Posts belonging to Category retirement

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.

Making Retirement Work

Retirement benefits and how to make them work — as in, you know, actually enabling employees to retire — was the subject of a spirited panel discussion at the second day of the Health & Benefits Leadership Conference in Las Vegas.

“Every day for the next 15 years, 10,000 people will reach retirement age,” said moderator Melissa Kahn, principal at benefits-consulting firm MJKAHN Associates. “This is the year that the last of the baby boomers will be turning 50. People are living longer and staying healthy longer and they’ll also be working longer.”

Many of these employees are concerned about retiring without enough funds to see them through old age, she said.

Panelist Greg Long, executive director of the Federal Retirement Thrift Investment Board, which administers the federal government’s 401(k) plan for federal employees (which has assets of $400 billion), talked about a step his agency took: It created an online tool that shows plan participants the monthly amount they would receive from an annuity based on their current plan balances. “You want them to focus on that monthly number, not the number that represents their account balances,” he said. This proved to be an excellent way to get participants focused on saving more and planning more for their retirement, said Long.

Laurie Rowley, co-founder and president of The National Association of Retirement Plan Participants, a nonprofit dedicated to financial education for the nation’s 75 million defined-contribution plan participants, discussed a comprehensive study her organization undertook to understand what drives plan-participant behavior. The biggest single impact on participants’ deferral rates, they found, was the company match. Financial literacy and the confidence participants have that they can actually acquire sufficient resources to retire comfortably were also key drivers, she said.

Trust was also an issue, said Rowley, with only 26 percent of study respondents saying they felt they could trust their DC plan’s recordkeeper.

Financial literacy has a fundamental impact on plan participant behavior, she said, including their deferral rates. Many people don’t understand the terminology related to financial planning and retirement.

“Financial literacy across all demograhpic groups is very low, and that impacts their confidence,” said Rowley. “We need to create personalized education that’s tailored around people’s financial needs. If you can inform them in a proactive way, that will really engage them.”

NARPP has created “just-in-time” educational materials that employers can provide to their workers as they’re making major financial decisions related to retirement planning, she says, adding that this material is available for employers to link to their own websites. Online education can also be valuable because some employees may be reluctant to let on how little they know about retirement and financial planning in front of their peers in a traditional classroom setting, said Rowley.

Catherine Golladay, vice president of participant services at Charles Schwab, said her firm has retrained its call-center staff to take a more “consultative” vs. transactional role with plan participants, using events such as an employee who calls in to make a hardship withdrawal from his 401(k) to discuss things like setting up an emergency savings fund and re-examining his investment strategy to generate higher returns.

“Our call centers have been trained to take a more conversational approach to interactions, with the goal of getting plan participants to think about whether their decisions make sense in the context of their financial lives,” she said.

Rowley said many employers that have set up auto-enrollment programs have cut back on financial education for their employees — and that’s a mistake.

“Our study shows that people who are auto-enrolled tend not to value their plans as much and are less financially literate,” she said. “But many plan sponsors have decided to roll back financial education in light of auto enrollment. That’s not right — many people still aren’t investing enough, and they still need education.”

A Workplace-Centric SOTU

President ObamaFrom the employer’s and HR leader’s perspectives, there were plenty of reasons to tune in to last night’s State of the Union Address—from minimum-wage issues and gender-pay equality to the announcement of a new savings bond designed to help working Americans start their own retirement savings.

For example, President Barack Obama announced an executive order that will require all federal contractors to raise their minimum wage to $10.10 per hour. He urged private employers to take similar action, pointing to organizations such as Costco as examples of large companies that had taken the initiative to raise pay rates to more than $10 an hour on their own.

President Obama also advocated the enactment of legislation that would increase the federal minimum wage to $10.10 per hour. “I am going to call this the 1010 Act,” he said, and urged Congress to pass the bill in 2014. “Let’s give America a raise,” added the president, to rousing applause.

While “the scope of the [aforementioned] executive order is unclear,” we should expect to see movement on the minimum-wage front in the days and months to come, even if it occurs first at the state level, says Connie Bertram, a Washington-based partner in the labor and employment department at Proskauer.

