A Hallmark Holiday?

I don’t know about you, but I’ve always had a certain ambivalence about what are generally termed “Hallmark holidays.”

You know the ones I’m talking about – the ones that seem crafted for the sole purpose of generating sales for greeting card sellers. Of course, after a while you no longer question their existence – and if one still struggles to remember exactly when “Grandparent’s Day” is, well, we’ve pretty much got Mother’s Day, Father’s Day, and Valentine’s Day down to a science (one that might not be on your calendar is National Slap Your Irritating Co-Worker Day, October 23). Indeed, these days there are months on the calendar devoted to a whole series of acknowledgements and remembrances.

There are also a number of occasions set aside to recognize the importance of saving (America Saves Week –February ), the importance of planning for retirement (National Retirement Planning Month – July, and National Retirement Planning Week – April), and the issue of retirement security generally (National Retirement Security Week – October). There’s even a National Financial Literacy Month (April) and National Financial Planning Month (October).

While I’ve had some involvement with most of those during my career (mainly to remind folks about their occurrence) and, sadly, for many those events are often dismissed as “Hallmark holidays” – even for those of us who have made a career-long commitment to helping improve the nation’s retirement prospects.

That said, one that has stuck with me – even prior to our affiliation with the Plan Sponsor Council of America – is 401(k) Day. This year it falls on Friday, September 6 – a date chosen in acknowledgement of the fact that, as retirement follows labor, this focus on retirement follows Labor Day (fans of history or trivia may appreciate that then-President Gerald Ford signed the Employee Retirement Income Security Act (ERISA) into law on the day after Labor Day, 1974).

Of course, these days the focus has broadened, and incorporates a focus on financial wellness ahead of retirement, as well as preparations for that time yet to come. Like retirement itself, the preparations are best attended to on an on-going basis, rather than a single date on the calendar.

Readers of this publication are all too aware of the challenges that confront our nation’s retirement savings system – widespread financial illiteracy, a persistent coverage gap, and looming shortfalls in the underpinnings of Social Security. That “familiarity” with these complex issues perhaps makes it too easy to dismiss the opportunity that an occasion like 401(k) Day represents.

Sure, we’re talking about these issues every day – but as a friend reminded me long ago, even a Hallmark holiday can provide an opportunity to pay attention to the people – and things – we often take for granted.

So, this year, let’s (all) take advantage of the “occasion” – all year long. You can find out how at https://www.psca.org/401kDay

- Nevin E. Adams, JD

6 Things That People Get Wrong About Retirement

Retirement planning can be a complicated process – and surveys suggest that most workers haven’t even attempted a guess. But even those who have can overlook some pretty significant factors that can have a dramatic impact on retirement readiness.

Here are some critical factors that are easy to get “wrong.”

The Cost of Inflation

Twenty or 30 years from now, prices are likely to be different than they are today, and for many, those prices will increase – and perhaps particularly costs of critical life aspects like health care. Consider that, overall, the average inflation rate for 2018 was 1.9%. It’s not that all prices will always go up – but they often do, and might increase faster than your income. Think of it as the “magic of compounding’s” evil twin…

There’s a calculator that you might find interesting at http://www.usinflationcalculator.com/.

The Cost of Taxes

A key part of the incentive for retirement saving in a 401(k) is the ability to postpone paying taxes on those salary deferrals. The operative word there is, of course, “postpone.” Sure enough, as those retirement savings are withdrawn in retirement, you can bet that Uncle Sam will be expecting his cut – and on a frequency dictated by the required minimum distribution schedules of the IRS.

In fact, every time I see one of those reports about the average 401(k) account balances of those in their 60s, I can’t help but think that somewhere between 15% and 30%, and perhaps more – won’t go toward financing retirement, but will instead go to Uncle Sam and his state and municiple counterparts.

After all, that’s one of those pre-retirement expenses that doesn’t end at retirement. And, while it may well be at lower rates than when it was deferred pre-tax – it may not be.

The Cost of Long-Term Care

Long-term care is one of those retirement cost variables that can be very complicated to predict – which perhaps explains why the vast majority of retirement needs projections models fail to take it into account (the Employee Benefit Research Institute’s being a notable exception). The data suggests that most of us will have some exposure to this risk – but also suggests that only a minority will get hit with a truly catastrophic bill against their retirement savings.

The question is, which group will you fall within? And can you afford to be wrong? 

