Retirement Readiness Surges with Focus Shift to Actual Data

  “Sure, it will probably be more work, and generate fewer clicks,” commented one industry source, “but it’s the right thing to do.”

Yes, after years of relying on uninformed “guesses” from individuals ignorant of their financial needs and situation, the retirement industry, major media outlets, and a large number of academics have made a commitment to focus on actual data, rather than hypothetical extrapolations from incomplete datasets.

Another explained, “we always thought that exaggerating the depth of the retirement crisis would encourage people to save more — but that turns out not to be the case.” Those projections affixed labels like “magic” to those extrapolated numbers based on surveys of uninformed workers, which not only ignored real differences in incomes, location and age, but were typically also averaged to further obscure accurate results. Likely fueled by previous reports of needed retirement savings, surveys of individuals routinely exaggerated the real needs of retirement finances — fueling future projections as well. 

“While self-assessment can be a critical foundation for retirement needs planning, we are committed to sharing real-world perspectives on actual retirement needs,” noted one industry expert. We’re ready to call “bs” on inflated, uneducated and unrealistic “estimates.”     

Part and parcel of this previous approach — and reinforcing its messages — were academic studies that mixed results of those who participated in a workplace retirement plan with those who never had, and individuals within five years of retirement with those who had just started working. All breathless reported by a media then-clamoring for click-bait ready headlines.     

An academic noted that, “I’m not sure what people expected since we routinely built our projections on the projections of others, who were — as it turned out — based on survey data from — well, questionable sources. No wonder we kept coming up with the same results.”

Indeed, new research, published by the Oxford Newfound Institute of Nihilism (ONION), finds that workers — no longer persuaded by “retirement crisis” headlines that there wasn’t any point in trying — now are taking proactive steps to understand their situation, often with the help of trained advisors. Previous research had shown that fewer than half of workers had made even a single attempt to assess their retirement needs, and many of those had simply … guessed.

Ironically, despite this newfound and dramatic increase in confidence, the new retirement savings goals were not only more likely to produce a successful outcome, they were generally higher than the goals previously set by workers who had gone through the process.

In fact, some of the most dramatic impacts were recorded by participants in plans where employers had not only provided for automatic enrollment immediately upon hire, but who applied automatic enrollment retroactively to existing hires as well. “All these years, I just assumed my employer thought it was too late for me to start saving,” said one long-time worker who had just been automatically enrolled under such a program. 

A separate, plan sponsor-focused report found that the renewed focus and confidence translated into tangible workforce management benefits as well. “We found that a growing number of older workers were simply hanging on to their old jobs, afraid to retire because they had no idea how much they would need to have in retirement,” observed one. “Now, for the first time in a long time, we’re seeing workers actively plan for their retirement date with confidence. We should have done this years ago!”

No foolin’.

• Nevin E. Adams, JD

Note: Sure, it's April Fool’s, but while the post above has a certain tongue-in-cheek character, the implications are not as fictional as you might think. In fact, they are well within the realm of a very potential reality for millions more — with a little help from plan advisors, their plan sponsor clients and the cooperation of plan participants. Not holding my breath on the shift in focus by the media, academia, or — sadly — even the retirement industry itself.

A Retirement Crisis of Complicity

 A recent headline asks: “Why Aren’t We Talking About America’s Retirement Crisis?”  Really? It seems to me that that’s ALL we’re talking about!

Even more ironically, that headline appeared in an op-ed crafted by none other than Teresa Ghilarducci (and her new co-author, Christopher Cook) who, so far as I can discern, talks (and writes books) about little other than the so-called “crisis.” And this specific op-ed, as hers often do, got picked up in syndication (see this link for details).  

But then, this week I stumbled across a LinkedIn post from Andrew Biggs, which matter-of-factly stated, “After a period of trying-in-good-faith, I've concluded I have to be more, um, forthright in calling out, shall we say, misinformation regarding Americans' retirement income security.” Said another way, it appears that Mr. Biggs has come to the conclusion – as I have – that polite commentary and even-handed discussions are insufficient to put to bed what continue to be extreme mischaracterizations (and, in some cases, outright lies) about the true state of retirement in America.

