Advice For Plan Sponsors To Address The Retirement Crisis

by: Ronald Surz


Education, auto enrollment, matching contributions and auto escalation encourage savings.

All savings need to be protected, especially as retirement nears, even if those savings are inadequate.

In retirement, sensible spending can be supported by an increasing equity allocation.

In a June 7, 2017, Investopedia article, author Barbara Friedberg asks Are We in a Baby Boomer Retirement Crisis?, in which she reports on the inadequacy of retirement savings in the following table:


Median Income

Retirement Savings Benchmark

Percentage on Track

Percentage Behind



Started a retirement fund























Three-fourths of those nearing retirement have not saved enough. This is a serious problem that retirement plan sponsors can address in two ways:

  1. Save enough.
  2. Keep it.
    1. Invest wisely
    2. Spend wisely

Save Enough

Saving enough is a behavioral challenge. Through education, auto enrollment and auto escalation, retirement plan sponsors are working to improve employee participation and savings in 401(k) plans.

As the table above shows, this is the number one way that employers can help their beneficiaries. Workers are simply not saving enough, and investment returns will not bail them out. In this Working Paper, the authors show that savings are far more important than asset allocation. To summarize, all cash is a fine investment strategy if you save enough.

But a plan sponsor's job doesn't end with education and contribution matching. Most plan participants do not make an investment election so they default that decision to their employer. It's the sponsor's job to see that defaulted employees don't lose their lifetime savings, as discussed in the next section.

Keep it: Invest wisely

Prior to the Pension Protection Act of 2006, defaulted employees were invested very conservatively in cash or stable value, but that's changed and target date funds have become the most popular qualified default investment alternative (QDIA). The problem is that target date funds have actually exacerbated the savings shortfall problem rather than correcting it, as we discovered in 2008 when the typical 2010 fund lost 30%. Target date funds are way too risky at the target date and have become even riskier since 2008. The next 2008 will be much worse than the first. The better design is to protect in the Risk Zone that spans the years before and after retirement, holding less that 10% in risky assets. Then after a beneficiary gets through the Risk Zone, assets are re-risked to sustain a lifetime of spending. More on this "bounce back" in the next section. This "V-shaped" glide path is a dramatic departure from current TDF practices, as is the very low cost for this path, but TDFs are still in their infancy and evolving.

Some beneficiaries might want to try to make up for inadequate savings by taking more risk with those savings. This should not be a choice made by fiduciaries on behalf of defaulted participants because it's an individual choice. "Default" should mean "safe." Most defaulted participants believe they are safe, and they should be. "Self-directed" means "whatever the beneficiary wants."

The following graph shows 3 glide paths: the most conservative is the default, and participants can choose a more aggressive "Moderate" path or an even more aggressive "Growth" path. Prior to the Risk Zone, these paths are similar to other TDFs, but the Conservative and Moderate paths are safer in the Risk Zone. Then post retirement typical TDFs are about 45% in equities, less than the Moderate and Growth paths.


Note that the option to choose an alternate glidepath solves the one-size-fits-all problem that plagues TDFs in general. One-size-fits-all is a failed design because we are all unique with unique needs and desires. We call this structure "Personalized Target Date Accounts."

Keep it: Spend wisely

Financial planners recommend that retirees use The 4% Withdrawal Rule that stems from a 1994 study by financial planner William Bengen. After testing a variety of withdrawal rates using historical rates of return, Bengen found that 4% was the highest rate that held up over a period of at least 30 years. The 4% withdrawal rule spends 4% of savings in the first year, and then that dollar amount increases by inflation in each subsequent year.

A recent study finds that the 4% Rule is currently not the slam dunk it used to be. The study estimates the success probability of a 4% Rule to be more than 90% using historical capital market assumptions, but this probability drops to about 75% in today's market environment. Many pundits have proclaimed the 4% Rule dead, at least for now, because real interest rates are zero, but this study says there's still life in the Rule, but not the vitality there used to be.

More importantly, the same study examines asset allocation glidepaths in retirement that support the 4% rule and concludes: the results reveal that rising glidepaths are even more effective, especially when they start off conservatively. The most favorable (i.e., least adverse) shortfall actually occurs with a glidepath that starts at only 10% in equities and rises to "only" 50% in equities. This is why the glide paths shown above have a "bounce back" in retirement.


Saving enough is the primary means to a comfortable retirement, but there's more. Retirement savers need to earn a good return on those savings and, most importantly, those savings need to be protected from losses, especially in the Risk Zone. Then the end game is to spend those savings wisely in retirement.

These are all common sense statements, but current practices are not sensible. Plan participants do not save enough and the most popular investment - target date funds - will someday destroy the little savings that beneficiaries have. It's a shame.

There are better ways and fortunately some plan sponsors are pursuing them.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.