Category Archives: retirement

The Not-Ready-for-Retirement Workers

Just when you thought it was safe to retire…

A new analysis from Aon Hewitt reveals most workers will likely be working longer to save enough to maintain their standard of living in retirement.

In fact, its analysis of 77 large U.S. employers, representing 2.1 million employees, projects the average worker will need to save 11 times their final pay at retirement (age 65) to keep their preretirement lifestyle. (Exact income replacement, of course, depends on the unique situation of each worker including age, income, anticipated retirement age and Social Security.)

Only one-in-five are on track to meet or exceed their needs in retirement at age 65. An additional 20 percent may be close to having reasonably adequate savings with some lifestyle adjustments. This leaves 60 percent of workers unable to afford to retire at age 65. Aon Hewitt projects that age 68 is the median age U.S. workers will be able to retire with sound financial security, while 16 percent are not expected to have enough to retire even by age 75.

“The benefits landscape has changed over time and U.S. workers are now accountable for a greater portion of their financial needs in retirement,” said Rob Reiskytl, partner at Aon Hewitt. “Unfortunately, most are under-prepared. The most important thing they can do is to establish goals for the kind of retirement they want and determine a savings plan to meet those needs and desires. This might mean starting to save more now, delaying retirement by a few years, or making a conscious choice to retire with a lower living standard.”

Aon Hewitt finds many workers are not planning enough for their long-term financial goals. A separate Aon Hewitt survey found that just over half of workers (54 percent) have estimated their retirement needs, determined savings requirements or forecasted how much income they’ll need in retirement. Only 40 percent of workers have created a financial plan to achieve their retirement goals.

“Many employers are increasing their focus on financial wellness, offering education, tools and resources to help workers achieve their savings goals,” said Reiskytl. “Taking advantage of online tools such as budgeting and debt-management programs and apps, professional investment advice and savings features like target-date funds, automatic rebalancing and managed accounts, are all things that will help workers close the savings gap.”

With retirement seemingly receding from many workers’ view as the days go on, this research only offers further proof that employees need help with planning their futures beyond their working years.

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Here’s a New Gen Y Adjective: Conservative

Gen Yers apparently don’t need to “get real” when it comes to retirement—a survey released earlier this week suggests many may already be “real,” at least when compared to their elders.

ThinkstockPhotos-494091025A study of 1,000 American adults released Wednesday by TIAA-CREF, titled the 2015 Lifetime Income Survey, found that, when it comes to retirement planning, Gen Yers (those between age 18 and 34) seemingly are more conservative than older generations in their retirement outlook, with only 56 percent saying they are counting on Social Security to provide income in their retirement. In contrast, 76 percent of those between ages 35 and 44 and 73 percent of those between ages 45 and 54 indicated that was the case.

According to the study, 34 percent of the respondents said if they could choose one primary goal for their retirement plan, it would be to ensure that their savings are safe, no matter what happens in the market—a marked increase from older generations. Only 16 percent of Americans ages 35 to 44 and 22 percent of Americans ages 45 to 54 reported the same.

The survey also found that Gen Yers tend to take a pragmatic view about the length of time their retirement may last: 34 percent say they plan to accrue retirement savings to allow them to live comfortably for more than 25 years, compared to only 26 percent of respondents overall. However—and here’s the particularly disturbing, though not necessarily surprising data point—31 percent aren’t currently saving any money for retirement, due in part to financial challenges such as student loans or jobs that don’t offer retirement plans.

Here’s one take on the findings, this from Teresa Hassara, executive vice president and head of Institutional Business at TIAA-CREF …

“Many in Gen Y came of age during the Great Recession, which helped shape their attitudes and outlook[s] on their own finances. They face higher student-loan debt and fewer prospects for full-time employment with benefits than previous generations, making it harder to save enough for a comfortable retirement. The gap between the need for financial security and having the will and the means to achieve it may well impact this generation for decades to come.”

All points well worth considering the next time you re-evaluate your benefits-communication strategy.