“I do think we’re going to see increases [in minimum wage] at the state level,” says Bertram, who is also head of the firm’s D.C. labor employment practice and co-head of Proskauer’s whistleblowing and retaliation, and government regulatory compliance and relations groups. “I doubt we’ll see across-the-board federal increases in the near future. But very often, when the federal government can’t take action, the states step in.”

Increasing pay rates and job opportunities was a recurring theme on Tuesday night, as President Obama announced a White House initiative geared at aiding the unemployed, and later this week will meet with a group of CEOs and business leaders in an effort to open up more opportunities for the long-term unemployed. And, as HRE Senior Editor Andrew R. McIlvaine writes today, the president also shared plans for improving the nation’s economy by connecting out-of-work individuals with skills-starved employers and strengthening the manufacturing sector.

Obama called on Congress to take action on other fronts as well, reiterating his call for passage of the Paycheck Fairness Act, which would strengthen the Equal Pay Act.

“As President Obama said, it’s time to leave ‘Mad Men’ attitudes and policies behind and adopt programs that allow people to hold jobs and care for their families,” said Debra L. Ness, president of the National Partnership for Women & Families, in a statement.

“We need Congress to advance the Paycheck Fairness Act, to finally reduce the punitive wage gap,” said Ness, adding that “we need a higher minimum wage, unemployment benefits we can count on and a real chance at retirement security.”

Indeed, retirement saving was on President Obama’s radar as well, as he offered details of a new retirement savings account—”myRA”—that he hopes will aid American workers in saving adequately for retirement.

“It’s a new savings bond that encourages folks to build a nest egg,” said President Obama. “MyRA guarantees a decent return with no risk of losing what you put in.”

The accounts, he explained, would be geared toward workers whose employers don’t offer traditional retirement accounts such as 401(k)s, and would essentially function like a Roth IRA, with government backing akin to that of a savings bond. As such, the balance of a myRA account could not go down, he said, with the investments having principal protection.

An initial pilot program will include companies that agree to enroll by the end of 2014, and workers making less than $191,000 annually will be able to invest, added President Obama.

The essential concept behind myRA accounts “has been around for a while,” says Lynn Dudley, senior vice president of retirement and international benefits policy with the Washington-based American Benefits Council, who likens the new myRA bond to R-bonds.

While more details on myRAs have yet to emerge, the accounts may prove to be an attractive option for many employers, especially those with large numbers of part-time or temporary workers, or employees who are in and out of the workforce, says Dudley.

“If a large employer is already offering a retirement plan, [it's] not going to eliminate that plan and send everyone to an [myRA] bond. [It's] going to keep [its] plan,” she says. “This is really targeted to people who aren’t already participating, or aren’t eligible to participate. It’s a select population, but it’s a growing one.

“And [such an account] is relatively easy to open up and offer through an employer,” adds Dudley. “It’s easy for HR to administer, and it’s portable for workers. The one drawback is that it’s an investment with a guaranteed rate of return, so it’s a conservative investment. But it’s a good idea.”

Saving For the ‘Future You’

Future YouA new report from Mercer and Stanford University’s Center on Longevity finds that when it comes to encouraging folks to save more for retirement, one picture can be worth far more than 1,000 words in a retirement brochure—”picture” referring specifically to age-enhanced photos of the participants. The report’s authors note that getting retirement-plan participants to making an “emotional connection” with their future selves can be an effective way to improve savings behavior. They found that people who saw an age-enhanced photo of themselves were willing to put an average of 6.8 percent of their pay into their 401(k) plans. Participants in a control group who were not shown such photos were willing to contribute an average of only 5.2 percent of their pay.

The importance of participating in a defined-contribution plan is underlined by a new study from the Employee Benefits Research Institute, which finds that the current levels of Social Security, coupled with at least 30 years of participating in a 401(k) plan, could provide most workers with at least 60 percent of their pre-retirement pay on an inflation-adjusted basis. Between 83 to 86 percent of workers should be able to replace 60 percent of their age-64 pre-retirement wages and salary with these sources, EBRI found, while 73 to 76 percent of workers should be able to replace 70 percent of their pre-retirement income. (Most retirement experts say a person needs to be able to replace between 70 percent and 80 percent of their final salary for an adequate retirement.)

