The Gaps in Retirement Savings "Gaps"

As spring follows winter, so apparently do dire predictions about the nation’s retirement prospects.

For example, the Center for Retirement Research (CRR) at Boston College now claims we are looking at a $7.7 trillion dollar “retirement gap” for American workers, up from $6.6 trillion five years ago. Meanwhile, a new report by the National Institute on Retirement Security (NIRS) on what it called the “Continuing Retirement Savings Crisis” didn’t cite a specific aggregate gap, but a year ago NIRS employed a similar approach to suggest that that gap was likely somewhere between $6.8 trillion and $14 trillion.

While these outcomes are cited widely (the CRR’s as recently as last week in a U.S. Senate hearing), the underlying methodologies and assumptions are worth understanding. Both rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF), and while both track the progress of American retirement readiness by examining how individuals in the SCF did over time, they fail to acknowledge that doing so compares the balances and readiness of two completely different groups of individuals at different points in time. The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers — income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement. But then, the math is easier.

There’s no question that there is a gap between what Americans are likely to need to live comfortably in retirement and the resources available to fund it. The non-partisan Employee Benefit Research Institute (EBRI) recently updated its EBRI Retirement Readiness Rating and found that the retirement savings gap was $4.13 trillion for all U.S. households (not just those who have retirement plan balances, though it uses actual 401(k) data for those who do have such plans, rather than relying on self-reported estimates), where the head of the household is between 25 and 64, inclusive. That may be well short of the projections offered by the NIRS and CRR, but it’s a big number, nonetheless.

Indeed, considering the enormity of that gap, policymakers — and Americans generally — might well feel like throwing up their hands and despair of ever closing it (indeed, earlier this month NIRS published a survey indicating that 86% of Americans believe the nation faces a retirement crisis).

What is unfortunately often lost in the trillion-dollar gap headlines (and the concurrent surveys that, unsurprisingly, talk about our deteriorating confidence about our retirement) is that not everyone has a retirement savings gap. Ironically, considering their differing methodologies, the CRR, NIRS and EBRI all put the number at about 50%. (EBRI’s number, which in its assumptions and use of actual data seems more conservative, says the number at risk of running short of money in retirement is in the low 40% range.)

How big is the gap at an individual level? The EBRI analysis breaks it down into manageable numbers: For those on the verge of retirement (Early Baby Boomers), the deficits vary from an aggregate of $19,304 (per individual) for married households, to $33,778 for single males and $62,734 for single females. If you look only at the individuals who do have gaps (EBRI’s projections, which take into account the potential costs of nursing home care and living expenses based on real experience, rather than arbitrary replacement ratios, indicate that about 57% will have sufficient retirement income), the gap for Early Boomers ranges from $71,299 per individual for married households to $93,576 for single males and $104,821 for single females.

Not surprisingly, those eligible to participate in workplace retirement plans fare better. Also not surprisingly, those who have jobs are more likely to have incomes and access to a workplace retirement plan — and those who work for larger employers are more likely to have both larger incomes and access.

However, even EBRI’s estimates include a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars. For those seeking to understand, and perhaps craft solutions for, the current projected shortfalls, this is an important distinction, and one given short shrift by a headline’s focus on the aggregate.

There are, of course, broad policy changes that can, and have, made a big difference, nationally and at a plan level — things like automatic (and immediate) enrollment, contribution acceleration and prudent selection of a default investment option, not to mention ideas (or legislation) that expand access to those plans.

That said, ultimately the retirement savings gap is an aggregation of individual savings gaps. And as advisors well know, you close those one individual at a time.

- Nevin E. Adams, JD

The Troubble With Tibble

Ours is a complex business. For one thing, it’s fraught with potential peril for inattentive plan fiduciaries, many of whom find themselves tasked with the responsibilities of the role (frequently as part of a much wider range of responsibilities) with little in the way of background, training or explanation to help.

And then you have the defendants in the Tibble v. Edison International case: a large ($2 billion-plus) plan that not only had an investment committee, but also one separate from the benefits administration function. Moreover, that investment committee had access to the services of an investment advisor (Hewitt’s investment consulting arm) to review, select and monitor funds and, according to the findings of the lower courts, a review process that was attentive to the requirements of an investment policy statement (IPS).

What they did not do was ask about the availability of lower-priced institutional shares.

However, that wasn’t the issue before the U.S. Supreme Court this past week. Rather, the Court was asked to decide how to apply ERISA’s statute of limitations to the action of selecting these funds. Three of the retail class funds were added as plan investment options in 1999; three more were added in 2002. The plan sponsor plaintiffs had successfully argued before the 9th Circuit that when the suit was brought in 2007, the funds which were added in 1999 had been on the plan menu for more than six years — beyond ERISA's statute of limitations. At issue was whether the prudence of that older selection could be challenged.

In the presentations before the Supreme Court, both parties agreed that there was a fiduciary duty to review plan investments, and both parties were willing to concede that the initial review and selection of an investment fund should be more extensive than just considering the retention or replacement of a fund that was already on the investment menu. It was the nature and extent of that review that consumed much of the discussion during the hearing.

In the initial ruling in the case, the district court said there had to be a change in circumstances significant enough to make the continued investment in that investment option an imprudent one, and cited legal precedent for its view. The discussion last week noted precedents in the 9th, 4th and 11th Circuits saying that change would have to be tantamount to adding a new fund. In Tibble, there doesn’t appear to have been a change in the funds on the menu per se, but rather, the mere existence of lower-cost institutional shares.

However, the Assistant to the Solicitor General, appearing in support of the plaintiffs’ position as a friend of the court, told the justices that in its assessment, the ongoing monitoring of investment options was "not limited to circumstances in which the fund changed so much that it's like a new fund is being put in place.” 

It remains to be seen how the Supreme Court’s view of the level of review and the circumstances that trigger it will affect the outcome of this case. We’ll have an answer by June.

That said, the words that linger in my mind — and that I think plan fiduciaries should remember — also came from the Assistant Solicitor General: “You have a duty to look on a periodic basis and, really, how are you going to know if there have been changes unless you looked.”

How indeed.

- Nevin E. Adams, JD