Thankfully, in an article posted on Forbes (titled “Fact-Checking Cook and Ghilarducci on Retirement (Again),” Biggs once again takes to task a follow up to his earlier response to (yet) another set of exaggerated claims and assertions by the pair. 

Here’s the latest:

“Nearly half of today’s middle-class adults will be poor or near-poor in retirement.”

Now, that’s a pretty bold statement – and one made without much backing. Actually, the article links to work by the New School (where Ghilarducci is the Bernard L. and Irene Schwartz Professor of Economics at the New School for Social Research in New York City) and is based on “Authors’ calculation using the 2014 Survey of Income and Program Participation.” Note “author’s calculation.” 

Biggs provides his own analysis of data, noting that the Census Bureau defines “near poverty” as having an income between 100% and 125% of the federal poverty threshold, while, according to Census Bureau research, (only) about 6.9% of age 65+ Americans have incomes below the poverty line. He then notes that about 14.8% had incomes below 150% of the poverty line, which is above near-poverty – and that if you split THAT group in half, then around 12.9% of current seniors are either poor or near-poor – TODAY.  

But by most objective measures (Biggs cites the Social Security Administration and the Urban Institute), he suggests that elderly poverty will DECLINE in the coming decades. Beyond that, he comments – as he has previously – that the vast majority of Americans who are poor in old age were poor PRIOR TO retirement. So, where does the conclusion that “nearly half” will be poor or near poor come from? While some of that might be attributed to the specifics of the aforementioned “author’s calculation,” another subtle clue can be found in the reference to “according to internationally-recognized measures”; we’ve seen those in Ghilarducci’s recommendations before – those are the ones that unfavorably compare the economic standards of life in America to Kazakhstan.   

“Nearly half of older Americans have no retirement savings and must rely solely on Social Security in old age.”

As it turns out, this is a two-fer – and Biggs breaks it down as follows. He points out – as he has previously – that the “nearly half of older Americans have no retirement savings” counts only individual retirement accounts. It completely ignores things like pensions (which, according to the Federal Reserve, Americans’ accrued benefits under traditional pensions top $16 trillion). It also excludes a taxable investment account, real estate, a farm or small business, and so forth. Biggs notes that, if you include all forms of retirement savings (and why wouldn’t you, unless you were trying to make a point?), you find a totally different picture. He cites the Federal Reserve, relying on its Survey of Household Economics and Decision-making, in finding that 88% of Americans aged 60 and over have retirement savings on top of Social Security. 

The second part – the level of reliance on Social Security – is also overstated. Biggs cites Social Security Administration researcher Lynn Fisher’s research using IRS data matched to government household surveys to examine how heavily retiree households rely on Social Security. She found that only 4.5% of elderly persons received all their income from Social Security for all of their income. “In other words, literally one-tenth of the figure Cook and Ghilarducci claim,” Biggs notes.  He also explains that the Census Bureau analyzed the number of seniors who receive at least 90% of their income from Social Security – just 12.2%, despite using a lower bar than Cook and Ghilarducci.

About 79% of people aged 62 to 70 can’t afford their pre-retirement living standards.

There’s plenty of actual IRS data – you know, the kind that people provide to the IRS under penalty of law – available to show that retirement income tends to compare favorably with pre-retirement.  Biggs turns to data from economists Peter Brady and Steven Bass that tracked incomes from ages 55 through 72 – and found that for the typical household, income drops by only 12% from age 55 to 65. Which, of course, means that the typical 65-year-old has a “replacement rate” of about 88%.  Beyond that, he explains that for the poorest 25% of seniors, their incomes increase in retirement.

And then there’s the alternative of just asking folks in retirement. Again, he references the Fed’s Survey of Household Economies and Decision-making which found that among 52-to-61-year-olds from 2019-2023, 76% said they were at least “Doing okay” – but among 62-to-70-year-olds, 82% did so. Among those age 75 and over, 86% said they were at least doing okay financially, the best in any age group. 

Of course, op-eds aren’t subjected to the same level of scrutiny as news – not that there’s been any shortage of news coverage on the topic of the looming retirement crisis. Let’s face it, there have been – and continue to be – a series of one after another industry survey that simply parrots the concerns of working Americans – the vast majority of which don’t seem to have ever tried to figure out their financial needs or reserves in retirement, apparently relying solely on the screaming headlines that assure them that retirement Armageddon is just over the horizon. It doesn’t help matters that retirement industry leaders echo and reinforce that perception.    

