Making a List...

  “You better watch out, you better not cry, you better not pout…”

Those are, of course, the opening lyrics to that holiday classic, “Santa Claus is Coming to Town.” And while the tune is jaunty enough, the message — that there’s some kind of elfin “eye in the sky” keeping tabs on us has always struck me as just a little bit…creepy.

That said, once upon a time, as Christmas neared, it was not uncommon for my wife and I to caution our occasionally misbehaving brood that they had best be attentive to how their (not uncommon) misbehaviors might be viewed by the big guy at the North Pole.

In support of that notion, a few years back — well, now it’s quite a few years back — when my kids still believed in the (SPOILER ALERT) reality of Santa Claus, we discovered an ingenious website[i] that purported to offer a real-time assessment of their “naughty or nice” status.

Indeed, no amount of parental threats or admonishments — in fact, nothing we ever said or did — EVER managed to have the impact of that website — if not on their behaviors (they were kids, after all), then certainly on their level of concern about the consequences.

In fact, in one of his final years as a “believer,” my son (who, it must be acknowledged, had been particularly “naughty” that year) was on the verge of tears, panic-stricken — following a particularly worrisome “reading”[ii] — concerned not so much that he’d misbehaved, and certainly not that he’d disappointed his parents with his misbehaviors — but that as a result, he'd find nothing under our Christmas tree but the lumps of coal[iii] he so surely “deserved.”

Naughty or Nice?

Every year about this time we read survey after survey recounting the “bad” savings behaviors of American workers. And, despite the regularity of these findings, most of those responding to the ubiquitous surveys about their (lack of) retirement confidence and their (lack of) preparations don’t offer much, if anything, in the way of rational responses to those shortcomings. Yes, even though they apparently see a connection between their retirement needs and their savings (mis)behaviors. The most recent “target” was the oft-overlooked Gen X — who, at least according to one recent survey is (even) less prepared than the Boomers OR Millennials (Gen X just can’t catch a break!)   

The reality has long been that a significant number will, when asked to assess their retirement confidence, generally acknowledge that there are things they could — and know they should have —done differently. Retirees routinely bemoan and regret their lack of attention to such things. Sadly, if there’s anything as predictable as the end of year regrets, it’s the perennial list of new year’s resolutions to (finally) do something about it. And the cycle repeats.

So if they know they’ve been “naughty” — why don’t they do something about it?

Well, some certainly can’t — or can’t for a time — but most who respond to these surveys seem to fall into another category. It’s not that they actually believe in a retirement version of St. Nick, though that’s essentially how they seem to (mis)behave. That said, they continue to carry on as though, somehow, these “naughty” savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of that myopic, portly old gentleman in a red snowsuit. They act as though at their future retirement date (which a growing number say will never arrive), despite their lack of attentiveness during the year(s), that benevolent elf will descend their chimneys with a bag full of cold, hard cash from the North Pole. Or that sufficient time (or market gain) remains to remedy their “wrongs.”

Unfortunately, like my son in that week before Christmas, many worry too late to meaningfully influence the outcome.

A World of Possibilities

Now, the volume of presents under our Christmas tree never really had anything to do with our kids’ behavior(s). As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates[iv]), not because we truly expected it to modify their behavior (though we hoped, from time to time), but because we believed that children should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize — or should — that those possibilities are frequently bounded in by the reality of our behaviors, as well as our circumstances. And while this is a season of giving, of coming together, of sharing with others, it is also a time of year when we should all be making a list and checking it twice — taking note and making changes to what is “naughty and nice” about our personal behaviors — including our savings behaviors. To “be good,” not just for “goodness” sake, but for what we all hope is the “goodness” of financial “freedom” in our lives.

Yes, Virginia,[v] as it turns out, there is a retirement savings Santa Claus — but he looks a lot like you, assisted by “helpers” like your workplace retirement plan, your employer’s matching contributions — and your trusted retirement plan advisors and providers. 

It’s time to do more than just make a list — but it’s a place to start.

Happy Holidays!

• Nevin E. Adams, JD

 

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[i] And it’s still online at http://www.claus.com/naughtyornice/index.php.htm

[ii] And yes, though this was before smartphones, there was a tendency to constantly check in. That said, there do appear to be a number of apps online now that purport to fulfill a similar function. 

[iii] For those unfamiliar with that reference… https://abc7chicago.com/st-nicholas-day-saint-lumps-of-coal/4846172/

[iv] At one point one of my daughters refused to contemplate the possibility of a 2^nd grade “relationship” because the boy didn’t believe in Santa!

[v] In case you’re curious as to that reference… https://publicdomainreview.org/collection/yes-virginia-there-is-a-santa-claus-1897/

The Path of Less Resistance

There was some good news — and some disappointing news — about the take-up of a “new” plan design last week.

It was the first anniversary of a coalition of recordkeepers called the Portable Services Network (PSN) — a consortium of firms that includes Alight, Vanguard, Fidelity Investments, Empower, TIAA and Principal — not to mention the Retirement Clearinghouse, whose long-term patience and commitment made the concept of auto-portability a reality. There’s even support for auto-portability in SECURE 2.0.     

The Good News

The good news: PSN reported that in its first year of operation — more than 15,000 plans representing approximately 5 million participants have signed up for auto portability. According to a press release, 549 auto portability transactions have been completed as of Dec. 1, 2024; and 7,841 auto portability transactions are “in motion” as of Dec. 1, 2024. In-motion transactions are those where the Retirement Clearinghouse has confirmed a match for an account holder of a small account stranded in a retirement plan or moved into a safe-harbor IRA (with the opt-out/consent notification process having been initiated). 

Why This Matters

Auto-portability is a process that facilitates an automatic rollover from one plan to another (or an IRA) when an individual changes jobs or otherwise terminates employment. Like auto-enrollment, it seeks to take advantage of behavioral finance — taking a complex process and creating a default that works to the benefit of the participant. As with automatic enrollment, participants can opt out — but in creating an “easy” path to do the “right” thing, it is hoped that not only will these balances remain as retirement savings, but that it will be easier for individuals to keep up with and manage their retirement savings.        

It’s a big deal — the Employee Benefit Research Institute has said that the leakage associated with job change could add up to $1.6 trillion in additional retirement savings over a 40-year period. More significantly, it could add up to $744 billion in extra retirement income for 98 million minority job-changers, with 30 million Black Americans expected to preserve $216 billion in incremental retirement wealth.

While there has been improvement over the years, those rollover decisions are — complicated. In fact, as I put together the financial components of my “retirement,” there was one aspect I dreaded more than any other. My balances were large enough that I didn’t HAVE to do anything more than leave my account “behind” — and for me that was certainly easier and less painful than going through the rollover process. 

That said, many don’t have that option — they are only presented with the option to roll it over to the IRA (that they probably don’t have) or a successor 401(k) (that they probably aren’t signed up for yet) — or to take it in cash. And I have to imagine that for the vast majority, taking it in cash is really the only option — even though they’ll wind up paying taxes and penalties that will significantly erode their balance — not to mention their retirement security.

The Disappointing News

PSN cited data by the Plan Sponsor Council of America (PSCA), based on the PSCA's survey of plans conducted in Sept. 2024, that found that — (only) 6% of all plans have implemented auto portability or will do so soon, including 12.5% of plans with between 200 and 999 participants, and 8.7% of plans with 1,000 to 4,999 participants.

And while that take-up rate was modest, that same survey found that 25.6% of plans are considering the implementation of auto portability, including 30.4% of plans with 1,000 to 4,999 participants and 47.5% of plans with over 5,000 participants. Not bad, considering that three years ago nearly 80% of plan sponsors surveyed hadn’t even heard of auto-portability!

All that said, for auto-portability to really work — to truly facilitate the movement of retirement savings from one plan to another — you need the broad network. More than that, you need the broad participation of the plan sponsor community to provide that option to retirement savers. Here’s hoping that in the months ahead more do. 

Because, thanks to the PSN it now seems that when it comes to retirement savings, you really, finally CAN take it with you!

- Nevin E. Adams, JD

Setting A (Too) High Bar?

  A recent article in The Wall Street Journal was titled “Here’s What Retirement With Less Than $1 Million Looks Like in America.” And it’s better than one might expect.

The individuals in this particular piece were a diverse group — indeed, the only real point of commonality was they all had less than $1 million in retirement savings. In view of the ubiquitous headlines proclaiming impending retirement destitution, one might well have expected tales of doom and gloom, though that wasn’t the case here.[i] There WERE, of course, stories of folks keeping an eye on costs, not travelling as much as they had expected, and in at least one case, deciding to stay put, rather than relocate to a warmer climate … but overall, these five — with savings ranging from $240,000 to $800,000[ii] — seemed to be in a good place — and half didn’t even wait till 65 to retire (though all chose their retirement time).

This is NOT the narrative that garners headlines (and clicks), of course. And, let’s face it; these individuals all had SOME retirement savings — presumptively because they, at some point in their working lives, had access to such a plan at work. There’s much to suggest that those lacking that access wouldn’t fare as well, though arguably nothing besides inertia (and in some cases, economics) precludes them from setting aside money in an IRA. But it does bring to mind that ever-present question — how much do you need to retire comfortably, at least on a financial basis? 

The real answer is, of course, it depends. 

Throughout my career, I have made several attempts to estimate my post-retirement income needs.  I did this with some trepidation because I had never quite managed to adhere to all the touchstones our industry touts. I never managed to save 15% of pay (even including employer matches, though I always contributed enough to get all of that), and never even maxed out my contributions until the last several years of my career (had to help get the kids through college, don’t you know). And as aggressively as we saved over the course of our lives — including taking advantage of catch-up contributions, we headed into retirement with nowhere close to the 10-12 times my annual salary in retirement savings some say should be your target. 

That said, once I got within sight of retirement, I also found that we didn’t need anything close to the 70% of pre-retirement income target to live the way we lived pre-retirement (much less the 80-85% some now advocate). Now, some of that is because my wife and I have always been modest in our expenditures — we live within our means. Perhaps more significantly, it’s (still) early — there aren’t yet any significant healthcare issues to worry about (we HAVE invested in long-term care insurance) — and my pre-retirement income was…comfortable. And while it wasn’t an economic prerequisite, relocation to a less expensive part of the country has provided some extra cushion (though, in fairness, the move itself, and the inevitable “adjustments” to a new home muted no small amount of that in year #1). 

In fact, how — and where — you live pre-retirement can have a significant impact on whether or not those common — and admittedly generalized — retirement savings milestones are applicable.  And, for those who haven’t — and perhaps won’t — take the time to undertake a more sophisticated analysis, those “rules of thumb” are surely designed to provide a sense of a target that should not only cover, but likely more than cover most needs. And — though long-term financing remains a question mark for many, perhaps most, Social Security provides a solid foundation to build upon — something that is worth checking out before hitting the panic button.

One thing that has been on my mind of late is, have “we,” in our efforts to help Americans save “enough” for retirement, pushed goal posts that are higher than they need to be? And in that process, have we not only undermined the confidence in an ability to retire with dignity, but fostered what seems to be a pervasive sense that the retirement system is…a failure? 

While I realize the answer is as varied as the individuals and individual circumstances considered — I think it’s a point worth considering.

Thoughts?

• Nevin E. Adams, JD

 

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[i] I’m always amazed at these type of personal vignettes — where a reporter from some major national newspaper somehow manages to track down a handful of individuals who are willing to share intimate details about their lives, financial and otherwise. The cynic in me often wonders at the process of picking particular individuals — do they shape the story, or are they chosen to support the story already envisioned by the writer? That said, they do put some real-life “texture” to the theoretical notion of retirement we all talk about. 

[ii] The article cites data from the Employee Benefit Research Institute (EBRI) that found total household balances in retirement accounts for those 55 to 64 years old are $413,814 on average, based on 2019 data, the most recent available.

A Retirement Thanksgiving . . . From ‘Retirement’

  Thanksgiving has been called a “uniquely American” holiday — and as we approach the holiday season, it seems appropriate to take a moment to reflect upon, and acknowledge — to give thanks, if you will.

While it’s the celebration following a successful harvest held by the group we now call “Pilgrims” and members of the Wampanoag tribe in 1621 that provides most of the imagery around the holiday, Thanksgiving didn’t become a national observance until much later.

On Oct. 3, 1789, George Washington issued his Thanksgiving proclamation, designating for “the People of the United States a day of public thanks-giving” to be held on “Thursday the 26th day of November,” 1789, marking the first national celebration of the holiday. However, subsequent presidents failed to carry forward this tradition.     

Incredibly, it wasn’t marked as a national observance until 1863 — right in the middle of the Civil War, (also on Oct. 3) and at a time when, arguably, there was little for which to be thankful. Indeed, President Abraham Lincoln, in his proclamation regarding the observance, called on all Americans to ask God to “commend to his tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife” and to “heal the wounds of the nation.”

We could surely stand to have some of that today. 

But for those of you who think the political harshness of today is a new phenomenon, consider that Thanksgiving was not made a legal holiday until 1941 when Congress named the fourth Thursday in November as our national day of thanks…in an answer to public outcry over President Roosevelt's attempt to prolong the Christmas shopping season by moving Thanksgiving from the traditional last Thursday to the third Thursday of November.

My List

With all of the strife and turmoil in our world, there remains much for which we can all be thankful. And in this, my second year of “retirement” — well, the list seems even longer. 

I’m once again thankful that so many employers (still) voluntarily choose to offer a workplace retirement plan — and, particularly in these extraordinary times, that so many have remained committed to that promise. I’m hopeful that the incentives in SECURE and SECURE 2.0 will continue to spur more to provide that opportunity.

I’m thankful that so many workers, given an opportunity to participate in these programs, (still) do. And that, under new provisions in SECURE 2.0, those who gain new access to those programs will be automatically enrolled, if not immediately, then in the weeks ahead.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there — and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful for new and modestly expanded contribution limits for these programs — and hopeful that that will encourage more workers to take full advantage of those opportunities, even if the increases aren’t as big as last year’s (on the other hand, inflation isn’t as high, either).

I’m thankful for the Roth savings option that provides workers with a choice on how and when they’ll pay taxes on their retirement savings. “Retirement” reminds me that there’s a LOT to be said in favor of tax diversification, particularly the way benefits like Social Security and Medicare are means-tested.

I continue to be thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, rising inflation, and competing financial priorities, such as rising health care costs and college debt.

I’m thankful for the strong savings and investment behaviors (still) evident among younger workers — and for the innovations in plan design and employer support that foster them. I’m thankful that, as powerful as those mechanisms are in encouraging positive savings behavior, we continue to look for ways to improve and enhance their influence(s).

I’m thankful that our industry continues to explore and develop fresh alternatives to the challenge of decumulation — helping those who have been successful at accumulating retirement savings find prudent ways to effectively draw them down and provide a financially sustainable retirement. Trust me, knowing how much your retirement income will be is an essential element in knowing when you can comfortably retire.

I’m thankful for qualified default investment alternatives that make it easy for participants to benefit from well diversified and regularly rebalanced investment portfolios — and for the thoughtful and ongoing review of those options by prudent plan fiduciaries. I’m hopeful (if somewhat skeptical) that the nuances of those glidepaths have been adequately explained to those who invest in them, and that those nearing retirement will be better served by those devices than many were a couple of decades ago (though looking at the age 65 glidepaths for several leading providers, I’m again skeptical).

I’m thankful that the state-run IRAs for private sector workers are enjoying some success in closing the coverage gap, providing workers who ostensibly lacked access to a workplace retirement plan have that option. I’m even more thankful that the existence of those programs appears to be engendering a greater interest on the part of small business owners to provide access to a “real” retirement plan.

I’m thankful that figuring out ways to expand access to workplace retirement plans remains, even now, a bipartisan focus — even if the ways to address it aren’t always.

I’m thankful that the ongoing “plot” to kill the 401(k) … despite some new voices … (still) hasn’t.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry — and that so many, particularly those among our membership, take the time and energy to provide that input.

I’m thankful to (still) be part of a team that champions retirement savings — and to be a part of helping improve and enhance that system.

I’m thankful for the involvement, engagement, and commitment of our various member committees that magnify and enhance the quality and impact of our events, education, and advocacy efforts.

I’m also thankful for the development of professional education and credentials that allow the professionals in our industry to expand and advance their knowledge, as well as the services they provide in support of Americans’ retirement.  I’m thankful for the consistent — and enthusiastic — support of our event sponsors and advertisers.

I’m thankful for the warmth, engagement and encouragement with which readers and members, both old and new, continue to embrace the work we do here.

I’m thankful — even in “retirement” — to continue to be able to make a “difference.” I’m thankful for those who seek me out at various events, or via email, to tell me how much they enjoy and appreciate my writing and speaking.

I am, of course, thankful for being able to “retire” — to kick back a bit. While I continue to get good-natured ribbing about how I don’t know how to “retire,” this second year of not working full-time has been a blessing in so many ways. I’m especially grateful to my wife for her encouragement and support throughout nearly four decades (amidst a LOT of sacrifices) and look forward to this next chapter in our lives. I’m thankful for the new home we’ve established as a base from which to enter that next chapter.  

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of an expanding circle of dear friends and colleagues, the opportunity to write and share these thoughts — and for the ongoing support and appreciation of readers… like you.

Wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

(How) Are 403(b) Plans Different from 401(k)s?

 The primary difference between 403(b) plans and 401(k) plans is the type of employer offering the plan, but a couple of new surveys from the Plan Sponsor Council of America (PSCA) highlight some interesting design differences as well.

Believe it or not, 403(b) plans have been around longer—since 1958. 401(k)s didn’t arrive until 1978 and really were not effective until 1981 (see Talking Points: An ‘Unintended’ Consequence). 

Like its 401(k) cousin, it was initially created under part of the Internal Revenue Code (Section 403(b)!)., and—like the 401(k)—it was designed to allow employees of certain tax-exempt organizations, such as public schools, hospitals, and religious institutions, to contribute to retirement savings on a tax-deferred basis. 

Over time, many of the things that differentiated the two (notably contribution limits) have been eliminated or at least narrowed. That said, their different histories and distinct employee populations mean that notable plan design differences remain.

What’s the Same (or Pretty Close)

According to PSCA’s 2024 403(b) Plan Survey, a quarter (24.4%) of 403(b) plan respondents now use auto-escalation, and another fifth (20.2%) permit voluntary escalation. That’s pretty consistent with findings from the (soon-to-be-published) 67th Annual Survey of Profit-Sharing and 401(k) plans, where 24.2% use automatic escalation for all participants, 8.9% do so for “under-contributing” participants, and 30.1% permit voluntary escalation.

One area in which 401(k) plan designs have traditionally lagged is periodic distribution options. However, perhaps due to the recent focus on retirement income, this gap has narrowed significantly. 

Among 401(k) plan respondents, two-thirds (68.8%) now offer a retirement periodic option (though 83.2% of the largest plans do), nearly identical to 403(b) plan respondents where 67.7% offer the periodic payment option, as do 91.2% of the larger plans.  

Another area of striking consistency is financial wellness programs. A quarter of responding 403(b) organizations provide financial wellness programs to employees—but that’s 44% of the largest plans (> 1000 workers) versus 10%-ish for plans with less than 200). Most (59%) deliver that online.  As for 401(k) employers, 27.1% provide those overall, versus 52.8% at the largest plans (and in the teens for those with 200 employees or less.

Most 403(b) plan organizations (78.4 percent) monitor at least one participant behavior. The most common behavior monitored by those plans was participant deferral rates (60.6 percent of plans), followed by loans (55.6%) and hardship withdrawals (51.4 percent of plans)—mirroring the tendency among 401(k) plan sponsors (78.3% deferral rates, 56.9% loan usage, and 50.9% hardship withdrawals).

What’s Different?

According to PSCA’s survey, while there has been movement in investment policy statements, only about half of 403(b) plan survey respondents (57%) have an IPS in place—though, in fairness, a full third (32.4%) didn’t know. Contrast that with the (soon-to-be published) 67th Annual Survey of Profit-Sharing and 401(k) Plans, which found those in place at 82.4% (here again, 12.5% weren’t sure, however).

Of course, there’s having the IPS to provide structure, and then there’s the frequency of review.  Among 403(b) plan respondents, annual was the most cited frequency (44.5%), with quarterly (34%) ranked second. Among 401(k) respondents, quarterly (64.8%) was the most common (even more so among larger plans), and annual was a distant second, cited by just 16.2%.

Automatic enrollment is (slowly) gaining traction in 403(b) plans; use increased yet again and is now available in 35.5 percent of plans — that’s up a third in just two years. Here, as with 401(k) plans (63.8% overall and 74.3% among the largest), more than half of large organizations employ automatic enrollment in contrast to just 21 percent of small plans, which is up from just eight percent of small plans a year ago.

Three percent of pay remains the most common default deferral rate among 403(b) plan respondents, used by 32.1 percent of plans, while 30.2 percent have a default rate greater than that.  Meanwhile, a default rate of more than 3% was already the default for two-thirds of 401(k) plan respondents to the 2023 survey.

Considering their history, it should be no surprise that 403(b) plans were much more likely to provide an annuity option; 56.7% overall and 70.6% of the larger plans do so for retirement.  That contrasts with 401(k) plans where the availability is half that—29% overall and 36.6% among the larger plans.

Another unsurprising difference can be found in the availability of ESG funds on the plan menu; just 6.4% of 401(k) plans did so in the 2023 401(k) survey, whereas those options were found at nearly four-in-10 403(b) plans, irrespective of plan size. 

Among 403(b) plan respondents, 42% offer a managed account option (29% of participants use it when offered) versus 50.4% of 401(k) plan survey respondents (68.5% among larger plans).

Oh – and one big difference not captured on these surveys – 403(b) plans (still) can’t invest in collective investment trusts (CITs). Apparently, some think that several decades of experience with 401(k)s isn’t enough for 403(b) adoption.

Of course, these similarities – and differences – are viewed from a macro lens.  We tend to talk about 401(k)s (and 403(b)s) as though these plans are designed and administered for the benefit of monolithic entities, but the industries and demographics for which these designs are applied are vastly different. 

Particularly in the 403(b) market, those differences often include whether a traditional defined benefit plan is part of the benefits equation—and that makes a huge difference in terms of positioning and ultimate benefits delivery—something that should always be considered in any kind of side-by-side comparison. 

Still, it’s good to know—and appreciate—not only the differences but the options and the rationale behind them as we work together to help support, expand, and enhance the nation’s private retirement system.

-          Nevin E. Adams, JD