These findings underscore the importance of Social Security income during retirement—especially for lower-income workers, says EBRI research director Jack VanDerhei:

“If, for example, we assume that a proportional 24-percent reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest-income quartile under voluntary enrollment 401(k) plans with an 80 percent replacement threshold drops 17 percentage points, from 67 percent to 50 percent, while the highest-income quartile —which receives less proportionate benefits from Social Security—drops by only 9 percentage points, from 59 percent to 50 percent.”

Giving Ikea Workers Another Reason to Stay

As you probably already know, Swedish home-furnishing retailer Ikea came under fire earlier this week for allegations that its French unit had “spied on” employees who were suspected of wrongdoing. The firm is also accused of spying on disgruntled customers in France.

I’m sure it’s just a coincidence, but there’s no denying that the furniture maker’s timing in announcing a new initiative called “Tack!” should help the retailer finish the week on a more positive note.

180px-Ikea_SouthamptonIn what’s an increasingly rare move these days, Ikea announced plans to provide an annual contribution to the individual retirements accounts of those workers who have been with the firm for five years or more. Ikea is starting with an initial global fund of $137 million, with the first distribution slated for next autumn. Payments are contingent upon certain “pre-agreed public targets” being made.

In January, Ikea will also be increasing its 401(k) match to 100 percent on the first 4 percent and 50 percent on the next 2 percent.

In announcing the lump-sum contribution, here’s what CEO and President Peter Agnefjäll said:

Tack! is the Swedish word for “thank you” and we want to show appreciation and gratitude for our co-workers’ loyalty and contribution. The program is inspired by [Ikea's Founder] Ingvar Kamprad’s wish to share success with all IKEA co-workers. All of them, no matter what position they hold, contribute and are important for our continued growth.”

Under the program, full-time employees will receive the same amount, regardless of their department, position or salary. Part-time workers will receive a proportional amount dependent on their hours. In the United States, more than 44 percent of Ikea’s employees (roughly 5,700 of them) have more than five years of experience. (Globally, Ikea has 136,000 employees in 26 countries.)

Commenting on the Ikea announcement, Dave Boucher, a partner with Longfellow Advisors in Boston, told me that Ikea’s move is fairly rare these days. “Ten years ago, profit-sharing plans like these weren’t out of the norm, but there’s a reluctance today to bring back employer contributions. So, from at least that standpoint, Ikea is raising the bar.”

But for many workers at Ikea and elsewhere, Boucher added, it could be a case of too little, too late. “Some large employer had to put their foot in the puddle first,” he said, “because we’re heading down a path where pension plans have dissolved, Social Security is under attack and if all I can afford is 3 percent or 4 percent in my 401(k) with an employer match, there’s not going to be enough money to retire on.”

In an era when companies are passing on more and more of the retirement burden to employees, it’s refreshing to see a large employer like Ikea recognize the retirement challenges that lie ahead for its employees and take a meaningful step in a different direction.  Time will tell, but I have to think the move could ultimately pay a nice dividend for the organization as far as talent retention is concerned.

What’s Missing from the Retirement Debate

CapitolThe paternalistic employers of days past are long gone — and will probably never return. That seemed to be the general consensus at the Employee Benefits Research Institute‘s biannual policy conference, held yesterday at the Shriners Auditorium Ballroom on a blustery cold day in Washington.

The big question, of course, is what will replace them — and do they even need to be replaced? EBRI, which is celebrating its 35th anniversary, convened an eclectic group of experts to debate what the future holds for employee benefits in the wake of the Affordable Care Act, the prevalence of defined-contribution retirement plans and the apparent unwillingness — or inability — of baby boomers to retire from the workforce. (The latest research from EBRI suggests DC plan participants are likely to, in some cases, end up better off than traditional defined-benefit plan participants.)

“When the [Employee Retirement Income Security Act] was passed in 1974, the question was whether it would be good or bad for employee benefits,” said Howard Fluhr, chairman of New York-based Segal Group, during a panel on the changing role of employers in employee benefits that was moderated by Business Insurance editor-at-large Jerry Geisel. “Well, for a while it was good, then it became bad, and then it became stifling. Now we’ve shifted to self-reliance as the end-all, be-all because of pressure from public policies. What it really means is, we’ve essentially shifted responsibility for managing volatility onto the backs of employees.”

