6 Obstacles to Retirement Income Adoption

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective. Still, some have said that this could be the year for retirement income—a combination of new offerings, volatile markets, and rising interest rates—and yet, it still seems that there are obstacles to overcome. 

Here are six:

1. There is no legal requirement to provide a lifetime income option.

Let’s face it, it’s a full-time job just keeping up with the plan provisions, standards, participant notices and nondiscrimination tests that are required by law. The notion that a plan sponsor would, in the absence of a compelling motivation take on extra work, and work that carries with it additional financial and fiduciary responsibility as well, doesn’t seem very realistic.

Indeed, with no legal obligation to provide this offering, and an underlying concern that providing the option does involve taking on additional liability…

2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”

I’ve never met a plan sponsor who felt that the guidance on offering in-plan retirement income options was “enough.”

I’m not saying they’re not out there—clearly there are in-plan options available in the marketplace now, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. That said, industry surveys (still) indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

Now, over the years the Labor Department has tried to ameliorate those concerns, as recently as Field Assistance Bulletin (FAB) 2015-02. Perhaps more significantly, among the key elements of the SECURE Act that sought to expand retirement income awareness/availability was a new safe harbor. Essentially it says that when a plan fiduciary of a defined contribution plan selects a “guaranteed lifetime income contract” to be offered under its plan, the fiduciary will be deemed to have acted prudently if it follows the steps outlined in the law. In other words, it provides a specific road map to follow[i], and if it’s followed, the new safe harbor means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract. Basically, the fiduciary must obtain specified representations from insurance companies about their financial soundness (and not have any information that contradicts those representations).

Of course, that safe harbor emerged in the waning days of 2019—just ahead of COVID, the CARES Act, and a fair amount of workplace/workforce disruption. It seems fair to say that the implications of its guidance have yet to be absorbed by most plan sponsors. Will it finally be “enough?” Time will tell.

3. Operational and cost concerns linger.

While several industry providers have offered what seem to be workable, effective solutions to the “portability problem,” plan sponsors remain concerned that the cost and complexity of transitioning these offerings—either by individual plan participants, or the plan itself—would be daunting, at best.  And that doesn’t take into account the educational challenges. 

Granted, there are a host of new and newly-branded solutions in and coming to market (check out our recent Retirement Income Buyer’s Guide for some insights)—but there remains a “learning” curve, and, at least in some cases, an UN-learning curve—for plan fiduciaries, and those who advise them.   

4. Participants aren’t asking for it.

Once you’ve walked through all the objections[ii] to in-plan retirement income options, it all seems to come down to this. Despite industry surveys that suggest worker interest in the concept (if not the reality) of retirement income solutions, it never seems to get to the level of expressing that interest to those who actually make retirement plan design decisions.

Sure, most plan sponsors acknowledge that participants (certainly older, longer-tenured participants) could use the kind of help that a retirement income structure could provide, and yes, plan sponsors are (still) looking for a more secure safe harbor, and they’d certainly welcome a PPA-ish “nudge” (along the lines of QDIAs) in that direction. At the same time large employers, anyway, have expressed interest in helping workers retire “on time,” and there is apparently increasing interest in retaining participant accounts in their plans. All in all, it seems that those interests would be well-served by a prudent, well-executed solution to provide a reliable retirement income alternative. 

That said, until it becomes an articulated concern for the workers they hope to attract, retain and eventually retire from their workforce, it’s likely that the adoption rate—by plans and plan participants—will be slower than might be hoped.

5. Participants don’t take advantage of the option when offered.

The so-called “take up” rates among participants can be sliced in different ways—by provider (the options are varied, after all), by participant age, even by the involvement of the employer in positioning in the option—but however you parse it, the word I’ve generally heard to describe participant adoption rates is… “disappointing.”

Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments—be it the overweighting of small probabilities, mental accounting, the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

To its credit, the retirement income industry has pretty consistently tried to overcome the objections raised with a series of product innovations. Unfortunately, that process has tended to make the offerings more complex AND more expensive. One thing for sure—if it’s not TDF-easy/simple to use, participants won’t.

6. (Most) advisors (still) aren’t promoting it.

