A Tale of a (Wobbly) Seat at the Table

 

I recently met some friends for lunch – but the only seats available were those high-back stools you basically have to climb up to in order to sit. But that wasn’t the worst of it.

As it turned out, my seat…wobbled. Which is to say that it basically rocked even as I sat there. Now, I’m all about rocking chairs in the proper setting, but when you’re trying to eat a meal (or enjoy a cold beverage), it’s annoying – particularly if you are one of those lean on the table types – and especially when your seat is high off the ground.   

And as I was sitting there desperately attempting to maintain my balance (it didn’t help that my companions found my predicament humorous), it called to my mind that retirement security has long been said to be based on the concept of a three-legged stool.

While the reference is somewhat dated, Social Security benefits were said to be one leg of a three-legged stool consisting of Social Security, private pensions and personal savings/investment.[i] There were, of course, some fallacies in the comparison, not the least of which was that those three legs[ii] (like that of my wobbly stool) weren’t equal, but they were all seen as essential to the overall stability of the end result. Time may have passed, and the components may have shifted, but crafting a credible, sustainable retirement income plan continues to require multiple prongs of support – and yet today, even those traditional legs are in need of some attention. 

Secure the Foundation

As with my initial attempts to correct the stool’s wobble, first and foremost, Social Security (and Medicare) needs to be shored up. 

To fully appreciate just how essential this program is, and how integral to a complete solution, just try finding a retirement income needs projection that doesn’t have as a foundational baseline Social Security benefits. Or consider that an emerging strategy to compensate for retirement savings shortfalls is to use those savings to postpone Social Security claiming in order to maximize those benefits. Indeed, considering how many Americans rely on Social Security as their sole – or at least a primary – source of retirement income, you’d think addressing the looming shortfall would be a matter of high priority for policy makers.

With all its funding shortcomings and demographic challenges, the “solution” is straightforward[iii] (raise FICA withholding rates and/or the income levels to which those rates are applied, or means-test and or reduce benefits). That said, the cost – political and economic – and will to do more than talk about the need to do more – remains sadly lacking.

It is, quite simply, “job #1” – and a foundation upon which everything else depends. Needless to say, perhaps – the sooner the better.

Open More ‘Doors’

The simplest solution to my wobbly stool was to find – another stool. Arguably, that just transfers the problem to another future diner, but... as it turned out, there were none available. Indeed, despite the protestations of a distinct, though all-too-readily published minority, the current private retirement system works well – but only for those who have access to it. While there’s little (other than human nature) preventing folks from simply going online and opening an individual retirement account – few do. In fact, data consistently shows that even modest ($30,000-$50,000 salary) income workers are twelve times more likely to save for retirement if they have access to a plan through work than those who don’t. But many – and these days that’s primarily those employed at smaller businesses – still don’t.  Our retirement vision of the future simply has to include universal availability. In the private sector only about half of full-time workers have that opportunity, and that’s a problem.

Now, small businesses are kept pretty busy just trying to stay IN business, but they have the same need to attract and retain talent as the Fortune 50, and a retirement plan benefit can certainly play a role. The recently passed SECURE 2.0 Act of 2022 provides massive incentives to do so (tax credits that, for those with 50 employees or less, basically make the plan free for the first three years), and, for those put-off by the potential complexity of providing those benefits, a “Starter K” that’s significantly streamlined compared with the traditional 401(k). Yes, there’s a provision that will require new plans of most businesses formed after Dec. 29, 2022, to offer automatic enrollment – but that will certainly help those workers save, and save more effectively. 

Let’s face it – even when you build it, they don’t always come. My guess is that all this will be effective to some degree – but that it won’t completely close the so-called “coverage gap.” But, as the dramatic new incentives in SECURE 2.0 have only just come online, we should probably give them a little time to sink in and take hold.

