More or less buried in the massive debate over what our health care system should look like is a provision to create a national long-term care insurance program. The Community Living Assistance Services and Supports (CLASS) Act would allow people to pay an average $65 a month and, after five years, be eligible for between $50 to $100 a day in benefits. Insurers oppose the CLASS Act — clearly, it would cut into their sales of long-term care insurance, which haven’t been all that great to begin with. Other criticisms of the act: The government doesn’t need to be expanding programs even further than it already is, and low benefits would give people a false sense of security.

While $100 is better than nothing, I can tell you from experience that it doesn’t cover very much. More

Reverse mortgages are increasingly the go-to solution for retirees confronting insufficient nest eggs and paltry income payouts in today’s low-rate environment. Last year, the number of new Home Equity Conversion Mortgages insured by the federal government amounted to 112,000 — more than 14 times the HECMs that were originated in 2001. The 2009 tally is expected to be even higher.

Last week’s news that 2010 Social Security benefits will not be given a cost-of-living adjustment — for the first time since inflation protection was added to the program in 1975 — will likely fuel demand for reverse mortgages. And lenders on the prowl for post-meltdown revenue sources are eager to boost the supply. More

Employment figures are poor all around, but if there's any class of workers that's held up relatively well, it's the college educated. Unemployment stands at only 4.7% for those with college degrees, versus 9.7% for those holding just a high school diploma, according to the latest figures from the Labor Department.

As much as a college diploma may assist today's youth with their future employment, paying for that education is giving their parents a severe headache. New surveys released by Fidelity Investments, the College Savings Foundation, and Sallie Mae have found that parents understand they're not saving enough, are worried about it, and are even planning to delay their own retirement to pay their kids' tuition.

Saving for college nowadays has been like trying to climb a sand dune: While 63% of parents have started saving for college (versus 60% last year), 43% say that they'll have to delay retirement to pay for it, up from 35% last year, according to Fidelity.
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When the Obama Administration announced the Making Home Affordable program in February, it estimated that the refinancing part of the program, known as HARP, could help as many as four million to five million homeowners with little or no equity (and even up to 5% underwater) refinance into less costly loans. So far it hasn’t exactly played out to expectations. Through July just 60,000 or so homeowners have landed a refi through HARP.

That makes it unlikely that HARP will come anywhere close to delivering on the administration’s goal by the time the program’s current authorization runs out in June 2010. (Its sister program, Home Affordable Modification Program, or HAMP, is authorized through 2012.)

While Treasury has the power to extend HARP past next year's deadline — which won't really help unless Treasury can also arm-twist lenders into doing these deals — a handful of other crisis-induced rule changes will need  Congressional action to be extended beyond this year. More

It's Friday — time to catch up on some of the week's most interesting, and sometimes puzzling, news in the world of personal finance.

1. Thought you had health insurance? Hah! The Washington Post ran a great story Monday about how insurance companies have canceled the health insurance policies of thousands of people after those policyholders have filed for claims related to expensive medical problems. The cancellations, known in the trade as "rescissions," are ostensibly justified by policyholders' failure to disclose previously existing medical conditions — think of someone who survives a heart attack who doesn't admit to cardiac problems when applying for health coverage the following year. The problem, according to the Post, is that rescission has become not only a tool for fighting fraud, but an excuse for insurance companies to weasel out of paying claims. One such case: After a woman filed a claim for emergency gallbladder surgery, her attorney alleges, her health insurer canceled coverage for her and her husband because he had failed to mention his high cholesterol. More

How hard is it to stay retired? As you've no doubt heard, football legend Brett Favre just came out of retirement — for the second time. But it isn't just sports figures who see retirement as little more than a passing phase: Polls suggest that anywhere from one-half to three-quarters of working Americans plan to return to some sort of work after they retire — that is, if they expect to retire at all. Some can't imagine life without some kind of work; others simply need the money. For many people, especially Gen-Xers, the notion of working after "retirement" may almost seem a given, especially for those who are struggling to save enough in the current recession.

