"Retirement Ready" Resolutions

As the New Year begins, we are often of a mind to think about making a fresh start. If you are an individual, you may (finally) be ready to be serious about saving for retirement - or you may have mailed in that last tuition check - or crossed that age 50 threshold where you can start "catching up" on retirement savings. If you're an employer, you may well have established new goals for your retirement plans this year—a new threshold for participation, perhaps—or maybe you’ve just rolled out a new fund menu for your participants.

But whether your plans - or your programs - have undergone change or not, this is a good time of year to help participants reexamine their savings goals—and perhaps even some of their “bad” retirement savings habits.

Here’s a short list of “resolutions” that can help you get started.

___ Resolve to participate in your workplace retirement savings plan.

If you are not already saving for your retirement in your workplace program, you are missing out on one of the most important—and easiest—ways of making sure that you are on track for a financially secure retirement. Unless, of course, you have a rich (old) uncle.

___ Resolve not to miss out on the company match.

Odds are your employer matches your contributions to your retirement savings account up to a certain level, say 5% of 6% of your pay. Whatever that level is, if you do not contribute up to that point, you are letting “free” money slip through your fingers.

___ Resolve to increase your savings rate in your workplace retirement savings plan by at least 1%.

If you are already saving, are you saving enough? Have you ever made an attempt—with some kind of planning tool or the assistance of a financial adviser—to figure out how much you will need? Even if you have, it is remarkably easy to increase your current rate of savings by as little 1%--and you might be surprised just how much difference that will make!

___ Resolve to consider rebalancing investments at least once this year.

Your retirement savings account is being rebalanced all the time—by the investment markets. You can start out the year with half of your account balance in stocks and the rest in bonds, and a month later find that 70% is now in stocks and just 30% in bonds, or the reverse. How much and how fast depends on how your balance is allocated, and what is happening in the market. The bottom line: Once you have taken the time to put together a thoughtful allocation, you need to keep an eye on things. Once a month is good, once a quarter is probably enough, and once a year—well, that’s a minimum. Try picking a day that you won’t forget—your birthday, an anniversary…. Or any three-day weekend.

___ Resolve to use target-date investments properly.

Target-date funds are a pre-mixed investment solution—and most are designed in such a way that they assume that you are investing all of your retirement savings in that one investment. If you mix and match that with other funds on your retirement savings menu—or split your savings between two (or more) target-date funds—you will probably wind up with a mess. Just pick one. It’s the basket you SHOULD put all your eggs into.

What would YOU add to this list?

- Nevin E. Adams, JD

"Naughty" or Nice?

A few years back — well, now it’s quite a few years back — when my kids still believed in the reality of Santa Claus, we discovered an ingenious website that purported to offer a real-time assessment of their "naughty or nice" status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole.

But nothing we said ever had the impact of that website — if not on their behaviors (they were kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been particularly naughty that year) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he so surely deserved.

One could argue that many participants act as though at retirement some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snowsuit. Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, though a significant number will, when asked to assess their retirement confidence, express varying degrees of doubt and concern about the consequences of their "naughty" behaviors. Like my son in that week before Christmas, they tend to worry about it too late to influence the outcome.

Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids' behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because we believed that kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize — or should — that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice — taking note, and making changes to what is “naughty and nice” about our savings behaviors.

Yes, Virginia, there is a Santa Claus — but he looks a lot like you, assisted by "helpers" like your workplace retirement plan, the employer match, and your retirement plan advisor.

Happy Holidays!

- Nevin E. Adams, JD

P.S.: The Naughty or Nice website is still online, here.

"Choice" Architecture - for Plan Sponsors

In recent years, the notion that the ways in which choices are presented to individuals — known as “choice architecture” — can influence their decisions, has been widely embraced.

Well before the advent of the Pension Protection Act of 2006, the retirement plan industry had acknowledged the positive influences of those behavioral finance techniques on overcoming, or at least countering, certain human behaviors.

Based on the evidence of several decades of adoption, we know that automatic enrollment — even with the ability to opt out — transforms voluntary participation rates of roughly 70% to near-unanimous participation. And yet, even with the structure and sanction of the PPA, today fewer than half of the roughly 7,000 plan sponsor respondents to the 2013 PLANSPONSOR DC Survey have implemented that design (large plans being significantly more likely to do so than smaller programs).

Even plan sponsors that have adopted automatic enrollment tend to do so with a default deferral rate that is almost assuredly too low to assure success for anyone (typically 3%, the rate specified in the PPA safe harbor) — which might not be so bad, but for the lagging implementation of contribution rate acceleration. The PLANSPONSOR survey found that only about a quarter (26.9%) did so. Even among the largest plans (more than $1 billion in assets), only about half (54.2%) “auto accelerate.”

And then there’s the inclination to automatically enroll only new hires. Industry surveys suggest that only about a third of auto-enrolling plans extend that to current workers.

Setting aside for a minute the reality that not every workforce is suited for the administrative rigor of automatic enrollment — and that many smaller employers have in place safe harbor plans that serve to automatically “enroll” workers via that safe harbor contribution — there are real, tangible, and often unacknowledged employer costs to undertaking automatic enrollment.  

Specifically, the transformative participation effects cited earlier frequently carry significant additional costs in terms of the employer match. The math of switching to a so-called “stretch match” — which seeks to ameliorate the cost issue by altering the rate of match (say by matching 25 cents on the dollar up to 12% of pay, rather than 50 cents on the dollar up to 6%) — may work, but workforces that have been accustomed to the latter formula will almost certainly see the former as a reduction in benefits.

Similarly, while PLANSPONSOR’s 2013 DC Survey found that three-quarters of the roughly 7,000 plan sponsor respondents said that it was either very important (41.1%) or important (36.8%) that their plan provide retirement income solutions to participants. Yet most do not offer any income-oriented products/services in their plan. That’s a disconnect, to be sure. But in view of expanding fiduciary concerns in selecting and monitoring those offerings, is it irrational?

Over the years, a lot of thought has gone into plan design features — choice architecture — that can help participants make better decisions (or, in some cases to make better decisions on their behalf). But policymakers and regulators, and the academics who sometimes advise them, tend to forget that the employer’s decision to keep, and to offer these programs in the first place, is also a choice.

A choice that the rules, regulations and limits bounding these programs don’t always encourage.

- Nevin E. Adams, JD

A Second Opinion on "Self-Medicating" Your 401(k)

At a recent event, one of the speakers was taking our industry to task for expecting too much from participants. “We don’t expect individuals to diagnose and treat their own illness,” he said, going on to note that with 401(k)s we expect people who don’t have any knowledge or training in investments to decide how to invest those balances.

Admittedly, those 401(k) investment decisions can be complicated for some — and, since it (mostly) is their money, after all, most do give individual participants the ability to decide how it will be invested. As nice as it would be if individuals were exposed to the basics of finance — saving, budgeting, investments — sometime in their lives ahead of that workplace plan enrollment meeting, or the pages of that 401(k) enrollment kit, that’s not the current system’s fault.