Improve the ‘Offramp’

At one point in my annoyance with my stool (yes, I had unsuccessfully attempted to remedy the situation with a wadded up paper napkin, but couldn’t quite get the balance correct) – and I gave serious thought to simply walking out and trying a different establishment (one that had better seating). But the food had been ordered, and I was the only one (apparently) struggling with the imbalance, so I decided to tough it out (though I have to say that dining whilst trying to maintain one’s balance doesn’t make for good digestion).

It is ironic that plans ostensibly designed to (ultimately) provide income in retirement, do such a poor job of providing…income in retirement. Now you can argue that the focus of these plans is to help workers accumulate savings FOR retirement, and that after that, they’re on their own – but there’s plenty of evidence to support the need for helping workers save and invest properly. And trust me, that’s a lot simpler than trying to figure out how to structure withdrawals in retirement. It may not be a legal obligation, but there’s a case to be made for employers who want to help assure that these workers save.    

All one has to do is look at the tremendous success of target-date funds – not only in the rate of adoption by plans and participants, but in how much better diversified 401(k) accounts are today versus a generation ago when everybody was making individual investment decisions. Already popular, that pace of take-up was spurred by the guidelines contained in the Pension Protection Act of 2006, and subsequent guidance from the Department of Labor. The question that needs to be answered then is, how/can we do something similar for helping get those retirement savers invested in a retirement income solution – but perhaps more critically, how can we get plan sponsors comfortable enough with the concept to adopt it the way they have target-date funds.      

The original SECURE Act took several key steps – helping address concerns about portability – how a retirement income account could be transferred during a recordkeeping conversion, or during an employee termination, as well as putting some additional clarity around a safe harbor to provide comfort to plan fiduciaries. At the same time, some intriguing new approaches emerged, as well as some refurbished solution – but then COVID-19 struck, and plan sponsors had much more to deal with than adding a retirement income feature to their plan, as they worried about the Great Resignation, navigating the sensitivities around working from home, and volatile markets.

The bottom line is that we don’t yet know how much these solutions – and the new legislative structures – will move the needle here. What we do know is that we need solutions that are cost-effective, relatively simple to explain, and readily available – and I know the retirement plan of the future will include those.

Accident ‘Tell’

While some still maintain that things like the 401(k) were an “accident,” in the space of a few decades it has become America’s retirement savings plan – in a way that the traditional defined benefit pension plan never really did in the private sector. That said, the past several years have seen dramatic improvements in access, efficacy, and participation in these programs – and it’s not been an accident.  The retirement system’s traditional three-legged stool has certainly undergone some needed rebalancing over time – and let’s face it, there may once have been three-legs to that stool, but they were NEVER equal.

There are many factors that influence these directions – legislation certainly plays a role, as does regulation – but ultimately it comes down to having goals, realizing that employers and the workers they employ are dealing with a wide variety of needs and circumstances, and trying to find a balance between them. To that end, the guidance and technical assistance of retirement plan advisors and third-party administrators are, and will continue to be, essential voices.     

Before our meal was finished, a table nearby opened up, and I was able to swap my wobbly stool for a more secure seat. Similarly, while a full resolution might not come to be as soon, or as well as we might hope/think – it seems to me that there are changes afoot and in place that have, and are continuing to move us in the right direction(s). Those will come to fruition all the sooner with the support and encouragement of trusted advisors, TPAs, recordkeepers, and the retirement industry generally.

Because if there’s anything more annoying than trying to sit on a wobbly three-legged stool, it’s not having any place to sit at all.

- Nevin E. Adams, JD 

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[i] These days, it’s arguable that private pensions and personal savings have been combined into retirement plan savings accounts, such as 401(k) and 403(b). Others have opined that there’s really a FOUR-legged stool, with that other leg being home equity.

[ii] According to Social Security, “the earliest use of this metaphor which we have been able to document was by Reinhard A. Hohaus, who was an actuary for the Metropolitan Life Insurance Company. Mr. Hohaus, who was an important private-sector authority on Social Security, used the image in a speech in 1949 at a forum on Social Security sponsored by the Ohio Chamber of Commerce. Hohaus, however, had a slightly different "stool" in mind than came to be understood in later years. His three-legged stool consisted of: private insurance; group insurance; and Social Security.”