But as it turns out, unretirement can have as many complications as retirement. There's a giant gap between what people say they're going to do after retirement and what they actually do: A 2009 study by the Employee Benefit Research Institute (EBRI) found that 72 percent of workers planned to work after "retirement" — up from 66 percent in 2007. But in fact, only 34 percent of retirees said they'd actually gone to work at some point during retirement. (A recent poll by the Longevity Alliance, conducted by Harris Interactive, found much lower percentages for both those who planned to work and those who actually did, but the gap between what people said and what they did was still there.)

There's a similar gap — if not quite as dramatic — between the age at which people expect they'll retire and the age when they actually do. While many say that the current economic mess has led them to delay retirement, the effect of these planned delays is hard to find in the data. As EBRI notes, among the people who have changed their expected retirement age within the past year

the vast majority (89 percent) say that they have postponed retirement with the intention of increasing their financial security. Nevertheless, the median (mid-point) worker expects to retire at age 65, with 21 percent planning to push on into their 70s. The median retiree actually retired at age 62, and 47 percent of retirees say they retired sooner than planned.

Why is this? Well, when you get older, to borrow a euphemism from Donald Rumsfeld, stuff happens. You may have health problems that keep you from working; getting a job may be harder than you thought. Heck, you might even decide that a life without paid work isn't quite as boring as you thought it would be. If you've already started getting Social Security, you may face reductions in your benefits if you go back to work (though this is only the case if you started your benefits before you reached your "full retirement" age). The AARP has a very useful page that can help you to sort out some of the costs and benefits of going back to work. And you'll find some helpful advice in this CNNMoney story.

You shouldn't count on being able to work enough in retirement to make up for a significant lack of retirement savings. But if you're healthy enough to work, the benefits of working in some capacity after you hit retirement age can be considerable. I suspect the percentage of those who actually do work after the age of 65 — as opposed to just saying they will — will increase considerably as the boomers and then the Gen-Xers hit that age.

Are you planning to work after the age of 65? If you're already past that age, are you working, or do you plan to return to work at some point in the future? If so, why? Money? Self-fulfillment? Health care benefits?

Maybe it’s a sign that recession really is easing: Once again we’re hearing arguments that you can save a lot less for retirement than the financial services industry would have you believe.

The last time this argument got much traction was in early 2007, when the housing market was still bubbling. Now John Rekenthaler, the well-respected vice president of research at Morningstar, has re-introduced this notion in a recent blog post entitled “The 80% Myth.” Writes Rekenthaler, “The financial services industry misleads the everyday investor by selling the notion that an 80% replacement rate of pre-retirement income is required for a successful retirement.”
As proof, Rekenthaler cites own parents, who retired at age 50 and have lived contentedly for nearly 30 years on just 50% of their pre-retirement income. They don’t eat out often or drink Starbucks, but they have traveled the world over. If his parents had aimed for 80% of pre-retirement income as the prerequisite for retiring, he notes, they might have had to work until age 70.

A modest income may work well for his parents. And it’s certainly true that the average retiree makes do with not that much. The median income for households headed by retirees is just $25,000 a year, according the Federal Reserve’s 2007 Survey of Consumer Finances (the most recent data available). That’s just about half the median income for all families, which is $47,000.

But does that mean aiming for an 80% income replacement ratio is really excessive? Consider that the past three decades have been extremely kind to retirees (2008 aside), who have benefited from strong GDP growth, low inflation, lower taxes, and bull markets in both equities and bonds. That’s undoubtedly helped many of them get by, along with a big boost from Social Security — the largest single source of income for people 65 and older, accounting for 40%.

Future retirees, however, face a very different economy than earlier generations. The problems with funding Social Security are serious. Moreover, given the trillions of dollars in debt being racked up by the U.S. government's  bailout efforts, many economists say higher tax rates are inevitable. Meanwhile, forecasts for economic growth and investment returns are lower.
And then there’s the problem of soaring healthcare costs. A recent study by the Employee Benefit Research Institute found that a typical 65-year-old male retiring in 2009 would need savings of anywhere from $68,000 to $173,000 to cover health insurance premiums and out-of-pocket expenses in order to have a 50-50 chance of affording those bills. To have a 90% chance, you would need to set aside $134,000 to $378,000. Women, who tend to live longer, need even more. The current healthcare reform efforts in Washington may slow the rate of increases, but that remains to be seen.

