Finance: Have you missed an investment opportunity?

By Timothy F. Terry, founder, World Trend Financial & Terry Lockridge & Dunn, Cedar Rapids

My dad retired in 1983 at the age of 56. Thanks to a defined benefit pension plan and Social Security, he has enjoyed a comfortable retirement for the past 28 years. I like to remind him he has received benefits longer than he worked.

A working-class father of 12, he belonged to a majority of Americans whose investment dollars went into raising a family.

While the thought of setting aside additional funds for retirement undoubtedly crossed his mind, life's zero-sum game always got in the way.

Thankfully he was a participant in a plan which promised income for life.

I think about this often as I witness the demise of the defined benefit (DB) plan. It is estimated that fewer than 40 percent of Fortune 1000 companies have an active DB plan.

The plans have been the victims of economic reality, a transient work force, Byzantine government regulations and some questionable actuarial assumptions. Inconsistent tax policy also has played an important part in their downfall.

In the place of the DB plans, most employers established defined contribution (DC) plans. Under these programs, the benefit is a function of participant and employer contributions, investment performance and time.

In other words, there is no assurance what amount will be there at retirement.

Those of us who advise employers and investors have been flummoxed by a number of DC issues.

First and foremost is the declining rate of participation. This fall off has been especially acute among younger workers.

As a consequence of the 2008 stock market decline and continuing volatility, plan sponsors have witnessed an unprecedented decrease in participation.

Among participants, investment losses have been significant. Lacking experience in declining markets, faced with a mind-numbing array of choices and saddled with good-old fashioned fear, investors have responded accordingly.

As a result, many have exited equity positions at the nadir and have missed the market rebounds. Add to this the water-cooler validation factor and you have all the ingredients for investment failure.

As an investment adviser, observing investors moving to the sidelines during a period of high market volatility is particularly distressing. While this reaction is understandable, it is disastrous.

This is best illustrated by an Standard & Poor's study analyzing the effect on an investor's total return if they missed just 10 of the top domestic stock trading days from 1997 through 2006. Being out of the market those 10 days would have reduced your rate of return from 8.42 percent to 3.42 percent.

In real dollars, it is the difference between having your $10,000 investment grow to $13,996 versus $22,451. In this example, running to the sidelines for safety reduced your return by 60 percent.

Unfortunately it is not always easy to make disciplined decisions when the investment world is unhinged. Unlike professional money managers, individuals rarely have access to detailed research studies and sophisticated asset allocation models.

As a consequence, the retirement accumulation phase is severely compromised. With the average 401(k) balance less than $60,000, it is little wonder many employees cannot afford to retire.

This has had some unexpected consequences for employers. A work force that cannot afford to retire must continue to work.

In a period of stagnation, this represents an acute predicament for employers.

They are unable to hire new workers. They also face the prospect of an aging work force consuming a higher percentage of benefits and wages.

There is a consequent erosion of enterprise value because of the risk of a disproportionately large percentage of their labor force retiring at the same time.

There are no quick fixes to this problem. However, there are some essential steps each employer should immediately take to begin the process.

1. Get involved. Become an advocate for employees setting aside for their retirement.

As a leader you need to set an example and communicate your concern for their future. After all, they are responsible for your company's success.

2. Sponsor education sessions. A survey by Fidelity Investments revealed that 71 percent of participants did not have detailed knowledge about how their plans operate.

3. Have the plan sponsor put some skin in the game. Require them to invest sufficient time to inform and survey the employees.

A low participation rate is a leading indicator that the message may not be getting through.

4 Avoid advising them how to invest, but be sure they have access to quality unbiased information.

An aging work force unable to retire is a national crisis none of us can solve. What we can do is assist our employees so they are in a better position to approach their retirement.