Plan design can surely help steer participants toward these options, but most advisors I’ve spoken with say that, for a variety of reasons (mainly cost and complexity) these retirement income options are still sold, and not bought. Beyond that, the current advisory focus seems more targeted on wealth management—a perfectly logical emphasis for those with enough wealth to warrant it, but arguably beyond the needs of many retirement plan accounts.     

As an industry, we bemoan worker inattentiveness to the sufficiency of their retirement savings accumulations—and that’s with the aid and assistance of workplace retirement savings education, defaults for decisions like contribution amount and investments, and increasingly the availability of a retirement plan advisor. 

But let’s face it: When it comes to making a decision about a lifetime income option, or even evaluating the option, most workers are—still—literally on their own.

- Nevin E. Adams, JD

 

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[i] See Guaranteed Income: The Impact of the SECURE Act

[ii] See 7 Reasons Retirement Income Solutions Stall

"Broken" Premises

 Perhaps because of the recent full moon, the nation’s 401(k) “haters” were out in force.

Yes, last week we were “treated” to a Bloomberg op-ed with ideas on how to “fix” America’s broken retirement savings system, a back-handed compliment (of sorts) on SECURE 2.0 in Forbes from Teresa Ghilarducci, and the trifecta was completed with an academics op-ed in the Washington Post alleging that the current retirement system is “built for the rich.” 

Most of the criticism was focused on the same old myopic view on taxes and tax preferences—all flavored through the prism of a highly biased preference for the involvement of the federal government in such matters, rather than the private sector.

Key Points

So, let me take a couple of minutes to make a few points that always seem to be glossed over:

1. Tax deferral is not tax avoidance. Those contributions and earnings will be taxed (though generally outside the 10-year budget scoring window Congress uses).
2. The ability to save for retirement on a pre-tax basis is a powerful incentive—even, and perhaps especially, for those that academics argue have no rational reason to do so (because, on a net basis, they have no federal income tax liability). 
3. Tax preferences encourage not only plan participation (though it does that), but also the creation/existence of retirement plans—in which lower income workers are 12-15 times more likely to save than on their own. 
4. Non-discrimination tests and legal contribution limits work (as designed) to keep an effective balance between the benefits of higher-paid and other workers. In fact, actual data proves that while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes. They are not “upside down.” 

Now, with those elements in mind (we’ll return to them throughout), what did the “haters” have to say?

The ‘Fixes’

Well, the Bloomberg editors’ “fix” to the system they claim is “broken” involves: (1) making access universal (but wait, what about Social Security?)—with a 3% auto-default rate with an opt out (they cite the UK’s NEST opt-out rate of 8%, though the opt-out rate for comparable state-run IRA programs in the U.S. is three to five times larger); (2) making it “simple” (the federal government’s Thrift Savings Plan, or TSP was cited), ostensibly with an abbreviated fund menu—or perhaps just because it’s a government solution; (3) making it “portable” (actually, they want it centralized, presumably with the federal government, so that it never has/get to be moved/rolled over), and (4) they want it to be “progressive,” which basically means shifting the current deferral of taxes to a straight-up government match to “the lowest earners.”[i]

There’s really nothing new here—the solution seems to be, more or less, a “nationalization” of retirement savings—with a program focused on helping those at the lower end of the income scale, but completely ignoring the vast sea of middle-income savers—for whom Social Security alone likely won’t come close to replicating their retirement income needs. 

The Washington Post op-ed was crafted by Daniel Hemel, a professor at the University of Chicago Law School and a visiting professor at New York University School of Law. He seems quite angered at the bipartisan support for SECURE 2.0 (actually the Securing a Strong Retirement Act of 2022) as some kind of sell-out by Congress to the financial services industry. He has an issue with “mega-IRAs,” but he also takes aim at Roth contributions, the extension of the required minimum distribution timeline, the non-tax refundability of the Saver’s Credit, as well as the scaled increase in the catch-up limits—all of which are characterized as either a giveaway to the rich, a budgetary “gimmick”—or both. He offers no solutions to any of this—though he does suggest that a focus on a strengthened Social Security would be a better use of their time (I, for one, would support that). Nor is there an acknowledgement that somewhere along the way this system “built for the rich” has somehow managed to wind up with roughly two-thirds of its participants in tax brackets that by most measures would fall significantly lower than that label would encompass. Groups for which this “broken” system is a lifeline beyond the baseline of Social Security and the pension benefits they never had. 