In the end, 50% or 80% of pre-retirement income targets are only rough rules of thumb. The only way to be sure you’re setting aside enough money for your needs is to draw up a realistic retirement budget — something that only becomes possible when you’re actually closing in retirement. But if you add up the economic challenges ahead, it seems pretty clear that it’s better to set your savings target high rather than low. The consequences (and the likelihood) of saving too much are small, while the consequences of saving too little could be disastrous. And by saving a lot now, we can all learn to live on less, which looks to be good practice for the years ahead.

It looks like the end of the American retirement dream as we know it. The 77 million baby boomers who are heading into their golden years with shattered nest eggs may prove to be the first generation in modern U.S. history to have less retirement security than their predecessors.

The numbers tell the story. For older workers, those ages 55-64, nearly 30% had no personal retirement savings — zip, nada — according to a recent analysis by benefits consultants Watson Wyatt, which reviewed data from the 2007 Survey of Consumer Finances (the most recent available). Those non-savers were mainly low-income households, but even among middle- and upper-income groups, retirement wealth was "generally inadequate," say the consultants.

Worse, only an elite 15% of households of any income level had saved the equivalent of at least four times earnings. And even that level of savings will probably not be enough to support you without a drastic downgrade in lifestyle. Say you are a 65-year-old who has saved four times your $100,000 salary, or $400,000. To reduce your chances of outliving that money, you should count on withdrawing only between  4% to 5% of that amount each year, or $16,000 to $20,000.  (To see how much you need to save for retirement, cnnmoney.com's retirement calculator can give you a rough idea.)

Social Security boosts that income, but the higher your salary pre-retirement, the less it helps afterward. For the lowest-paid individuals, according to one study, Social Security replaces 71% of income; for the highest-earning workers, it replaces only 31%. If you're the 65-year-old retiree in our example, a simple Social Security calculator estimates you'll receive $24,000 a year in benefits; adding in withdrawals from savings brings your income to around 40% to 44% of the pre-retirement level. Not all that retirement income is taxable, but it's still a big drop. And remember that Watson Wyatt's estimate of people's retirement savings is based on 2007 wealth levels; the recent market downturn has undoubtedly reduced the ranks of households that are successfully saving for retirement. (To get an estimate of your Social Security income, try this tool.)

All of which makes retirement security a critical issue that the Washington has yet to confront. Right now President Obama is grappling with a stalled health care plan and controversial financial reforms, among other issues. But judging by the one measure he has put forward, he seems to support only incremental change: His  automatic IRA plan would require employers that don't currently offer a retirement plan to automatically enroll workers in an IRA. (They could opt out.)

But that proposal doesn't address the real causes of the crisis, according to many economists, who say do-it yourself  plans like 401(k)s and IRA burden investors with too much risk and fail to deliver reliable retirement income. Some recommend crafting a universal retirement savings plan instead that would spread risk and responsibility among workers, employers and the government.

Even many supporters of the current system urge broader reforms. Says Christian Weller of the Center for American Progress: "The three-legged stool of retirement — public pensions, employer pensions and individual savings — is still intact, but it does need to be strengthened." He suggests more automatic features individual retirement accounts that would make them look more like pensions, as well as offering incentives for workers to stay on the job longer.

Clearly, given the pace of change in Washington, any major reforms, if they ever happen, are a long way off. Meanwhile, would-be retirees will need to save as much as they can and work longer they planned. That doesn't bode well for the American retirement dream.

What do you think should be done to rescue the retirement?

In its most recent survey of corporate pension accounting, Hewitt reports that the average assumed long-term rate of return at year-end 2008 is 7.98%.  That’s the number that companies estimate they'll earn annually on their pension investments; they use that guess to help decide how much they must invest today to pay future benefits. While  7.98% is  lower than the 8.34% assumed rate in 2004, it  still seems a tad optimistic when viewed through “new normal” binoculars. Stocks aren’t expected to earn much more than 8%, and there’s little reason to expect bonds will post returns beyond their 5% historical long-term average. (In fact, given where we are in the interest rate cycle, 5% might be optimistic.)