[iii] I was no fan of this in 1983 when all of this was done either – but…

 

Could Employer Contributions Actually Lead to Leakage?

I recently stumbled across an academic study that claimed to find a correlation between higher employer contribution rates and leakage.

I will confess to a certain skepticism at that finding. There are, after all, a well-established series of things that contribute to leakage, broadly defined as distribution of retirement savings prior to retirement – but employer matching contributions – and certainly more generous matching contributions – have never been on that list.

The study – innocuously titled “Cashing Out Retirement Savings at Job Separation” – spends most of its 20-odd pages talking about leakage, its impacts on retirement security, and some possible solutions.  That said, one needs read no further than the abstract of this paper to find its surprising conclusion regarding one such underlying cause; its authors “estimate that a 50% increase in employer/employee match rate increases leakage probability by 6.3% at job termination.” More specifically, “The higher the proportion of one’s 401(k) balance contributed by the employer, the more likely employees are to cash out, holding constant balance and covariates.”

Proportion ‘Ate?’

That latter part is significant, since we know that participants with lower balances are more likely to have their balances distributed at job separation (so-called “force-outs” being typical at $1,000 or less). In fact, the paper acknowledges that “A higher balance discourages leakage holding all else constant.” Even so, a 6.3% increased probability might be “statistically significant,” but it most assuredly isn’t significant in economic terms. But to see any kind of connection between a more generous employer match and leakage just seemed – unusual. Particularly since – and as the study’s authors acknowledge – “Employers with more generous matches care about their employees’ well-being in retirement, but unintentionally nudge employees to cash out when they change jobs.”

The research cites a relatively robust sample (162,360 employees terminating from 28 retirement plans form 2014-2016 from a recordkeeper “that covers 15% of the U.S. workforce”), from a variety of industries. They acknowledge that the cash-out percentage (41.4% of employees cashing out at job separation) in this sampling is “strikingly high,” although in this group[i] – though interestingly “only 27.4% of terminating employees ever carried a loan, and only 3% of those defaulted.” The latter data point stands out because previous studies have found that outstanding loans defaulted at job separation are a significant cause of leakage. And – while averages are notoriously unreliable datapoints, the terminating participants in this sample had an average account balance of $46,556.[ii]

Reasons Able?

Of course, these researchers were looking for a connection between employer contributions and leakage – and, having found one – held out four possible rationales for that connection. First, they considered a scenario where workers, cognizant of the higher match actively planned to “leak” – basically “over-saving” to obtain the match, cutting into the income they actually needed for current expenses, and then needing the leakage to fill that hole. Secondly, they opined that a higher employer contribution rate during employment might engender a higher level of job security, and a correspondingly higher spending rate by the worker – that, upon termination, might then need to be funded by higher rate of withdrawal/leakage. Thirdly, they thought that workers might retain a sense of mental accounting that compartmentalized the employer match as “free” money, rather than sums set aside specifically for retirement (though the leakage impacted more than that account). Finally – and this is the rationale they landed upon to explain this “account composition” effect – that individuals who contributed a smaller proportion of their 401(k) balance (relative to the match) may be prone to think of their accounts at job separation as a readily spendable pile of cash (less so if one contributed more).

All of this felt to me like they were trying (too hard?) to rationalize behavior that wasn’t “rational.” That said, the researchers nonetheless conclude that “exiting one’s firm and being told that a sum is available can transform a perceptually illiquid source of long-term retirement security into a psychologically liquid pile of cash. Terminating employees spend the money when, arguably even for the minority of employees involuntarily terminated, there are good options of reducing household spending, adding gig forms of employment, or leveraging home equity lines of credit to supplement unemployment benefits until back in the workforce.”

Ultimately, it was impossible to really get inside the numbers and assumptions presented to ascertain how much of this conclusion was data-based versus “extrapolation.” The contributions labeled as matching looked to be more than just standard matching, perhaps including QNECs or safe harbor contributions as well, but there wasn’t enough detail in the paper’s tables to confirm that. As noted above, the withdrawal rates were high, and the “average” account balance presented clearly covered a wide variety of possibilities. And let’s not forget that, even with those considerations, the additional rate of leakage attributed to these generous employer contributions was pretty small.