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Shoring Up Pension Plans

About two-thirds of companies that sponsor defined-benefit plans plan to take steps this year to protect their bottom lines from expected rises in premiums from the Pension Benefit Guaranty Corp.

That’s according to a new survey from Aon Hewitt, which queried 183 DB plan sponsors about their current and future plans. Twenty-two percent said they’re “very likely” to offer terminated vested participants a lump-sum window this year, while 19 percent plan to increase cash contributions to their plans to reduce PBGC premiums in the year ahead and 21 percent will consider purchasing annuities for some of their plan participants.

“A growing number of plan sponsors anticipate increasing pension plan costs due to recent changes to the Society of Actuaries longevity models and rising PBGC premiums,” said Aon Hewitt’s Ari Jacobs, its global retirement solutions leader.

President Obama has once again proposed giving the PBGC the power to raise premiums on single and multiemployer DB plans, a strategy that would raise a projected $19 billion over the next decade (Congress rejected the President’s previous proposal). This move is staunchly opposed by many in the business community, however — including the ERISA Industry Committee —  who say it would “create a direct conflict of interest.”

“This proposal continues to resurface each year, and policymakers appropriately have rejected it as an inappropriate and impractical expansion of government authority that would hurt plan participants and plan sponsors,” ERIC CEO Annette Guarisco Fildes said in a statement.

Although the PBGC is now on sturdier financial footing than in previous years — thanks in part to an improving economy — the agency still faces considerable deficits in its single-plan and multiemployer insurance plans. The annual report estimates that the multiemployer plan has a 90-percent chance of running out of money by 2025.

Late last year Congress passed the Multiemployer Pension Reform Act, which makes it easier for sponsors of plans that are at serious financial risk to reduce payments to retirees, with the intent of reducing the risk that the PBGC will need to take over the plan.

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Five Important Steps for Retirement

retirement reviewMercer has just released its annual “10 Steps DC Plan Sponsors Should Take” for the coming year, or things employers should do to ensure their defined-contribution plans are meeting the needs of plan participants while staying in compliance and taking advantage of recent innovations. Some of these recommendations include the usual about financial-wellness education, monitoring participants’ progress against their retirement goals, reviewing plan fees and checking up on providers to make sure they’re staying compliant.

Rather than list all 10 steps, I’ve focused on the five that address relatively new developments.

First, you should make sure your plan is responsive to participants’ retirement-security needs by studying the latest available options, such as services promoting Social Security optimization. You should also be prepared to “respond to favorable regulatory changes,” such as the increased guidance on the use of in-plan annuities.

Second, you should conduct an in-depth analysis of your current, or future, managed-account provider. Heightened scrutiny of such providers, including the Government Accountability Office’s recommendation to the DOL to conduct an in-depth review of managed-account providers, means you should be taking a close look at your processes for selecting and monitoring these providers.

Third, make sure the capital preservation option in your plan is still the most appropriate for plan participants. Capital preservation options such as money market and stable value options have an important place within the DC framework. Given the new fixed-income products that have arrived on the market within the last few years, along with the increased SEC regulations that will be placed on money market funds in 2016, now is a good time to review your plan’s offerings to determine whether they’re still meeting participants’ needs.

Fourth, think about what a disabled employee can do to keep current with his or her plan while out on leave.  As Mercer notes, when employees go out on disability, their DC plan contributions can take a hit. This causes a gap in participants’ retirement preparedness that, depending on their leave’s duration, they may never be able to fully close. However, new regulations that allow continued contributions during periods of disability could mean that such a gap is not inevitable.

And finally, # 5: keep an eye on liquidity. Last year saw major growth in liquid alternatives, says Mercer, such as diversified inflation and hedge funds. Exposure to options such as these is not new: Many target-date funds have some exposure to these options. Plan sponsors need to review how these liquid alternatives are defined, reviewed, implemented and monitored within the plan. Make sure these exposures are appropriate for plan participants based on what’s available on the market today, and determine whether or not additional exposure should be considered.

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So How Are the Financial Experts Doing?

When it comes to 401(k) performance, you’d think employees might do better with the help of the so-called experts, right? Well, maybe not.