Even before the credit crisis fallout, there was plenty of skepticism about corporate pension assumptions. In the 2007 Berkshire Hathaway shareholder letter Warren Buffett stepped through yet another of his clear-eyed market/math lessons that pointed out the long-term trend is for stocks (net of expenses) to earn around 7% and bonds 5%.  Plug that into a 70/30 stock-bond mix (typical for pension funds) and you get a return closer to 6.5% than 8%.

I am going to leave the world of pension funding/underfunding and switch gears to what matters more for many of us: The rate of assumption we have for our self-managed 401(k) and IRA retirement assets. After  all, most of us aren’t covered by traditional pensions. And that leads me to ask the question: What’s your assumed rate of return? (See the poll below.)

Beware of the “garbage in, garbage out” trap. The higher the rate you use, the higher the risk you run of falling short. First off, there's the problem of high expectations falling short of real-world returns. Second, when you assume a high rate of return it often becomes an excuse to contribute less. And to be sure, after the 18% annualized gain for the S&P 500 in the 1990s it was easy to assume the markets would do most of the heavy lifting for our retirement.

Consider how different rates of return would impact a $250,000 retirement portfolio today. (Assume no additional contributions.)

In 15 years, the $250,000 would be worth:

•    $2.99 million @ 18% assumed rate.
•    $1.04 million @ 10% assumed rate
•    $793,000  @ 8% assumed rate
•    $643,000 @  6.5% assumed rate

So, what rate are you banking on? To see the impact of different assumptions, check out this calculator where you can adjust your contributions and assumed rate of return. And keep in mind the advice of Steve Utkus, chief of Vanguard’s Center for Retirement Research:  “Contributions need to be higher than many of us imagined. Markets, averaged out over good and bad periods, are now recognized to play a smaller role.” Are you ready to pony up more?

I recently read a somewhat depressing article in The Economist about the “end” of retirement.

The article begins with a bit of history: When pensions began in Germany over a hundred years ago, they were for people who lived to 70 — twice as long as the average person. When Social Security was introduced in 1935, 65 was three years more than the American life expectancy. Essentially, retirement was created for those who lived an abnormally long life. (The Social Security Administration acknowledges that average life expectancy at birth back then was 58 for men and 62 for women, though it also points out that 54% of men and 61% of women who survived childhood made it to age 65.)

The author then goes on to say that nowadays, Americans are living much, much longer, trying to retire earlier, and saving less. There’s no way Social Security can cover this, and the 401(k) isn’t working either, as both individuals and employers stop contributing.

Relatively few people today can remember the days before retirement, and I’m sure none of us want to imagine a future without it, either. But The Economist’s argument overlooks one big problem: Even if you do want to work for the rest of your life, you can’t guarantee that your job will be around that long.
A McKinsey study from last month showed that 71 percent of US workers have jobs unfavorable to income growth – jobs for which demand is decreasing or supply of workers in increasing.

The study gave an example of how a traditional job likely requires new skills:

“[A] purchasing manager in a US manufacturing multinational might be tasked with buying the best value inputs from anywhere in the world to supply factories in Asia. To do that job well, she would need advanced skills in a host of information technologies, the ability to coordinate the activities of colleagues and business partners in a global network, and very likely have a formal education in foreign languages.”

If you're an adult who has been working for years, building your human capital may seem daunting; learning new skills is difficult, time-consuming and often expensive. The study concludes by saying that America has seen redevelopment challenges like this before, and we have risen to the occasion. In the late 19th century we quickly morphed from a farm-based economy into the leaders of the industrial age. During World War II American women valiantly became skilled factory workers to fill the void left by men. It may be time for another nationwide re-education.

The recession may be the catalyst in the transformation. When the economy recovers, jobs may return — but don’t assume they’ll be the same jobs that were lost. Beware the catch-all term “growth.” According to McKinsey, “Unless the mass of America’s human capital can be developed fast, the nation risks another period in which growth resumes but income dispersion persists, with Americans in the bottom and middle-earning income clusters never really benefiting from the recovery.”

So, readers, when (if at all) are you planning to retire? If you are like our average subscriber, you have almost 20 years to go before you can collect Social Security benefits. In the meantime, what do you plan to do to ensure that your job will be around that long?

You may be able to imagine yourself working for another 20 years doing exactly the same job you’re doing now — but don’t count on it.

