Are We Worrying About the ‘Right’ Retirement Risks?

As if there wasn’t enough to worry about regarding retirement—a new research paper suggests we’re not worrying about the “right” things.

More precisely, that paper, published by the Center for Retirement Research at Boston College, was titled, “How Well Do Retirees Assess the Risks They Face in Retirement?” And, as you might suppose, the answer provided at the conclusion of the paper is—“not very well.” 

The premise of the paper relies on the author’s identification of five major risks in retirement, which turn out to be:

• Longevity risk (the risk of outliving one’s resources)
• Market risk (the financial risk not only from the markets, but from things like the housing market)
• Health risk (the risk of unexpected medical and long-term care expenses)
• Family risk (the risks arising from divorce, death, or the unexpected illness of an adult child)
• Policy risk (notably the sustainability at current benefit levels of Social Security)

Arguably, all of these are legitimate risks that need to be considered and dealt with as part of any reasonable retirement plan, though one might argue that even these aren’t exhaustive (consider, for example, inflation—but more on that in a moment).

The paper’s author performs some statistical alchemy and then determines that the three top risks retirees should be worrying about are:

(1) longevity; (2) health; and (3) market.

But, according to the author’s analysis retirees are most worried about are:

(1) market; (2) longevity; and (3) health.

Now, despite the headlines[i] that followed the publication—and aside from the specific ordering—those actually seem to match up pretty well to me. However, the “point” seems to be that retirees are more worried about the market than they “should” be, that the bigger risks to their retirement are that they might outlive their savings—and/or that their bad health might drain them faster than expected—but they’re focused on the market impact on savings. Bottom line: retirees are worried about the “wrong” things.

At this point, a couple of points should be made. First, the assessment of what these retirees are worried about was drawn from 2016 data. And secondly, the conclusions about what retirees are concerned about are gleaned from a series of questions in that databank[ii]—which, with the “help” of the author’s calculations, are turned into those weighted sentiments of concern. And then, having crafted some subjective sense of the relative concerns of those elements, the author purports to establish the “objective” benchmark against which they are to be judged. 

Market risk falls relatively low on this scale because of his assumed 20-year investment horizon in retirement, though retirees may lack that confidence, particularly these days.

The paper’s author concludes by highlighting the need to educate the public on these various retirement risks (and presumably their relative importance, based on their likely impact), most specifically the need for lifetime income products (to shield against the longevity risk) and long-term care support (to buffer against the health care concerns).

Now, I’d argue that a judgment based on subjective 2016 data doesn’t tell us much about what retirees (particularly these days) are actually concerned about—and even if it did, it doesn’t seem to me that there’s enough difference in priorities to matter. 

To me, it’s not so much which risks retirees are concerned about, much less their ordering—but that they are aware of the potential risks and seeking help on how best to mitigate them. But what I do think is important—and here I agree with the study’s author—is (more) education about the multiple potential risks to retirement security—and not just for those already in retirement, but for those of us still trying to make preparations against those risks. 

- Nevin E. Adams, JD

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[i] Retirees are underestimating retirement risk, study finds, Seniors Badly Misjudge Key Retirement Risks, When saving for retirement, seniors overestimate market volatility and underestimate life expectancy.

[ii] The source data—the Health and Retirement Study (HRS)—asks respondents to assess the probability of various outcomes. The respondents give a number from 0 to 100, where 0 means absolutely no chance and 100 means absolutely sure to happen. And for these purposes, the questions ranged from “the probability that stocks will be worth more next year than they are today,” to the chance of gaining 20% or more over the next year and the chance of losing 20% or more, to the probability of the probability of spending $1,500 or more in the coming year on health care.

The Sure Not-So-Sure Thing

 By some accounts, I just spent the past week in “retirement”—driving around sightseeing, reading some good books, hanging out with family, and yes—even walking on a beach.

And I have to tell you—if that was retirement, I don’t know how I’m going to afford it.