Here’s a disturbing study I ran across today coming from researchers at Michigan State University and the University of Notre Dame: Financial experts do not make higher returns on their own investments than untrained investors.

153430966There’ve been more than a few surveys in recent years that suggest employees would like more help in managing their 401(k)s and preparing for retirement. So you’d think putting their nest eggs in the hands of “the experts”—or at least people they think are more expert than themselves—would give them some level of comfort.  But if there’s any truth to the new study mentioned above, which looks at the private portfolios of mutual-fund managers, they’d be mistaken. Among other things, the study—titled “Do Financial Experts Make Better Financial Decisions”—found the experts were “surprisingly unsuccessful” at outperforming nonprofessional investors. (The study is slated to be published in an upcoming edition of the Journal of Financial Intermediation.)

To reach their conclusion, the researchers—Andrei Simonov, associate professor of finance at Michigan State University, and Andriy Bodnaruk, assistant professor of finance at the University of Notre Dame—compared the portfolios of 84 mutual-fund managers in Sweden against the portfolios of untrained investors and found “no evidence that financial experts make better investment decisions than peers.”

Simonov says he’s not denying there aren’t talented fund managers out there, but does suggest that there are “very, very few of these superstars, and the average investor probably can’t afford to invest with them anyway.”

(Though the study took place in Sweden, Simonov and Bodnaruk believe the findings are just as applicable to the United States and other countries.)

Whether you’re an investor or a fiduciary, the notion that these experts aren’t performing any better than the average nonprofessional investor probably isn’t going to help you sleep any better at night. Most of us would like to think the opposite was the case, especially in an environment in which employees seem to be more stressed than ever about their financial well-being.

Employees certainly don’t need yet another thing to be frightened by. Oh BTW, Happy Halloween!

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A Few Industries Retaining DB Plans

retirementA new analysis by Towers Watson finds that although the number of Fortune 500 companies that continue to offer defined-benefit pension plans to new hires has plummeted during the last 15 years (from 299 companies to 118 at the close of 2013), the number that shifted away from DB plans last year is the lowest number in more than 10 years. The analysis also found that nearly half of the Fortune 500 that no longer provide DB benefits to new hires  still have active employees who continue to accrue benefits.

The analysis also found that the insurance and utilities industries are bucking the trend of shifting from DB plans to defined-contribution plans: More than half the companies in these sectors still offer DB and DC plans to new salaried employees. Among insurance companies, 66 percent offer a pension and DC plan to new hires, while 59 percent of utilities do. Utilities tend to have more long-term career workers than other industries, according to Towers Watson, while the insurance industry includes many employees who “may be more inclined to understand and appreciate DB plans than workers in other sectors.”

Among the Fortune 500 that continue to offer pensions to new hires, only 34 offer a traditional pension, while 84 provide a hybrid, or cash-balance, plan. More than half (57 percent) of employers that established a hybrid plan either before or after 1998 still offered a hybrid plan to new hires in 2013, the analysis found.

Cash balance plans have had a rocky history, particularly when large companies such as IBM turned to them to replace their traditional DB plans a decade or so ago. Since then, however, greater regulatory clarity on the use of such plans appears to have made them more acceptable, particularly among small employers.

 

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Promising News for Gen Yers

Millennials are apparently in a lot better shape when it comes to tucking money away for retirement than many of us might have thought. In fact, if we’re to believe the latest data from the Transamerica Center for Retirement Studies, a strong case could be made that this workforce demographic definitely has its act together.

475319371(1)According to TCRS’ 15th Annual Transamerica Retirement Survey, 70 percent of millennials are already saving for retirement either through employer-sponsored plans, such as 401(k)s, or through plans outside the workplace. What’s more, the median age at which these workers begin to save for retirement is 22. Pretty impressive, no?

The study also revealed that millennials who are participating in employer-sponsored 401(k)s and the like are contributing a median of 8 percent of their annual salary into those plans. (At companies offering a match, the salary deferral rate hits 10 percent!)