There is, however, at least one conclusion worth drawing from this – and that’s that if the worker considers these accounts “free” money – and goodness knows, the employer match has long been positioned as such – they might well not realize the price they will pay, both at the point of distribution (taxes and penalties) – and ultimately at retirement – for spending those retirement savings…now.

- Nevin E. Adams, JD  

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[i] Another aspect of this group that struck me as odd – only about two-thirds of this group took a one-time total cashout, whereas another 21% depleted their 401(k)balances in two or more withdrawals within eight months.  One would normally expect traditional leakage patterns to be tied to a single withdrawal, rather than a series.

[ii] With an understandably large standard deviation of more than $97,000 – I say understandably because individuals with that size account balance tend to stay with the plan (an easy default) or rollover to an IRA or other plan). As the authors acknowledge, “A higher balance discourages leakage holding all else constant.”

The Big Retirement Question

I’ve been honored with a lot of praise and congratulations over the past couple of months about my “retirement” (and not a little skepticism about my understanding of the term) — but in quiet moments, there’s been one question that keeps coming up.

That question — and it generally arises once topics like “what are your plans,” “are you going to move,” and “can your wife really stand having you around all the time” have been broached — is, quite simply, “how do you know when it’s time to retire?”

Honestly, it’s a complicated question, and one to which the answer is deeply, even intimately, personal.  For many it’s not their choice, of course. Surveys suggest that for significant minorities the timing is imposed on them by external factors; a job layoff, a physical impediment, or perhaps caretaking responsibilities. While none of those were factors in my decision, at the outset, it’s worth bearing in mind that the “when” is not always in your control.

For most people — including THIS person — the calendar plays a role. Sixty-five is one of those milestone markers to which folks (and plan documents) still “anchor” — I say “still” because full retirement age under Social Security for today’s retirees is no longer 65. You don’t actually have to be retired in order to claim Social Security — but as I eyed that decision point, I had Social Security’s marker in mind. The reality is that there remains a certain age range in which thoughts of retirement can be considered “normal.”

Regardless of age (or Social Security) considerations, a big focus of my retirement timing was about finances. More specifically, first knowing how much our monthly living costs (and that knowledge is a lot more accurate closer to actual retirement than it would have been 30 years ago). That said, it remains something of a moving target, what with surging gas prices, and the reemergence of inflation. We tend to live within the bounds of a known paycheck, one that often (though not always) makes an effort to keep pace with such things. As one contemplates the uncertain “certainties” of a more-or-less “fixed” income — well, when you’re looking out over a financial future that is likely to be twenty years — or more — even the most prescient crystal ball gets a little fuzzy.      

All that starts with a baseline, of course, and thanks to my wife’s spreadsheeting and budgeting skills, it was pretty easy to extrapolate what our baseline expenses would be once work-related expenses (including things like 401(k) contributions) were behind us, including a cushion of sorts for the travel we have in mind, and some “new” considerations for things like healthcare.[i]    

With that financial floor established, we then had “only” to see what regular sources of income[ii] we had to meet those expenses. In that regard, we were fortunate — able to structure regular streams of retirement income that exceeded our baseline expenses while still preserving the larger pools of retirement savings that we had set aside over our working careers for things beyond that baseline out into a distant future. 

At that point we had dealt with what for many is the big obstacle — knowing that we could afford to walk away from that regular paycheck, and that we could maintain our current lifestyle. Now, that wasn’t the first time we had run through those estimates — doing so had already helped us establish savings goals over the years — but the calendar provided a specific focus with regard to timing.

And then COVID hit. 