What You’ll Get from Social Security

Ask any young worker today about their expectations regarding Social Security, and you’ll likely encounter a fair amount of skepticism; a recent Pew Research report notes that roughly half of Americans (48%) who are younger than 50 expect to receive no Social Security benefits when they retire. Indeed, according to the 2018 Retirement Confidence Survey published by the Employee Benefit Research Institute, today’s workers are almost half as likely to expect Social Security to be a major source of income in retirement (36%) as today’s retirees are to report that Social Security is currently a major source of income (67%).

As things stand today, Social Security’s future is far from certain, though even under a worst case scenario, retirees are likely looking at a reduction, rather than a cessation of benefits. That said, as things stand now, those who retire at full retirement age today would be looking at a maximum of….

When You’ll Retire

Perhaps the most important assumption is when you plan to quit working; today most Americans are doing so at 62, though 65 seems to be the most common assumption – and while using 70 (or later) will surely boost your projected outcomes (it both gives you more time to save, and reduces the time that you will be drawing down those savings), it may not be realistic for many individuals. The 2019 Retirement Confidence Survey found that more than 3 in 10 (34%) workers expect to retire at 70 or beyond or not at all, while only 6% of retirees report this was the case.

In fact, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned (43% in the 2019 RCS). Many who retired earlier than planned did so because of a hardship, such as a health problem or disability (35%), and a similar number did so due to changes at their company (35%) – in other words, events not within their control, and likely not foreseeable (admittedly, 33% did so because they could afford to do so).

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

How Long Your Retirement Will Last

Needless to say, the sooner your retirement starts, the longer it might last. But the length of retirement is also a function of what the academics refer to as “longevity,” and what regular people call “life.” 
Indeed, the good news we are living longer – but that means that retirements can last longer, and medical costs can run higher. And while we’re living longer, studies indicate that we tend to underestimate how much longer we will live. The Social Security Administration notes[i]that a man reaching age 65 today can expect to live, on average, until age 84; a woman turning age 65 today can expect to live, on average, until age 86.5.

But those are just averages; about one out of every three 65-year-olds today will live past age 90, and one in seven will live past age 95.

Though it’s also worth noting that the averages include a fair number of individuals who won’t make it that “far.”

Ultimately, of course, it’s not what you get wrong about life and retirement – it’s what, and how much, you get right.

 

- Nevin E. Adams, JD

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[i]The Social Security Administration has an online calculator that, based only on gender and birth date (and there are a lot of additional factors to consider), can provide a high-level estimate.

A Change in Providers

We really hadn’t been focused on making a change, though the subject had come up from time to time. 

In fact, considering how long we had been thinking about making a change without actually doing anything about it, the change itself felt almost accidental in its suddenness. So sudden, in fact, that, in hindsight, I found myself wondering if we were “hasty” – perhaps too hasty.

Make no mistake – we had been happy enough with our current provider, certainly at first. In fact, we had been with them for a number of years and had, over time, expanded that relationship to include a fully bundled package of services. That made certain aspects simpler, of course – though we discovered pretty quickly that the “bundle” was presented as being more seamless than it actually was. Still, net/net, we were ahead of the game financially, and certainly no worse on the delivery side; we were just a bit disappointed in the disconnect between the sale and the service levels.

And all was fine for a while – or so it seemed. Looking back, there were signs of trouble that we could have seen – if we had been looking. There were unexpected charges on the invoices, and services that we were sure had been described as being part of the bundle that turned out not to be. There was the monitoring service that was supposed to be in place that we found out wasn’t – quite by accident, and months later. Over time we cut back on the services included, but the prices just kept going up. We were, quite simply, getting less and paying more, and getting less than we thought we were paying for. And it grated on us.

In hindsight, perhaps we should have been more vocal about our discontent. I’ve wondered what might have happened if we had called up and questioned those invoice charges, or made a bigger fuss about the sporadic outages. But, in the overall scheme of things, the charges weren’t large, just not what we expected. We figured that perhaps we had been the ones to misunderstand – and didn’t want to look “stupid” by calling to complain about a charge that some fine print in some document somewhere said was perfectly legitimate. Meaning always to go check that out sometime, the time to do so never materialized. Instead, we grumbled among ourselves about how aggravating it was – and how we should do something about it… sometime.

Unfortunately, change is painful and time-consuming. The emotional and fiscal toll these changes took, while annoying, simply wasn’t enough to put change at the top of the to-do list. So, we talked about a change – and every so often asked friends and acquaintances about their experience(s). Of course, it was hard to find someone else who was in exactly the same situation – and a surprising number simply empathized with our plight, being stuck in much the same situation themselves. All of which conveyed – to us, anyway – a sense that, uncomfortable as we might be with the current service package, we were probably about as well-positioned as we could be.

