My Point of View by Jennifer Vogt-Erickson

I admit, I have a conservative streak.

One of the issues motivating me to vote with a conservative bent this year is retirement. Before my fellow DFLers begin to worry, though, let me explain how this makes me even more likely to vote for Democrats.

The two largest parties in Minnesota have starkly different ideas about the direction America’s retirement savings should take. Compare the standing platforms of the two parties:

DFL: “We believe all Americans have the right to a secure retirement.”

GOP: “We support phasing out of Social Security while allowing Americans the flexibility of investing their Social Security payments while continuing to fulfill our obligation to older Americans (this would include prohibiting Congress from using Social Security funds for any other purpose).”

“Phasing out Social Security” in favor of do-it-yourself retirement investing? The warning signs about 401(k)’s and similar investment plans have been well-documented in the past several years. Here are some of the key pitfalls:

1. Most people lack the knowledge to prudently manage their accounts, much less maximize their returns.

Investment or withdrawal mistakes are common and costly among workers below the top 20 percent of income earners. People often learn what they need to know in hindsight, after the damage is done. Such missteps can easily mean the difference between a comfortable retirement and one of just getting by or working for years longer.

2. Fees can substantially erode returns over the long haul.

Index funds, which track a certain stock index such as the S&P 500, are the lowest cost option, but many people choose managed funds that can cost over 1 percent a year in fees. In theory, actively managed funds have a better chance of beating the market, but 80 percent of these funds do worse than index funds once fees are subtracted.

The difference in costs between funds may seem small in the short term, but over 40 years of investing, the total cost of managed funds can top $100,000 due to lost compound interest. It’s essentially a huge gift to the financial industry, while workers shoulder 100 percent of the risk.

In 2011, the median fees on 401(k) plans was 0.78 percent, or approximately $248 per participant. Most people don’t know what amount they’re paying; the cost of fees aren’t reported on individual investment statements.

3. The timing of market fluctuations can have a huge impact on people’s 401(k) assets.

Two hypothetical workers enter the labor force 10 years apart and save the same amount each month in the same funds. While both work the same number of years, one retires when the market is high, and one retires during a market downturn. Despite equal contributions, one will probably have a much smaller nest egg.

Some other things to consider about Social Security and retirement investing:

1. At age 65, a person can expect to live about 20 more years. To maintain one’s standard of living in retirement, financial experts recommend saving an amount equal to about 10 times one’s highest earnings, plus another $100,000-$200,000 for medical expenses.

Yet among people ages 55-64, one-third report having less than a year’s income saved and about 20 percent have none at all. Among those with 401(k)’s in this age range, with 20 years of contributions, the average nest egg is about $80,000.

2. Half of workers don’t have a 401(k) or similar plan to contribute to, and only 18 percent of workers have a pension from their employers, down from 35 percent a generation ago.

3. Two-thirds of seniors rely on Social Security as their primary source of income.

Social Security has liabilities, to be sure, but reforming it — such as raising the age when benefits kick in, due to increased longevity — is preferable to replacing it. With fewer people receiving pensions and 401(k)’s falling far short of closing the gap, more people than ever will need it to get by.

We should also reform 401(k)’s so they primarily serve workers rather than the mutual fund industry. This could include greater transparency of fees, automatic enrollments, pooled assets, locked-up assets, and professional management of funds.

The retirement issue is yet another example of how the DFL Party best represents the economic interests of regular Minnesotans. The Democrats’ stance is to protect people in their retirement years. While the Democrats emphasize security (i.e. stability), the Republicans favor flexibility (i.e. risk).

Given the performance of 401(k) plans and working people’s spotty track record for managing their own accounts, the state GOP is effectively promoting a retirement shortfall for the majority of Americans.

In terms of the retirement I hope to have someday, I prefer the conservative approach, and that’s part of the reason why I’ll be voting for Democrats this fall.

 

Albert Lea resident Jennifer Vogt-Erickson is a member of the Freeborn County DFL Party.