IN Daily Opinion/Column

Asset allocation R.I.P.?

New study reveals savers not saving enough -- and asset allocators not allocating assets enough

Jun 29, 2011 @ 2:19 pm

By Evan Cooper

Sure, it serves the business interests of Putnam Investments to encourage greater savings, but you've still got to hand it to CEO Bob Reynolds for backing up his talk with action.

Putnam is taking a visible role in educating Congress (i.e., lobbying) about the importance of maintaining incentives for retirement savings, including adoption of a universal IRA. And yesterday the company launched the Putnam Institute whose goal is to “critically examine key investment theories, strategies and assumptions and suggest changes that can achieve better outcomes for companies, institutions, plan sponsors, investment advisers and individual investors.”

The first research completed by the Institute involved a survey of 3,300 working Americans to help determine their level of retirement preparedness. Overall, the study found that Americans are on track to replace about 64% of their current income when they retire. Without Social Security, however, their savings and investments will provide them with only about 30% of their current income.

Of course, wealthier Americans are better off than the less affluent. But the study found that the most powerful factor contributing to a successful retirement outcome, regardless of income level, is disciplined long-term saving and investment.

In other words, the key to maintaining your life style in retirement is spending less than you make and saving a lot. For someone who grew up in the 1950s and 1960s, when local banks encouraged school kids to put away a quarter a week through a passbook savings account, that kind of common sense, eat-your-vegetables financial advice seems as revolutionary as tail fins and hula hoops. But it's a radical message for several reasons.

First, what it's saying is that if individuals don't take responsibility for themselves, they're sunk.

I couldn't goad Putnam executives into acknowledging that corporate America should help in this effort (after all, they sell retirement plans to companies and don't want to antagonize potential customers) but I don't think it would be the end of capitalism if cash-engorged corporate giants - who pay their CEOs unconscionable salaries and lavish them with regal perks - kicked in more than the measly 3% match that's become the norm in 401(k) plans. At least let companies pick up the cost of running the plan rather than picking the pockets of participants. But that's a rant for another time.

Bottom line: We've got to fend for ourselves in retirement, and if Congress thinks it can cut Social Security benefits without millions of Americans becoming homeless and destitute, they should have their heads examined.

Second, adding risk in an effort to seek higher returns is probably too dangerous. Obviously, investors have to be diversified and include equities in their portfolios, but conservatism in investing is key because the level of savings trumps asset allocation in importance in achieving one's retirement goals, according to Putnam. As our reporter Lavonne Kuykendall pointed out in her story about the Putnam findings, most target date funds are way too heavily weighted toward equities to achieve security for retirees. Instead of the 30% allocation to equities typical of many target date funds, an allocation of about 10% is more appropriate, Putnam said. The biggest risk to retirees isn't inflation or longevity risk, the fund company claims, but an unfavorable “sequence of returns.” That's finance-speak for hitting a bear market just as you begin drawing down funds and not having an opportunity to recover.

Investing smarts, it seems, can't make up for a dearth of savings.

Finally, the study found that individuals who use advisers were on target to earn higher income in retirement than those who didn't use advisers. Putnam couldn't say what advisers were doing specifically that led to a better result, but perhaps it involved encouraging their clients to save and invest regularly.

If that's the case, and if the sheer volume of saving is more important that brilliant investing, I'll go out on a limb and say the study suggests that advisers should be more of a coach and less of an investment guru.

While investing know-how has cachet and commands higher fees, the seemingly mundane job of encouraging greater savings actually has more bottom line impact.

So let me propose the next research study for the Putnam Institute: figuring out a way for advisers to get paid for doing what their clients need most.

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