Saving for Retirement

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By Patricia Uceda, Spring 2015 Graduate Research Assistant

Saving for retirement is very important in order to ensure you have the financial freedom to enjoy your later years without having to stress about money. Unfortunately, a 2014 survey found that 35% of middle-class Americans are not making any contribution to a retirement vehicle such as a 401(k) or an IRA, and 41% of those between the ages of 50 and 59 are not saving for retirement at all. Additionally, a report by the Center for American Progress found that millions of Americans will not be able to maintain their standard of living in retirement due to lack of savings, and that this problem is only going to get worse.

These numbers are very concerning. Luis A. Aguilar, commissioner of the SEC, recently gave a speech about this problem at the American Retirement Initiative’s Winter 2015 Summit. He attributed most of this to lack of knowledge on retirement income preparedness. The two most prevalent investments made by those planning for retirements are target date funds and municipal securities. While these may be attractive options for investors because of their ease and predictability, Mr. Aguilar spoke on two issues facing these commonly used investment options.

Target Date Funds

Target date funds automatically rebalance mix of stocks, bonds, and other investments, gradually becoming more conservative as time passes. They have become very popular because they do not require active management by investors. Approximately 72% of 401(k) plans offer target date funds, in many cases being the default option within the 401(k) plan. It has often been called “autopilot investing” because it allows investors to rely on financial experts to make important decisions regarding the management of the account.

Many investors perceive these funds as being risk-free, largely due in part to misleading marketing. However, target date funds do not guarantee sufficient income after retirement; in fact, there is no guarantee that investors will not end up losing their investment altogether. In 2008, investors who invested in target date funds had average losses of 30%, which only grew the following year. Unfortunately, the SEC has not yet enacted any rules dealing with target date fund disclosures as of this date, although better measures are greatly needed.

Municipal Bond Market

Municipal bonds are another investment that are commonly used by investors who are nearing retirement. While they may seem like a very safe option due to the fact that they are issued by municipalities, the fact is that the municipal securities market is not subject to the same level of regulation and transparency as other markets. The SEC’s ability to oversee the municipal securities market is limited to requiring certain limited disclosures and enforcing the antifraud provisions of the federal securities laws.

More needs to be done to enhance the disclosure practices currently in place in the municipal securities market. There are currently 1.5 million different types of bonds with many different factors and features that give rise to endless permutations. This leads to a high degree of complexity and confusion among investors. In addition, disclosures often leave out detailed information regarding the issuer’s outstanding debt, which is something investors usually would like to know before investing. In order to ensure that the municipal bond market is more fair and transparent to investors, certain changes need to be made.