For an elderly person with few assets, a reverse mortgage can be a lifesaver: It enables cash-poor retirees to tap equity in their house for living expenses, home repairs or health care needs. If you’re 62 or older, reverse mortgages allow you to borrow against the value of your home and not repay the loan until you sell the house, move out or die. If the amount owed is more than the value of the house, the lender eats the difference. If it's less, you (or your heirs) keep what's left over after paying off the loan. In the meantime, the loan provides income, which you can take as a lump sum, monthly payout or line of credit drawn on as needed.

But make no mistake: Reverse mortgages, which come with high fees and hefty interest charges, are a costly option and often sold by aggressive salespeople who push inappropriate financial products on vulnerable seniors. That’s why Senator Claire McCaskill (D-Mo.) held hearings Monday in St. Louis on reverse mortgages. A year and a half ago, Sen. McCaskill began investigating problems associated with reverse mortgages, including predatory lending, aggressive marketing and the potential risks to the federal government — which insures 90% of reverse mortgage loans. Comptroller of the Currency John Dugan earlier this month said reverse mortgages bear a striking similarity to the risky sub-prime mortgages that got so many Americans in financial hot water. The Federal Housing Administration estimates it may lose $800 million from insuring these loans in the next fiscal year.

Yet the number of people getting reverse mortgages keeps rising. Even as home values are falling (leaving seniors with less equity to tap), more than 112,000 reverse mortgage loans were made in 2008, up from about 22,000 in 2003, according to the National Reverse Mortgage Lenders Association. Monthly reverse mortgage loan volume is setting records too, with nearly 9,000 reverse mortgages made in May.

My colleague Walter Updegrave wrote about the problems with reverse mortgages last year, spelling out how greedy salespeople not only persuade seniors to take out high-commission reverse mortgages, but also convince them to spend the proceeds on high-priced financial products such annuities, boosting their commissions even more.

Retiree advocates at AARP say that predatory lenders are also attempting to get seniors to use proceeds of their reverse mortgage to buy expensive long-term-care insurance. But in most cases, it makes more sense for seniors to use the payout for actual long-term care, not a hard-to-use insurance policy.

If you are considering taking out a reverse mortgage or have a parent or family member who is, don’t fall for a pitch from a salesman who cares more about a lucrative commission than determining whether a reverse mortgage makes sense for you. To learn more about reverse mortgages, check out resources at AARP and HUD.

Do you know anyone who is considering a reverse mortgage or has had a negative experience taking out a reverse mortgage? Tell us about that experience.

Just about all parents tell the same war stories from childhood: "When I was your age, I had to walk two miles – in 3 feet of snow — to get to school." Or, "When I was your age, we had only one TV in the house." But pretty soon, parents may add this one, too: "When I was your age, I didn't have an IRA."

The Obama administration wants to stop that story in its tracks.

IRAs, along with 401(k)s, didn't exist until the mid-1970s. But after 30-plus years, the plans still are not ubiquitous. As Time magazine columnist Justin Fox points out in his blog post, only 57.7% of U.S. workers have some kind of retirement plan. The rest are counting on other savings and/or Social Security.

And that's a problem, because according to the latest data from the Employee Benefit Research Institute, half of workers ages 55 and older have less than $50,000 saved. The bear market isn't helping. From the start of 2008 through the first four months of this year, 401(k) account balances for workers ages 55 to 64 fell an average of 10% to 20%.

Obama's plan for IRAs does not make the accounts universal. Instead, it targets employers that don't offer a retirement plan to workers. But like Social Security, the benefit would be automatic. If workers aren't given a 401(k) or similar option, then their employer must automatically open an IRA on their behalf and make contributions through direct deposit, pulling the cash from the workers' paycheck. Employees who don't want to participate could opt out.

Critics claim such a plan would A) be too expensive, B) help turn the U.S. into a "nanny state," and C) be too burdensome for small businesses.

But it's also hard to argue against a program (any program) that would help people build some retirement security. You can't rely on employer contributions for it: Just consider the number of companies that cut their 401(k) match this year. Individuals aren't dependable, either.

And even as dramatic as Obama's proposal seems, it doesn't cover everyone. A growing number of company 401(k) plans have an automatic enrollment feature, but not all do.