Federal legislation and tax policy has been beset by the law of unintended consequences, said Fluhr, with the result that laws and regulations which were originally intended to strengthen employee benefits have, over the years, become so complex that employers were practically forced to dispense with the more-paternalistic benefits of years past. This has been accompanied by an embrace of “short-term thinking” among businesses and lawmakers, he said.

“We as a society have lost some control because we’ve lost sight of public policy, and employers have no control over that,” said Fluhr.

Larry Zimpleman, chairman and CEO of Des Moines, Iowa-based Principal Financial Group, urged attendees to not view the past with rose-tinted glasses.

“The good old days were not necessarily as good as we remember them,” he said. “We’ve moved the employee-benefits platform to be more voluntary. Why? Because employees like choice, employers like having control over costs, and defined-contribution plans and voluntary benefits lets them have that.”

He concurred with Fluhr, however, on the short-sightedness that is prevalent in policymaking these days.

“There haven’t been strong voices on both sides of the aisle in Congress on employee benefits for a long time,” said Zimpleman. “Remember when Sen. Ben Cardin, a Democrat, and Sen. Bob Portman, a Republican, worked together on the Pension Protection Act of 2006? Intitiatives like that have been drowned out by ideology-driven debates. And now there’s this mind-set that retirement benefits cost the U.S. government money — that’s destructive thinking.”

Indeed, for every $1 the government forgoes for tax-advantaged retirement plans, he said, it reaps $4 in tax revenue later on as retirees are able to continue spending. “The government more than gets its revenue back; it just has to wait a little longer for it,” said Zimpleman.

“The idea that, one way or another, we have to take care of one another has been lost in Congress,” said Fluhr.

When asked which is better — traditional defined-benefit plans or DC plans — Zimpleman took issue with the question. “The ideal is, both,” he said. “Hybrid plans … are a healthy approach.”

There’s more to come from this EBRI conference, so tune in this Monday …


Retirement?! Ha!

laughing retirementNot to be snarky, but surely that must be the reaction many people have when questioned about their retirement goals. I say “surely” because yet another study has come out documenting the sorry state of many Americans’ financial preparedness for retirement.

In fact, this latest report — from Washington-based HelloWallet, a research and advisory firm focused on personal finance — finds that a majority of Americans  enrolled in defined-contribution plans are actually accumulating debt faster than they are setting money aside for retirement. The report finds that the amount of money that working Americans nearing retirement are using to pay down their debts has increased by 69 percent during the past 20 years and that households headed by those ages 55 to 64 now spend 22 cents out of every dollar paying off loans –the same percentage as younger people, according to the report.

People are indeed approaching retirement much more in debt than in the past, economics professor Olivia Mitchell tells the Washington Post. The main reasons appear to be greater spending on housing, larger and more auto loans and more credit card debt, says Mitchell, who heads the Pension Research Council at the University of Pennsylvania’s Wharton School.

I’m certain that increased spending on the latest TVs, tablets, cars and other gadgets is playing some role in this — after all, people want what they want, even if middle-class incomes have been stagnant for more than a decade. But if we also take into account the near-continuous rise in the cost of housing, college and medical care, not to mention those returning-to-the-nest twentysomethings who can’t find jobs, we might be a little less judgmental.

Further Evidence Older Workers Are Staying

We continually see studies that reveal how older workers are delaying their retirements. Indeed, as recently as this past Monday, we posted a piece on this blog that made that very point.

Some 82 percent of working Americans over 50 say it is somewhat likely they will work for pay in retirement, according to a piece about the Associated Press-NORC Center for Public Affairs Research poll reported on in that post.

Well, if you’re looking for more proof of this, here’s the latest from Gallup (just released yesterday):

S169277210ince 2010, Gallup reports, there’s been a three-point increase in the percentage of Americans ages 65 and older who are still in the workforce—employed full-time through an employer, self-employed, working part-time or unemployed but actively searching for work. (The results are based on more than 350,000 interviews per year with U.S. adults ages 18 and older.)

On the other end of the spectrum, there has been a two-point decrease in the percentage of Americans ages 18 to 29 who are in the workforce.

Not that we didn’t see this coming, but the recession has clearly taken its toll on older Americans, who have postponed their retirements—or who, having retired, are now being forced to re-enter it.

Gallup’s employment data show that 12 percent of those 65 and older are now employed full-time for an employer or are self-employed full-time, compared to 9 percent in 2010, suggesting that many older Americans are keeping their full-time jobs.