And then, just ahead of that article, Teresa Ghilarducci, a familiar critic of 401(k)s, pens an article ostensibly focused on the provisions of SECURE 2.0 (even taking the time to try and explain why it garnered such strong bipartisan support) on her way to pointing out why her proposal (now labeled the Ghilarducci/Hassett/EIG retirement proposal) is superior. Now, most of us would think that legislation—any legislation—that passed the U.S. House of Representatives by a margin of 414-5 would have to be on something as innocuous as naming a post pffice—that it would advance so many aspects of retirement security instead is a testament to the importance of the issue(s), and the potential to make strides in addressing them. 

Well, Ms. Ghilarducci seems to think that while SECURE 2.0 is perhaps better than a poke in the eye with a sharp stick (my words, not hers), but she claims the fixes it provides are too little (and probably too late), compared with her solution (if bipartisanship in the U.S. Congress is quickly dispensed with, she takes great pride in her alignment with conservative economist Dr. Hassett) that would build a TSP-like program for—well, everybody—or at least those who don’t already have a retirement savings plan at work. This particular article doesn’t go into the details of her solution, but we’ve seen (and written) about it before. Mind you, she’s not really worried about what you and I might consider middle-income workers—her focus is on the lower end (less than $52,000 median household earnings). It calls for a government (rather than an employer) match—but one that is only 3%. Now, that’s a number that has appeared in previous proposals she has put forth—and Jack VanDerhei, while at the Employee Benefit Research Institute, projected that it comes in well under where the status quo brings that same group in the current system.[ii]

‘Broken’ Premises

Now, those of us who actually work with real people know that this so-called “broken” system works amazingly well—for those who have access to it—including, most especially, those at the lower end of the income scale. The academics routinely target the well-off in their criticisms, but ignore the needs of middle-income households for whom Social Security will almost certainly not be… enough. And completely discount/ignore the role that the current tax preferences play in fostering the formation and maintenance of these retirement plans. 

Indeed, underneath all of the criticisms, the real issue seems to be that—as we’ve noted repeatedly—not enough working Americans have access to that system. What these critics don’t seem to appreciate is that, rather than closing that gap by encouraging more plan formation and participation, these random op-eds—often based on myopic views and faulty premises—only serve to undermine that goal. But then, perhaps there’s a reason… 

There are plenty of success stories out there—I’ll bet every single one of our 35,000+ readers know one, ten, a dozen, perhaps hundreds… it’s past time we started telling them.

- Nevin E. Adams, JD

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[i] Weirdly, as a throw-in they suggest that folks should be able to “tap their accounts for the occasional emergency expense”—which they claim would “save billions more that would otherwise go toward interest on often-predatory payday loans.”

[ii] My thinking is that, like earlier proposals, her math works because she assumes that any balances not actually withdrawn by the individual (and perhaps their spouse) would be absorbed into the “pool” and used to fund other payouts.

Are We Ready for Retirement Income?

 It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective.

That’s right—for the vast majority of participants today, creating that “paycheck for the rest of your life” remains a DIY undertaking. To this day only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

However, the need for that solution is widely acknowledged—and there are some new, if somewhat familiar, solutions emerging. 

Earlier this month, BlackRock garnered some headlines with news that not only was it building annuity contracts into a target-date fund series, but also that it had already lined up five large plan sponsors (with some $7.5 billion in assets) to implement the option as a default. 

That followed by a few months the March announcement of a consortium of providers (American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, N.A. and Wilshire) that had collaborated on a new in-plan target-date fund series with guaranteed income for life baked in. One that is also purportedly “portable among major recordkeepers where Income America 5ForLife is available”).

