that from 1979 to 2009, productivity grew by 80%, but the average hourly wage grew by only 19%, and even then all the wage growth occurred from 1996 to 2002, reflecting the strong economic growth of the late-1990s.
According to Lawrence Mishel, president of the EPI,
stagnant wage growth due to globalization, the decline in union membership, and deregulation, have all hit college educated workers and those without degrees equally hard.
From 2002 to 2006, the average inflation-adjusted median annual American household income declined from $46,058 to $44,389. The EPI also found that productivity in the economy grew by 80% between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 11%, and nearly all of that growth occurred in a short window in the late 1990s.
Pervasive Age Discrimination
Half of the U.S. workforce is over 40-years-old, and “age discrimination is a growing problem for workers over 40,” according to AARP. But in a recent Supreme Court decision (Gross vs. FBL Financial Services0, the court substantially toughened the standard that older workers must meet in order to prove that his or her employer violated the federal Age Discrimination in Employment Act (ADEA).
Unfortunately, the decision means many older workers will never see their day in court, and it is now being applied by some courts to restrict the rights of employees in other types of employment discrimination cases too, AARP reported. Employment data also found that the average length of unemployment between jobs for older workers is at an all-time high — well over a year.
“Age discrimination is a serious and growing problem,” said Nancy LeaMond, AARP’s Executive Vice President, in endorsing the regulations at issue. “Workers and employers alike will benefit from the helpful guidance provided by the EEOC.” LeaMond made the comments after a provision in the Commerce-Justice-Science appropriations bill (H.R. 5326), introduced in May 2012, would prohibit the Equal Employment Opportunity Commission (EEOC) from using any funds to “implement, administer or enforce” its recently issued final regulations on age discrimination.
Problems With Working Longer
The EPI paper found that “Many policymakers and pundits, including the co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform, subscribe to the belief that the retirement age should be raised and older workers can offset benefit cuts by working longer. Advocates of raising the retirement age argue that only a small group of older workers would be harmed and that hardship exemptions can be put in place to protect vulnerable workers
Why the Problem Exists
Unless 401(k) advice providers publically acknowledge they are following the fiduciary standard, the advice provider has to manage their conflict-of-interest problem. Like an insurance claims adjuster who is paid by their insurance company, the adjuster’s job is to protect the insurance company from excessive claims. This creates an inherent conflict-of-interest between the insurance customer and the adjuster. Similarly, when a 401(K) advice provider makes their investment presentation, it includes a section on career planning, often as part of questions on how long the employee expects to work, whether they expect to earn more in the future than today, and when they plan to retire. But too often, those plans can be derailed by age discrimination and wage stagnation.
“Continuing to work is not an easy option for older workers, many of whom have difficult jobs or retire sooner than planned due to job loss, illness, or the need to care for a sick family member:
- Poor health remains a significant barrier to continued employment for older Americans. Roughly 20–30 percent of Americans in their 60s have a health problem that limits their ability to work or to perform basic physical tasks.
- Many older workers continue to work in physically demanding or difficult jobs. According to recent studies, 45 percent of workers age 62 to 69 have physically demanding jobs or work under difficult conditions, and an even greater share have jobs that require at least sporadic physical effort.
- An estimated 20 percent of older adults provide unpaid care to a frail senior or other adult, according to one study.
- The argument that most workers can offset cuts by working longer assumes there are jobs for these additional older workers, including those who are laid off or otherwise find themselves unemployed. Returning to work is a particular challenge for unemployed older workers, who are likely to be out of work longer than prime-age workers and to experience larger pay cuts if they manage to find jobs.
- About 40 percent of workers retire earlier than planned due to poor health, caregiving responsibilities, job loss, or similar reasons.
Proponents also assert that hardship exemptions can be put in place to protect vulnerable workers. However, past experience and the nation’s current contentious political environment do not support the claim that effective hardship exemptions, even if theoretically possible, are politically feasible:
- Previous studies using restrictive definitions have found that one in 10 older workers would be at risk of facing hardship from an increase in the retirement age. This briefing paper estimates that the share at risk would probably be closer to one in 2 older workers.
Forced Austerity Is Here
While millions of Europeans have protested cuts in benefits and pensions, Americans have quietly suffered the same fate, but the net effects are the same. Reduced savings rates, lower wages, the phasing out of pension plans and a shorter work history due to age discrimination will all produce a lower standard of living for millions.
These are serious problems which can affect all workers regardless of whether they are white or blue collar, their industry or geographic location. Since these are pervasive and undiscussed problems, they must become an integral part of any serious financial planning discussion in both 401(k) and personal finance settings. And while it is politically safe, it is not correct to say, as many personal finance commentators assert, that a higher savings rate alone will lead to greater asset growth and a more financially secure retirement.