Of course, many predict this trend will eventually switch direction, as workers begin to replenish their retirement accounts. (Let’s hope they’re right.) But for the time being, the latest data indicate we aren’t there yet.

Fidelity Employees Sue Fidelity Over Fidelity 401(k)s

They say all publicity is good publicity, but the PR spin doctors at Fidelity Investments may have a different take on that old saying after a group of current and former employees claim in a lawsuit that their company’s  sponsored plan is dominated by expensive Fidelity mutual funds when lower-fee options are available within Fidelity’s own offerings and from other providers, as CNN Money recently reported:

The legal battle heated up earlier this month when 26 current and former employees signed on to join the proposed class action, which was filed by a former employee in March. Their request to join the suit is pending.

According to the suit, all of the more than 150 investment options available in the Fidelity plan were offered by Fidelity or a company subsidiary, the story states. And, at the end of 2010, the suit claims nearly 85 percent of the plan’s assets were held in actively managed Fidelity mutual funds, which tend to have higher fees than passively managed index funds.

On the Fidelity side, the story quotes a spokesman:

“We believe the lawsuit is totally without merit, and we intend to defend vigorously against it,” said spokesman Vincent Loporchio. “Fidelity has a very generous benefits package that provides significant contributions to our employee’s retirement planning.”

The CNN Money story also notes this isn’t the first time a retirement-plan provider has been sued by its own workers:

The Fidelity complaint comes on the heels of a wave of 401(k)-related lawsuits against financial firms and other companies that allege mismanagement and inappropriately high fees.

Under the federal Employee Retirement Income Security Act, companies with 401(k) retirement plans have a “fiduciary responsibility” to act in the best interest of their employees.

In 2011, for example, Wells Fargo (WFC, Fortune 500) agreed to pay $17.5 million to settle a class action lawsuit that alleged it had engaged in self-dealing when choosing investments for its 401(k) plan. In the same year, Wal-Mart (WMT, Fortune 500) and Merrill Lynch settled a multimillion dollar lawsuit that alleged the Wal-Mart 401(k) plan had subjected its workers to excessively high fees.

While the online response to the story has been mixed, with both sides of the argument staked out, a commenter named Maurice at may have perhaps summed it up best:

I think the thrust of the Fidelity lawsuit is that the choice offerings’ fees are too high cost, not that they are pedestrian funds. This lawsuit will be more damaging publicity-wise, rather than out of Fidelity’s pocket. The plaintiffs best chance is getting additional choices for plan in a settlement. If it goes to trial or arbitration, I am guessing that the plaintiffs will lose.

A Clearer Picture of Retirement

retirementThe Institutional Retirement Income Council has some ideas for helping defined contribution health plan participants to understand what their income and savings will look like when they retire.

The non-profit think tank recently shared those ideas in a comment letter to the Department of Labor, recommending that lifetime income illustrations and projections be mandated as part of pension benefits statements that plan sponsors distribute to their DC plan participants.

“Given the risks DC plan participants face, including a lack of understanding of how much they need for retirement, how long their funds will need to last and how to spend the funds when they do retire, it is imperative that participants receive this information,” said IRIC President William R. Charyk, in a statement. “To make the disclosures voluntary would be seriously detrimental to them.”

Penned in response to the DOL’s advance notice of proposed rulemaking focused on lifetime income illustrations given to participants in defined contribution plans, including 401(k) plans, the letter includes other recommendations from IRIC, such as:

• Mandating a set of assumptions for DC plans to use when making disclosures;

• directing participants in a clear, easy-to-understand way to the DOL’s interactive online calculator, which they can use to explore how changes in behavior or economic conditions may affect their retirement income;

• including the illustrations, disclosures and other information within the quarterly benefit statements provided to participants rather than as a separate notice; and

• using the Social Security retirement age for the individual in all projections.

Overall, IRIC “agrees with the concepts set out in [the DOL’s] proposal,” according to Charyk. “Our members believe in and promote the concept that defined contribution plans, including 401(k) plans, need to become distribution vehicles and not merely savings vehicles. As a result, we strongly embrace the concept of providing plan participants with meaningful illustrations of the income that retirement savings will generate once they terminate employment.”