In reality, individuals are routinely asked to make decisions on things in which they have no real knowledge or training. On numerous occasions, I’ve had plumbers and mechanics ask me to make decisions to either replace or repair enormously expensive systems with no ready information other than the explanation of the alternatives from the professional who is asking me to make that decision. A professional who, in some cases, has a relationship dating back only to the point in time at which his or her name was gleaned from the Internet (or Yellow Pages). Fortunately, most of those decisions aren’t matters of life and death, even if there is all-too-frequently a certain urgency to them.


However, the event speaker’s assertions notwithstanding, while we may not expect individuals to accurately diagnose their illnesses, we do ask them to make decisions on complicated matters in which they lack expertise. For example, several years back, a friend of mine received a troubling diagnosis from his regular physician. Now the area of concern was beyond the particular expertise of that doctor, so he suggested that my friend seek the opinion of a specialist. He did, only to find that the specialist’s opinion directly contradicted that of the doctor he knew and trusted.

Now my friend had to make a decision — and one in which he had a vital interest — even though he lacked the personal expertise to fully evaluate and appreciate the options.

Keeping up with a 401(k) isn’t like when the plumbing starts to leak, or the “check engine” light comes on — clear signals that there is a problem that requires prompt attention. For the most part, retirement investment and planning issues are less obvious, though even that hardly makes them unique. My friend’s serious medical situation was diagnosed only because he had gone in for a checkup because he was of an age where you schedule them whether you think you need one or not.

Similarly, you don’t need to be a financial expert to manage your retirement savings — you just need to have the common sense and discipline to schedule regular financial checkups with someone who does.

- Nevin E. Adams, JD

First Things First

This may be the time of year when thoughts turn to stockings hung by the chimney with care, but it’s also the time of year when parents have to deal with assembling some of the things in those packages. And while Santa may have elves on staff to undertake the construction of a tricycle, dollhouse or Little Tykes airplane seesaw, in our house, that "elf" was named “Dad.”

A painful lesson learned over those years was the importance of following the instructions. No matter how self-evident the process appeared at the outset, or how much I thought I remembered assembling something similar in the not-too-distant past, lurching ahead and tackling things in the order I thought made most sense was inevitably a formula for disaster. And then there was the year some miscreant had apparently “liberated” the assembly instructions from the package. Since it was Christmas Eve by the time I discovered this, all I had to go by was common sense and the picture of the finished product on the package.

Debates about the best way to achieve retirement security often seem to resemble an assembly without a set of directions — frequently without even the benefit of an agreed-upon “picture” of what the finished product is supposed to look like.

A recent hearing held by the Bipartisan Policy Commission focused on three key threats to retirement security: longevity (the risk of outliving your resources), leakage (the distribution of retirement funds prior to retirement) and the costs associated with long-term care (LTC).

Jack VanDerhei, research director for the nonpartisan Employee Benefit Research Institute (EBRI), demonstrated the impact that each of these three events can have on retirement security. With regard to leakage, he explained that more than one in five of the middle 50% who are simulated to run short of money in retirement with leakages present would have sufficient funds if leakages were completely prevented. Unlike many who tout this as a solution, however, he took pains to acknowledge that that assumed no response from participants (such as individuals deciding to contribute less (or not at all) if they knew that they wouldn’t have access to those funds prior to retirement.

Of course, once you have attained retirement, longevity risk — the risk of outliving your resources — becomes a factor. VanDerhei noted that while nearly two-thirds (62%) of the middle 50% are simulated to have sufficient retirement income, those in the longest relative longevity quartile — who would live the longest — only had a 33% chance.

One potential solution —a qualifying longevity annuity contract, or QLAC — didn’t help much. Modeling the impact of a 25% QLAC on retirement readiness, and even among those projected to live longest, VanDerhei found increases in retirement readiness of only 6.6% for early Boomers and 9.6% for Gen-Xers. Overall — that is, with no filter for longevity — this option actually reduced retirement readiness, due to the expense of these arrangements.

As for LTC expenses, while this won’t be an issue for everyone, it can have an enormous impact on the retirement security of those who are affected. VanDerhei explained that only 17% of the middle 50% of those in the top LTC quartile (those most likely to incur those expenses) will have sufficient retirement income.

Ultimately, while each of the three highlighted elements (leakage, longevity and LTC) had an impact on retirement readiness, EBRI’s numbers indicate that a bigger threat is simply not being eligible for a workplace retirement plan. How big a difference? Well, looking at the second and third income quartiles (the “middle 50%”) of Gen-Xers, the probability of not running short of money in retirement soars from 51% to 80% when you compare those with no future years of eligibility in a DC plan to those with 20 or more years.

Put another way, regardless of which solutions are put forth to deal with issues like leakage, longevity and long-term care, they’ll be of little value to those who lack access to a workplace retirement plan.

It’s not just a matter of priority — it’s all about putting the “first thing” first.

- Nevin E. Adams, JD

Thanks Giving - A Retirement Plan Professional's List

Thanksgiving has been called a “uniquely American” holiday, and one on which it seems fitting to reflect on all for which we should be thankful.

Here’s my 2014 list:

I’m thankful that retirement plan coverage and participation is up, if slightly, and that there seems to be a expanding national dialogue about how to expand that.

I’m thankful that a growing number of policy makers are willing to admit that the “deferred” nature of 401(k) tax preferences are, in fact, different from the permanent forbearance of other tax preferences — even if the governmental accountants and academics remain oblivious.

I’m thankful that so many employers offer access to a retirement plan in the workplace — and that so many workers, given an opportunity to participate, do.

I’m thankful that most workers defaulted into retirement savings programs tend to remain there — and that there are mechanisms in place to help them save and invest better than they might otherwise.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry — and that so many in our industry, particularly those among our membership, take the time and energy to provide that input.

I’m thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, and competing interests, such as rising health care costs.

I’m thankful for objective research that validates the positive impact that committed planning and preparation for retirement makes.

I’m thankful for the perspectives that remind us that the “golden age” of pensions wasn’t. And that allow us to appreciate the strengths of the current system, even as we work to improve it.

I’m thankful that the prospects of fee disclosure seem to have made the realities less of a shock than might otherwise have been the case for some.

I’m thankful that fewer seem to think that their 401(k) is free – though more than a bit concerned that some (including, according to surveys, some plan sponsors) still do.

I’m thankful that plan design enhancements such as automatic enrollment, contribution acceleration, and qualified default investment alternatives continue to be adopted — and hopeful that more plan sponsors will see fit to extend those advantages to their existing workers as well as their new hires.

I’m thankful for qualified default investment alternatives (QDIA) that make it easy for participants to create well-diversified and regularly rebalanced investment portfolios — and for the thoughtful review of those options by prudent plan fiduciaries.

I’m thankful that the “plot” to kill the 401(k) … (still) hasn’t …

I’m thankful, in this anniversary year, for the foresight of those who brought ERISA into being — and for all who have, in the subsequent 40 years, worked to make it better through legislation, regulation and interpretation.

I’m thankful for the team here at NAPA, and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference on a daily basis.

I'm thankful for the warmth with which readers and members, both old and new, have embraced me, and the work we do here. I'm thankful for all of you who have supported — and I hope benefited from — our various conferences, education programs and communications throughout the year. I’m thankful for the constant — and enthusiastic — support of our advertisers.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts — and for the ongoing support and appreciation of readers like you.

 

Here’s wishing you and yours a happy Thanksgiving!