SECURE ‘Acts’

Those announcements, of course, came in the wake of the SECURE Act, which included three specific provisions designed to overcome the reluctance of plan fiduciaries (and participants?) to embrace these options:

• Portability—generally, it permits special distributions of a “lifetime income investment” when the investment is no longer authorized to be held under the plan, which makes it possible for a participant to keep the investment even if the plan sponsor changes recordkeepers or decides to eliminate the investment from the plan lineup. 
• Disclosures—requires plans to give participants projections of their current account balance as a monthly benefit using assumptions prescribed by the Secretary of Labor, a provision designed to help participants better understand what their projected retirement savings will produce in terms of monthly income in retirement. Or, said another way, to help get them oriented to thinking about turning that retirement savings balance into that proverbial paycheck for life.
• Fiduciary Safe Harbor—which, in essence, provides that a DC plan fiduciary that selects a “guaranteed lifetime income contract” to be offered under its plan, he/she will be deemed to have acted prudently if it follows a series of steps outlined in the law. That means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract.

It remains to be seen if all this will actually move the needle—but they do seem to directly confront—and, at least potentially—resolve the issues that have long been put forth as objections to the embrace of lifetime income options on a retirement plan menu. Indeed, both offerings also deal with the more traditional objection to annuity products—their cost—if they actually work.

There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). Wrapping a complicated product (and lifetime income is complicated) in a relatively simple product is certainly one way to ease acceptance. Moreover, doing so with a product in which contributions are defaulted should certainly improve the rate of adoption by participants—if plan sponsors are inclined to make it available on that basis. 

And if advisors are willing to help. 

- Nevin E. Adams, JD

The "Magic" of Compounding

Some numbers were put in front of the Senate Finance Committee last week—numbers that even the chairman of that powerful body called “jaw-dropping.”

The numbers were 51 million and $6.2 trillion—the former the potential number of new retirement savers, the latter a separate projection of the potential new retirement savings (over a 10-year period) that could result if two pieces of existing retirement legislation were implemented, specifically the combination of some key provisions of the Automatic IRA Act and the Encouraging Americans to Save Act.

Those projections—presented in testimony by American Retirement Association CEO Brian Graff—were the work (and rework) of many late (and early) hours by a number of individuals over a period of months.

Key Assumptions 

Now, predicting the behavior of human beings decades into the future may seem like the stuff of science fiction, but it can be parameterized. However, the key to a projection that aligns with reality likes in the assumptions. Here the key provisions (and assumptions applied) were that:

• All employers with 10 or more workers that don’t currently offer a plan do so.
• All those new plans offer automatic enrollment (no employer contribution for a new plan).
• Those new automatic enrollment plans start deferrals at 6%, and auto-escalate to 10%. 

Oh—and with regard to those new participants, a 20% opt-out rate was assumed in the first year, similar (though actually somewhat less, because we assumed that the new Saver’s Match would dampen the rate of opt-outs) than that experienced by the state-run programs like OregonSaves. And yes, that’s higher (about double) the rate experienced by 401(k) plans in the private sector with automatic enrollment.  

As for the Enhanced Saver’s Credit (let’s call it the Saver’s Match for clarity), we simply assumed that everyone eligible would get it (except, of course, for those that opted out), in the amount(s) provided in the (then proposed) legislation. We even factored in self-employed and “gig” workers, a still small, but growing element in the economy.

Why it Matters

We’ve long highlighted the issue with access to a retirement plan at work—“coverage”—alongside data that supports the fact that even modest income ($30,000/year to $50,000/year) workers are 12-15 times more likely to save for retirement via a workplace plan than on their own. While a growing number of states have embraced the notion of a “mandate” on the part of employers to provide payroll deduction to a state-run plan, extending that concept on a national level is a real game-changer in terms of providing that opportunity. 

Doing so combined with automatic enrollment (also a provision of most of the current state-run plans) helps workers get off to a good start, and providing a Saver’s Match seems likely to encourage most to stay with it—and perhaps, particularly among smaller employers, without requiring the financial impact of an employer contribution. 

Moreover, not only do the expanded levels of eligibility for the enhanced Saver’s Match mean that more individuals will be eligible, making it refundable means that more will be able to claim it—and, with so many more having access to retirement accounts, they will now have a retirement-oriented place in which to put it.

In our business, we often talk about the “magic” of compounding, and when retirement savers see how that early contribution can grow and build on itself, it does truly seem magical. In fact, no less a personage than Albert Einstein is reputed to have said that “Compound interest is the eighth wonder of the world.”[i]

Indeed, taken together, the compounding impact of these two sweeping proposals look to produce a retirement result worthy of that accolade—if they can make it into law.