That said, and to answer Ghilarducci’s question, at least some of us are not just talking, but are actively working to forestall the retirement “crisis” she and others have been “promoting” for the past several years. No doubt, some will struggle in retirement – as they have prior to that date. But we need to quit excusing such “promotion” as anything other than hyperbole designed to sell books, inspire televised interviews and promote “solutions” that would undermine the amazing success of the private retirement system. 

If we don’t – well, we’re quite simply being a complicit enabler in helping spread that narrative by our silence.

- Nevin E. Adams, JD

The Plot to Kill the 401(k)…Thickens

 Critics of the 401(k) have moved way beyond mere bad-mouthing—and are now openly advocating actions that would undermine support for, and participation in, those programs.

It started with criticism of the 401(k) itself—how it was “never intended” to be a primary source of retirement income—as though that precluded the possibility. There were the insinuations that later became outright claims that—despite evidence to the contrary—401(k) plan benefits were “upside down” and that tax benefits accrued only to the rich. Then reports—based on small samplings of data—that employer matching contributions didn’t really impact/influence contribution levels—and that the match was…“unfair”—or “exploiting naïve myopic workers.”

More recently, there was the pining for the defined benefit plan design, even though it never really provided the level of benefits promised for most—and even though the vast majority of workers in the private sector never even had that as an option—and even though no serious analysis with a full appreciation of the costs (and risks) of businesses taking on those obligations sees that as a reality. 

Yes, for years now the 401(k) has suffered the Shakesperean “slings and arrows of outrageous fortune.” Sometimes the motivations of those throwing stones have been obvious—sometimes not.  Some are surely just academics desperate/eager to be published, others have a strong preference for/commitment to a federal government “solution,” rather than the private sector. Some—surely some—are honestly just motivated to examine and improve on that voluntary system—but limited by access to comprehensive data. 

Of course, one might instead more cynically wonder if there’s a deliberate reliance on distorting measures like averages and means extrapolated from accounts ranging from those at the beginning of their savings career with those nearing retirement—in that, the retirement industry itself has been complicit in its search for clicks and headlines, regardless of the messages those distortions perpetuate. Throughout, there have been criticisms about the lack of coverage and/or participation—but little acknowledgement that the system has long been considered as supplemental to that “big government” solution—Social Security (which, let’s face it, has challenges of its own).

Having laid that groundwork, in recent weeks, those voices have become increasingly bold in their condemnations. There’s no longer any pretense about their plans for the 401(k). Quite frankly, they plan to starve it to death—to redirect those tax deferrals to other projects, and not as deferrals, but as outright taxpayer-funded “grants.” Not so long ago, the notion of taking away the preferences that do, in fact, encourage participation—but more importantly foster sponsorship of these programs—would have been anathema to political prospects. Apparently, those days are now behind us.    

Little wonder that in the latest Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) and Greenwald Associates, the second-highest concern of survey respondents was that the U.S. government would make “significant changes to the America retirement system.” 

So, what can we do about all this? Here are some suggestions:

Call out those in Congress who want to strip away support for the 401(k). Here I am talking specifically about the sponsors of the latest attempt to undermine the private retirement system—the sponsors of the innocuously labeled “Retirement Savings for Americans Act” (RSAA). More specifically, I’m talking about Sens. John Hickenlooper (D-Colo.) and Thom Tillis (R-N.C.), as well as Reps. Terri Sewell (D-Ala. 7th) and Lloyd Smucker (R-Penn. 11th). Up until now, the sponsors have demurred on how this bill would be paid for—until Sen. Hickenlooper recently acknowledged that he would be willing to reduce the 401(k) incentives and limits to pay for the proposed plan, which would include a 5% federal match. That’s right—a 5% federal match. Those heading to the NAPA DC Fly-In Forum, take note!

