Plummeting stock market leaves N.H. residents with poor retirement plans

Newest 401ks

New Hampshire Union Leader

Aoife Connors

Boston University Washington News Service

March. 3, 2009

WASHINGTON – New Hampshire families are still struggling with the economy, but Rep. Paul Hodes, D-N.H., says encouraging signs are already evident.

“We are seeing a positive response from equity and the bond markets,” Hodes said Wednesday.  “If the stock market stays up and keeps rising, it will have a beneficial effect on 401(k)’s.”

Recent plunges in the stock market that took it down to its lowest level in 12 years caused a severe decline in the value of 401(k) retirement plans for many New Hampshire residents.

Americans have lost about $2 trillion worth of retirement savings in 401(k)’s and traditional defined-benefit pension plans, according to the Congressional Budget Office.

Hodes warned that people cannot rely on a market rebound to replenish the value of their retirement plans.

“In the long term,” he said, “we must return to a manner of fiscal prudence and cautious investing in our retirement plans.”

Craig Copeland, a senior research assistant at the nonpartisan Employee Benefit Research Institute, said, “this downturn is going to greatly change the future of retirement plans and the course of people’s retirement.”

He said “it will take years to regain the value of their pensions for those who heavily invested their 401(k) in equity.”

Speaking about the improvements in the stock market in recent days, Copeland said, “One or two days is really hard to tell. It’s going to take sustained levels of improvement; it’s not going to take care of itself in just one or two weeks.”

He cautioned that “in order for people to get the value of their stock back, they will have to stay investing.”

Many economists say it will be 2010 before the economy starts to pick up. Copeland’s view is that “when the stock market improves, it will be a strong indicator on the value of pensions.”

A 401(k) plan allows workers to increase the value of their retirement savings by investing a portion of their before-tax income in stocks, bonds and money-market investments while deferring income taxes until withdrawal. In many cases, employers match part of that investment.

The 401(k) is the least secure retirement plan because it is exposed to the volatility of the stock market, unlike Social Security or defined-benefit pension plans, which guarantee retirees a fixed monthly sum during retirement.

Because of the financial crisis, some companies say they can no longer take any responsibility for their employees’ futures. Many, including Macy’s and United Parcel Service, have suspended their matching contributions to 401(k)’s. Others have dropped the traditional plans or scaled back the benefits.

Hodes said he truly understands the pain caused by the devaluation of 401(k)’s. “Many of my friends and people in New Hampshire are worried.”

People’s pensions have certainly not been completely wiped out, Rep Carol Shea-Porter, D-N.H., said. “They are dramatically reduced and an extra burden, but if people keep their 401(k) pension money invested, when the economy pops up they will make money again.”

But she warned that retirees and people retiring now are the most affected.

Lisa Shapiro, chief economist for Gallagher, Callahan and Gartrell, a law firm in Concord, agreed: “The hardest hit folks are the retirees and the near retirees because they are not looking as long term.”

She noted that “more people are now continuing to work for longer and those retired are starting to go back to work part-time.”

Bruce Elmslie, professor of economics at the University of New Hampshire, also said the effect is that people will stay in the labor market longer and retire at age 66 instead of 62 in order to increase their Social Security benefit. This will save the system money because there will be fewer people on the system’s rolls and for a shorter period of time.

Shapiro said retirement investments in the market, like 401(k)’s, are designed to be long-term. These economic times are a wake-up call, she said, telling people that they need to have appropriate allocations in place as they approach retirement age.

 “There is a mixed outlook in the short term,” she said, with economists expecting recovery by the end of the year. “But we don’t know whether we have hit rock bottom yet.”

Elmslie’s view is that “if you want to build your savings to make money for you, you’ve got to invest in the stock market.” He added that “if people have retirement investments in the stock market they should be left there; they have lost as much as they can lose by now.”

Hodes said the stock market is not yet reacting to the fundamentals of the recovery plan Congress approved last month, but the recovery is happening.

“Stimulus will start kicking in this spring,” Hodes said. “The Fed programs, TARP [the Troubled Asset Relief Program] and the recovery package are all efforts being made to restore the financial system.” But, he added, it will take time, as President Obama has said.

Shea-Porter said that as Congress makes changes in regulatory and financial systems, “we should look at what changes are necessary in 401(k)’s, Social Security and pensions.”

She said that “a lot of people are so upset they’re not even looking at their portfolios because they have been hit so hard.”

Hodes, for his part, said that “people have lost so much of their 401(k) savings, so prudence and a reasonably conservative approach are required from the mainstream.”

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