Now, I realize that isn’t the stuff of most “real” retirements, though it is frequently the stuff of retirement planning brochures. My week was a family vacation, and it was spent doing the things that families do on vacations.[i] And it served as a stark reminder that while sitting on a beach doesn’t cost much, making arrangements to stay—and eat—in proximity to the aforementioned beach is a whole other financial consideration.

That said, when those actually in retirement are asked about their retirement confidence—well, it’s pretty high. According to the Employee Benefit Research Institute/Greenwald Associates annual Retirement Confidence Survey, 77% of current retirees report feeling either very (33%) or somewhat confident about having enough money to live comfortably throughout their retirement years. All of which suggests that if there’s a lot of uncertainty about what retirement will be like/cost, once you’re “in it”—well, you both have a sense of what it’s going to cost, and how much you have to cover it.[ii] That, by the way, despite the reality that the same RCS has for years found that significant numbers of individuals have found themselves in retirement through no choice of their own[iii]—sometimes due to health, sometimes due to employment-related decisions. 

Today we are looking at an unusual confluence of events: a tight job market in the middle of what has been termed the “Great Resignation,” surging inflation at rates not seen in a generation, and investment markets that, after a remarkable run-up—well, let’s just say it’s been rough on most 401(k) accounts. We’re getting the same kinds of investment advice we always do/give during such downturns—but one can’t help but wonder if it’s “different” this time—if the disruptions are anything but “transitory.”

“Disruptions” are the bane of a fixed income, of course. Just when you think you have it all balanced out, you have to spend (a lot) more for gasoline, pay a higher real estate tax bill, scrape up some money for a new prescription drug, or deal with the financial consequences of an unexpected medical emergency (or that of a loved one). That this happens at the same time that your investment portfolio is taking a sustained “hit” contributes to the sense of economic pessimism that garners so much press, polling and political aspirant attention in this election season. Without question, things cost more than they did (when you can find them on the store shelf), and those on fixed incomes (and that includes a growing number of current workers who perhaps haven’t gotten a pay increase in a while) have to make “adjustments”—often painful ones. And if all of this doesn’t warrant changes in financial plans, it certainly warrants a new level of discussion about them.  

Perhaps the only “sure” things are death and taxes after all—but the lesson for those of us still drawing a paycheck and planning for retirement is the importance of preparing for that third “sure” thing when it comes to retirement planning: uncertainty.

- Nevin E. Adams, JD

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[i] In fairness, we also spend a day tracking down the gravesites of some ancestors, and that probably isn’t on most vacation agendas!

[ii] It’s worth highlighting, of course, that workers reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer are twice as likely as those without any of these plans to be at least somewhat confident (83% with a plan vs. 40% without one). 

[iii] In the 2022 RCS, 32% who retired earlier than planned say they did so because of a hardship, such as a health problem or disability, not related to COVID-19. Another 23% say that they retired due to changes at their company, but 38% say they could afford to retire earlier.

Back to ‘Normal’?

Things are—slowly—getting back to normal. Planes are filling up, commutes are slowing with increased traffic volumes, and in-person meetings are back underway. 

And while for many readers things have been back to “normal” for some time, I’ve had the opportunity over the past two months to participate in three separate advisor events that were the first such in-person gatherings since the onset of the pandemic.

We’ve learned not only how to navigate things like virtual committee meetings and education sessions, but found that in many cases those platforms could be even more effective in extending our reach to individuals who might not have made it to an in-person session, or who might have been more receptive to those messages in the wake of COVID concerns about health and job security. 

While we’re not quite “done” with COVID (and perhaps we never will be), we’ve learned a lot of valuable lessons. The notion that we have to be in a physical office to be productive has been soundly rebuffed. At the same time, in every in-person gathering I have had the opportunity to be part of these past several months, there is an energy, an excitement, an enthusiasm that transcends any I’ve experienced in even the most engaging “virtual” formats. Oh, one day in the distant future we may not need that social connection—or perhaps we’ll simply tell ourselves that whatever is “lost” is more than compensated for by the convenience and cost savings of remote engagement.