 

- Nevin E. Adams, JD 

The Cost of Living

At a recent conference, our luncheon table got to talking about savings trends and the unique challenges of Millennials, specifically the impact of graduating with so much college debt.

While several at the table had graduated with (and since paid off) college debt, the sums paled in comparison to the kinds of figures bandied about in recent headlines — or did, until I loaded up an online calculator that allowed us to see what our college debt at graduation amounted to in today’s dollars. To the collective astonishment of the retirement experts at that table, the totals, adjusted for inflation, were very much in line with the figures reported for today’s graduates.

Factoring in those kinds of cost-of-living adjustments is, of course, a crucial aspect of retirement planning. Unlike Social Security, there is no annual cost-of-living “adjustment” for retirement savings—no systematic means by which those accumulated savings are increased to offset the increased costs of things like heating fuel, food and medicine. After all, managing to replace a targeted amount of preretirement income is of little consequence if, 10 years into retirement, that amount isn’t sufficient to provide for life’s necessities.

The bottom line is this: We’re well advised as savers to take into account the inevitable cost-of-living increases that occur over time, even in a period of low inflation. To their credit, most retirement savings calculators retain an inflation assumption that can help those future projections reflect potential realities (though you often have to provide that rate).

However, those adjustments are also often incorporated in a projected annual increase in pay (and deferral) that, for a significant number of American workers, may be little more than a quaint anachronism. Unfortunately, the cost of living moves on without our proactive involvement — unlike our rate of savings (in the absence of design changes such as contribution acceleration).  

Every generation has its own challenges, of course. And even if this newest generation of workers lacks the promise of a defined benefit pension (as noted previously, the realities of those promises were often something else altogether), a growing number will find themselves enrolled automatically upon hire and invested in a diversified asset allocation portfolio. Some will also find that their initial deferral is raised automatically each year.

Certainly the level of college debt is daunting for many, and may well dissuade some from saving for retirement, at least until some of that obligation is “retired” — as it did many of their parents.  Doubtless this newest generation of workplace savers feels that they are dealing with a set of extraordinary financial constraints, though those constraints may not be as unique as they may think once one takes the cost of living into account.

Not to mention the costs of living — in retirement.

- Nevin E. Adams, JD

"Missed" Deeds and 401(k) Fees

The Nov. 7 issue of The New York Times included a story about “Finding, and Battling, Hidden Costs of 401(k) Plans.” The story focused primarily on the plight of Ronald Tussey, the named plaintiff in Tussey v. ABB, Inc., one of the so-called “excess fee” revenue sharing cases.

Tussey, now 70, claims that he was told that his retirement plan was “free,” even though, according to the Times article, “middlemen¹ were deducting expenses from his savings.” The story also notes that Tussey “never thought that his retirement plan might be flawed,” and that “he trusted his company so much he kept his money in his 401(k) long after he left.”

Over the years, I have been astounded at the allegations of fiduciary misconduct in these revenue-sharing cases. Each has its own flavor, of course, but for the most part they have struck me not so much as the outcomes of bad acts, per se, but rather steps that should have been taken in keeping with their fiduciary duty to ensure that the fees and services provided are reasonable and in the best interests of participants and their beneficiaries.

In Tussey’s case, ABB (his former employer) is alleged to have been told by a consultant that they were paying too much for record keeping fees, and then did nothing about it — for instance, though their decision to close a balanced fund and force participants into age-appropriate target-date funds. The use of float was also challenged. Both of those charges were dismissed by the 8th U.S. Circuit Court of Appeals; just this week the U.S. Supreme Court declined to hear the case.

But the point of the Times article was all about fees,² outlining places and ways that readers can find out about the “…raft of obscure fees and services that few employees will be able to discern,” while also cautioning that none of those resources can help them figure out how much is too much. (That did not, however, keep the author of the article from redefining ERISA’s prudent man standard of care to mean “…finding a reasonable selection of low-cost funds and services.”)

A couple of weeks back, my wife and I met with our financial advisor to transfer and consolidate some small IRAs. Having attended to the basics, the conversation turned to investments, and then to a couple of fund recommendations. The advisor carefully outlined the expense ratios associated with the fund (which seemed reasonable to me), and then turned to the charges associated with investing in that fund. He didn’t call them a load, of course,  but that’s what it was, and a hefty one at that. And, Ronald Tussey’s status notwithstanding, I was reminded again just how lucky most 401(k) participants are.

Even if, as the article frets, participants aren’t able to find or understand thier 401(k) fees and don’t know what is reasonable — even if they assume such things are free — their retirement savings are under the care and oversight of a plan fiduciary. That fiduciary is personally responsible for ensuring that the fees and services are reasonable, is expected to engage the services of experts, if necessary, to make that determination, and is accountable not only for the things that are done wrong — the misdeeds — but for the “missed” deeds as well.

Nevin E. Adams, JD

1. “Middlemen” in this case seem to have been Fidelity Management Trust Company, the plan’s trustee and record keeper, as well as Fidelity Management and Research Company, the investment advisor to the Fidelity mutual funds on the plan.

2. Lending numerical support to their claims, the Times article cites a 2012 report on 401(k) fees by the left-leaning Demos advocacy group claiming that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees, according to its model. That model, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund. The report was authored by Robert Hiltonsmith, who some may recall being featured in the 2013 PBS Frontline special, “The Retirement Gamble.”  

Access "Able"

Though I’ve now spent more than three decades working with employment-based benefit plans, I’ve also worked for some very different employers, ranging from organizations that employed tens of thousands of workers to those that were a fraction of that size. Those organizations were all very different, of course, but they all had at least one thing in common: All offered a workplace retirement savings program.

That’s apparently not as common as one might think, certainly among smaller employers. In fact, a new study from the Employee Benefit Research Institute (EBRI) notes that the probability of a worker participating in an employment-based retirement plan increased significantly along with the size of his or her employer.

How significantly? Well, the EBRI report notes that for wage and salary workers ages 21‒64 who worked for employers with fewer than 10 employees, just 13.2% participated in a plan, compared with 57.0% of those working for employers with 1,000 or more employees. Filtering for those workers who are full-time, full-year, at employers with 1,000 or more workers, two-thirds (66.5%) participate, compared with just 16.9% at employers with fewer than 10 workers.

One is inclined to look for other explanations than employer size alone. Perhaps smaller employers pay less, or hire younger workers (who might also be paid less) — and those factors might play some role. However, the EBRI analysis found that, even controlling for age, workers at smaller employers still had persistently lower levels of participation across the age groups.

Moreover, across various earnings levels, workers at small employers (less than 100 employees) were less likely to participate in an employment-based retirement plan. Indeed, even among workers making $75,000 or more, a considerable disparity was found — just 27% of those in that income category working for the smallest employers participated in a plan, compared with 81% of those working for employers with 1,000 or more employees.

But when you adjust for access to a plan — the percentage participating divided by the percentage working for employers that sponsor a plan — you find that those differences largely disappear. For example, while just 16.9% of those full-time, full-year employees who work at workers participate in a plan. That’s about 86% of the 19.5% of workers in that category whose employer sponsors a plan — which is nearly identical to the participation of private-sector employers with 1,000 or more employees.