In actual dollars, the annual retirement savings for millennial households jumped from $9,000 in 2007 to $32,000 in 2014, an increase that obviously is connected to the timing of their entry into the workforce (many on the heels of the Great Recession).

Others have studied this issue before, but I don’t recall seeing anything nearly as upbeat as these TCRS figures. In June, Wells Fargo released the results of its 2014 Wells Fargo Millennials Study. That survey found 55 percent of millennials reporting they were saving for retirement, compared to 45 percent who were not. (Unlike the TCRS study, that study included those currently not in the workforce, perhaps explaining the discrepancy.)

No doubt, more than a few factors are behind TCRS’ extremely encouraging numbers, including the fact that many millennials are fully aware Social Security won’t be there for them (at least in a meaningful way) when they retire. (Indeed, more than eight in 10 respondents said they believe that will be the case). But I have to imagine at the top of the list of the various drivers here is the widespread adoption of automatic enrollment, a relatively newer development.

I spoke to TCRS President Catherine Collinson the other day to get her take on the findings. As you might imagine, she said she was “enormously pleased” with the high savings rate among millennials. “It’s encouraging to see they’re getting such a head start, compared to older generations,” she pointed out.

Looking at the results, Collinson said, there’s little question millennials take retirement benefits very seriously and consider these offerings much more than just a nice-to-have. Indeed, one statistic in TCRS’ study found that three out of four millennials said they consider it a major reason for accepting a job offer. So if employers don’t have competitive offerings today, they would be well served to close that gap soon.

The other thing in the report worth noting is the importance these workers place on information and advice, an area that continues to be something of a weak spot for many organizations. Nearly three-quarters (73 percent) of the respondents in the TCRS study said they would like to receive more education and advice on how to achieve their retirement goals, compared to 65 percent for Gen X workers and 57 percent for baby boomers.

On this front, Collinson pointed out, employers need to take greater advantage of the innovations that are out there in the provider community. “Providers are always innovating,” she said, “but there appears to be a disconnect between those innovations and what plan sponsors are actually doing.”

Certainly, that’s a point plan sponsors might want to consider as they formulate their strategies for 2015.

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Preventing 401(k) “Leakage”

leakWhen employees change jobs, their retirement funds tend to spring a leak. New analysis from the Employee Benefit Research Institute reveals that of the three primary types of “leakages” that occur with 401(k) accumulations among workers age 65 and younger (loans, hardship withdrawals and cash-outs when changing jobs), cash-outs when changing jobs represents two-thirds of this leakage.

EBRI found (using its proprietary Retirement Income Projection Security Model) that the combined impact of these three types of leakages on 401(k) accumulations at age 65 of younger workers with at least 30 years of 401(k) eligibility reduced the likelihood that these workers would be able to achieve an 80-percent income replacement rate at retirement by 8.8 percentage points for those in the lowest-income quartile and by 7 percentage points for those in the highest-income quartile.

Leakage has been a real problem among 401(k) participants: A study released last year by online financial firm HelloWallet found that penalized 401(k) withdrawals increased from $36 billion in 2004 to almost $60 billion in 2010, and that one in four Americans planned to tap their retirement accounts to meet current expenses. We’ve written about the potential risks of hardship withdrawals from 401(k) accounts and what some companies are doing to try and discourage employees from doing this.

Is restricting or eliminating the ability of employees to withdraw money from their retirement accounts the answer? Jack VanDerhei, EBRI’s research director, says doing this could have consequences that end up doing more harm than good. Here’s what he had to say during recent testimony before the ERISA Advisory Council:

This analysis needs to be accompanied by a very strong caveat that there are clear data gaps that will need to be filled,” said EBRI Research Director Jack VanDerhei. “For example, we have found in previous research that participants in plans with a loan option have higher contribution rates than those without such access, and a similar relationship may exist with respect to the availability of hardship withdrawals. Removing or restricting these plan options would likely reduce levels of 401(k) participation or access, and that could result in a significant drop in retirement savings for some employees eligible for participation in a 401(k) plan.”

 

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Lowering the Bar on Retirement?