Quit sharing and promoting “research” based on distorted or questionable data—and the organizations that produce them. Yes, I know you’re just trying to highlight the need for action, and perhaps to provoke a business opportunity. And yes, I know you don’t always have time to wade through the assumptions and math, not to mention biases in sampling size—or those that are simply surveys of individuals that don’t know any “better.” But if you feel compelled to share it, at least take the time to acknowledge that you haven’t had the chance to validate the results.  And come to https://www.napa-net.com where we try to keep you up to date on such things.

Support the organizations that are supporting and advocating for positive change and enhancements in these programs. If you’re reading this, you’re likely already a supporter of one of those (the National Association of Plan Advisors)—and good for you. You can (and should) also support those efforts by participating in committees, conferences, and education programs. And by sharing the information you find here. You can even start with this one!

Quit apologizing for the 401(k). That’s right. Even the 401(k)’s most vocal champions seem to be inclined to acknowledge “we still have work to do.” I’m not suggesting we ignore realities—but this “voluntary” retirement savings program has in a remarkably short period of time become THE way Americans save, and they have VOLUNTARILY set aside TRILLIONS of dollars for the future. To my eyes, this is a jaw-dropping incredible, amazing success. 

The failure laid at the feet of 401(k)s—if a failure it is—is that people who don’t work, or who don’t work for employers who offer a retirement plan at work, are in worse shape than those who do. Now, I’m not saying that the 401(k) design works for everyone, and it most assuredly won’t work for those who don’t have access to its benefits. That said, 401(k)s are working for far more people and in far more varied circumstances than the fear-mongering headlines give them credit for. It’s one thing, after all, to acquiesce to what has become a journalistic “creed”—that “if it bleeds, it leads”—and something else again to wield the knife. 

Those of us who see the impact it has made, and continues to make, on a daily basis need to be willing to say that. Out loud and proudly.

- Nevin E. Adams, JD

Shifting the 401(k) ‘Balance’?

A week or so ago, I came across an announcement that IBM was making changes to its 401(k). More specifically that, effective next year they were going to replace their matching contribution in their 401(k) with an employer contribution to a cash balance plan.[i] In the days that followed, the news was picked up in a couple of different trade publications—the implication being that this might be signs of a new shift in plan design. Heck, even Teresa Ghilarducci weighed in, championing the “evolution” to a defined benefit structure from the “flawed” 401(k). She never misses an “opportunity.”

Readers here are likely familiar with the basic concepts of a cash balance design. Technically a defined benefit plan, it’s generally referred to as a “hybrid” because it also has a number of participant-friendly aspects that it shares with a defined contribution plan, notably an account balance (though it’s a “notional” one) that is shared with participants. The benefits accumulate somewhat evenly over time, rather than being more service “back-loaded” as traditional pension plans tend to be. But just like a traditional DB plan, cash balance plans are funded by the employer on an actuarial basis, and the investments are employer-directed, ostensibly with an eye toward the benefit obligations that are accruing. Also, some cash balance plans are insured by the Pension Benefit Guaranty Corporation (PBGC), just like traditional pensions (and yes, the employer has to pay premiums).

Of course, cash balance designs aren’t new, nor are they new at IBM, which (in)famously shifted to one from a traditional defined benefit plan back in the late 1990s. I say “infamously” because it triggered a couple of participant lawsuits from individuals who thought their benefits had been reduced in the move—an age discrimination suit they won, only to lose on appeal. That said, even in finding for IBM the appellate court acknowledged that older workers were generally correct in perceiving "that they are worse off under a cash-balance approach" because such a plan eliminated the possibility of earning larger benefits as they neared retirement. "But removing a feature that gave extra benefits to the old differs from discriminating against them," the judge wrote. 

That controversy notwithstanding, cash balance plans have, in recent years, proven to be quite popular—particularly among smaller employers because they provide more funding flexibility than a traditional DB plan, and the potential for better benefit accumulation than the non-discrimination and top-heavy test limits often allow with defined contribution plans, such as a 401(k). But what IBM has done—basically replacing its 401(k) match with a cash balance plan contribution does appear to be unique—and worth noting.