A few years back the Maryland Lottery had a simple slogan: “You gotta play to win.” That’s a motto that those saving for retirement should take to heart.

However, when it comes to retirement plan participation, it looks like a lot of those who work for small employers aren’t yet getting a chance to “play.”

- Nevin E. Adams, JD

Room to Grow

Several months back we acquired an aquarium, and I looked forward to filling it up with all kinds and sizes of exotic fish – only to be disappointed to find out that, despite the massive displays of what appeared to be whole schools of fish in similar sized tanks at the pet store, our tank would only support a handful of the fish I had hoped to display. The reason; they need room to thrive and grow. The more fish you want to have (and live), the bigger the tank.

The IRS has now announced the new contribution and benefit limits for 2015. Most were increased, notably the annual contribution limits for 401(k), 403(b), and 457 plans (from $17,500, where it has been for the past two years, to $18,000) and the catch-up contributions for those over age 50 (from $5,500, where it has remained since 2009, to $6,000).

But since industry surveys suggest that “only” about 9%-12% currently contribute to those levels, does it matter?

It’s worth remembering, of course, that these adjustments only reflect increases in the cost of living; you’d need more than $6,000 to buy what that $5,500 catch-up contribution would have gotten you in 2009. Moreover, they are timed in such a way that those increases must accumulate to a certain level before the adjustment kicks in.

But why don’t more people max out on those contributions? Well, cynics might say it’s because only the wealthy can afford to set aside that much. But at Vanguard only 36% of workers making more than $100,000 a year maxed out their contributions. If these limits and incentives work only to the advantage of the rich, why aren’t more maxing out?

Limit 'Ed'

Those who look only at the outside of the current tax incentives generally gloss over the reality that there are a whole series of benefit/contribution limits and nondiscrimination test requirements. These rules are, by their very design, intended to maintain a balance between the benefits that these programs provide between more highly compensated individuals and the rest of the plan participants (those rules also help to ensure a broad-based eligibility for these programs). Surely those limits are working to cap the contributions of individuals who would surely like to put more aside, if the combination of laws and limits allowed.

In that vein, one of the comments you hear frequently from those who want to do away with the current retirement system is that the tax incentives for 401(k)s are “upside down,” that they go primarily to those at higher income levels, those who perhaps don’t need the encouragement to save. And from a pure financial economics perspective, those who pay taxes at higher rates might reasonably be seen as receiving a greater benefit from the deferral of those taxes. Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary.

However, drawing on the actual administrative data from the EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), the nonpartisan Employee Benefit Research Institute found that those ratios were relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000. In other words, while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes — and not “upside down.”

Again, what keeps these potential disparities in check is the series of limits and nondiscrimination test requirements: the boundaries established by Internal Revenue Code Sections 402(g) and 415(c), combined with ADP and ACP nondiscrimination tests. Those plan constraints were, of course, specifically designed (and refined) over time to do just that — to maintain a certain parity between highly compensated and non-highly compensated workers in the benefits available from these programs. The data suggest they are having exactly that impact.

But let’s think for a minute about a group that doesn’t get nearly enough attention. It’s the group — millions of working Americans, in fact — who are not wealthy, but they earn enough that Social Security won’t come close to replicating their pre-retirement income.

These middle, and upper-middle income individuals apparently aren’t the concern of those who want to do away with the 401(k) — but, their personal retirement needs notwithstanding, these are the individuals who in many, if not most, situations, not only make the decision to sponsor these plans in the first place — they make the ongoing financial commit to make an employer match.

Allowing those contribution limits to keep pace with inflation not only helps remind us all of the importance of saving more — like the right-sized aquarium, it also helps provide us all with a little more room to grow our retirement savings.

- Nevin E. Adams, JD

Just "Because"

As you may have heard (but may not), we recently celebrated National Save for Retirement Week. Of course, there’s no “magic” to a week dedicated to a focus on saving for retirement — even one that Congress has seen fit to acknowledge with a resolution.

That said, saving for retirement — which seems far away for some (though likely not as far away as some think) — is something that many find easy to defer for another day, a more convenient time, a more settled financial situation. We all know we should do it — but some figure that it will take more time and energy than we can afford just now, some assume the process will provide a depressing, perhaps even insurmountable target, while others don’t even know how to get started.

You deal with these objections all the time. However, in recognition of National Save for Retirement Week, here are five simple reasons why you, or those you care about, should save — and specifically save for retirement — now:

Because you don’t want to work forever.

If you want to stop working one day, you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t free.

Many people assume that expenses will go down in retirement, and they may for some. On the other hand, retirement often brings with it changes in how we spend, and on what — and that’s not necessarily less.

For example, research by the Employee Benefit Research Institute (EBRI) has found that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age (see “How Does Household Expenditure Change With Age for Older Americans?”).

Because you may not be able to work as long as you think.

In 1991, just 11% of workers expected to retire after age 65, according to the Retirement Confidence Survey. Twenty-three years later (2014), that same survey found that a third of workers report that they expect to retire after age 65, and 10% don’t plan to retire at all.

Expectations are one thing, but realities seem to be different. The RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned (49% in 2014), and many who retire earlier than they had planned often do so for negative reasons, such as a health problem or disability (61%) — things that are not within their control.

Because you don’t know how long you will live.

People are living longer and the longer your life, the longer your potential retirement, particularly if it begins sooner than you think. Retiring at age 65 today? A man would have a 50% chance of still being alive at age 81 (and a woman at age 85); a 25% chance of living to nearly 90; a 10% chance of getting close to 100. How big a chance do you want to take of outliving your money?

Because the sooner you start, the easier it will be.


- Nevin E. Adams, JD

Moving Targets

Before target-date funds were “cool” (or widely available), I had steered my mother toward an asset-allocation fund as a good place to invest her retirement plan rollover balance.

The logic was, I thought, impeccable: A professional money manager would be keeping an eye on and rebalancing those investments on a regular basis. The fee was reasonable, and the portfolio was split about 60/40 between stocks and bonds, which also seemed reasonable in view of her investment horizon. From time to time Mom would call and ask if we needed to rebalance that investment — and I confidently assured her that there was no need to do so, that the fund’s design took that into account.

Then at some point (though definitely between 2006 and 2008) that professional manager decided that a “better” allocation was to shift the asset allocation to be invested nearly entirely in stocks. Now, knowing how such things work, I can’t imagine that a shift that dramatic wasn’t clearly and concisely communicated to holders on a timely basis — or at least in a manner that the legal profession deemed sufficient. But by the time we realized what had happened — well, that reasonably priced professional fund management wound up feeling more like someone had decided to bet it all on “red.”

With that experience under my belt, and a wary eye on recent market movements, I couldn’t help but notice a Reuters report this week which noted that within the last year, several large target-date fund providers had increased the equity allocations of their TDFs. Now, honestly, I don’t know what their previous allocations were, much less where they currently stand, nor am I privy to the rationale behind these moves. I don't know if it's a broad-based shift across their entire family, or specifically focused on those with longer time horizons.

