Getting 'Out' While the Getting's 'Good'

It’s been fun watching “Coach K” take another team to the Sweet 16 this year—hard to believe he’s been coaching for nearly half a century. 

I had the opportunity to see Mike Krzyzewski coach in person just once—and in the not-so-friendly confines of the claustrophobic Cameron Indoor Stadium (no, I was not rooting for Duke). And while he’s had better teams—and Duke’s not on my favorites list—I, for one, won’t be disappointed if he wound up an amazing career by winning it all… again (a sentiment made easier because the teams I was pulling for are no longer in contention).

And then there was Tom Brady—who may have had the shortest retirement in NFL history. Rumors notwithstanding, apparently Aaron Rodgers is still willing to keep playing. Presumably both are at least partially motivated by the possibility of hanging up their cleats with another championship ring on their hand—to get “out” at the top of your game. 

A Pew Research Center analysis of the most recent labor force data concludes that, as of the third quarter of 2021, just over half (50.3%) of U.S. adults 55 and older said they were out of the labor force due to retirement. That compares to 48.1% in the third quarter of 2019, before the onset of the pandemic. Looking through a more traditional retirement age focus, in the third quarter of 2021 two-thirds of those 65- to 74-year-olds were retired, compared with 64.0% in the same quarter of 2019.

Indeed, there’s a widely cited datapoint that 10,000 Boomers head into retirement every single day—an eye-dropping pace that is almost certainly higher these days. The Pew report notes that the leading edge of the Baby Boomer generation reached age 62 (the age at which workers can claim Social Security) in 2008. Between then and 2019, the retired population ages 55 and older grew by about 1 million retirees per year—but in the past two years, the ranks of retirees 55 and older have grown by… 3.5 million.

This is all a bit extraordinary. Back in the aftermath of the so-called “Great Recession,” retirement rates actually declined. By the third quarter of 2010, 48% of adults ages 55 and older[i] were retired, down from 50% in the same quarter of 2007, according to Pew. Of course, accompanying that downturn was a steep decline in the value of financial assets, not to mention home prices. Not surprisingly, that combination (and the rampant uncertainty of the times) apparently served to keep workers… working.

That’s not been the case in the aftermath of the pandemic; household wealth has been rising since the onset of the pandemic (thanks in no small part to the checks from the federal government), the markets have (certainly until recently) been robust, housing prices are rising (unfortunately, so are a lot of other things). Heck, even Social Security saw a nice bump (we’ll set aside the funding/sustainability concerns for another day).

Now there are doubtless many factors underlying these trends—surely the Boomers at least have been “conditioned” to think of the attainment of a certain age as time to cease, or wind down, full-time employment. Moreover, while it may be a phase rather than a permanent shift in sentiment, there’s no denying that many, perhaps most, workers are rethinking—work. 

 But one can’t help but note that the increases in financial wealth—and here some credit is surely due to the compounded impact of workplace benefit programs—employer contributions, and the savings that have benefited from the strong markets—that have provided the cushion, if not the wherewithal—to step out of the rat race—with the comfort and backing of their workplace retirement savings. 

And who wouldn’t want to get “out”… when the getting is “good.”

- Nevin E. Adams, JD

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[i] I’m not sure why 55 was chosen as a marker. In fairness, the notion that roughly half the population 55 and older was “retired” strikes me as extraordinary, in and of itself. While some amount of that is surely involuntary, I can’t help but think that I’m doing something “wrong”… ;-} 

Life-Changing Times

 It’s hard to believe that just two years ago many of us went into our places of work, packed up, and went home for what most thought would be a week, maybe two—and wound up being a lot more than that.

In March 2020, my wife and I had just returned from a funeral in the Boston area. While the worst of what we would come to learn about COVID was—well, yet to be learned—we knew that cautions were in order. So we drove, rather than flew to the event—which wound up being full of strangers (many of whom were in what would come to be acknowledged as “vulnerable” health categories). Throughout we were aware, conscious of a certain risk, but we were not overly cautious—about on the order of what you would do when you come into contact with someone who had a cold. 