Then, one day, out of the blue, an opportunity presented itself. We weren’t looking for it, as I said earlier, but the months of frustration left us open to a casual message from an enterprising salesman – one who not only knew his product, he clearly knew the problems that others like us had with our current provider.

He did more than empathize with our situation. He did not pump me for information about what I was looking for, or what I didn’t like about my current situation. Rather, he was able to speak about the features/benefits that his firm offered… and, to my ears anyway, essentially ran through the list of concerns I had – but had not articulated – with our current situation. In fact, before our conversation was done, he had pointed out to me things that his firm offered as a matter of course that the current provider hadn’t even mentioned in all the years we had been associated – things I had assumed we couldn’t get, or couldn’t get without paying a lot more.

We made the change two weeks ago – and while it’s early yet, I’m thrilled with the results.

Ultimately, our former provider set themselves up by taking our business for granted, for (apparently) caring more about attracting new customers than in attending to our concerns, and for (apparently) assuming that “quiet” meant satisfied.

Provider changes can be fraught with uncertainty, if not peril. Little wonder that it often takes a pretty serious misstep (or a consistent history of smaller missteps) on the part of an incumbent to warrant such a response. So, are your clients happy, content, and “quiet”?

Or have they just quit complaining?

- Nevin E. Adams, JD
 
Note: For the record, the provider change recounted above involves my cable company.

Plan Sponsors Are From… Mars?

Do plan sponsors really know what participants want?

Back in the early 1990s, there was a very popular “self-help” book on relationships titled “Men Are From Mars, Women Are From Venus.” The basic premise, of course, was that men and women have different means and styles of communication – that, in essence, they might as well be from different planets (hence the title).

It suffers, as most such works do, from over-generalizing (to say the least – the hidden points system ostensibly maintained by each gender struck me as truly bizarre, even in the 1990s) – but it no doubt stimulated some relationship conversations, and if it opened some of those doors – well, that’s a good thing.

The relationship between plan sponsors and participants isn’t generally fraught with the same layers of complexity, but every so often a survey comes out that makes me think otherwise.

The latest was a report by American Century which surveyed (separately, but both during Q1 2019) 1,500 respondents between the ages of 25 and 65, currently working full-time outside the government and 500 defined contribution plan decision makers.

The survey found that only a small minority of plan participants (14% of those ages 25-54) wanted employers to "leave them alone" when it came to help with retirement savings – about half the number that plan sponsors thought felt that way. And, according to the survey, more than 80% of participants wanted at least a "slight nudge" from their employers (though, let’s face it, plan fiduciaries might well be reluctant to go too far).

On target-date funds, some 40% of responding employers felt that investment risk pertaining to market movements was the most important factor in target-date investments – while a comparable number of employees were more concerned about longevity risk (in fairness, investment risk wasn’t far behind).

Speaking of investments, nearly all – 90% - who either already offered or were considering offering ESG investments thought their participants would be interested (and why wouldn’t they), while two-thirds of sponsors say their retirement plan advisor is currently or should be recommending ESG solutions.

However, only 37% of participants actually expressed some interest in ESG options – and we’ve seen plenty of industry surveys (including the Plan Sponsor Council of America’s, among others – and that interest, not surprisingly, was apparently at least somewhat dependent on performance comparable to the average product. Ultimately, American Century found that while sponsors believed that 88% of workers were at least somewhat interested in the option, fewer than 40% actually were.

Sometimes the disconnects aren’t even between different parties; the American Century survey found that 82% of plan sponsors believe it was at least “very important” to measure how ready employees are for retirement – and yet only 46% formally did so.
Over the years, we’ve seen similar “disconnects” in the benefit priorities, availability of retirement income options, and, in fairness, we’ve also seen disconnects between what individuals say they would do – and what they seem to actually do given an opportunity. Not to mention those between plan sponsors and providers – and yes, between plan sponsors and advisors.

There are, of course, any number of rational explanations for those apparent gaps. We can be reasonably sure that these surveyed plan sponsors and participants aren’t coming from the same place - literally. We also know that different industries, and different employers, and even different geographic locations seek to hire and attract different kinds of workers – who are, in turn, motivated and attracted by different things – which they may or may not choose to share with their employer.