The Reuters piece is cautionary in tone — basically intimating that these moves might be underway at a time when the markets have peaked, with an undertow of concern that the timing could be problematic. Doubtless the headline will draw clicks, if not concern — after all, you don’t have to be very old or in this business very long, to remember that just prior to the onset of the 2008 financial crisis, several performance-lagging TDF managers made what seemed, at least in hindsight, to be a badly timed equity shift in their portfolios. Nor was it that long ago that we heard concerns expressed by participants, particularly older ones (and subsequently regulators on their behalf) who were, in the aftermath of that crisis, surprised to find just how much exposure their TDF investments had to those equity markets.  

Despite these concerns, TDFs have continued to gain prominence in retirement plans, and in retirement plan participant balances. Consider that nearly three-quarters (72%) of 401(k) plans in the EBRI/ICI 401(k) database included TDFs in their investment lineup at year-end 2012, and 41% of the roughly 24 million 401(k) participants in that database held TDFs. Consider as well that at year-end 2012, 43% of the account balances of recently hired participants in their 20s were invested in TDFs. Older workers have not been as inclined to invest in those options, though it may simply be that, as older workers, they aren’t as likely to have been defaulted there.

Whether or not this time will be different in result, only time will tell. But we can all hope that the communications about such shifts are understood and appreciated by plan participants and plan sponsors before the results make it too late to do so.

Nevin E. Adams, JD

Crisis Centered?

Is there a retirement crisis or not? 

Though you may have missed it, last week a Wall Street Journal op-ed (subscription required) claimed that there was an “imaginary” retirement income crisis that was being pushed by some who want to boost Social Security benefits and reduce tax incentives for saving (such as those available to 401(k) plan participants). In fact, authors Andrew Biggs and Syl Schieber claimed that the statistics relied on by the crisis were “vast overstatements, generated by methods that range from flawed to bogus.”

Within a day, New School economics professor Teresa Ghilarducci responded, claiming in an opinion piece on the Huffington Post website that “The Retirement Crisis Is Real,” referring to the WSJ op-ed as making “startling and misleading claims.”

Ultimately, those who believe (or who want to believe) that there is no retirement crisis will likely draw comfort from the assertions of Biggs and Schieber, who have made similar points before. Similarly, those who are inclined to see a retirement crisis looming will likely be reassured by Ghilarducci’s quick and pointed response. Unfortunately, those who have not yet made up their minds are not likely to find much in either article to shed much light on the discussion.

If indeed a “crisis” looms, it’s one that we’ve seen (and been cautioned about) for a very long time. What seems likely is that at some point in the future, some will run short of money in retirement, though they may very well be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels. In fact, a recent analysis by the Employee Benefit Research Institute (EBRI) found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers — between 83% and 86% of them, in fact — with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold — and that’s making no assumptions about the impact of plan design features like automatic enrollment and annual contribution acceleration.

That is, of course, for workers who have had a full career of retirement plan eligibility at work, and while tens of millions of workers do, many do not yet. That’s a missed opportunity to forestall a potential crisis, since we know that the primary factor in determining whether or not a middle-income worker is saving for retirement is whether or not they have a retirement plan at work. It’s also probably a factor in how individuals feel about their retirement readiness, a point emphasized in findings from the 2014 Retirement Confidence Survey where there was a clear distinctions, not only in confidence, but in preparations that might support those sentiments (see "The 2014 Retirement Confidence Survey: Confidence Rebounds — for Those With Retirement Plans").

At the end of Ghilarducci’s op-ed, she cites the concerns about retirement expressed in a recent Gallup poll. “If things are as rosy as Mr. Biggs and Mr. Schieber state, why is everyone so afraid?” she asks.

At least part of the answer, it seems to me, is that they keep reading headlines like hers.

- Nevin E. Adams, JD

"Left" Overs

I’ve never been big on leftovers. Now, I know that many relish the taste of cold pizza for breakfast, while others swear that a desirable marinating takes place during storage. As for me, no matter how good the original dish, and despite the wonders of microwaving, I have a hard time getting excited about sitting down to a meal comprised of things that (at least in some cases) weren’t good enough to finish the first time.

When it comes to retirement savings, most still seem to “begin” with whatever is “left over” — after bills, living expenses, food and the like.

Not that we’re comfortable with that approach. A recent Wells Fargo/Gallup survey found that, taking their savings and Social Security income into consideration, more than two-thirds (69%) of investors say they are “highly” or “somewhat” confident they will have enough money to maintain their desired lifestyle throughout their retirement years. However, nearly half (46%) are still “very” or “somewhat” worried about outliving their savings, including 50% of non-retirees and 36% of retirees.

Nor is it a uniquely American issue; the Towers Watson Global Benefit Attitudes Survey found that in developed economies typically two-thirds of respondents believe their financial resources will support 15 years of retirement, but less than half are confident when considering 25 years into retirement.

So, how are we dealing with this worry about running out of money? Well, surveys are beginning to indicate that this uncertainty is already translating into extended work lives — or at least some expectation of being able to do so. Simply stated, for some, the “answer” to not having enough saved to retire is simply to work longer. Mathematically, those assumptions can produce a satisfying projected outcome. Unfortunately, like an assumption that your retirement investments will return 12% annually for the next 30 years, the data suggests that the reality of working longer is often undermined by circumstances beyond the individual’s control.

On the path toward more realistic assumptions, a growing number of providers now make available a projection as to how much monthly income a participant’s retirement savings would produce, and in May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has proposed that a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance. These efforts will doubtless make it easier for today’s workers to anticipate how much retirement income they will have available, based on certain assumptions.

As for those already in retirement — and unable to adjust assumptions— some studies have shown that retirees are adjusting to their income realities — though arguably those are the kind of reality adjustments most would rather not be forced to make.

For those with time to prepare ahead, while we know that the requirements of the “here and now” frequently intrude on our preparations for the “there and then,” there’s something to be said for taking the time now to think about what those retirement savings “leftovers” could taste like — and how small the portions could be.

- Nevin E. Adams, JD

"Working" Capital

In response to concerns that tomorrow’s retirees will run short of money, we are often told to save more, to work longer, or — as often as not these days — to work longer and save more. Certainly working and saving longer can do wonders in terms of stretching your retirement nest egg.

It should probably come as no surprise that American workers are expecting to work longer. The Retirement Confidence Survey notes that in 1991, just 11% of workers expected to retire after age 65. This year that was up to 33% of workers, and another 10% who said they don’t plan to retire at all.

However, the timing of the retirement decision is often not within an individual’s control. A recent survey conducted by Merrill Lynch and Age Wave found that a majority of retirees surveyed (55%) say they retired earlier than they had expected — just 7% later than they expected. Similar trends were found in EBRI’s 2014 Retirement Confidence Survey (RCS), where while more than one-in-five (22%) of workers say they plan to wait at least until age 70 to retire, only 9% of current retirees actually did so. In fact, going back to 1991, the RCS has found that the median (midpoint) age at which retirees report they retired has remained at age 62 throughout this time.

In fact, the RCS has consistently found not only that a large percentage of retirees leave the work force earlier than planned (49% in 2014), but that many retirees who retired earlier than planned cite negative reasons for leaving the work force when they did, including:

• health problems or disability (61%);

• changes at their company (such as downsizing or closure (18%); or 

• having to care for a spouse or another family member (18%). 