- Nevin E. Adams, JD

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[i] He went on to say: “He who understands it, earns it; he who doesn’t, pays it,” but that’s a story for another day.

The 'End' in Mind

I was discussing the subject of retirement over the long holiday weekend with family. 

There was a lot of talk about Social Security (or the looming lack thereof), the impact(s) of inflation, and how the markets (stock and housing) had boosted prospects, but ultimately decided we weren’t sure when that would happen, we weren’t even positive that it would happen (the so-called “great resignation” notwithstanding), or if it might consist of a gradual slowdown/pullback. Moreover, we really didn’t know what “it” would be like if and when it did happen, or where we might be living even if and when. Finally—it had been a pretty hectic week, after all—I somewhat playfully suggested that the best definition of retirement would be the absence of time-critical deadlines and Zoom meetings. Ah, now that’s something to look forward to!

However, and as those who are already ensconced there can attest, retirement has its own set of pressures, and they go well beyond bucket list “bingo.” But the “difficulty” that my family discussion had in actually describing what we would “do” is a real problem in retirement planning. After all, if you don’t know what you are going to “do” (or from where you will be doing it), it’s really hard to develop a plan, certainly not an effective one. Let’s face it, the things we are accustomed to saving for—a car, a house, the kids’ college tuition, a vacation trip—generally are not only things we can envision, they have a very specific price tag—and sometimes a specific deadline.

Now, of course, retirement—more precisely, living in retirement—also has a price tag, if not a specific deadline (though the latter can certainly influence the former). Anyone who has an interest in knowing what that is can turn to any number of readily available calculators capable of revealing that number, or at least a range of numbers. Unfortunately, those disembodied figures don’t shed much light on defining what we’ll get for our money—and even then they tend to be so large that the normal reaction is, “Isn’t there a cheaper model?” (or perhaps a higher assumed return).

The sad reality is that too few take the time to make that calculation before making that decision. In fact, according to the Employee Benefit Research Institute/Greenwald & Associates’ 2020 Retirement Confidence Survey, just over 4 in 10 (44%) have (ever) estimated[i] how much income they and your spouses would need each month in retirement—a pretty consistent finding from the RCS, which began asking that question way back in 1993. 

Doubtless some of the reluctance is the sheer complexity of the “ask” (not to mention the variables), the press of more immediate concerns, perhaps even a fear of what the answer will be. For years now, a number of providers have produced an estimate of how much monthly income one’s current account would yield on participant statements, a feature (somewhat) codified in the SECURE Act. That said, and with its many assumptive flaws, I’ve never found that focus particularly useful, though it’s an improvement over the traditional lump sum “need” that most calculators provide, and certainly better than a mere account balance. Personally, I think we’d do a better job of paying that retirement “bill” if participants set an annual target—a budget for retirement, just like we have for the mortgage or the car payment. That would give them a shorter-term target that could still be part of the larger, often apparently unassailable goal. Too often, retirement savings is a function of what is left over after everything else is paid. And that means that, too often, particularly when things like health care costs, groceries, and filling the tank cost more than we had planned, we not only don’t pay that retirement “bill,” we don’t even see it as overdue. 

Retirement planning needs to start with the “end” in mind, of course—but to be effective it also needs a constructive road map to help chart the way there. 

- Nevin E. Adams, JD

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[i] Worse—and this data point was not in the 2020 RCS—when you ask how people had made some kind of assessment of their retirement income needs, a jaw-droppingly large percentage indicated they… guessed.

Thanks, Giving

Thanksgiving has been called a “uniquely American” holiday —and so, even in a year in which there has been an unprecedented amount of disruption, stress, discomfort, and loss—there remains so much for which to be thankful. 

I’m thankful that so many employers (still) voluntarily choose to offer a workplace retirement plan—and, particularly in this extraordinary year, that so many have remained committed to that promise.

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

I’m thankful for the strong savings and investment behaviors emerging 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 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 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 decade ago.

I’m thankful that so many workers, given an opportunity to participate, (still) do. I’m particularly thankful this year that so many were able to do so without taking advantage of the expanded access to those accounts via the provisions of the CARES Act.

I’m thankful that those on Capitol Hill were able to (mostly) set aside partisan differences long enough to pass the CARES act, including those expanded access provisions and the Payroll Protection Program, which likely helped many avoid having to tap into their retirement savings.

