Two 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.