When Larry Fink, CEO of BlackRock
BLK
Fink is a thought leader extraordinaire for his views on environmental, social and government (ESG) issues, a punching bag for conservative, ossified Wall Street hacks. His observations — if you can get beyond the toxic politics of ESG haters — are like prisms that allow us to focus and fix the flaws of the U.S. retirement system.
In his most recent annual letter to investors, Fink talks about how his parents saved for retirement and how it shaped his worldview. Yet few Americans have the opportunity to be covered by a guaranteed, defined-benefit pension the way the “Greatest Generation” after World War II was protected.
Our retirement system is fragmented, flawed and failing nearly half of the working population, which is not offered a defined contribution plan like a 401(k) through their employer. Unacceptably large swaths of US workers are simply not saving enough for retirement, according to the Century Foundation.
“Although workers have the option to establish an Individual Retirement Account (IRA) outside of work and put a portion of their earnings into those tax-advantaged accounts, most do not.” the Foundation stated. “Only 12 percent of American households save for their retirement outside of the workplace through an IRA.”
Fink bemoans the disappearance of defined-benefit pensions, which a handful of big companies are considering reinstating:
“One reason my parents had a financially secure retirement was CalPERS, California’s state pension system,” Fink notes. “As a public university employee, my mom could enroll. But pension enrollment has been declining across the country since the 1980s.”
“Today in America,” Fink continues, “the retirement message that the government and companies tell their workers is effectively: ‘You’re on your own.’ And before my generation fully disappears from positions of corporate and political leadership, we have an obligation to change that.”
Why Emergency Savings Are Important
Fink’s pragmatic approach to improving retirement savings focuses on some troubling hard numbers. Many workers can’t afford to save because they lack rainy day savings.
“Four-in-10 Americans don’t have $400 to spare to cover an emergency like a car repair or hospital visit,” Fink states. “Studies show that when people have emergency savings, they’re 70% more likely to invest for retirement. But this is where workers run into another barrier: Investing is complex even if you can afford it.”
Complicating the retirement gap is mutual fund expenses. Although companies like BlackRock, Vanguard and State Street are leaders in low fund expenses, small savers and companies get hammered with high costs and commissions.
In a better, simpler world for most investors, retirement options would be cheap, streamlined and boiled down to a few options like the federal government’s Thrift Savings Plan. Such a plan should be offered universally to all workers and wouldn’t be linked to employment.
One of Fink’s biggest barriers to sound retirement investing is no surprise to those who follow behavioral economics: It’s fear.
“America has rarely been a fearful country,” Fink observes. “Hope has been the nation’s greatest economic asset. People put their money in American markets for the same reason they invest in their homes and businesses — because they believe this country will be better tomorrow than it is today.”
How do you vanquish fear and invest for retirement? Educate yourself. There are more resources and tools online than ever before. Save automatically in a company plan or set one up yourself. Successful investing comes down to what President Roosevelt once said: “the only thing we have to fear is fear itself.”
Like Fink, I believe that hopeful action triumphs over fear. Set up a low-cost diversified portfolio with no-load mutual funds. You’ll feel more than hope when you look at your returns over several decades. You’ll probably feel more comfortable — and certainly less fearful.
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