As for IBM, while external perspectives on the announcement appear to be largely positive,[ii] it remains to be seen how it will be accepted by those it is ostensibly designed to benefit. Some have already commented that the loss of a match will reduce incentives to save in the 401(k)—others that the resulting diminishment in the 401(k) balance will undermine the amounts available for loans and hardships, though that arguably isn’t the purpose for those 401(k) savings, either. On the other hand, all eligible IBM employees stand to get this employer contribution, not just those who contribute to the 401(k) (though with what is said to be a 97% participation rate, it seems that few are left out at present, though we don’t know their contribution rates). You don’t have to be a cynic (though it helps) to imagine that IBM has done the math here, and that the change is either neutral, or inures favorably to their bottom line.

People tend to forget that the contributions defined in a defined contribution plan can be (re)defined each plan year—and while reductions are rare, they are not unprecedented. That said, even in rolling this new benefit out, IBM has (according to an internal communication memo posted online) acknowledged a reduction; “IBMers will also receive a one-time salary increase to offset the difference between the IBM contributions they are currently eligible to receive in the 401(k) Plan and the new 5% RBA pay credit”—though arguably that’s trading a pre-tax benefit for one on which taxes will be due immediately.   

While it’s certainly an interesting move—by a company with a history of interesting benefit moves—and, despite the enthusiastic response of Professor Ghilarducci, it seems unlikely to catch on more broadly.  Retirement savers have not only long understood and appreciated not only the value of an employer match, and so seem unlikely to embrace “losing” that to new plan they don’t understand, however even the tradeoffs are presented. As for plan sponsors—well, inertia is a powerful force in plan design as well—and a big design change that requires sensitive (and likely) ongoing communication will almost surely give pause to even the most innovative.

That said, it should serve as a reminder that plan designs can, and should, serve multiple purposes. It will be interesting to see how this one pans out.

- Nevin E. Adams, JD  

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[i] It’s actually referred to as a Retirement Benefit Account (RBA), though the description fits a cash balance plan, and it’s described as being offered “within IBM’s Personal Pension Plan.”

[ii] Not exclusively, of course—there’s cynicism to be found with regard to IBM’s true motives here. 

Rescuing Retirement from the ‘Rescuers’

Delegates to last week’s NAPA DC Fly-In Forum were treated to a discussion about a proposal touted as “rescuing retirement.” But the math (still) doesn’t seem to work. And it’s likely to kill the 401(k) (or at least its tax benefits). Here’s how.

The proposal itself isn’t new – its the Guaranteed Retirement Account (GRA) concept initially introduced by the New School’s Professor Teresa Ghilarducci, now somewhat modified, and embraced by Hamilton E. (Tony) James, President and COO of money management Blackstone. This newest version was rolled out earlier this year. Writ large there seem to be two significant differences in this newest version (packaged in a nice 119-page softbound book, Rescuing Retirement):

• James’ involvement, which lends some investment cred to the assumptions of the proposal; and
• a reduction in the mandatory contributions from employer and employee (the original proposal called for 5%, the new one only 3%).

The Ghilarducci/James team firmly believes that the current tax preferences inordinately benefit higher-paid workers, and therefore they have no trouble taking those away from all workers (they’ll let employers keep their current preferences for sponsoring the plan) in order to “pay” for the $600 non-refundable tax credit that is supposed to make the mandatory 1.5% employee contribution “free” for lower-income workers.

Under the GRA proposal, workers won’t be able to access the money prior to retirement – no more loans or hardship withdrawals. They assume, and perhaps rightly so, that emergency savings shouldn’t be taking place in your retirement account. Additionally, when you do retire, you will have to access the money in an annuity form – no more lump sums, and no bequests. You annuitize the payment at retirement (it can be a joint and survivor), but once you pass, any residual amount stays in the pool.

Ghilarducci and James actually seem to think they are doing employers a favor by giving them a way “out” of the bother (and expense) of providing workplace retirement plans. (James went so far as to refer to some conversations he’s had with some Fortune 500 CEOs, and apparently they’d love nothing more than to be done with these plans.) Oh sure, for those who have not previously offered a plan their new 1.5% mandatory contribution will represent an additional cost – but for everyone else, that 1.5% is likely a drop in the bucket compared to what they are spending now – and they won’t have to deal with the administrative responsibilities or fiduciary liability of a qualified plan.