I’m thankful for the hard work of so many recordkeepers, TPAs, accountants, advisors and attorneys who—under strained and stressful conditions of their own—worked through and helped their plan sponsor clients and participants work through—the provisions and practical implications of the CARES Act (and just mere weeks after having done so for the SECURE Act).  

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)… (still) hasn’t. Yet.

I’m thankful for the opportunity to acknowledge so many outstanding professionals in our industry through our Top Women Advisors, Top Young Retirement Plan Advisors (“Aces”), Top DC Wholesaler (Advisor Allies), and Top DC Advisor Team lists. I am thankful for the blue-ribbon panels of judges that volunteer their time, perspective and expertise to those evaluations.

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 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 all of you who have supported—and I hope benefited from—our various conferences, education programs and communications throughout the year—particularly in a year like this, when it has been so difficult to undertake, and participate in, those activities. I’m hopeful that at some point in the near future we’ll be able to do so… together.

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 thankful for the constant—and enthusiastic—support of our event sponsors and advertisers—again, particularly in a year when so many adjustments have had to be made.

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 for the team here at NAPA, ASPPA, NTSA, ASEA, PSCA (and the American Retirement Association, generally, as well as all the sister associations), and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

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

Uncertain Outcomes

As the nation enters its third month under the constraints of the COVID-19 pandemic, it seems a dramatic understatement to say we are living in uncertain times.

Let’s face it, even as the nation begins to (re)open, concerns about the coronavirus remain widespread, and the markets, though stabilizing, remain volatile. Unemployment rates, though optimism remains that they will be short-lived, are at levels not seen since… well, at levels never seen before. And then, in the midst of all this, as a nation, we are reeling from a fresh wound—the tragedy and implications of George Floyd’s death—and while many are hopeful that meaningful change can finally come from this, there’s sadness—and anger—that the protests calling for that change have been accompanied by acts of violence.

Amidst all this worry and uncertainty, it’s hard to believe that the CARES Act—and the Payroll Protection Program—have only just been drafted, executed, and implemented to help stave off at least some of the economic uncertainty that currently confronts many. Not to mention that we had only just begun getting our arms around the practical implications of the SECURE Act—which incorporated retirement provisions that purported to stave off future economic disaster.

The mortality and hospitalization projections related to COVID-19 have perhaps provided a fresh appreciation for both the importance, and the limitations, of models as a predictor of the future impact of current decisions. That said, those seeking to forestall problems are generally well advised to rely on something other than a “gut sense” of the potential impact.

Earlier this year the Employee Benefit Research Institute (EBRI) projected the potential impact of the key provisions[i] of the SECURE Act. EBRI projected that those projections could  reduce the U.S. retirement deficit for workers currently age 35-39 by as much as 5.3%—double that if they work for small employers (those less than 100 employees), mostly because those who are in the latter category are so much less likely to have access to a retirement savings plan at work—and, as readers of our publications know, those without access to a plan at work are significantly less likely to save for retirement—12 times less likely, in fact.

However, the overall impact of these SECURE provisions is larger; those specific projections merely quantify the reduction in shortfalls for those who otherwise wouldn’t have enough retirement income.
Among those who were already deemed to have had “enough” retirement income (and EBRI employs a fairly conservative basis for that foundation, one based on actual estimated needs, rather than an ad hoc percentage of pre-retirement income), SECURE almost certainly adds some cushion to those projections. Indeed, the EBRI report differentiates between reductions in deficit and increases in surplus.

When You Assume…

Those are encouraging numbers. But it’s worth acknowledging that there’s a healthy dose of assumptions underlying those projections, as surely there must be in anticipating future human behaviors. EBRI’s Research Director (and data modeler extraordinaire) Dr. Jack VanDerhei takes pains to outline those in the paper, but it’s worth noting that the ranges in assumptions employed are—well, they’re all over the place.

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Consider that in the EBRI report, the assumptions presented for MEP adoption range from a one-third take-up by employers with no participant opt-out to one in which two-thirds of employers who do not currently offer a plan choose to do so, with a 25% opt-out rate by workers. And, as you might imagine, the results vary widely based on the assumptions used. On the other hand, they’re arguably no different than if you were to ask a random group of advisors how many more employers will now offer plans because of changes like the greatly expanded start-up tax credit, or as a result of the efficiencies resulting from an open MEP.