In hindsight, what might have been a “super spreader” event didn’t turn out to be one—even though less than 48 hours later the governor of the Commonwealth was putting in place lockdowns and restrictions that would have precluded our trip. We’ve not regretted that trip for a moment over the past two years, though on more than one occasion since I’ve thought to myself just how remarkable that was. It could have been life-changing.   

In fact, the past two years have been life-changing in such different ways—many have lost loved ones, and, worse, been precluded from saying “good-bye”—others have had damage to their health, or the health of loved ones—many more have suffered financial hardship—and, incredibly, some have not only emerged relatively unscathed, but prospered, at least financially—spared travel and commuting expenses, and perhaps even courtesy of assistance funds from the federal government. Most of us can identify with more than one of those categories. 

That said, while COVID, or the response to COVID, has affected us all[i] in some ways—and continues to do so—the impact was… uneven. Some industries—ours included—pretty much packed up one night, went home—and continued to do what we do every day (with modest adjustments). Others—restaurants, hotels, airlines, law enforcement, fire departments—couldn’t. Some—notably schools—tried to pivot to remote learning overnight with what are/were necessary, but arguably unsatisfying results. And then there were some—and here one can’t help but acknowledge the bravery, commitment and sacrifice of health care and long-term care workers—who not only “couldn’t,” but were required to put their very lives at risk in the service of others. 

These actions, and the response to these actions, will almost certainly be life-changing—in ways we cannot now fully appreciate. 

Amidst labels like the “Great Resignation,” it’s been widely proclaimed that we’re never going back to “normal”—that work, at least the notion of a 5 day/week physical location—has been changed…forever. And certainly, for some workers and workplaces, that is true. Whether that will be for good or ill, whether “cultures” can (or should) still be nurtured on that basis remains to be seen. 

However, the COVID pandemic has also illuminated—in a unique way—the importance of workplace benefits: the financial buffer that retirement savings can (and do) provide in an emergency, the synergies between our financial and physical health, and an opportunity for these programs to be—to the extent they aren’t already—an integral component of an organization’s culture.

And if these programs are an integral component of your culture—what does it say about your organization? Is it “just enough” to get by? 

Or could it be… should it be… life-changing?

- Nevin E. Adams, JD

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[i] Indeed, I’ve walked away from this experience convinced of a couple of things: (1) most of the jobs that can’t be done from home are probably worth more than they’re paid; (2) many of us live further from the ones we love than we realize; and (3) many likely live further from work than we’d prefer. 

Is the Retirement System ‘Fragile’?

It’s not all about “the Benjamins,” but a recent analysis of the nation’s private retirement system certainly puts a lot of emphasis on the accumulation of aggregate assets in retirement plans.

The Morningstar report—“Retirement Plan Landscape Report, An In-Depth Look at the Trends and Forces Reshaping U.S. Retirement Plans”—is extraordinarily diverse and comprehensive[i] in its assessment—though while the report’s authors seemed to be striving for a balanced assessment, the overall sense was one of a leaky boat.

No Surprises 

There were some findings that seemed to surprise the authors that didn’t strike me as all that remarkable. Apparently (I hope you’re sitting down for this one) larger plans pay lower fees (expressed as basis points) than smaller plans. They are also more likely to invest in collective investment trusts (which tend to have lower fees, though that isn’t necessarily the case).

What I did find surprising was Morningstar’s assessment that those smaller plans pay, on average, “just” 88 basis points (compared to the 41 basis points estimated for larger plans)—indeed, I found both numbers pretty reassuring. On the other hand, “averages” can often obscure reality, and the authors also found that smaller plans also feature a much wider range of fees between plans—with roughly a third of those plans costing participants more than 100 basis points in total.

And make no mistake: Those higher fees are—literally—a “toll” on retirement. The Morningstar report says that two workers who save the same amount and invested the same way might well result in an individual who worked for a smaller employer (and who participated in a smaller plan) having 10% less in retirement savings. That’s a hefty price to pay—but then this is hardly the only area in life where larger purchasers are able to obtain a volume discount.

