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Week In Review

48% Saving Less for Retirement

Be it the dismal disappointment of seeing their 401(k) balances fall, loss of a job or a wage cut, 48% of Americans are savings less for retirement, according to a Country Financial survey of 2,340 working Americans. Only 12% have increased savings, and it's status quo for 35%, according to the survey, conducted by Rasmussen Reports.

Although 41% have moved their portfolios into less risky investments, 41% are more confused about how to save for retirement after weathering the recession, and, perhaps unrealistically, 53% don't expect economic conditions to force them to delay retirement.

Only 30% believe it is possible for a middle-income family to save for a secure retirement, a five-point drop from 2009 and a seven-point decline from 2007, when the survey began.

"It's important to remember most families can build a secure future by taking actionable steps like developing a plan and updating it as their family's financial needs change," said Keith Brannan, vice president of financial security planning for Country Financial.

Hands-Down, Target-Dates Beat Balanced Funds

After one 2030 target-date fund lost 41% in 2008, legislators in Washington went up in arms against the fund category. One of the most controversial proposals would have limited equity exposure in such funds, but the industry fought back on the grounds the '40 Act gives asset managers leeway to determine holdings without interference.

A closer inspection by Morningstar found that target-date funds have actually outperformed balanced offerings across the board in the past three years. The average 2035 fund lost 1.93%, while the average balanced fund lost 2.77%.

Further, Morningstar's "2010 Target-Date Series Industry Survey," which analyzed the offerings of the 20 largest advisors, found that those companies that went ahead and answered calls to reduce equity exposure suffered steep losses in 2009.

Ironically, these "changes to the funds' equity exposure could leave the industry open to charges that it's fighting, [not riding] the market, and not positioning the funds correctly for the future," said Laura Pavlenko Lutton, editorial director of the mutual fund research group at Morningstar. "Some funds that were aggressively positioned in 2008 were whipsawed when they turned conservative prior to the market rebound in 2009.

"Target-date funds have been the subject of unprecedented regulatory, governmental and media criticism in the wake of 2008's market slide, but that has not deterred millions of investors from making these funds the centerpiece of their retirement savings," Lutton said. More than $45 billion in new cash flowed into these funds in 2009.

Morningstar also found that fund families have been lowering costs or introducing cheaper indexed series, and that fund complexes that populated their target-date funds with proprietary, rather than outside, funds showed no advantages in terms of costs or performance.

Areas for improvement, however, include far better disclosures on the holdings and risk levels in various target-date funds, as well as the fact that too few portfolio managers have their own money invested in the funds they run.

Momentum for Annuities In 401(k) Plans Builds

More retirement think tanks are getting on board with the idea of including annuities in 401(k) plans, but so far, only a handful of large employers have this as an option.

"They are complicated," explained Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "And [if] you hand over a bunch of your hard-earned cash and go out on the street and get hit by a bus, it's gone."

Further, investors are afraid an insurance carrier could go out of business, and plan sponsors don't like the administrative headache of switching annuity investments when workers change jobs, added Robyn Credico, a consultant with Towers Watson.

In addition, the Retirement Security Project at Brookings Institution recently spelled out a number of perceived problems with annuities among investors: "Annuities may not inspire confidence because they are not sufficiently transparent or simple to understand. Consumers find themselves mystified by annuities' complex provisions and worry that insurance companies are pricing their products unfairly. Comparison shopping between annuities, let alone between riders and lump-sum options, can be a lot more complicated than contrasting a Toyota to a Ford in an automobile showroom."

Nonetheless, the Obama administration recently came out in favor of annuities, and the Department of Labor and Treasury Department are gathering information on the feasibility of including annuities in 401(k)s.

Meanwhile, The Retirement Security Project recommends either automatic annuitization once workers reach age 45, with the right to opt out, or moving 50% of a worker's savings into an annuity upon retirement.

And the 401(k), which serves plan sponsors, advocates the creation of a federal insurance fund similar to the FDIC to guarantee annuities.

Educate Investors About Retirement Income: Cogent

Cogent Research says advisers aren't talking to their clients often enough about retirement income products. While investors are comfortable with annuities as accumulation vehicles, few are comfortable with, or knowledgeable about, annuitization.