That turned out to be a mixed blessing. For all the awful, scary things that came with the pandemic, it gave me and my wife of (then) 35 years an extended period of time together in close quarters. Our nest was empty, but for two four-legged children — and it affirmed not only our relationship, but the comfort of knowing that I could be not only content, but happy being at home. Make no mistake, if there’s one big regret that one hears retirees express, it’s that they weren’t ready for the shift to a home focus (not to mention their spouses). COVID provided me with a real-world preview of that experience — and even with the interruptions of incessant Zoom and Teams calls (or perhaps because of them?) — I could tell I was … ready.

So, how do you know when it’s time to retire? Well, for my money (literally), you need to have the interest — the motivation — to seek less of the “what you have to do” so that you have more time for the things you want to do. That needn’t be age-related, of course — but life’s ongoing obligations sometimes require a deferral of the latter in the interests of the former. 

To that point you also need to have the money figured out — because the things you want to do may not put food on your table or a roof over your head. That said, you might find that you can live more simply, or live elsewhere — and enjoy life more with…less. It’s easy to get caught up in the pace of work and life — and to push off for another time the opportunity to “smell the roses” — all the more so if you love and enjoy your work.     

Finally, it’s really important to have the right mindset to be ready to step outside the confines of a W-2 employment structure — that you have people or interests or hobbies that can (continue to) provide meaning, fulfillment, and joy in this next chapter of life.

It’s still early days for me in this new chapter — and I’ll concede that by most outward appearances I haven’t retired at all. Trust me, like any new “job” there’s a learning curve. And I’m working on it.

- Nevin E. Adams, JD

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[i] We didn’t appreciate it initially, but to date Medicare planning has proven to be the most stressful because, while the coverage is surprisingly good, premiums are income-based — and Medicare starts with the last official income number it has — your 1040 AGI…FROM TWO YEARS AGO. Perhaps needless to say (except to Medicare), my post-retirement income is less than it was two years ago — but, fortunately, we were successful in making our case on that point.

[ii] I (finally) consolidated my 401(k)s. I’m happy to say that the depositing of those savings has gotten a LOT more efficient over the years. However, I’m disappointed to say that getting those funds OUT is about as tedious as it has always been (one of the reasons I had put off consolidation) — and EVERYONE, it seems still insists on doing so via a hardcopy check that has to get to you via the U.S. mail (though you CAN pay a ridiculous premium to expedite that delivery) — UNLESS you’re rolling it over to an IRA on their platform. Gee, I wonder why… 

Reminders and Remberances

As we headed to San Diego last week, two things were uppermost in my mind.

The Summit, of course — you don’t spend 10 months of your life focused on pulling together (and executing) the nation’s largest (and for my money, best) retirement plan advisor conference without running through your mind a constant list of things to be done, things that you think were done, but you’re not sure, and, of course — the things you COMPLETELY forgot about until the day before you fly out.

The other thing was my father. See, April 1 was the anniversary of my father’s passing, and while it’s been 17 years, I still remember that day. It was unexpected — on a Saturday morning when such calls are inevitably good or awful news. I had just wrapped up my weekly column when I got that call — from my sister. My father, who had been battling cancer for several years now, had suffered a series of heart attacks. By the end of the day and, sadly, several hundred miles away from our home — he had passed.

He had, by then, had nearly a decade’s worth of retirement — not as long as most hope for, but to that point he had outlived any of the men in his family line — and he was, as they say, prepared to meet his Maker. There’s a great peace with knowing such things amidst the sorrow and heartache, and I was grateful for it, and the comfort it gave my mother.

We know that, as ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death — through faith and, with luck, sound financial planning. Most don’t dwell on those realities on a daily basis, and that’s doubtless a good thing. In my Dad’s case, he — thanks to my mother’s example — had done what they needed to do to sustain their then-current, albeit modest, lifestyle in retirement — in no small part a result of the sacrifices they made during their working lives.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. Participants increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls. Seventeen years later my Mom continues to benefit from those earlier decisions. Don’t bother telling me that those of modest incomes can’t or won’t save.  

As we leave San Diego this week — chock full of inspiring keynotes, insightful content, and amazing networking experiences — I’ve been reminded, anew and afresh, of just how important what WE do, and how we do it — as individuals, and as industry professionals, is in terms of helping provide a sustaining post-career lifestyle. And how lucky I am to be part of that effort.