But aside from my very real sense that killing the tax preferences for 401(k) savers would also serve to “kill” the 401(k), policymakers can’t help but be drawn to the notion of a proposal that purports to “rescue” retirement without costing the taxpayers. Well, without “costing” the taxpayers more, anyway (remembering, of course, that these are deferrals – a postponement of taxation, not a permanent deduction).

But does the proposal actually do what it claims?

First off, it does nothing for Boomers. As James aptly noted at the Fly-In, “It’s too late for them.” So whose retirement is being rescued? Well, younger workers – Millennials particularly, but more specifically, lower income workers – who in some cases are also part-time, part-year. Those workers are less likely to have access to a plan at work, and – likely because of their lower incomes — are certainly less likely to take full advantage of it.

Still, if today’s savings rates are deemed insufficient to help today’s retirement savers achieve their goals, how in the world can a combined 3% savings rate (employer and employee) possibly “rescue” retirement?

Well, despite their book’s auspicious title, from our discussion last week (and there were a couple of hundred witnesses), the only people who are being “rescued” are those who aren’t saving anything at all now (they’d be forced to save under this proposal) who also happen to be making $46,000 a year or less. That’s the group that Ghilarducci and James say will, under this proposal, achieve a 70% replacement rate (assuming Social Security, and no reductions there) in retirement. Everybody else? Well, you can keep saving for retirement, but Ghilarducci and James don’t see any reason to “underwrite” that responsible behavior by allowing you to defer paying taxes on compensation you haven’t yet received.

But even if you’re only focused on shoring up the prospects of lower-income workers, could a 3% contribution be enough? Even with the 7% return¹ that Ghilarducci and James assume for their GRAs, I just couldn’t see it adding up.

So I asked Employee Benefit Research Institute (EBRI) Research Director Jack VanDerhei to run the GRA program assumptions – for younger workers only (ages 26-30) – and asked him to compare that to what those same workers might get if they simply continued in their 401(k)s.

The EBRI analysis took actual balances, contribution rates and investment choices across multiple recordkeepers from more than 600,000 401(k) participants, looking at those currently ages 26-30, including those with zero contributions, with 1,000 alternative simulated outcomes for stochastic rate of returns based on Ibbotson time series (with fees between 43 and 54 bps), including the impact of job change (an assumption was made that 401(k) participants would continue to work for employers who sponsored 401(k) plans), cashouts, hardship distributions, loan defaults, and with contributions based on observed participant data as a function of age and income and asset allocation based on observed participant data as a function of age. For the Ghillarducci/James GRA, EBRI assumed no cashouts, hardship distributions or loan defaults (they aren’t allowed), assumed a deterministic 7% nominal return with no fees, and took their assumptions about the 3% mandatory contributions. And then compared the two outcomes at age 65.

The result? Well, as you can see in the chart to the right , the median for all income quartiles fares worse under the GRA proposal than under their current 401(k) path. (To download a full-page pdf of the chart, click here.) That’s not to say that every 401(k) path will provide sufficient income in retirement, of course – but it does affirm the common sense logic that if current rates of saving aren’t sufficient, 3% – even mandatory, and even with no leakage – won’t match the performance of the 401(k).

Of course, we know that today not everyone has access to a 401(k), and we’re all working to change that. But those truly trying to rescue retirement should probably do so with a life preserver, not an anchor.

- Nevin E. Adams, JD

Footnote

1. They view this return as conservative next to the 8.5% returns assumed by public pension plans, and think 401(k) investors only get 3-4%.

The "Plot" Thickens

In recent weeks, I have been distressed to see a pair of reports by what are sometimes affectionately referred to as 401(k) “haters” — but that’s not what I find most troubling.

One, by the Economic Policy Institute, is innocuously titled, “The State of American Retirement,” but it might be more honestly subtitled, “How 401(k)s have failed most American workers.” The other is a formalized (and slightly updated) version of Teresa Ghilarducci’s Guaranteed Retirement Account (GRA) proposal titled, “A Comprehensive Plan to Confront the Retirement Crisis.” Both reports tread familiar, and misguided, ground.