More U.S. employees are satisfied with their company-sponsored retirement benefits now compared with five years ago, according to new research courtesy of The Towers Watson Global Benefits Attitudes Survey:

The nationwide survey of 5,070 full-time employees found that two-thirds of respondents (67%) say they are satisfied with their employer-sponsored retirement plans, including defined benefit and 401(k) plans. That’s a jump of 13 percentage points since 2009, with much of the increase concentrated among younger employees and those with DB plans.

But while a jump in employee satisfaction is always encouraging to see — especially around a topic as big as retirement — we can’t help but wonder if this increase in satisfaction, “with much of [it] concentrated among younger employees and those with DB plans,” actually reflects a lowered bar of expectations among those younger workers, who may not have the same concept of retirement as older workers may hold, including how old they will be when they actually do retire.

Indeed, according to another recent survey from Towers Watson, nearly four in 10 U.S. workers plan on working longer, an increase of nine percentage points since the company’s 2009 survey.

“A large majority of these employees expect to delay retirement by three or more years, while 44 percent plan to delay it by five years or more.”

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Different Views of Retirement

88366557 -- retirement optionsTwo somewhat divergent reports on retirement vehicles crossed my desk this past week — underscoring the differences in demographics and philosophies that seem to be a part of the overall retirement picture.

One, a release from Towers Watson, shows sharp improvement in the financial health of America’s 100 largest pension plans and even possible pension de-risking ahead should this improved financial picture continue.

This is great news for pension plans, probably the best we’ve seen since the Great Recession. As Dave Suchsland, senior consultant at Towers Watson, says:

The rising stock market, combined with higher interest rates for the first time in five years, pushed funding levels significantly higher. This is good news for employers, as stronger pension fund balance sheets will reduce required cash contributions in the near term while lower pension costs will improve corporate earnings.”

More specifically, the analysis of year-end corporate disclosures found the pension deficits for these largest pension sponsors among U.S. publicly traded organizations fell 57 percent, from $295.5 billion at year-end 2012 to $125.9 billion at year-end 2013, a decrease of $169.6 billion. As the release puts it:

The pension deficit for these companies hasn’t been this small since 2007, when plans had a surplus of $82.3 billion. Meantime, the overall average funded status jumped 13 percentage points, from 78 percent at the end of 2012 to 91 percent at the end of 2013. That is the best funding level since the end of 2007, when the average stood at 103 percent. Additionally, the number of plan sponsors with fully funded plans surged from five at the end of 2012 to 22 at the end of 2013. At the end of 2007, half of these 100 plans were fully funded.”

In the words of Alan Glickstein, senior retirement consultant at Towers Watson, these improved funding levels — combined with recent increases in Pension Benefit Guaranty Corp. premiums and a newly released Society of Actuaries mortality study — “will make de-risking actions very attractive in 2014.”

Then there’s this, a white paper from Buck Consultants showing younger workers — specifically millennials — prefer defined-contribution plans — specifically 401(k) and 403(b) plans — given their predisposition for mobility.

Here are some of the things Buck says employers should consider as they design the kinds of retirement plans that will attract and retain millennials (born early 1980s to early 2000s):

  • Attractive web portal that is easy to use and navigate. Millennials pride themselves on being tech-savvy and are used to state-of-the art retail websites, so websites should have links to frequently asked questions or pop-up windows with additional information.
  • Automatic enrollment with an escalating contribution feature. This is an important feature for millennials who tend to act later rather than sooner, and may not take the time for the thoughtful analysis needed for retirement planning.
  • Make it an outcome-based plan. Millennials will appreciate a DC plan that comes “fully loaded” with pre- and post-retirement features, helping individuals better prepare for retirement.
  • ROTH savings option. Millennials will likely be in a higher tax bracket as they approach retirement age. Showing the benefits of ROTH savings should improve overall satisfaction with the plan.

While pension plans are clearly not on the fast track to extinction we anticipated not that long ago, clearly worth noting in Buck’s piece is the importance of recognizing who you’re serving with what retirement vehicle.

Just my humble — hopefully not-too-convoluted — observation.

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