We already have too many choices to make: How to invest our account, when to rebalance and how much to draw down, for example. Automatic IRAs and 401(k)s could take one decision off the table — and save future generations from hearing yet another story that starts, "When I was your age…"

Convert some of your retirement savings into a lifetime annuity and you could snag a big tax break, if a new bill recently introduced in the House sees the light of day.

The rationale behind the Retirement Security Needs Lifetime Pay Act (H.R. 2748) is that we are going to screw up withdrawals from our retirement accounts and run out of money way too soon. Indeed, more than 40% of respondents to a MetLife survey said a 10% annual drawdown of their retirement savings seemed on target. But that aggressive pace would deplete your retirement funds in under 10 years; given longer life expectancies, it's prudent to aim for a retirement income stream running for at least 20 years, and preferably 30. (In fact, the universally accepted initial annual withdrawal rate to ensure your money will last as long as you, is 4%.)

So that brings us to the new legislation introduced by Reps. Earl Pomeroy (D-N.D.) and Ginny Brown-Waite (R-Fla.) that holds out a nice tax carrot to get us to convert some of our lump sums into annuities that will provide a lifetime income stream. The idea is to get us to  create our own old-fashioned pension plans that deliver steady payouts. Key provisions of the bill include:

•    You will be allowed to exclude 50% of annual annuity payouts from a non-qualified plan (one you invested after-tax dollars in) from taxable income. The annual maximum exclusion would be $10,000.
•    You will be allowed to exclude 25% of annual annuity payouts from a qualified plan (401(k), IRA and other tax-deferred accounts) from taxable income.

The bill also creates a tax incentive to purchase longevity insurance, an annuity usually structured so it doesn't start paying out until you're in your eighties. (In return for that delay of gratification, you get higher annual payments than you would from annuities that start paying earlier.)

In 2005 Pomeroy floated a similar idea (the more catchily-named Lifetime Pension Annuity for You Act) that never made it out of committee. But that was long before retirement security was threatened by a severe bear market and the bursting of the real estate bubble.  And according to academics who studied the 2005 version, the tax breaks would help to reduce the cost of annuities (by getting more folks to buy ‘em) and wouldn’t be a huge hit for Treasury’s coffers. Then again, back when the study was conducted we didn’t have massive deficits to pay for, so any hit to future tax revenue may be a tough sell in Congress today.

And what about you? Would a tax break entice you to consider converting some of your retirement savings into an fixed annuity?

Whether or not the 401(k) is the nation's best-designed retirement savings vehicle, for most people, it’s the only retirement plan they’ve got. Unfortunately, the most compelling feature about the 401(k) — the matching contribution from your employer — is disappearing fast. To save money, one-quarter of U.S. employers have eliminated matching contributions to employee 401(k) retirement plans since September, according to a recent survey of senior finance and HR executives by CFO Research Services and Charles Schwab.

Just how much does a company save by eliminating that benefit? Hewitt Associates ran the numbers in an April survey. For a company doing the typical match (50 cents for every dollar an employee contributes up to 6% of pay), the cost savings is about $1500 per worker.  That can add up to a lot — anywhere from $2 million for a small company to $25 million for a large firm, Hewitt says.

This isn’t a new play. In past downturns, companies have been quick to cut their 401(k) matching contribution and have later restored the benefit when the economy improves. But that move takes a big toll on workers’ bottom lines at a time when they can least afford to take another hit to their retirement savings. Even a short-term halt in that contribution can have a long-lasting negative effect on your retirement savings. That’s because once the match is suspended, many employees reduce their own 401(k) contributions or even stop contributing to their plan entirely. As a result, employees' retirement savings shrink by thousands of dollars. For example, younger workers earning $50,000 a year who contribute 6% of their salary will have $16,000 less for retirement than what they would have had if their employer hadn't suspended their match for one year. That loss jumps to $48,000 if employees stops contributing during that year as well. While they may eventually start saving in their 401(k) again, Hewitt finds even a hiatus in savings of just a few years can deplete retirement savings by hundreds of thousands of dollars. For example, a younger worker earning $50,000 a year who stops contributing 6% of his or her salary for five years can have up to $150,000 less for retirement.