But “those” days aren’t yet these days—and in just a couple of weeks we’ll be convening—in person—for our 10th annual NAPA D.C. Fly-In Forum. I still remember attending the first one as a “special guest,” and being struck even then by the quality of the program and speakers. More importantly, the room was full then—as it continues to be—of the nation’s leading retirement plan advisors, networking and engaging not only with each other, but with some of the most influential voices in Washington.

This year looks to be no exception—and as impactful as last year’s “virtual” version surely was, it really can’t compete with the reality of an in-person event—not to mention the opportunity to walk to—and through—our nation’s Capitol. 

We’ll have a lot to talk about—while the Labor Department’s next steps on the so-called fiduciary rule and ESG rules have just been pushed back, the final proscriptions of PTE 2020-02 have just taken hold (notably the requirement to document, in writing, the best interest case for a rollover recommendation), and the controversy regarding the recent compliance assistance release on cryptocurrency is still reverberating. 

This year’s Fly-In Forum will feature comments from Ali Khawar, who has been serving as Acting Assistant Secretary for the EBSA, as well as Zeena Abdul-Rahman, Branch Chief, Investment Company Rulemaking Office, Division of Investment Management at U.S. Securities and Exchange Commission to speak to ESG, as well as a very special panel of Hill staffers for some “inside the Beltway” perspective, and a panel of expert ERISA litigators to discuss recent developments, and provide insights on staying out of court. And no NAPA D.C. Fly-in Forum would be complete without the appearance of key legislators, which this year will include Sens. Ben Cardin (D-MD), John Barrasso (R-WY) and Rob Portman (R-OH) to shed light on the incredible opportunities contained in SECURE 2.0, RISE & SHINE, the EARN Act, and/or the combination/assimilation of all of the foregoing.   

But for me—and for the dozens of advisors who have participated over the past 10 years—the most impressive aspect of our Fly-In Forum is the second day, where delegate-advisors have an opportunity, assisted (and prepped) by the NAPA GAC team, to meet with legislators and their staff on Capitol Hill, to share your perspectives, ideas and concerns, based on your front-line, real-life experiences working with retirement plans, plan sponsors and participants. Heading into a crucial mid-term election cycle, your voice—your insights and perspectives—have never been more critical.

Whether you’ve done this a dozen times, or have never had the opportunity, the NAPA D.C. Fly-In Forum is an amazing “first-hand” experience. For those ready to get off the sidelines and contribute to a real difference in retirement policy, you won’t find a better “ticket” than the NAPA D.C. Fly-In Forum.

Things may be getting back to “normal”—but it’s anything but business as usual.

- Nevin E. Adams, JD

Looking Before You 'Leap'

As new rules about rollover disclosures kick in, a new report highlights an often unacknowledged risk of rollovers—high(er) fees.

That’s right—a new report from Pew Trusts seems to have stirred up a new awareness of that issue—all this attention just as PTE 2020-02 brings the written requirement of why a rollover is in the best interests of participants into play.

That difference shouldn’t come as a surprise to anyone who has ever compared the fees in their 401(k) to an IRA. Most 401(k)s benefit from institutional pricing, and if the menu of available investment options isn’t quite as broad as that in an IRA, they benefit from the selection and monitoring by ERISA fiduciaries. Yes, IRAs are just that—individual retirement accounts—smaller, generally speaking with more options—and yes, much more likely to be charged retail mutual fund fees—more expensive. In that sense the report—though it’s garnered headlines of late—doesn’t really tell us anything we didn’t know, if we’d only stop to acknowledge it. 

However, sure as I am willing to accept the conclusions based on both personal experience and professional acumen, I am a tad skeptical in the results of the analysis. The title is truer than one might expect. The title of the report speaks volumes as it says: “Small Differences in Mutual Fund Fees Can Cut Billions From Americans' Retirement Savings.” Because, after all, it surely could—but does it?