ESG ‘Risk’

There was also little surprise in the finding that “Plan sponsors appear to have shied away from considering environmental, social and governance (ESG) information and analysis, in part because of regulatory uncertainty.” Oddly, Morningstar’s analysis—here they leverage their own ratings system to ascertain funds that might be considered to be exposed to ESG “risk”[ii]—produces a number that, while well short of what Morningstar would apparently deem prudent,[iii] still notes that “as many as 48% of retirement plans with at least 100 participants already offer investment strategies that use ESG analysis to evaluate investments”—though that belies the results of most industry surveys (including PSCA’s 64th Annual Survey of 401(k) and Profit Sharing Plans). On the other hand, the report acknowledges that this includes funds with a “broad definition” of ESG—funds that presumably take those type factors into account without touting that as an explicit emphasis (and perhaps without the awareness and focus of plan fiduciaries). Regardless, and undoubtedly for the reasons cited by the report, there’s little question that plan sponsors outside of the public and non-profit sectors have indeed shied away from ESG. At least for the moment.

Assets Oriented

There was, however, some interesting new ground in the apparent “churn” in the system. The report states that more than 380,000 plans closed during the period from 2011 to 2020—a result it attributes largely to employers going out of business. While that is certain a point of vulnerability for those previously covered by those plans (not to mention the presumed loss of employment), the solution for that lies beyond the retirement system per se.

As we have noted consistently, the report expresses concerns about coverage and the access to workplace savings, but ultimately differentiates its focus from traditional retirement system analysis by focusing on the size and flow of the system, as measured by assets. Indeed, and as noted above, the report seems particularly obsessed on the subject of assets—not on an individual level, or on obtaining a measure of retirement income adequacy, but on the premise that more assets mean the ability for plans in the system to negotiate for lower fees (and, on a related note, to opt for investment types, notably CITs, that have lower expenses). But while the emphasis was intriguingly unique, it’s also the basis upon which these authors affix the “fragile” label to the system, as if “the system”—as measured by assets—must constantly grow in order to be considered healthy. 

Now, there were some jaw-dropping numbers behind this premise—the report claims that there have been outflows of more than $400 billion a year since 2015, at least as reported by plans in their annual filings. However, at a time when 10,000 Boomers are said to be heading off into retirement every day, one might well expect a lot of them to be taking their retirement savings with them. 

‘Out’ Flows?

The concerns expressed in Morningstar’s analysis seems to assume that much of the outflow is pre-retirement “leakage”—though they seem equally concerned about rollovers. Why? Well, once again they write that, “More assets in the defined-contribution system would help more sponsors gain the leverage to demand lower fees from asset managers and drive down costs for end investors.” While true enough, it seems an odd anchoring. 

Indeed, in commenting on their assumptions, the authors comment that while they believe their estimates are “conservative,” and that “any errors understate the massive detectable flow of money out of DC plans,” they also admit that it is “…clear from Internal Revenue Service data that most flows out of plans are for rollovers rather than cash-outs…,” though they concede you can’t draw a distinction there between cash-outs and rollovers with the Form 5500 data.

Indeed, while 30,000-foot assessments of the retirement savings landscape are not unique, in looking nearly exclusively at the total pool of assets in that system and its implications, Morningstar’s report makes no attempt to correlate those assets to the needs of the individuals covered by the system. 

‘Pool’ Rules?

That asset-focused prism leaves it to claim that the entire system “relies on a few thousand employers to cover most people saving for retirement,” as though that’s a unique vulnerability. But the defined contribution retirement system is not one gigantic pool that must satisfy all obligations. Sure, it would be great if more employers, specifically more small employers, saw fit to offer a plan—but the fact that they don’t doesn’t put “the system” at risk. 

But those who do have these programs, and take advantage of them, face no jeopardy as a result (although they may well wind up being taxed at higher rates in the future). The U.S. DC system doesn’t “rely” on new employers to offer plans to compensate for those that are no longer doing so—though arguably the coverage gap, and the lack of ready access that results, are an issue of general concern.

All in all, the report offers an interesting assessment of “the system”—more thoughtful and comprehensive than most, though the obsession with total assets seems a bit myopic, and as one might expect a lot of assumptions, perhaps of necessity in a report as broad as this.  

In sum, while its conclusions are perhaps a bit “fragile” upon which to build a firm assessment, there’s plenty there to warrant discussion—and action.  But is the system "Fragile" - only for those who aren't part of it.