The Merrill Lynch/Age Wave survey cautions that while early retirement used to be equated with financial success, today’s retirees say that health problems are now the top reason for their early retirement (37%). In fact, the surveys indicate that the issues that seem to be triggering earlier-than-expected retirements not only serve to cut short working (and savings) careers, but bring with them additional expense.

Retirement planning requires a lot of assumptions — things like how much we’ll need to live, the return(s) on our investments, how long we’ll live in retirement, and when that retirement will begin.

However, the data also suggest that the assumption that we’ll be able to work to — much less through — the traditional retirement age of 65 may be one of the more optimistic.

- Nevin E. Adams, JD

Under Covered

Have you heard this one? “Only about half of working Americans are covered by a workplace retirement plan.”

Sure you have. It’s a statistic that is widely cited and reported, both in the mainstream press and on Capitol Hill. It comes from a reliable, objective source (the U.S. Census Bureau’s Current Population Survey) and conjures up a compelling need for action by advisors (and others) hoping and working to expand the availability of workplace retirement plans.

In reviewing the Census Bureau data, the Employee Benefit Research Institute (EBRI) recently noted that, in 2011, 78.5 million workers worked for an employer or union that did not sponsor a retirement plan. That is the “less than half” number cited, and reported, with such vigor.

However, when you look at the data underlying that aggregate number, you find it includes:

• 8.9 million people who were self-employed (and thus arguably are prevented from being covered by their own inaction);
• 6.2 million who were under the age of 21 (who, being under ERISA’s mandated age coverage level, would logically not be “covered”);
• 3.9 million who were age 65 or older (and beyond “normal” retirement age);
• just over 31 million who were not full-time, full-year workers; and
• 16.8 million who had annual earnings of less than $10,000.

When you take those factors into account, it’s pretty easy to see logical reasons why so many workers are not “covered.” When you filter out the overlap between those categories — situations where workers fall into several of those categories simultaneously (for example, workers who are under age 21, have less than $10,000 in annual earnings and are not full-time, full-year workers) — there are about 42.4 million workers whose lack of coverage might logically be attributed to being in one or more of those categories. And yes, that’s more than half of the “uncovered” workers in the CPS analysis.

Not that there isn’t a gap in coverage — unpublished estimates from EBRI drawn from the March 2013 Current Population Survey suggest that approximately 20 million private sector workers earning between $30,000 and $100,000 per year don’t have access to a retirement plan at work. That’s a gap that needs to be filled, and advisors, working with plan sponsors and providers, are working to do so every day.

So yes, claiming that “fewer than half of working Americans have access to a workplace retirement plan” is technically accurate. But while it makes for a compelling headline, it represents a gap in news coverage of the issue that hinders our understanding of the real factors underlying the data, and in the process undermines our ability to address it.

- Nevin E. Adams, JD

"Class" of 74

Pensions were not on my mind in 1974, certainly not on Labor Day of that year.  While I was pondering my new college textbooks, President Gerald Ford, less than a month in that role, signed into law the Employee Retirement Income Security Act of 1974 – better known to most of us as ERISA. Little did I know at the time that that law – and the structure it provided to the nation’s private pension system – would, in the years to follow, play such an integral role in my life.

ERISA did not create pensions, of course; they existed in significant numbers prior to 1974.  Rather, it was designed to regulate what was there and would yet come to be – to protect the funds invested in those plans for the benefit of participants and beneficiaries with a consistent set of federal standards.  And, as part of that protection, to establish the Pension Benefit Guaranty Corporation (PBGC).  As President Ford said at the time, “It is essential to bring some order and humanity into this welter of different and sometimes inequitable retirement plans within private industry.”

Has ERISA “worked”?  Well, in signing that legislation, President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.”  Today that system has grown to exceed $17 trillion, covering more than 85 million workers in more than 700,000 plans.

The composition of the plans, like the composition of the workforce those plans cover, has changed over time.  While much is made about the perceived shortcomings in coverage of the current system, the projections of multi-trillion dollar shortfalls of retirement income, the pining for the “good old days” when everyone had a pension (that never really existed for most), the reality is that ERISA—and its progeny—have unquestionably allowed more Americans to be better financially prepared for a longer retirement. 

Forty years on, ERISA – and the nation’s retirement challenges – may yet be a work in progress.  But, by any measure, this “class of 74” has done the nation a great service.

-          Nevin E. Adams, JD

"Working" It Out

It is routinely reported that 10,000 Baby Boomers are retiring every day, and yet surveys continue to indicate that Americans plan to postpone retirement.

This raises the question: are more older Americans working?

A recent Wall Street Journal article notes (subscription required) that one of the biggest changes in the U.S. labor market over the past two decades has been the increasing number of people working over the age of 55. As recently as 1993, only 29% of people that age were in the labor force, but by 2012 more than 41% of that age group were still in the labor force, the highest since the early 1960s.

It’s hard to find a workplace survey these days that doesn’t find workers planning to work past the traditional retirement age of 65. For example, a recent survey by the Federal Reserve found that fewer than one in five workers age 55 to 64 planned to follow the traditional retirement model of working full time until a set date and then stop working altogether.

A recent report by the Employee Benefit Research Institute (EBRI) noted that the percentage of civilian, noninstitutionalized Americans near or at retirement age (age 55 or older) in the labor force declined from 34.7% in 1975 to 29.4% in 1993. However, since then the overall labor-force participation rate of this group has increased steadily, reaching 40.5% in 2012 — the highest level over the 1975-2013 period — before decreasing to 40.3% in 2013.

Venus and Mars?
The labor-force participation rate for men ages 55 and older followed the same pattern through 2010, falling from 49.4% in 1975 to 37.7% in 1993 before increasing to 46.4% in 2010, roughly where it stood in 2013. On the other hand, the labor-force participation rate of women in this age group was essentially flat from 1975 to 1993 (23.1% and 22.8%, respectively). But after 1993, the women’s rate also increased, reaching its highest level in 2010 (35.1%), where it remained though 2013.

The increase in labor-force participation for the age groups below age 65 was primarily driven by the increases in female labor-force participation rates, as the male labor-force participation rates of those ages 55-59 and 60-64 were lower in 2013 than they were in 1975. In contrast, female labor-force participation rates for those ages 55-59 and 60-64 increased sharply from 1975 to 2013, despite some leveling off in 2010-2013.

The Journal article draws on some Department of Labor data that show that while there are fewer men working at every age, at any given age, more men were working in 2013 than in 2000. By way of example, the article notes that at the turn of the century, about 66% of 60-year-old men and 20% of 70-year-old men were still in the labor force — participation rates that stand today at 72% and 25%, respectively.

So, while there are clearly more people retiring, and thus more not working, there also appear to be more older individuals (on a percentage of workforce basis) working today — though perhaps not as many as once thought they might.

When You Assume...

The use of assumptions was the focus of a recent report from the Employee Benefit Research Institute (EBRI), which not only highlighted the assumptions used in two separate retirement studies, but illustrated a real problem with their results.

The EBRI report examined two earlier  studies — one by Pew Trusts, the other by the Center for Retirement Research at Boston College — that purported to show that the retirement prospects for Gen Xers were worse than those of the Baby Boomers. The EBRI report not only highlighted the questionable assumptions, but took the time to quantify the impact (see “EBRI Report Calls Out Pew, CRR on Retirement Conclusions”). Such public criticisms are a rarity, as evidenced by the media coverage accompanying the release of the EBRI report.