The report that is garnering so much attention now claims that, in the aggregate, the amount of retirement savings lost in such rollovers potentially reaches tens of billions of dollars. Citing data from the Investment Company Institute, the report notes that in 2018 alone, investors rolled $516.7 billion from employer retirement plans into traditional IRAs. They go on to assert that an analysis of fee differentials suggests that over a hypothetical retirement period of 25 years, those retail investors could see an aggregate reduction in savings of about $45.5 billion—just from that single year of rollovers.

Math ‘Problems’

The analysis—based on data from Survivor-Bias-Free U.S. Mutual Fund Database, Center for Research in Security Prices—though it relies on medians and averages for its fee conclusions—and, based on those, it asserts that annual expenses for median retail shares (ostensibly what you’d have access to in an IRA) were 0.34 percentage points higher than those for institutional shares (again, ostensibly what you’d have access to via your typical 401(k). Similar projections are presented for hybrid, and for what the analysis purports to be the smallest median fee difference. Having chosen these points of reference, the analysis simply does the math.[i]

Rollover Rationales

Regardless of the size of the differential—what role, if any, do fees play in these rollover decisions? Suffice it to say—not much. 

At least according to another report[ii] published last September by Pew, based on a survey of 1,125 older workers and recent retirees ages 55 to 75 between May 12 and June 5, 2020—roughly half currently and the rest working full time, though all had at least $30,000 in retirement savings. The survey asked participants a series of questions about whom they had consulted in deciding what to do with their retirement savings and how they planned to handle their savings (in the case of those still working), or what they had done with their savings (in the case of retirees).

Now, there are many reasons underlying the distribution decision—fees, convenience, investment options—but when the workers weighed in they said they were most motivated to stay in their current plan because they preferred the investment options—a reason cited by 50% of respondents as the most important reason, and mentioned by nearly three-quarters (73%) as at least one reason why they intend to leave their savings in their current plan when they retire. Not surprisingly—since those surveyed had at least $30,000 in savings—more than half felt that staying in their current plan would be convenient.

On the other hand, only about 3 in 10 were motivated to plan on keeping their savings in their current plan because they thought it would have lower fees than other options, and a mere 15% said lower fees in their current plan was the most important reason for planning to leave their savings where they are.

‘Control’ Voice

Near-retirees planning to roll their savings into an IRA at retirement were similarly motivated by convenience and investment options, according to the report. However, the strongest motivating factor for those respondents was the ability to have greater control over their investments, with more than 6 in 10 (63%) saying that was one reason that they planned to roll their workplace savings into an IRA, while for nearly 4 in 10 it was the most important reason. Roughly a quarter said that investment performance was behind their plan to move their savings into an IRA when they retired, and the same number actually said it was because the IRA had lower fees. 

Control was most important among retirees as well; about 18% of retirees cited lower fees as a reason for rolling over their savings, slightly less than the 25% of near retirees who cited fees as a reason—more specifically that the IRA had lower fees than their current plan. Only 4% of retirees said it was the most important reason, nearly identical to the 3% of near retirees who said the same.

Said another way, fees were not a major consideration in the rollover decision—and when it did manifest itself as a reason, it was because the IRA fees were believed to be lower than their current plan. Which, again, in view of certain market realities, suggests that those workers didn’t appreciate/understand the fees paid in their 401(k).  

The reality is, a small difference in mutual fund fees can cut billions from Americans’ savings—an impact that, unfortunately, many of those contemplating a rollover may not realize[iii] or prioritize in their decisions. 

That said, while those new disclosures documenting why a rollover is in the participants’ best interest may not solve the problem—they should make it easier for advisors to help them better understand what they may be giving up. And perhaps all of this attention to this important issue will help participants who aren't working with an advisor to "look" before they simply leap... 

- Nevin E. Adams, JD

[i] While the comparisons are certainly “directionally” accurate assuming the math is correct, the size and scope of the impact surely suffer from the imprecision of the markers employed. But considering the sheer size of the rollover market (it now outpaces that of the 401(k), it’s surely a significant amount.