- Nevin E. Adams, JD

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[i] While much of the report focuses on DC plans, the Morningstar researchers also intriguingly acknowledge that more than 33 million people are or will receive benefits from defined benefit plans as of 2019, and that DB plans accounted for more than 30% of distributions paid to participants in 2019 and they do not appear to have peaked. It even notes that approximately 8.8 million people who are no longer working are still entitled to future benefits and 11.7 million people who are still working will eventually receive benefits. Looks like those “dead” pension plans still have a lot of life in them! 

[ii] The percent of assets that are in the various categories of ESG risk assigned by the Morningstar® Sustainability Rating™ for funds, sometimes called the globe rating.

[iii] In fact, the report comments, “…sponsors have left the U.S. defined-contribution system in the aggregate tilted toward investments with more ESG risk—which is the degree to which companies fail to manage ESG risks, potentially imperiling their long-term economic value. Plan sponsors may wish to reexamine their investment choices using an ESG lens.” 

The Big(ger) Picture

Our industry often seems to treat participants like children who can’t make big decisions—but a recent research paper suggests they might make better choices if we expanded their perspective.

The paper, intriguingly titled “Financial Wellness Meets Behavioral Economics,” highlights a behavioral tendency known as “narrow framing”—basically a tendency to focus on one complex choice, or one element of a complex choice, at a time.  Now, at first blush this seems rational, and perhaps even prudent—but the paper suggests that this kind of linear thinking means that people are inclined to overlook real-life disruptions like financial emergencies—which are not only uncertain with regard to amount or timing, but even in terms of whether they will occur at all. Little wonder, therefore,  that studies routinely find that workers say they are ill prepared to come up with the funds to cover some kind of short-term emergency outlay of $400.

This particular e paper—authored by none other than Shlomo Benartzi, Professor Emeritus, UCLA Anderson School of Management and Senior Academic Advisor at Voya Financial, which published the paper—explains that “when it comes to household financial planning, the ‘one future’ fallacy often leads people to focus on predictable and recurring expenses, such as rent and the monthly phone bill.” It cites research by Abigail Sussman and Adam Alter that finds that people struggle to budget for any kind of “exceptional expense,” whether it’s a summer vacation or a new television. Since these expenses are not recurring, and most household budgets are narrowly framed around regular monthly charges, people fail to consider them as part of their financial plan. So far, so good.

The paper’s ultimate premise seems to be that if people could see the full range of their financial needs, they could do a better job of allocating funds—that, among other things,  they’d make more rational health care decisions if they were presented a full integrated cost impact of a plan with premiums and deductibles (the author suggests most focus on the deductible). In short, the paper suggests that we (advisors and the retirement industry generally) need to do a better, holistic job of helping individuals see the full range of options and alternatives, work with them to choose the most optimal—and, of course, make it easy for them to act, rather than defer acting on those choices.

Or, said another way (as the paper does), “the ultimate goal is to develop a data-driven financial wellness platform that helps people better allocate their scarce dollars.”

Now I don’t doubt for a minute that people “overlook” budgeting for emergency expenses because they don’t view them as a specific reality (I also figure that many don’t because they feel they have other, better uses for that money, including perhaps “eating”). In that sense, creating a “slot” for emergencies alongside the budgetary savings/spending slot for “retirement,” rent, food, and transportation is logical in both acknowledging the potential need alongside those that tend to be seen as “must-pays.”   

I’m not altogether sure, however, that an unspecified emergency (and approximated cost) will warrant the appropriate attention—and more than a little concerned that if it did, it would do so at the expense of items that feel more “discretionary” (like retirement).[i] And while this may be old-world thinking, I’ve seen (and heard of) far too many situations where giving people not only lots of decisions to make, but forcing them to come up with “answers” for all of them might well produce a misallocation of resources—or in a worst-case scenario, forestall a decision of any kind whatsoever.   

So from an academic perspective, “narrow framing” might well be a “bad behavior” that precludes “rational” decision-making, though I tend to see it more as a coping strategy for folks struggling to make complex financial decisions spread across limited means. But then I’d also argue that sometimes you need to make choices that, while perhaps deemed financially rational, aren’t necessarily the ones you need to make in order to sleep at night.

Thoughts?

- Nevin E. Adams, JD

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[i] I am, however, convinced that the positioning of health care programs/options/expenses could do with some improvement.