The Overfeathered Nest Egg

Critics say financial-planning calculators encourage employees to save too much.

First, let’s get one thing straight: critics of conventional retirement savings models do not want employees to simply forget about saving for retirement. “We aren’t promoting undersaving,” says Ty Bernicke, CFP, with Bernicke & Associates Ltd., in Eau Claire, Wisconsin.

What Bernicke and several other retirement experts are promoting is a revisionist view of most current financial-planning advice, which they claim encourages oversaving. “The advice being given is incredibly bad,” says Laurence Kotlikoff, a professor of economics at Boston University. “The entire methodology is primitive. It’s akin to 14th-century medicine.”

At the heart of the debate are the calculators used to determine retirement needs. The models, says Kotlikoff, use too little information to make meaningful recommendations. Moreover, the results are complicated by the inherent conflict of interest at most financial-planning firms: under many fee structures, the more people save, the higher the firms’ income. Consequently, says Bernicke, “there is a huge vested interest in how much is saved.”

The financial-planning firms, not surprisingly, disagree. Just about every study by Fidelity shows that Americans aren’t saving enough for retirement, insists pensions Deborah Pont, spokesperson with Fidelity Investments. Fidelity’s 2007 Retirement Index, for example, indicates that the median retirement savings of American households is a measly $22,500. And even if financial institutions do have an interest in increasing saving, says Stuart Ritter, CFP, with T. Rowe Price in Baltimore, “that doesn’t mean their advice is wrong.” It’s akin to a doctor operating on a patient, he says. The doctor may be compensated for the surgery, but that doesn’t mean the patient doesn’t need it.

Still, if the calculator critics are right, companies may face a dilemma. After all, says Bernicke, companies have an ethical responsibility to provide retirement education to their employees. And this responsibility can be compromised when large investment companies, with their own agendas, assist in that education. They may advise employees to continue building their nest eggs even if they have saved enough. Conversely, if employees curtail their savings and end up without adequate funds for retirement, that could lead to other repercussions — like class-action suits or federally mandated savings plans. “Just having a plan isn’t going to be enough,” says Richard Ferri, CEO of Portfolio Solutions LLC in Troy, Michigan.

Not So Simple

The fundamental problem with most financial calculators, say critics, is that they are too simplistic. Fidelity’s myPlan Snapshot, for instance, offers a financial “snapshot” that requires users to provide their age, income, amount already saved, the amount they save each month, and their investing style. Based on this, the software computes how much they need to save and how much they’re likely to save if they maintain current habits.

If a 30-year-old making $75,000 with $50,000 already saved plugs in a $500 monthly contribution to a growth portfolio, the model calculates that he is on track to accumulate only $1.7 million on average when $3.6 million is needed. If that same investor uses Vanguard’s calculator and projects a modest 7 percent return, the model estimates that he is on track to save $1.4 million when $4.9 million is necessary. If $20,000 in annual Social Security benefits are added to the mix, the target number decreases to $3.2 million. Still, says Kotlikoff, “this is miles beyond what a middle-class household can save without starving or investing in risky assets.”

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