Retirement Savings Fall Far Short

IN the span of a few short years, many American workers have been left on their own to save for retirement, as companies whittle down or close traditional pension plans to save costs. And surveys suggest that most employees are faring poorly at the new responsibility.

Gauged on current savings levels, most Americans will have only one-third to one-half the annual income they will need to retire in comfort, according to a study by Oppenheimer Management Corporation, New York. To bridge that gap, they may have to work past age 65 or accept a much-reduced standard of living.

``Most Americans today did not live through the Great Depression, but at this rate, that's exactly what most people's retirements will be like,'' Jon Fossel, chief executive officer of OppenheimerFunds, was quoted as saying when the study was released in July. Income shortfall

Princeton University economist B. Douglas Bernheim sees similar hurdles. According to his Baby Boom Retirement Index, the generation born between 1946 and 1964 are only saving one-third of what they need for relative financial security in retirement. And these calculations, Dr. Bernheim emphasizes, ``err on the side of conservatism.''

Alternatively characterized as an ``American tragedy'' or ``national retirement crisis,'' the income shortfall could still be largely averted through education, many retirement consultants say. The key problem so far is that the discreet shift of retirement planning from corporations and government to the individual has not been well communicated.

People still tend to view saving for retirement as an extra rather than a necessity.

The phenomenon is not new, of course. Americans have done a relatively poor job of preparing themselves for retirement in the past, Bernheim says. But today the pressures on income are increasing, jobs are less secure, housing is no longer a sure-fire investment, and Social Security may be straining hard by 2010 when one-fifth of the population - 45 million - will be in retirement.

Even coverage in a traditional pension plan may have lost some security. Many larger companies have underfunded plans while others are trimming promised benefits to limit liabilities.

New accounting rules that require big companies to list retiree medical costs up front, for example, have pushed nearly two-thirds of the affected firms to cut medical coverage, according to one survey. About 3 percent have dropped retiree coverage completely. And retirees have no recourse, as a celebrated Primerica court case proved earlier this year. The company won on the grounds of ``financial burden.''

The solution, many believe, is educating the public about defined contribution plans - already popularized in the form of 401(k)s. As defined benefits plans (traditional pensions) slowly close - 60,000 over the past decade - many are being replaced by company-sponsored defined contribution plans.

Defined benefits plans are company-funded and provide the retiree with a monthly check calculated on years of service and levels of pay. Defined contribution plans are employee-funded and take pretax dollars from the paycheck to deposit in tax-sheltered investments. The onus to save is on the employee.

Currently, almost half of US households (47 percent) are not covered by either a defined benefit or defined contribution plan, according to the WEFA Group. Conservative savings

The task ahead is thus twofold: to first draw people into these defined contribution plans and then to educate them about saving and investing. Almost one-third of those eligible do not participate. And those who do are still putting too little aside in overly conservative investments, retirement consultants say.

``Excessive conservatism is our greatest challenge,'' says Jim Klein, a vice president of Towers Perrin, a New York-based compensation consulting firm. ``People think of it [a 401(k) plan] as a bank account. They're not used to their bank account dropping 20 percent a year [with stock market fluctuations]. They panic rather than say this is a long-term investment.''

Ignorance about investment fundamentals has left many 401(k) participants investing in guaranteed investment certificates, money market funds, and bond funds, which lose in returns what they save in risk.

By some estimates, as much as 75 percent of 401(k) participants have nothing invested in stocks, historically the best investment over the long run.

Standard and Poor's guide to retirement planning suggests individuals 40 years from retirement invest 70 to 90 percent of their retirement savings in stocks to maximize returns. That figure should gradually drop to between 5 and 40 percent of a portfolio for people five years from retirement.

For women, the need to save is even greater than for men. Women tend to work fewer years at lower salaries and save less than men. And they can lose part or all of their spouse's retirement income if divorced or widowed.

Bernheim suggests single women between the ages of 25 and 44 earning $50,000 save at least 10 percent of their after-tax salary - putting away about $72,000 by their mid-40s, double what he recommends for men.