[ii] Pew Survey Explores Consumer Trend to Roll Over Workplace Savings Into IRA Plans

[iii] The Pew report notes that “although few said that they would continue a rollover into an IRA with higher fees than their workplace plan, previous research by Pew has shown that many people struggle to fully understand their investment fees. Just 25% of workers in an earlier Pew survey said that they had read and understood the fee disclosure of their retirement account. 

Dividing Lines

 It’s been said that there remains more that unites us than divides us—but that’s not how it feels most days. 

However, such times are not all that unusual for this diverse nation. Indeed, if today’s battle lines do seem harsher and more extreme, my sense is that it’s only because they are magnified by media and social media, transported to us every minute of the day and night by devices we dare not relinquish any longer than to recharge the battery.

Consider the nation’s declaration of independence which we will commemorate on Monday. Students of history—not to mention aficionados of the musical 1776 or readers of David McCullough’s John Adams or viewers of its HBO miniseries adaptation—know that the decision to declare independence was no easy matter. Indeed, the political bartering and frustrations involved in getting to a “unanimous Declaration of the thirteen United States of America” would have been all-too familiar to the legislators of today. Even then, it was declared to be “unanimous” only because one of the 13 colonies voting was persuaded to abstain from the vote rather than oppose it. 

While we celebrate the Fourth of July as Independence Day, that is neither the day on which the Continental Congress passed the resolution (July 2), nor the day on which the declaration was signed by the members of that Congress (only President of Congress John Hancock and Charles Thomson, Secretary, signed it on the 4th (the former in a hand “large enough for King George to read without his spectacles”). Most delegates didn't sign it until August 2. One didn't sign until 1781. Three delegates never signed.

The signers—who stood to lose everything they possessed, including their lives—surely did so with trepidation. Indeed, Hancock reportedly said at the signing (on August 2) that they must all stick together—to which Benjamin Franklin reportedly responded, “Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately.” 

Of course, that declaration was neither the beginning nor the end. Hostilities with England had already been underway for more than a year, the terrible winter at Valley Forge was more than a year in the future, General Cornwallis’ surrender at Yorktown was still more than five years off, and an official end to the hostilities would not come until 1783. 

Invoking the Vision

Less than 100 years later, even as the nation approached another Independence Day celebration, President Abraham Lincoln would find himself in the middle of an enormously unpopular war fought to keep the nation together, while two American armies converged at Gettysburg for what would be the bloodiest battle in the nation’s history. Even so, President Lincoln later that year invoked the vision of the nation’s founders to launch his Gettysburg Address with the words; “Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal.” This at a time when the outcome of that conflict—and his own reelection prospects a year later—were anything but certain. 

Without question we live in times of great social distress, where it seems that everything, literally everything, has been polarized and politicized into divergent and irreconcilable camps. Those looking for common ground or points of potential agreement seem to be few and far between, while those seeking compromise are typically condemned for trying. Indeed, the choices our nation faces today—on terrorism, the fighting in Ukraine, health care, energy costs, inflation, the economy, and yes, even retirement savings[i]—seem relatively modest in scope when considered next to the daunting prospects our forefathers faced in 1776. What they could not have had at that time—but what their vision has surely bequeathed to us—is a confidence in what we now consider American ideals and the resilience of the American spirit.

Their sacrifices were made a long time ago—and the liberties they fought to win, and later to preserve, are so interwoven into the fabric of our day-to-day expectations that it is easy to forget just how precious and rare they remain in this world. 

With all its faults, all its frailties, what we have here remains a special gift. It’s a national treasure we should appreciate every day—even if we only celebrate it once a year. 

- Nevin E. Adams, JD

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[i] Those of us who have committed ourselves to build, expand and nurture a more secure retirement for American workers have to find solace in the overwhelmingly bipartisan legislative efforts—both in recent months, and before—in support of that goal.