Clearly, just because your employer no longer kicks in to your retirement plan doesn’t mean you should stop too. Remember, your 401(k) is still a pretty good deal even without a company match. You get a big tax advantage by putting pre-tax dollars away for retirement, which lowers your current taxable income. And you don’t pay taxes on the gains in your plan until you begin withdrawing the money at retirement, which effectively gives you a higher after-tax rate of return than if you were in a taxable investment account. Sure, you can get similar tax advantages with a Roth or deductible IRA but you can only sock away $5,000 a year with those. With a 401(k), you can save up to $16,500 pre-tax in 2009. You can’t discount the convenience of having your retirement investments taken directly out of your paycheck either.

As for your employer, Hewitt suggests some other actions for companies to take to cut costs before slashing their company matches, including shopping around for funds with the lowest expenses and getting rid of costly printed materials which duplicate information found on company  websites. For a thoughtful take on how 401(k) plans can be improved, read this piece by my colleague Penelope Wang.

Sometimes a great notion just doesn’t live up to its promise.

That’s certainly true for target-date retirement funds, which are all-in-one portfolios that automatically shift to grow more conservative by your retirement date. A staple of 401(k) plans—and the default option for most new  investors—many target funds underperformed badly in the market meltdown. The typical 2020 portfolio dropped 30% last year. Worse, many shareholders in 2010 funds, who were poised to retire, got hit with similar losses.

Question is, who’s going to fix target-date retirement funds, and how?

Cue the federal government. On June 18 a hearing on target-date funds will be jointly held by the Labor Department and the Securities and Exchange Commission, which may eventually lead to new rules for these investments.

According to SEC chairman Mary Schapiro, who laid out the agenda for the hearing before a House financial services subcommittee earlier this week, regulators will examine the different asset mixes held by target date funds, which led to widely varying results. Among  2010 funds, Schapiro noted, returns last year ranged from -3.6% to -41%. The SEC and Labor Dept. will consider "whether additional measures are needed to better align target-date funds' asset allocations with investor expectations,"  Schapiro said.

Regulators will  also look closely at whether a target-date fund’s name might be "misleading or confusing to investors," Schapiro said. Not that there’s much question about investor confusion. One recent survey (pdf) found that 62% of investors polled thought “investing in a target-date fund means you will be able to retire on the target date.”

That would seem an obvious conclusion. But instead fund companies assume you will keep your money in your target fund for another two or three decades after retirement, instead of cashing out immediately. So the funds often hold a large stake in stocks, anywhere from 40% to 70% of the portfolio, until the retirement date, only then downshifting to bonds and cash.

Why assume such a long investing timeline? For one thing, higher stock allocations enable  fund groups to tout better performance records, since historically (if not lately) stocks have  delivered higher returns than bonds. The strategy is also a way to make up for the poor savings habits of 401(k) participants, since many fail to contribute enough to build adequate nest eggs.

Of course, taking greater risks to chase higher returns can easily backfire—just look at last year. As one would-be hearing witness, Joseph Nagengast of Target Analytics, wrote in his comments to the SEC (pdf), “If a fund labeled 2010 is really targeted to ‘land’ at 2040, it should be re-labeled as a 2040 fund.” (You can read comments from other experts seeking to testify at the SEC's website.)

If any reforms do result from these hearings, they would likely focus on improved disclosure of target-date risks. But regulating asset allocation is more difficult. Even financial experts disagree about the proper portfolio mix of stocks, bonds and other investments. Will a government agency be a better judge?

Still, it's clear by now that these investing choices should not be left up to the fund companies that market target funds, or employers, who aren't financial experts. The best solution, as some 401(k) critics have pointed out,  would involve guidance from independent fiduciaries, whose only concern is the interests of the fund shareholders—perhaps a federal retirement board should take on the task, as Vanguard founder John Bogle has suggested (pdf).

Meantime, a few fund groups are seeking to get ahead of any federal regulations by making their own changes. Schwab announced last month that it was reducing the amount of stock held by its target-date funds. Its 2010 portfolio, for example, shifted from a 50% stake in stocks to 43%.  Other firms that have made similar fixes include Aim and OppenheimerFunds, according to Financial Research Corp.

It's a start.