Misguided and misleading as these kinds of reports are, they’re not new or even original. I’d almost be inclined to simply ignore them. That is, until I see headlines like, “The Plan That Could Render Your 401(k) Obsolete,” or “These Depressing Charts Show the Different Ways 401(k)s Fall Short,” reported with a straight face by the personal finance press. The latter, which just appeared in The Washington Post, leads off with the assertion, “We already know that the 401(k) has not been a great solution for improving Americans’ retirement security.” Oh, do we?

Here’s some data that (somehow) is overlooked by these reports: According to the nonpartisan Employee Benefit Research Institute (EBRI), in 2013, 82% of 401(k) participants (for whom this information was available) made less than $100,000 per year, and 51% of 401(k) participants made less than $50,000. Even more importantly, moderate income workers participate when they have the option: More than 70% of workers earning between $30,000 and $50,000 save in their 401(k). Oh, and the notion that “less than half of American workers have access to a retirement plan”? Well, the fact is that 8 out of 10 full-time workers are eligible for some kind of workplace retirement plan, the most common of which is a 401(k)-style plan. The 50% statistic cited repeatedly by academics and the media includes seasonal and part-time workers — granted, they have a retirement to worry about, but their issues in the here and now are economic, not a fault of ERISA or the 401(k), which have long had specific coverage thresholds.

It is, as a colleague of mine said recently, blaming the well for the drought.

The failure laid at the feet of 401(k)s — if a failure it is — is that people who don’t work, or who don’t work for employers who offer a retirement plan at work, are in worse shape than those who do. Now, I’m not saying that the 401(k) design works for everyone, and it most assuredly won’t work for those who don’t have access to its benefits. That said, 401(k)s are working for far more people and in far more varied circumstances than the fear-mongering headlines give them credit for. It’s one thing, after all, to acquiesce to what has become a journalistic “creed” — that “if it bleeds, it leads” – and something else again to wield the knife.

It’s past time to call out these reports — and the reporting on them — for what they really are: part of a long-standing and deliberately intentioned “plot” to kill the 401(k) — first by undermining its value, discounting and demeaning the modest tax deferrals that encourage American savers to put aside their natural preferences for spending, then discrediting as “rich” those who do take advantage of the option and make thoughtful preparations for retirement, and then, as advisors well know, disparaging those who work with retirement savers to make good long-term decisions.

It’s been said that, “A lie unchallenged becomes the truth.” If those of us who know better don’t start speaking up — and speaking out — you can bet that the drumbeat of coverage about the failure of the 401(k) will one day become a self-fulfilling prophecy. For some, that day has already arrived.

- Nevin E. Adams, JD

Crisis Centered?

Is there a retirement crisis or not? 

Though you may have missed it, last week a Wall Street Journal op-ed (subscription required) claimed that there was an “imaginary” retirement income crisis that was being pushed by some who want to boost Social Security benefits and reduce tax incentives for saving (such as those available to 401(k) plan participants). In fact, authors Andrew Biggs and Syl Schieber claimed that the statistics relied on by the crisis were “vast overstatements, generated by methods that range from flawed to bogus.”

Within a day, New School economics professor Teresa Ghilarducci responded, claiming in an opinion piece on the Huffington Post website that “The Retirement Crisis Is Real,” referring to the WSJ op-ed as making “startling and misleading claims.”

Ultimately, those who believe (or who want to believe) that there is no retirement crisis will likely draw comfort from the assertions of Biggs and Schieber, who have made similar points before. Similarly, those who are inclined to see a retirement crisis looming will likely be reassured by Ghilarducci’s quick and pointed response. Unfortunately, those who have not yet made up their minds are not likely to find much in either article to shed much light on the discussion.

If indeed a “crisis” looms, it’s one that we’ve seen (and been cautioned about) for a very long time. What seems likely is that at some point in the future, some will run short of money in retirement, though they may very well be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels. In fact, a recent analysis by the Employee Benefit Research Institute (EBRI) found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers — between 83% and 86% of them, in fact — with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold — and that’s making no assumptions about the impact of plan design features like automatic enrollment and annual contribution acceleration.