As recently as a few years ago, I would have assumed that findings published by credentialed individuals associated with a reputable institution of higher learning could be taken at face value, if only because I assumed that if their methodologies were flawed, their findings would be taken to task by other similarly credentialed individuals.
Sadly, that does not seem to be the case.

The Pew report, though it went to some pains to determine appropriate rates of return to project out the future balances of both Boomers and Gen Xers, chose to completely ignore any future contributions.  Not so big a deal for those on the cusp of retirement perhaps, but what about those Gen Xers (defined as those Individuals born between 1965 and 1974) who are (just) 40? That’s at least a quarter century of contributions — and earnings on those contributions — completely disregarded by the Pew assumptions. Think that might tend to produce a lower retirement readiness conclusion about that demographic?

As for the report by CRR, the EBRI report explains how it relies on “wealth-to-income patterns by age group from the 1983–2010 Federal Reserve Surveys of Consumer Finances (SCF).” That certainly sounds like a credible source, but it also happens to be based on self-reported information and a perspective of 401(k)-plan designs and savings trends that pre-date the impact of automatic enrollment plan features that followed the passage of the Pension Protection Act of 2006. Not that you’ll find that acknowledged in the report, even in the footnotes. And yet data from the CRR’s NRRI are routinely cited in industry reports.

Projections about the future inevitably require some assumptions, and the EBRI report does as well. But it not only lays out its assumptions in great detail, it provides a wide range of findings associated with those various assumptions so that readers can draw their own conclusions based on the scenario(s) they think most likely to occur.

There’s an old adage that points out the inherent dangers in relying overly much on assumptions. It cautions that one should “never assume, because when you assume, you make an ‘ass’ of ‘u’ and ‘me.’”

That goes double for those who blindly rely on research findings drawn from assumptions poorly constructed and/or undisclosed.

Nevin E. Adams, JD

• See an earlier analysis of the Pew Trust report here.

• You can find a more comprehensive explanation of some of the issues associated with the CRR’s NRRI here.

Lessons Learned

I joined EBRI with a passion for the insights that quality research can provide, and a modest concern about the dangers that inaccurate, sloppy, and/or poorly constructed methodologies and the flawed conclusions and recommendations they support can wreak on policy decisions.  While my tenure here has only served to increase my passion for the former, on (too) many occasions I have been struck not only by the breadth of assumptions made in employee benefit research, but just how difficult – though not impossible – it is for a non-researcher to discern those particulars.

We have over the past couple of years devoted some of this space to highlighting some of the most egregious instances, but as I close this chapter of my professional career, I wanted to share with you a “top 10” list of things I have learned in my search to find reliable, objective, actionable research:

1. There are always assumptions in research; find out what they are. Garbage in, garbage out, after all (the harder you have to look, the more suspicious you should be).
2. Just because research validates your sense of reality doesn’t make it “right.” But just because it invalidates your sense of reality doesn’t necessarily make it right, either.
3. Take the conclusions of sponsored research with a grain of salt.
4. Self-reported data can tell you what the individual thinks they have, but not necessarily what they actually have.
5. Sample size matters. A lot.
6. “Averages” (e.g., balances/income/savings) don’t generally tell you much.
7. There’s a certain irony that those who propose massive changes in plan design, policy, or tax treatment, frequently assume no behavioral changes in response.
8. When it comes to research findings, “directionally accurate” is an oxymoron.
9. In assessing conclusions or recommendations, it’s important to know the difference between partisan, bipartisan and nonpartisan.
10. In an employment-based benefits system, the ability to accurately gauge employee response to benefits change is dependent on the reaction of the employers who provide access to those benefits.

One of the things that I’ve always loved about the field of employee benefits was that there was always something new to learn, and with each position along the way I have gained a new and fresh perspective.  I’ll always treasure my time here as a member of the EBRI team, the opportunity I’ve had to contribute to this body of work – and I’m looking forward to continuing to draw on EBRI research for insights and analysis in my new position, as I have for most of my professional career.

That said, I’ll close by commending to your attention one of my favorite “lessons” – a quote attributed to Mark Twain, and one worth keeping in mind along with the 10 “lessons” above:

“It’s easier to fool people than to convince them they have been fooled.” 

Here’s to not being fooled.

- Nevin E. Adams, JD

"Repeat" Performance

A few months back, I was intrigued to catch several episodes of “Cosmos,” an updated version of the classic 1980 Carl Sagan series.  Along with the significantly expanded and enhanced visuals and (to me, anyway, generally annoying) animations, the series recounted the work, travails and accomplishments of Edmond Halley, who, even today, is probably best remembered for the comet whose 75-year cycle he identified and which still, as Halley’s Comet, bears his name.

Halley wasn’t the first to see the comet, of course – in fact, it had been recorded by Chinese astronomers as far back as 240 BC, noted subsequently in Babylonian records, and perhaps most famously shortly before the 1066 invasion of England by William the Conqueror (who claimed the comet’s appearance foretold his success).  Halley noted appearances by the comet in 1531, 1607 and 1682, and based on those prior observations – and the application of the work and mathematical formulas of his friend Isaac Newton – predicted the return of the comet in 1758, which it did, albeit 16 years after his death in 1742.

Of course, the importance of repeated, measured observations isn’t restricted to celestial phenomena.  Consider that individual retirement accounts (IRAs) currently represent about a quarter of the nation’s retirement assets; and yet, despite an ongoing focus on the accumulations in defined benefit (pension) and 401(k) plans that have, via rollovers, fueled a significant amount of this growth, a detailed understanding as to how these funds are actually used during retirement has, to date, not been as well understood.

To address this knowledge shortfall, the Employee Benefit Research Institute has developed the EBRI IRA Database, which includes a wealth of data on IRAs including withdrawals or distributions, both by calendar year and longitudinally, which provides a unique ability to analyze a large cross-sectional segment of this vital retirement savings component, both at a point in time and as the individual ages and either changes jobs or retires.  Indeed, as a recent EBRI publication notes, the rate of withdrawals from these IRAs is important in determining the likelihood of having sufficient funds for the duration of an individual’s life, certainly where these balances are a primary source of post-retirement income.

Previous EBRI reports[i] have explored this activity for particular points in time, but a recent EBRI analysis[ii] looked for trends in the withdrawal patterns of a longitudinal three-year sample of individual post-retirement withdrawal activity, specifically those age 70 or older (in 2010), the point at which individuals are required by law to begin withdrawing money from their IRAS.

The EBRI analysis concluded that, when looking at the withdrawal rates for those ages 70 or older, the median of the average withdrawal rates over a three-year period indicated that most individuals are withdrawing at a rate that not only approximates what they are required by law to withdraw, but at a rate that is likely to be able to sustain some level of post-retirement income from IRAs as the individual continues to age.

Furthermore, the report notes that an examination of these trends over this period suggests that, based on the resulting distribution of average withdrawal rates over time as a function of the initial-year withdrawal rate, the initial withdrawal rate for those in this age group appeared to be one that these individuals are likely to continue to make the next year.