Sometimes people are more inclined toward openness with an anonymous survey – which may present option(s) they hadn’t even considered. And sometimes, of course, they’re “led” by questions designed to produce a certain outcome. Plan sponsors glean their sense of their workforce from any number of sources with a wide range of reliability – everything from personal experience, to industry surveys to the headlines in the press…to the inevitable “squeaky wheels” that (too?) often darken the door of HR with their latest complaint and/or suggestion.

That there are different perspectives should come as no real surprise – and, if the occasional survey highlights some apparent discrepancies in priorities, well one hopes that should spur some constructive consideration and engagement.   

Because, ultimately, what matters isn’t what “planet” you’re coming from – but that you’re speaking the same language.

- Nevin E. Adams, JD

Half A Chance...

I’ve never played the lottery. But there are days…

I tell myself it’s because I know how remote the odds are, that the rules are too complicated, that they “feed” on the aspirations of people who should be spending their money on “better” things – and even that I don’t have enough “lucky” numbers to bet on consistently. But those are rationalizations.

The simple fact, despite the screaming billboards and nightly news reminders about the size of the latest “mega” jackpot, is that I simply find it inconvenient. Oh, it’s not like I never frequent the convenience stores or even grocery checkouts that these days beg for the cash/credit card that hasn’t yet been put away. I’ve never really regretted walking away from those “temptations.” And yet…    

As an industry, we spend a lot of time focused on a wide variety of considerations that impact the likelihood of having a financially satisfying retirement. But what about those who don’t have access to a retirement plan?

Now, even thoughtful industry insiders have been known to push back on the notion that people don’t have access to a retirement plan. And, in fact, you don’t have to be an industry insider (though it helps) to know that anyone who doesn’t have access to a retirement plan at work can stroll down to your local bank or financial services outlet and open an IRA – heck, these days you can just boot up your computer and do that online. And yet people don’t. This isn’t really a surprise – but even among modest income workers ($30,000-$50,000/year), we’ve seen that workers are 12 times more likely to save via a workplace retirement plan than to open that individual IRA.

Last week, we unveiled a state-by-state analysis that highlighted the coverage gap – that more than 5 million employers in the United States still don’t offer a workplace retirement savings benefit, a generation after the 401(k) plan design was first introduced. And what that means is that more than 28 million full-time workers don’t have an opportunity to save for retirement in a 401(k) – and that doesn’t include more than 23 million part-time workers who don’t have that opportunity.

That is, of course, the coverage “gap” that the so-called state-run automatic IRA programs are designed to close. And, though it’s still relatively early in that particular vein, they do seem to be having a positive effect. In Oregon (whose OregonSaves program has just commemorated its second anniversary), they’re reporting more than 6,856 employers now participating – who ostensibly didn’t offer a plan before – with some 95,704 employees – who, ostensibly, weren’t saving for retirement previously. And if the opt-out rate is high (approximately 30%) compared with the 7-9% rates typical of automatic enrollment plans administered in the private sector, well it not only lacks the support of an employer match (not to mention the support of workplace education or an advisor), but it also has a (still) relatively high 5% default contribution rate, though recent surveys suggest that the default rate standard is rising in 401(k)s.

There are, of course, issues with the emergence of multiple, and potentially contradictory, state-run versions – particularly for employers who draw workers from multiple states. But in just this last year, the program has begun offering traditional IRAs and has been opened to the self-employed, gig economy workers and cannabis businesses. The program is now more than halfway through its statewide rollout, which will be completed by mid-2020, with more new “features and improvements” in the works. Similar programs in Illinois and California are underway, or nearly so – and Rep. Richie Neal (D-MA), Chairman of the House Ways & Means Committee, has previously proposed a federal version. 

Much of the coverage gap can be laid at the door of smaller employers, which arguably have a different focus on such matters than larger organizations. And, sure enough, a 2013 analysis by the nonpartisan Employee Benefit Research Institute (EBRI) found that 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 participation rates between larger employers and smaller ones largely disappear. For example, while data indicates that just 16.9% of those full-time, full-year employees who work at smaller employers participate in a plan – that turns out to be about 86% of the 19.5% of workers in that category whose employer sponsors a plan. And that is nearly identical to the participation rate of private-sector employers with 1,000 or more employees.

A few years back I remember hearing a lottery motto, “Gotta be in it to win it.” That’s a motto that those worried about retirement finances should always take to heart.

But if they’re going to have (more than) half a chance, there’s something to be said for improving the odds – by having a chance to “play.”

- Nevin E. Adams, JD