Now, unlike many of the uncertainties in our lives, when it comes to retirement, advisors can make a difference—and potentially a huge difference in the SECURE Act realities, whether it’s by informing and encouraging employers to take action, nudging them toward positive and proactive plan designs, or simply working with individual workers to help them maximize the expanded opportunities. In sum, we can all have an impact far beyond our immediate circle—and beyond our lifetimes.

We live in uncertain times, after all—but the importance of the role you  play in expanding retirement opportunity and security—and our nation’s future—is anything but…

- Nevin E. Adams, JD

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[i]Specifically, the projections contemplate greater access by allowing providers to offer multiple employee plans (MEPs), and also factor in the impact of raising the cap under which plan sponsors can automatically enroll workers in “safe harbor” 401(k) plans from 10% to 15% of wages, and required coverage of long-term part-time employees.

The End in Mind

Could lifetime income disclosures undermine retirement savings?

Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement – and a sense that the emphasis on account growth, and account balances, glosses over the reality that at some point in the future those savings will need to be turned into a retirement paycheck.

Enter the SECURE Act, which among its numerous retirement-related provisions added the new “lifetime income disclosure” requirements to ERISA’s benefit statement rules. It applies to individual account plan benefit statements and the lifetime income disclosure must be provided in one benefit statement during each 12-month period. Simply stated, the new law requires that the participant’s total accrued benefit be expressed as a “lifetime income stream” in the form of a single life annuity and a qualified joint and survivor annuity, assuming the participant has a spouse of equal age. The assumptions for these disclosures will be provided later by the DOL.

While it’s generally assumed (certainly that was what the authors of SECURE hoped) that this presentation will help participants attain a more realistic perspective on their retirement future (or at least the sufficiency of the financial resources they have amassed for that eventuality), there has been some concern that the reality, certainly in the absence of counsel on how to improve those prospects, will discourage, rather than motivate saving. Indeed, that was a concern expressed at a gathering of ERISA attorneys here in the nation’s capital.

That puzzled me a bit – I’ve currently got my accumulated 401(k) savings spread across the plans of four different providers, and three of them have been projecting my retirement income for several years now. Now, because those balances are in different places, those projections haven’t been especially useful (though I know how to add), but still… providing those type projections may still be on the horizon for some, but it’s hardly a big leap. And I’ve not heard or read about any big slumps in savings rates as a consequence.

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Though it’s likely drifted from the recollection of most, back in May 2013, the DOL’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance (sound familiar?). The question then, as now, was – what impact, if any, would that disclosure have on participant behaviors?

Well, the Employee Benefit Research Institute (EBRI) included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those proposed to be provided by the EBSA’s online Lifetime Income Calculator proposal, and ask workers for their reaction(s).

What impact did that have?

Now, while there are certainly going to be differences resulting from a personal engagement (and there were some  differences in the assumptions,[i]) EBRI asked about their current account balances, and assuming retirement at 65, presented them with a monthly income figure. As it turned out, more than half (58%) felt that the illustrated monthly income was in line with their expectations.[ii] Considering those results, it is perhaps not surprising that the vast majority (81%) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17% replied that hearing this information would lead them to increase the amount they are contributing.

It remains to be seen what difference(s), if any, guidance from the DOL following the SECURE Act’s admonitions might have on the projections some (most?) recordkeepers are already providing, and how individuals, once presented with those  projections actually respond.

That said, the evidence we do have – the EBRI study and the anecdotal sense from the examples already in the marketplace – suggests that that “end in mind” focus will, at worst, have no impact – and at best, might well be the positive influence its proponents have hoped.

- Nevin E. Adams, JD

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[i]Of course, any such projection is necessarily required to make a number of critical assumptions – including future contribution activity, future rates of return, future asset allocation, and future annuity purchase prices. Other changes in assumptions were:

• Rather than using normal retirement age for the calculation, they asked about their expected retirement age.
• Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
• Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.

[ii]On the other hand, 8% of the defined contribution participants said the monthly amount was much less than expected, though another 19% said it was somewhat less than expected.