No Country for These 10 Million Baby Boomers

• 10 million baby boomers in small retirement savings plans (SRSPs) face risks of losing lifetime savings in the next stock market crash.
• SRSPs are like the “Country” in the movie. Baby boomers are the “Old Men.” And the next crash is the soulless villain that is not going away.
• Pooled Employer Plans (PEPs) could help but they do not currently provide sufficient protection for baby boomers in SRSPs.
• Baby boomers should take control of their savings, move them to safety, and ensure they are informed about their investments and rights under ERISA.

The 2007 hit movie No Country for Old Men pits an “old man” played by Tommy Lee Jones who values justice, morality, and lawfulness against a younger vicious man who acts according to his own immoral codes, played by Javier Bardem. The “Country” in the movie is 1980s barren desert plains Texas near the Rio Grande – wild and woolly. It’s a great movie punctuated with moral lessons.

Taking from the movie’s framework, the “Country” in this article is the wild and woolly market of one million small retirement savings plans (SRSPs) that have less than 100 participants. The “Old Men” are 10 million baby boomers in SRSPs who cannot afford to lose their lifetime savings. They’re the heroes who must protect themselves from the villain that is the next stock market crash.

This is a warning and guidance for 10 million baby boomers to protect their savings in SRSPs. There’s a good chance that the next crash will rob them of their savings.

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There are 20 million people in SRSPs with $1 trillion total assets, so 30% of 401(k) participants and 15% of the assets. Some SRSPs have joined Pooled Employer Plans (PEPs) but these have not yet fully caught on.?

SRSPs are a dangerous “Country”

Although regulated by ERISA, SRSPs operate “under the radar” because they are too small for lawsuits or regulatory fiduciary enforcement. Many are created primarily? to provide retirement savings benefits for owners. Business owners need to focus on running their companies, rather than overseeing ?a retirement plan.

Baby boomers in SRSPs generally know their employers personally and trust them, which is good, except “Trust but verify” is even better. Baby boomers need to know how they are currently invested, and to move to protect if they are exposed to high risk.

How safe should baby boomers be? Academic lifetime investment theory is very safe for those near retirement with 80% in “risk-free” assets. This safety reduces the Sequence of Return Risk that can spoil the rest of life. 80% risk-free is much safer than common SRSP practice. Most target date fund? (TDF) providers say they follow this theory, but they don’t. TDFs are 85% risky for those near retirement.

The point is that baby boomers are at risk of suffering serious losses in the next stock market crash that could cause them to run out of money. The next stock market crash is like Javier Bardem’s villain in the movie.

If they have discretion, baby boomers in SRSPs need to move their savings to the safest option on the platform. If employers have discretion, baby boomers need to talk to their employers about giving them protection. They should do this now.

Even if the next crash is years from now, most baby boomers will remain? in the Risk Zone for the entire decade of the 2020s. I’m not predicting an imminent crash, although that is certainly possible. I’m warning baby boomers that a crash will be devastating to them unless they move to protect now because they are in the Risk Zone.

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Pooled Employer Plans (PEPs)

Some SRSPs have joined together in order to simplify management, control fiduciary liability, and reduce costs. Pooled Employer Plans (PEPs) are starting to catch on, but these do not ?protect baby boomers although they could, but that is another article.

PEPs don’t matter much yet, but baby boomers in PEPs still need to take back control of their savings and move them to safety.

Business owners really don’t want to be fiduciaries, but they are when they sponsor a SRSP. Jerry Conway, principal of PEP-HUB, observes that the Wild West in SRSPs entails:

·?????? Missed eligibility for employees

·?????? Wrong definition of compensation?

·?????? Incorrect Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.

·?????? Improper profit sharing allocations

·?????? Missed control group and affiliated service group identification and testing/reporting

·?????? A long list of potential conflicts between the plan document and how the plan is administered?

·?????? Conflicts of interest by plan providers

·?????? Lack of stewardship by plan fiduciaries resulting in excessive fees paid by participants.?

Many believe that PEPs are the wave of the future that make the Wild West less wild, which has brought 165 pooled plan providers – P3s—to the market. There are currently 350 PEPs. One million SRSPs are the prospects.

?Reform will be too late. The villain wins.

The majority of 401(k) plan participants cannot make an informed investment decision so they default their decision to their employer. The most popular employer choice is a target date fund (TDF). In the 2008 market crash, the average 2010 TDF for those near retirement lost more than 30% and that created an uproar, but nothing changed.

In 2008 there was only $200 billion in TDFs. Today it’s $4 trillion. The next crash will bring serious reform to TDFs, but it will be too late for current participants.

The Government Accountability Office (GAO) was charged with an examination of TDF risk, but they simply rubber-stamped common practice. Their report is a big disappointment that says nothing to warn participants in TDFs. The villain wins.

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Conclusion

Participants in small retirement savings plans may feel like they are “family” so they are protected, and this may be true. But baby boomers are near retirement, which is a time when investment losses could ruin the rest of life by reducing the time that savings last. Baby boomers need to “Trust but verify.”

Because SRSPs are the wild and woolly “Country” in 401(k) plans, “Old Men” baby boomers need to protect themselves now – before the next stock market crash. Baby boomers should not assume that they are protected because they probably are not.

The surprising end to the movie is that the villain is not in jail and survives to ruin another day. Stock market crashes are not going away. We can hope that the next crash is not too bad and way in the future, but baby boomers are in the Risk Zone now.

It’s like airplane risk but the odds of a crash increase every day that the stock market goes up. Beware of a shocking Minsky Moment.

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