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General Treasurer Gina Raimondo has been leading the drive to overhaul the retirement system for public employees -- with its $7.3-billion unfunded liability -- but has rebuffed calls from some critics to scrap the pension plan altogether.
During an appearance on the July 10 edition of 10 News Conference, when reporter Jim Taricani asked her about the sustainability of the current system, she pointed out that without a pension program, most people are ill-equipped to deal with the financial challenge of retirement.
The state's pension program, she said, "is clearly crushing the state with a debt we can't afford and that's why we have to fix it. It really is a crisis. Having said that, the average 401(k) in America of a person who's 60 years old is under $100,000, so that isn't retirement security either. I think we can maintain an element of defined benefit, an old-fashioned pension plan, but design it in a way that is sustainable and affordable."
We wondered whether that's the real average for a typical 60-year-old with a 401(k).
When we asked about the source of her comment, Raimondo's office sent us a lot of material on 401(k)s in general, but none of it was specific to 60-year-olds. As we looked for other data, we realized this would be a complex issue to analyze -- partly because of the difference between average and median. But we’ll get to that.
For starters, some perspective: even having $100,000 in retirement savings isn't a lot.
We did a quick calculation on Fidelity Investment's retirement planning website. Sixty-year-old workers making $50,000 a year who have $100,000 in a 401(k) will only have about half the money they need when they retire, even with Social Security and even if they're aggressively investing in stocks, the market stays strong and they're putting the maximum amount into their retirement savings plan. (For a 60-year-old, the maximum annual contribution limit is $22,000.)
Michael Ryan, a former president of the Rhode Island Society of the Financial Planning Association, said retirees should only tap about 4 to 6 percent of their savings per year if they want their money to last. "A hundred thousand dollars is going to generate $4,000 to $6,000 a year," he said. "That's not an overwhelming amount of money to have saved for retirement, unfortunately."
It's also important to talk about how 401(k) savings trends are often characterized.
If you look at some data, it appears that the treasurer is wrong because the average account balance among people in their late 50s and early 60s is well above $100,000.
For example, Fidelity Investments, which handles 401(k) plans for about 11 million people and bills itself as "the nation's No. 1 provider of workplace retirement savings plans," reports that during the first quarter of this year, the average balance for their 401(k) customers age 60 to 64 was $126,200, above the $100,000 cited by Raimondo.
The nonpartisan Employee Benefit Research Institute in Washington, which has a database of 20.7 million 401(k) participants, reported that in 2009, the average balance for people in their 60s was $162,522.
So, at first, it appears Raimondo is wrong because the correct amount seems to be considerably higher than $100,000.
But Raimondo was talking about a typical individual who has a 401(k) plan, specifically a typical 60-year-old.
For the typical 401(k) saver, the average is the wrong statistic to cite. A small number of people investing aggressively can skew the average upward.
More relevant is the median balance -- how much the individual in the middle of the spectrum has saved.
And that's a very, very different number.
Consider the EBRI data for all age groups. While the average account balance at the end of 2009 was $59,381, the median amount -- representing how much was in the account of a typical 401(k) holder -- was just $17,794.
So what are the numbers for 60-year-olds?
Fidelity said that the median savings accumulated as of March 31 was $45,300 for ages 60 to 64.
(Several people we spoke with emphasized that the median isn't the most accurate number either because it fails to account for people who have changed jobs in recent years and may have, as a result, taken 401(k) savings from past employment and rolled them over into IRAs. As a result, the actual amount saved by a typical worker can be significantly higher than the median numbers would suggest.)
Alicia Munnell, a professor of management sciences at Boston College and coauthor of "Coming Up Short: The Challenge of 401(k) Plans," sent us to the Survey of Consumer Finances, done in 2007 by the Federal Reserve System, which tried to take IRA savings into account. That survey was before the recession but Munnell said the markets have rebounded enough that those numbers probably apply today. (The next SCF isn't due until next year.)
That data, analyzed by Boston College's Center for Retirement Research, also suggests that Raimondo was overly optimistic.
The typical 55- to 65-year-old had $78,000 set aside for retirement, but that included individual retirement accounts created when people leave a job and roll their 401(k) savings into an IRA.
If you only look at the 401(k) savings, the typical 60ish person has about $60,000.
"If someone is saying that people don't have a lot of money in these plans, that's right," said Munnell.
Munnell, and others we interviewed, said they knew of no specific data on 60-year-olds.
Raimondo's office cited Munnell's report on the Federal Reserve numbers when we asked for data to support the treasurer's claim.
In summary, Raimondo said that "the average 401(k) in America of a person who's 60 years old is under $100,000."
Her spokeswoman, Joy Fox, argued that because the savings rate is under $100,000, Raimondo’s statement would be True, even if the actual number was tens of thousands lower.
Fox also said Raimondo's larger point is that "given how little the average 401(k) was worth, the defined contribution system did not provide retirement security" for state workers who, in the treasurer's words, "at the end of a hardworking career . . . ought to have security in retirement."
That larger point is well taken. Give Raimondo points for not overstating the problem.
But all the evidence we could find involving that age group suggests that the average account holder has saved about $60,000 or less in their 401(k)s, which is the plan the treasurer cited.
For that reason, we believe her statement is "accurate but needs clarification or additional information," the definition of Mostly True.
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TurnTo10.com, "10 News Conference: July 10, 2011," accessed July 11, 2011
Emails, Joy Fox, spokeswoman, Rhode Island General Treasurer Gina Raimondo, July 17, 2011
Fidelity.com, "MyPlan Snapshot," Fidelity Investments, accessed July 14, 2011
Interview, Michael Ryan, financial planner, Professional Planning Group, Westerly, and former president of the Rhode Island Society of the Financial Planning Association, July 14, 2011
Interview and emails, Michael Shamrell, spokesman, Fidelity Investments, July 18 and 19, 2011
EBRI.org, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009," Employee Benefit Research Institute, November 2010, accessed July 19, 2011
Interview and email, Jack VanDerhei, research director, Employee Benefit Research Institute, July 19, 2011
Interview, Alicia Munnell, a professor of management sciences, Boston College, July 15, 2011
Vanguard.com, "The great recession and 401(k) plan participant behavior," The Vanguard Group, March 2011, accessed July 18, 2011
EBRI.org, "Average 401(k) Balance Among Consistent Participants Rose Nearly 32 Percent in 2009," Employee Benefit Research Institute, Dec. 2, 2010, accessed July 19, 2011
Interview, Beth McHugh, vice president of market insights, Fidelity Investments, July 19, 2011
CRR.BC.edu, "An Update on 401(k) Plans: Insights from the 2007 SCF," Center for Retirement Research, March 2009, accessed July 14, 2011
CRR.BC.edu, "Pension Coverage of Workers on Current Job, 1992, 2004, & 2007," Center for Retirement Research at Boston College, March 3, 2009, accessed July 14, 2011
Emails, George Lausch, writer/editor, Center for Retirement Research at Boston College, July 14 and 20, 2011
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