Bies Addresses Challenges in Retirement Savings
In a recent speech to financial executives, Susan Bies, a member of the Federal Reserve System’s Board of Governors, discussed the economy, consumer spending and investment, and how household financial conditions affect retirement savings. Labor markets are gradually improving, and consumer spending was relatively robust during the Christmas holiday season despite the restraints brought by higher energy prices, Bies said. She also noted that businesses are spending more on capital equipment. Core inflation should remain in its current range, which would allow the Federal Reserve to continue to remove its accommodative policy stance at a moderate pace.
Households hold steady
She said that many homeowners have used home refinancing to pay down loans with higher interest rates, thus decreasing the portion of the household budget dedicated to servicing debt.
Bies’ generally positive economic outlook indicated that the household sector as a whole is in good shape. Though households have taken on a significant amount of debt, leaving some analysts to fear that many households have become overextended, the rapid growth of this type of household debt largely reflects a surge in mortgage borrowing fueled by recent years’ historically low mortgage interest rates coupled with increased housing prices.
Bies addressed the issue of how consumers plan for long-term financial stability in retirement. The shift away from the older model of defined benefit plans to today’s defined contribution plans, such as 401(k) plans, presents new freedoms and new responsibilities for both employers and workers planning for retirement. The growth of 401(k) plans, which now cover 40 million workers and hold assets of about $2 trillion, has put greater responsibility on individual employees to actively manage their retirement wealth. Bies added, however, that the average employee may not have the skills or the interest to make the choices that will generate sufficient retirement income. As a result, employees without investment experience may choose a 401(k) plan’s default investment options, which in many cases are low-risk, low-return money market funds, or employees may invest heavily in their employer’s stock. Both these investment strategies are troubling, Bies said, because they may not lay the foundation for workers’ financial security later in life.