Long-term investors may be smarter than they think.
That’s the word from a financial expert with three Harvard degrees (B.A., law, Ph.D.) who was in the charge of the Federal Reserve in Washington on 9/11. (Alan Greenspan was overseas.)
Roger Ferguson, former vice chairman of the Fed and now CEO of the TIAA-CREF financial services firm, was in town last week. TIAA-CREF manages $453 billion of investments, including 401(k)-like retirement plans for 49,000 participants in metro Atlanta. The plans — actually 403(b)s in the nonprofit sector — include employees of Emory, UGA, Tech, Morehouse, Children’s Healthcare, Fulton County schools and Woodward.
Ferguson told me that despite the complexities in today’s financial world, the same principles still apply — diversify, know your appetite for risk and take the long view.
“The investment rules have not changed in 40 or 50 years,” he said.
By contrast, much has changed for short-term traders, he said, but most investors are not in that category.
“We’re not traders,” he said, referring to TIAA-CREF and pointing out the difficulty of trying to time the market. “I would discourage individuals from being traders.”
While the overall rules may not have changed, the forces affecting employee finances have.
“All the legs of the retirement stool are under stress,” Ferguson, 59, said. One of those three legs is the disappearing, traditional defined-benefit pension plan. The second leg, Social Security, is in trouble and will be getting an overhaul.
The result is that more weight is being placed on the third leg — 401(k)-like plans.
“The 401(k) was never meant to be the main retirement plan,” he said. “We need to rethink the 21st century retirement system.”
What does that mean? The following, Ferguson said:
– There should be automatic enrollment in a retirement plan at work, including an IRA if an employer does not offer a 401(k) or similar plan. Employees could opt out, but they would start out as participants.
– Saving a sufficient amount over your work life to replace most of your pre-retirement income. Counting an employee’s and employer’s contributions, 10 percent to 14 percent of salary needs to be saved each year.
– Over time, increase the percentage deducted for your retirement plan.
– Diversify by choosing among a “reasonable” number of options in the plan. Ferguson believes employers should not offer too many fund choices because they can overwhelm some investors. The optimum number, he said, is 10 to 12.
– Plans should offer wise, objective advice tailored for each employee. The advice should come without any sales pressure to invest in a specific product.
– Employees should consider a guaranteed income for life — an annuity — for part of their retirement mix. An annuity is like “longevity insurance” that tries to protect you against outliving your resources.
– Younger workers starting their careers should try to develop a game plan that prepares them for the different stages of life — marriage, home, kids, college, retirement.
“Plan for a future that’s going to evolve,” Ferguson said.
That’s not a bad idea for any of us.
- Henry Unger, The Biz Beat
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