To this day my parents’ example reminds me that those results come from decisions — big ones, and a zillion small daily ones — to set aside for the post-career life we hope to have. It is a decision, a choice.

Here’s hoping more of us make the right one — while we can — so that those we leave behind will have better, easier ones.

- Nevin E. Adams, JD

A ‘Value’ Proposition

A few weeks back, an industry friend commented that, while we had certainly done a great job promoting the NAPA 401(k) Summit, that campaign hadn’t fully captured the essence of what makes “the Summit” different. Let me try here.

There are, admittedly, a lot of conferences out there — and most promote — as we do — the great content, compelling keynotes, robust networking and great accommodations.  Some of them actually deliver on those promises. But since everyone says they do, how do you know the difference?

The most obvious metric is, perhaps growth. Time-pressed advisors don’t waste their time going to conferences that don’t deliver the “goods.” The Summit has now been around for more than 20 years — and it’s challenging to sustain consistent growth over that long a stretch. That said, when I arrived here back in 2014, my first Summit “here,” we had about 1,300 attendees — and about a third were advisors.  And we were pretty darned proud of that ratio.

But this year we’re looking at about 2,400 — and almost exactly half are advisors. You can do the math. 

Now, that’s the what — but it’s also part of the “why.” And for my money, a big part of the “why” is because of the “who.” I’ve long referred to the Summit as the nation’s retirement advisor convention for one simple reason; everybody who is anybody in the retirement plan space will be there — and they don’t just swing by to do a quick “drive by” presentation — they stay.[i] So, whether you’re looking to reconnect with old friends, to connect with new ones, or to meet and/or learn from others — the Summit has you covered on all fronts.

We do approach our content a bit differently than most, I think. While it’s gotten to be pretty common for events to boast of their steering bodies, many, perhaps most — are just figureheads to the actual agenda development. They’re a group to whom the folks doing the “real” work of planning, structuring and implementing the event keep updated, mostly for a sense of validation and the occasional course correct. Oh, and so that the event can “show off” the luminaries that have agreed to lend their name (and face) to promote its bona fides.

Our steering committee is informed not only by their own experience and perspective as some of the industry’s leading advisors, but by the reader polling that provides insights from you. We don’t just ask them what they think we should include (or merely ask for that affirmation of a sponsored agenda platform), we ask them what session(s) they are willing to “own” — and by that we literally mean carrying responsibility not only for panel/speaker selection, but for ensuring that those chosen fulfill their responsibilities — up to and including making sure that the session delivery itself lives up to the high standards of the nation’s retirement plan advisor convention. They literally have skin in the proceedings. And, unlike many events, we choose the topics, and only THEN do we match speakers/perspectives with those topics. The result? Well, despite a solid diversity of topics, attendees often “complain” that they want to attend two or three “competing” sessions all at the same time.     

There are, of course, a myriad of ways to build and structure events — note here that I haven’t said a word about our keynotes, or even NAPA After Dark (that has in just a few short years become the pinnacle of networking events). But, aside from the practical information, valuable insights, vibrant networking — and yes, world-class entertainment — it’s worth remembering that among all the (other) things that set the NAPA 401(k) Summit apart — unlike every other advisor conference out there — your NAPA 401(k) Summit registration helps support the activities of NAPA — your advocacy, information and education organization — not the bottom line of some corporate media organization or some private equity firm. NAPA not only informs and educates — it literally is your voice with regulatory agencies and legislative bodies both here in the nation’s capital — and across the nation. 

And more importantly, your attendance at the NAPA 401(k) Summit remains a unique investment in your future — and the future of your profession.

See you in San Diego!

 - Nevin E. Adams, JD

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[i] And there’s no better testimonial to the value of the Summit and the commitment to be part of it than the numerous courageous (and sometimes harrowing) efforts undertaken by many to get to Summit — see “Planes, Trains, and …U-Hauls?”