That is, of course, for workers who have had a full career of retirement plan eligibility at work, and while tens of millions of workers do, many do not yet. That’s a missed opportunity to forestall a potential crisis, since we know that the primary factor in determining whether or not a middle-income worker is saving for retirement is whether or not they have a retirement plan at work. It’s also probably a factor in how individuals feel about their retirement readiness, a point emphasized in findings from the 2014 Retirement Confidence Survey where there was a clear distinctions, not only in confidence, but in preparations that might support those sentiments (see "The 2014 Retirement Confidence Survey: Confidence Rebounds — for Those With Retirement Plans").

At the end of Ghilarducci’s op-ed, she cites the concerns about retirement expressed in a recent Gallup poll. “If things are as rosy as Mr. Biggs and Mr. Schieber state, why is everyone so afraid?” she asks.

At least part of the answer, it seems to me, is that they keep reading headlines like hers.

- Nevin E. Adams, JD

Reality “Checks”

A recent opinion piece by Teresa Ghilarducci in the New York Times took on what she termed a “ridiculous approach to retirement,” drawn from what appears to be a series of “ad hoc” dinner conversations with friends about their “retirement plans and prospects.”

Most of the op-ed focused on the perceived shortfalls of the voluntary retirement savings system: People don’t have enough savings, don’t know how much “enough” is, make inaccurate assumptions about the length of their lives and their ability to extend their working careers, and aren’t able to find qualified help to help them make more appropriate savings decisions. In place of the current system, which Ghilarducci maintains “will always fall short,” she proposes “a way out” via mandatory savings in addition to the current Social Security withholding. Consider that, just three sentences into the op-ed, she posits the jaw-dropping statistic that 75 percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts.

“You don’t like mandates? Get real,” she declares.

When we looked across the EBRI database of some 2.3 million active¹ 401(k) participants at the end of 2010 who were between the ages of 56 and 65, inclusive – people who have chosen to supplement Social Security through voluntary savings – we found only about half that number (37 percent) with less than $30,000 in those accounts. Moreover, when looking at those in that group who have more than 30 years of tenure, fewer than 13% are in that circumstance – and neither set of numbers includes retirement assets that those individuals may have accumulated in the plans of their previous employers, or that they may have rolled into Individual Retirement Accounts (IRAs), as well as pensions or other savings (see Average IRA Balances a Third Higher When Multiple Accounts are Considered).

That’s not to say that the financial challenges outlined in the op-ed won’t be a reality for some. In fact, EBRI’s Retirement Security Projection Model® (RSPM) developed in 2003, updated in 2010², finds that for Early Baby Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs (see “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model”) .

The op-ed declares that a voluntary Social Security system “would have been a disaster.” Indeed, an objective observer might conclude that that is why Congress originally established Social Security as a mandatory system, to provide a base of income for retirees as it still does today. With the underpinnings of that mandatory foundation of Social Security, the current voluntary system was established to allow employers and individuals to supplement that base. In recent decades Social Security’s benefits have been “reduced” by increases in the definition of normal retirement age, and a partial taxation of benefits, despite increases in the mandatory withholding rates, in order to adjust to the realities of rising costs from changing demographics. Even before the recent two-year partial withholding “holiday,” Congress was, and is still today, discussing additional adjustments to that mandatory system.

The voluntary system should be judged as just that, a voluntary system. As noted above, the data makes it clear that voluntary employer-based plans are, in fact, leading to a great deal of real savings accumulated to supplement Social Security. Many in the nation work every day to encourage those savings to be increased (see www.choosetosave.org ).

The “real” questions, certainly as one reflects on the debate over the Affordable Care Act mandate, amidst today’s political and economic turmoil, are whether the Congress and the nation will be willing – and able – to pay the price of an expanded or new retirement savings mandate, and, regardless of that outcome, how can a voluntary system be moved to higher levels of success?

Nevin E. Adams, JD

¹ Active in this case is defined as anyone in the database with a positive account balance and a positive total contribution (employee plus employer) for 2010.

² The RSPM was updated for a variety of significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM to account for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010. For more information on the RSPM, check out the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model.”

Last June EBRI CEO Dallas Salisbury participated in an “Ideas in Action with Jim Glassman” program discussion with Ghilarducci and Alex Brill from the American Enterprise Institute titled “America’s Retirement Challenge: Should We Ditch 401(k) Plans?” You can view it online here.