Of course, while the median withdrawal rates suggest many individuals would be able to maintain the IRA as an ongoing source of income throughout retirement, further study is needed to see if these individuals are maintaining those withdrawal rates over longer periods of time.  Moreover, the integration of IRA data with data from employment-based defined contribution retirement accounts currently underway as part of initiatives associated with EBRI’s Center for Research on Retirement Income (CRI) will allow for an even more comprehensive picture of what those who may have multiple types of retirement accounts do as they age through retirement.

And we won’t have to wait 75 years to see how it turns out.

• Nevin E. Adams, JD

[i] See “IRA Withdrawals, 2011” online here.   See also ““Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” online here. 
[ii] See “IRA Withdrawals in 2012 and Longitudinal Results, 2010–2012” online here. 

Look-Back "Provisions"

My wife and I recently celebrated our wedding anniversary.  It was a special day, as they all are, but as I thought back on the events of our life together, I was struck by the realization that I have now been married for about half my life.  Not that I didn’t expect to remain married, or to live this long; if someone had asked on my wedding day if I thought I’d still be alive and married this many years hence, I’m sure that I would have expressed confidence, likely strong confidence, in both outcomes.  However, if someone on that same day had asked me to guess then where I would be living now, what I would be doing, or what my income would be (or need to be)—well, my responses would likely have been much less certain.

In just a few weeks we’ll be making preparations to launch the 2015 Retirement Confidence Survey (RCS)[i].  It is, by far, the longest-running survey of its kind in the nation.  Indeed, this will be its 25^th year.  Think for a moment about where you were a quarter century ago, what (or if) you thought about retirement, what preparations you had made… then consider for a moment what you have done in the years since.  Are you where you thought you would be?  Are you more – or less – confident about your prospects for a financially secure retirement?  Have you planned toward a specific retirement date or age?  Has that changed over the years – how, and why?

Through the prism of that near-quarter-century window, the RCS provides a unique perspective to view in the here and now, and to look back over time on how American workers – and retirees – have viewed their preparations, readiness, and confidence about retirement.  It has also provided those who are working to help improve and/or ensure those prospects insights into those collective preparations, or lack thereof. Moreover, the RCS has offered the ability to gauge potential responses to specific regulatory, administrative and legislative alternatives, both real and envisioned – a critical real-world filter to balance the theoretical world in which academics often imagine we live and respond, or as they often assume, won’t respond[ii].

Retirement confidence is, of course, a state of mind at a point in time, unique to individual situations, and as past waves of the RCS have shown, it’s not always based on a realistic assessment of where you are or what lies ahead.  That said, the RCS offers more than a sentiment snapshot, and those who look not only to feel better about retirement but to have a basis for that feeling need look back no further than the pages of that report.

The RCS has outlined the impact that real-world actions can have on confidence: having saved for retirement, having sought professional investment advice, having made a determination as to how much is needed for retirement, and – as last year’s RCS findings emphasized — having some kind of retirement savings account.  Little wonder that those who have undertaken those steps are more confident of the outcomes.

It’s one thing to anticipate that eventual cessation of paid employment, and something else altogether to make the preparations – to choose to save – and to be confident that you’ll be able to look back with satisfaction one day knowing that you have the financial resources to enjoy it.

• Nevin E.  Adams, JD

Your organization can be part of the 25^th Retirement Confidence Survey.  Survey underwriters serve as a member of the survey’s Advisory Board, along with the opportunity to participate in the review and update of the 2014 questionnaire; have the opportunity to participate in a pre-release, underwriters’ briefing on the results of the survey; are able to utilize the survey materials and findings for your research, marketing, communications, and product-development purposes – and you’ll be acknowledged as an underwriter of this, the 25^th Retirement Confidence Survey, among other benefits.  For more information, contact us at nadams@ebri.org.

[i] More information about the Retirement Confidence Survey is available online here.

The Status Quo

While the prospects for “comprehensive tax reform” may seem remote in this highly charged election year, the current tax preferences accorded employee benefits continue to be a focus of much discussion among policymakers and academics.

The most recent entry was a report by the Urban Institute which simulated the short- and long-term effect of three policy options for “flattening tax incentives and increasing retirement savings for low- and middle-income workers.”  The report concluded that “reducing 401(k) contribution limits increases taxes for high-income taxpayers; expanding the saver’s credit raises saving incentives and lowers taxes for low- and middle-income taxpayers; and replacing the exclusion for retirement saving contributions with a 25 percent refundable credit benefits primarily low- and middle-income taxpayers, and raises taxes and reduces retirement assets for high-income taxpayers.”

However, and to the authors’ credit, the report also noted that “the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates[i].”

In previous posts, we’ve highlighted the dangers attendant with relying on simplistic retirement modeling assumptions, the application of dated plan design information to future accumulations, and the choice of adequacy thresholds that, while mathematically accurate, seem unlikely to provide a retirement lifestyle that would, in reality, feel “adequate.”

However, one of the more pervasive assumptions, particularly when it comes to modeling the impact of policy and/or tax reform changes, is that, regardless of the size and scope of the changes proposed, workers – and employers – will generally continue to do what they are currently doing, and at the current rate(s), for both contributions and/or plan offerings.  Consequently, there is talk of restricting participant access to their retirement savings until retirement, with little if any discussion as to how that might affect future contribution levels, by both workers and employers, and there are debate about modifying retirement plan tax preferences as though those changes would have no impact at all on the calculus of those making decisions to offer and support these programs with matching contributions.  Ultimately, these behavioral responses might not only impact the projected budget “savings” associated with the proposals, but the retirement savings accumulations themselves.

EBRI research has previously been able to leverage its extensive databases and survey data (including the long-running Retirement Confidence Survey) to both capture  potential responses to these types of proposals and, more significantly, to quantify their potential impact on retirement security today and over the extended time periods over which their influence extends.  In recent months, that research has provided insights on the full breadth of:

• A retirement savings cap[ii],
• The proportionality of savings account balances with incomes[iii], and
• The impact of permanently modifying the exclusion of employer and employee contributions for retirement savings from taxable income, among other proposals[iv].

While we can’t be certain what the future brings, considering the likely responses to policy changes is a critical element in any comprehensive impact assessment – not only because the status quo is rarely a dependable outcome, but because, after all, those who assume the status quo are generally looking to change it.

• Nevin E. Adams, JD

[i] From Urban Institute and Brookings Institution:  Flattening Tax Incentives for Retirement Saving:  “Our findings should be interpreted with caution. Actual legislation for flattening tax incentives requires more than the simple adjustments discussed here. For instance, if a credit-based approach is used, then the laws would need to ensure some recapture of those benefits for those who made contributions one year and withdrew them soon thereafter.

Additionally, the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates. For instance, employees may save more in response to improved incentives, in which case the benefits to low lifetime income households would be greater than we find. On the other hand, employers might reduce their contributions in response to some of the policy changes outlined. In this case, the tax and savings benefits we find would be overstated.  While our policy simulations are illustrative, addressing these behavioral responses would be a chief concern in tailoring specific policies to create the best incentives.”

[ii] See “The Impact of a Retirement Savings Account Cap”
 
[iii] See “Upside” Potential
 
[iv] See “Tax Reform Options: Promoting Retirement Security”, and “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances”