Debt ‘Limits’ – Causation, Correlation or Coincidence?

You have to wonder what the Wall Street Journal has against automatic enrollment.

The latest instance of finding the cloud in this silver lining arose in a recent Journal article by Anne Tergesen, “Downside of Automatic 401(k) Savings: More Debt” (subscription required). The article, based on the findings of a recent academic study, says that automatic enrollment has “pushed” millions of people who weren’t previously saving for retirement into those plans – but quickly cautions that “many of these workers appear to be offsetting those savings over the long term by taking on more auto and mortgage debt than they otherwise would have.”

This “crowding out” concern – that automatic enrollment would stretch already strained financial resources, particularly among lower-income workers – has long been a sticking point for those advocating caution regarding automatic enrollment.

The Study

So did the study – drawn based on what the researchers termed a “natural experiment” created by the decision of the U.S. Army to automatically enroll civilian workers into their retirement savings plan at a point in time – validate this concern? Well, the researchers found “no significant change” in debt levels of those automatically enrolled four years after hire – excluding auto loans and first mortgages.

In those categories, the researchers noted that automatic enrollment increased auto loan balances by 2% of income, and first mortgage balances by 7.4% of income. However, the researchers didn’t seem overly concerned about these increases, noting that they involved the acquisition of assets (and in the case of a home mortgage, an asset that might actually play a factor in retirement security) – though they did conclude that the advent of automatic enrollment seemed to leading workers to take on more debt to offset the “loss” in income to automatic enrollment savings.

On the other hand, the researchers note that it seems likely that much of the increase in first mortgage debt is caused by automatically enrolled employees being able to obtain larger mortgages due to their extra TSP balances loosening down payment constraints. And as regards their preparation for retirement, automatic enrollment clearly helps. The researchers noted that at 43-48 months of tenure, automatic enrollment increases cumulative employer plus employee contributions since hire by 5.8% of first year annualized salary.

Where’s the ‘Beef’?

So, what’s the beef about automatic enrollment? Well, despite the headline (and the subhead, “New research finds employees auto-enrolled in retirement plans borrow more than they otherwise would have, offsetting savings”), the article struggled to find anyone (including three of the authors of the research) who would say anything bad about automatic enrollment. But then, back in 2013, this same Ann Tergesen wrote about the “Mixed Bag for Auto-enrollment,” claiming that “employees who are automatically enrolled in their workplace savings plans save less than those who sign up on their own initiative.”

That article, in turn, built on – and cited – a 2011 article Tergesen jaw-droppingly titled “401(k) Law Suppresses Saving for Retirement.” In the case of the latter, Tergesen glommed on to one of 16 possible scenarios, and focused on the notion that some workers would simply rely on the mechanics of automatic enrollment’s 3% default, rather than picking the higher rate that they might if they filled out an enrollment form (encouraged by things like education meetings and incentivized by things like a company match). Remember that nothing about an automatic enrollment option requires workers to rely on automatic enrollment. In fact, under automatic enrollment, total savings actually went up, notably for lower income workers.
 
Auto Impact

The nonpartisan Employee Benefit Research Institute (EBRI) has estimated that moving to automatic enrollment improves projected retirement outcomes by anywhere from 17.5% to more than 33%, depending on age and income. Indeed, the lowest income quartile saw their outcomes improve by more than 20% pretty much across the board. In fact, EBRI has previously projected that approximately 60% of those eligible for automatic enrollment would immediately be better off in those plans than in one relying on voluntary employment, and that over time (as automatic escalation provisions took effect for some of the workers) that would increase to 85%.

And while it wasn’t mentioned in the most recent Journal article, the study at hand acknowledged that automatic enrollment was “extremely successful at increasing contributions to the TSP at the left tail of the distribution while leaving the middle and the right of the distribution unchanged.” Said another way, automatic enrollment did a great job of increasing contributions among lower income workers.

All in all, while automatically enrolled workers in the study (and let’s remember this is a specific subset of the population for a limited period of time), on average had more debt in two very specific categories, it’s far from clear that this was a consequence of automatic enrollment – and it’s by no means certain, even if it were, that in the long term it’s a bad thing.

Indeed, it’s not clear that the dots connected here are causality or simply an interesting correlation.
What is clear is that automatic enrollment has been enormously successful at helping workers – particularly lower income workers – prepare for a more financially secure retirement.

- Nevin E. Adams, JD

Familiar ‘Grounds’?

A recent report by the GAO paints a pretty bleak picture of American retirement. Is it accurate?

For the most part, the report covered familiar ground, bemoaning the “marked shift” away from the traditional defined benefit pension plan (glossing over how few private sector workers were covered by these plans, even in their heyday, and the fraction of those who received a full pension), and highlighting low savings rates, the pervasive lack of broad-based access to workplace retirement plans and the daunting challenges confronting even those who do enjoy that access.

The report also spends several of its 173 pages chronicling (with pictures) the ways in which “leakage” also undermines retirement savings. And for good measure, it invokes the findings of the Melbourne Mercer Global Pension Index  — which the GAO calls the “most comprehensive” — that ranks the U.S. retirement system 20th out of 25 countries surveyed (and gives us a “C” grade). Indeed, the report treads such familiar ground in such a familiar way that it hardly seems controversial.

In fairness, having seen, studied and even commented on the data, reports and surveys cited in the GAO report, the authors can hardly be faulted for their air of pessimism. As they explain in their introduction, “More and more people are retiring, and many are living longer in retirement. Health care costs are rising, Social Security is stretched to the limit, and debt — both personal and public — is a threat to financial security.” But in retreading this “familiar” ground, they also restate as fact some things that have been drawn into question — and gloss over some more recent findings that provide valuable context.

‘Over’ Looked?

For example, the 2013 Survey of Consumer Finance (SCF) is a widely cited report, and is invoked repeatedly by the GAO in its assessment of the resources available to American workers in retirement. This is a reputable and well-regarded source of consumer information, drawn from a sampling of about 6,000 households (different ones every cycle). That said, the information contained is “self-reported,” which is to say that it tells you what individuals think they have (or perhaps wish they had), but not necessarily what they actually have. Now, the GAO has previously relied on this data — and in fact recalls a 2015 report by the GAO that claimed (and was titled) “Most Households Approaching Retirement Have Low Savings.”

The rationale for the “most” in the 2015 report headline appears to come from its focus on households age 55 and older, where the GAO noted that (only) 48% had some retirement savings, and thus one might reasonably assume that the remaining 52% had no retirement savings — and that would seem to be the case. However, 23% of that 52% said they had a defined benefit plan. Now, that assessment may be inaccurate (see above), but if they do, in fact, have a DB plan, that plus Social Security might well be sufficient. So, “most” have no savings, but about half of that “most” might not need savings. Admittedly, that distinction makes for a clumsy headline.

Among those age 55-64 with no retirement savings, the median net worth was $21,000 (about half of these had no wage or salary income), while among those in the same age bracket with any retirement savings, their median net worth was $337,000. Compared to those with retirement savings, these households (those aged 55-64 with no retirement savings) have about one-third of the median income and about one-fifteenth of the median net worth, and are less likely to be covered by a DB plan. The bottom line is that, even accepting the self-reported data of these individuals, there is a considerable disparity, and one that suggests that a more targeted analysis (and dare I suggest remedy) might be more in order.

In evaluating things like retirement income and coverage, the GAO report draws on information from, among other sources, the Current Population Survey (and in some cases other reports based on that information). While it is one of the most-cited sources of income data for those whose ages are associated with being retired (typically ages 65 or older), and has also been used to provide annual estimates of employment-based retirement plan participation, a 2014 redesign of the questionnaire has resulted in much lower estimates of the percentages of workers who participate in an employment-based retirement plan. In fact, the non-partisan Employee Benefit Research Institute (EBRI) has cautioned that it has resulted in historically “sharp and significant” reductions in the levels of worker participation in employment-based retirement plans.

Missed ‘Out’?

Not mentioned in the GAO report (but cited in a recent Forbes article by Andrew Biggs of the American Enterprise Institute) is an analysis by Census Bureau economists Adam Bee and Joshua Mitchell, who used IRS data to measure the share of new retirees receiving benefits from private retirement plans. Biggs notes that in 1984, only 23% of new retirees received any sort of private pension benefits, but by 2007, 45% of new retirees received private pension benefits.

As for the aforementioned ranking of the U.S. retirement system, it’s really hard to compare apples to oranges, as such comparisons inevitably do. But in the Forbes article noted above, Biggs reminds us that Mercer measures adequacy by virtue of things like tax preferences for retirement savings, ages at which participants can access their savings, whether savings must be annuitized, etc. As things to consider, perhaps — but a ranking based on subjective weightings and criteria that includes certain qualitative factors doesn’t necessarily produce an objective result.

‘Post’ Retirement

Another recent analysis, “Using Panel Tax Data to Examine the Transition to Retirement” — conducted by Peter J. Brady and Steven Bass of the Investment Company Institute and Jessica Holland and Kevin Pierce of the IRS — found that most individuals were able to maintain their inflation‐adjusted net work‐related income after claiming Social Security. Looking only at how much individuals reported as net income on their taxes the year before they started drawing Social Security benefits, compared with the three years after they began that draw, they found that, looking at working individuals age 55 to 61 in 1999 who did not receive Social Security benefits that year, three years after they started claiming Social Security (which could be viewed as a proxy of sorts for entering retirement) that median ratio of net work‐related income at that point compared to net work‐related income one year before claiming was 103% — which means, of course, that three years later, they are actually reporting (slightly) higher income levels than they were prior to retirement. Does that mean they will still be doing so a decade later? No — but why not even an acknowledgement that such results have been documented with actual IRS data?

Other Points

The GAO report does remind us that where you work matters (in 2016, 89% of workers in information services had access to an employer-sponsored plan, compared with 32% of workers in the leisure and hospitality industry), and how you work matters (“one reason lower-income workers lack access to employer-sponsored retirement plans is that they struggle to meet plan eligibility requirements related to sufficient tenure and hours worked”) in terms of having access to a retirement plan, and how much you make really matters (“…workers in the lowest income quartile were nearly four times less likely to work for an employer that offered a retirement plan, based on our analysis of 2012 SIPP data, controlling for other factors”). And it highlights the critical importance of, and the very real danger posed to the nation’s retirement security by the projected shortfalls in Social Security.

On the other hand, for some reason the GAO report cites the creation of the QDIA safe harbor as a failure of sorts, in that no surge in new plan adoption accompanied it (completely disregarding the huge boost to diversified savings and increased participation via automatic enrollment that has resulted). Ditto the demise of the MyRA, whose dismal take-up rate stood in some contrast to its shockingly high cost. It had a different — and more sympathetic — perspective on the state-run programs for private sector workers, decrying the uncertain status of such offerings after the signing of legislation that overturned the safe harbor rule from the Obama administration.

Ultimately, the GAO report makes one very simple recommendation: the appointment of an independent commission to “comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve how the nation can promote more stable retirement security.” All well and good.

But here’s hoping that, should such a committee be formed, it will look beyond the all-too-familiar ground that the GAO chose to tread.

- Nevin E. Adams, JD

Preparing for the Storm

If you live (or were travelling to) the upper east coast of the U.S. this week, odds are you spent some time making preparations for what looked to be (and by the time you read this likely is) a big winter storm.

We don’t always get that much time to prepare, of course – and sometimes when we do, those big storms don’t turn out to be very big after all. But you can generally count on lots of frenzied weather forecasters predicting snow-mageddon (even if they do offer some caveats), and at least one shot of the inside of a local grocery showing empty bread and milk aisles. Because, after all, who could go 48 hours without bread and milk?

Life is full of surprises – and though most of those are unaccompanied by a friendly meteorologist to help us anticipate them, one might well wonder why we let them “sneak” up on us without making better preparations.

Perhaps the most obvious is the topic of retirement preparation. Any day now the queen mother of retirement confidence assessments – the Employee Benefit Research Institute’s Retirement Confidence Survey (RCS) – will likely, as it has for more than a quarter-century now, tell us that Americans are, writ large, uncomfortable, uncertain, and unprepared for retirement. Nor is this some external assessment based on an objective evaluation of retirement preparations and needs. Rather, this survey, as are most of the industry survey progeny it has since inspired, is a self-reflection by survey respondents. Respondents including some who do not save, and others who do not save “enough,” and many, probably most, who haven’t even tried to guess at how much “enough” might be. Most will likely be concerned about their prospects for a financially secure retirement – but apparently not concerned enough to do very much about it.

Indeed, if history is a fair guide, I think it’s fair to say that the media coverage will likely rival that of an impending environmental apocalypse. Despite the researchers best efforts to provide some perspective on the findings, you can almost certainly count on an obsession as to how many haven’t yet accumulated $1,000 in savings – albeit without regard to their age, their income, or whether they have the encouragement and incentives of a retirement plan at work. If the report finds a drop in confidence, it will almost certainly be cited as a lack of confidence in a system that isn’t working. If, on the other hand, the report finds a surge in confidence – well, then you can expect reports that talk about how unfounded the confidence is.

As complicated as weather forecasting can be, it pales in comparison to trying to figure out what the financial “weather” for the next 30 years is going to be. Little wonder that those already in retirement tend to be more confident than those with decades of preparation still ahead. Still, what all too often gets lost in our criticisms of the current system is just how well it works.

Perhaps only three-of-four eligible to participate in such programs choose to do so, but on an employer-by-employer basis, participation rates north of 90% are not impossible to find – and that’s before the adoption of mechanisms like automatic enrollment, where those kinds of rates are common. Target-date funds have, in incredibly short order, gained the favor of plan sponsors and participants alike – with as yet incalculable benefits for those retirement investments. Those, and a whole new generation of retirement income alternatives are coming to market – alternatives that, unlike the prior generation, will benefit from the scrutiny of plan fiduciaries trying to make sure that a lifetime of accumulation isn’t decimated in a single moment. These innovations have come to light, and to market, because of the employer-sponsored system. By comparison, what kinds of innovations have been brought to those disciplined enough to set aside money in a retail IRA?

In the real world, a lucky few know how to save and invest properly; somewhat more have access to the counsel and advice of a trusted adviser. But for most of us, the workplace retirement program is our first and only “investment” account. It is the one place where even those with relatively small balances can have access to professional advice, alongside the opportunity to gain the purchasing power of a group.

None of which would be possible without the involvement of their employer, the funding of that company match, and the tax incentives that underpin a structure that gets workers of modest means to do what never seems to come naturally to human beings – to prepare for the storm before it’s upon us.

For those of you in the path of this storm, stay safe – and I look forward to seeing hundreds of you in Las Vegas at the 16th Annual NAPA 401(k) Summit!

- Nevin E. Adams, JD

this post originally appeared here.

"Common' Sense

At a time when the nation’s legislative wheels seem mired in partisanship, the last week of January turned out to be a busy one for retirement plan proposals.

First the president unveiled his myRA concept in the State of the Union (along with a reference to an automatic IRA proposal previously included in the White House’s annual budget), followed a day later by introduction of the Retirement Security Act of 2014, a bipartisan proposal by Sens. Bill Nelson (D-FL) and Susan Collins (R-ME). A day after that, Sen. Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, formally introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act of 2014, an updated version of his 2012 proposal.

All three were intended to expand and improve the retirement savings of Americans—although, as you might expect, the three take quite different approaches. Consider that the myRA calls for the development of a “new retirement savings security” to encourage savings in a kind of Roth IRA, while Sen. Harkin’s proposal would require employers above a certain size to offer a whole new type of retirement savings plan (and would impose some new threshold enrollment and withdrawal requirements on existing 401(k)s, as well). As for the Nelson/Collins proposal, it seems to be largely focused on lowering or removing certain current regulatory and administrative barriers to smaller employers offering retirement plans.

Despite their varied approaches to the commonly-stated goal of expanding retirement savings, all three do have one other key commonality: All look to leverage the success of the work place and systematic payroll deductions in fostering retirement savings. Of course, that’s a foundation whose worth previous EBRI research has documented:¹ the impact that eligibility for a work place retirement plan can have on retirement readiness,² as well as the additional help that automatic-enrollment designs can provide.

It remains to be seen whether the legislative proposals will go anywhere—and the potential impact of myRA on motivating new savers is also uncertain. Just this week, Senate Majority Leader Harry Reid (D-NV) introduced a proposal on defined benefit pension smoothing—not to provide any kind of help for retirement, but as a way to pay for a three-month extension of unemployment benefits.

But as America Saves Week nears, the activity on Capitol Hill serves as an additional reminder that a good place to start—any time, with or without the incentives of legislative change—is to Choose to Save. ®³

Nevin E. Adams, JD

¹ The January EBRI Notes, “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,” is available online here.

² See “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” online here, and “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” online here.

³ You can find a wide variety of tools and resources—including the popular and widely recommended Ballpark E$timate—at http://www.choosetosave.org/