‘Watch’ Words

The retirement industry spends enormous time modeling outcomes, but most of what really prepares us for retirement isn’t found in a Monte Carlo simulation. It’s learned from watching people around us live their lives. Often our fathers.

My parents led mostly through example — and powerful as that can be, as a kid those messages are often too subtle to be noticed, much less appreciated.

At 6’ 5” he was an imposing figure, all the more from the pulpit from which he did speak. He was a good speaker, but not a natural one. As a minister, he worked hard at it, studied his subject matter, and practiced his presentation relentlessly, each and every week. I always thought it amazing that such a quiet, introverted man would choose that career — but, and though it can’t have been easy, it was something he felt called to do at an early age.

ad space

He had opinions, but didn’t impose them on others. It was difficult (and sometimes frustrating) to wrest opinions from him. Indeed, despite his ministry, at home my dad was a man of few words — spoken words, anyway.

Significantly, he walked his “talk” — his faith, his love and respect for all people, even those with whom he disagreed — and those were attributes in short supply, even then. But this quiet “giant” found his true gift in writing — and in the process extended his influence and ministry well beyond a single congregation.

For all that fine example, I didn’t learn anything about finance from my dad — he avoided big purchases with the fervor of Ebenezer Scrooge, though he’d spend that much (and more) on small things (mostly books, much to my mother’s chagrin). His retirement decision was driven almost exclusively by age — honestly, I think he was going to stop working at 65 even if the finances didn’t support that timing (fortunately, they did).

ad space

His life example(s) notwithstanding, I’m a different person than my dad, though his example is never very far from my thoughts. As a parent, I’ve tried to share with my kids the lessons I’ve learned (and continue to learn), tried to spare them the pain that came with many of those (some I still can’t bear to admit aloud), but I’ve also tried to give them the room they need — and deserve — to learn their own on the life path(s) they chose — though that’s a life lesson of its own, and one with which I still sometimes struggle.

Sometimes we follow in our parents’ footsteps — and sometimes we go a different way. But here’s hoping that the footprints we leave along the way — intentional or otherwise — make other’s lives…better.

Happy Father’s Day!

• Nevin E. Adams, JD

Are Your Retirement Savings Behaviors Naughty — or Nice?

  We’re often told that actions — or lack thereof — have consequences. Indeed, this is the time of year where many a stressed-out parent often falls back on the admonition from that holiday classic “Santa Claus is Coming to Town” — you know, “you better watch out, you better not cry…” because Santa is keeping tabs.   

In fact, as Christmas approached, it was not uncommon for my wife and I to caution our occasionally misbehaving brood that they had best be attentive to how their actions might be viewed by the big guy at the North Pole.

That said, a few years back — when my kids were still “kids” (and “believers”) — we stumbled across an ingenious website; one that did more than caution. It actually purported to offer a real-time assessment of one’s "naughty or nice" status. Our parental admonitions notwithstanding, nothing we ever said or did had the impact of that website — if not on their behaviors (they were kids, after all), then certainly on their level of concern about the consequences.

In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty that year) was on the verge of tears, distraught that he'd find nothing under the Christmas tree that year but the lump of coal and bundle of switches he surely “deserved.” 

‘Naughty’ Savers?

Arguably, there are plenty of websites available to workers to check on their status as “naughty” or “nice” retirement savers. Despite that availability, surveys consistently indicate that they are, for the very most part, disinclined to do so[i] — perhaps because they, like my son once upon a time, feared the answer.

Nor is there much sign that those fears ever translate into improved behaviors. Indeed, it often seems that, their bad savings behaviors throughout the year(s) notwithstanding, some think they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit, or perhaps pull off some kind of compounding “magic” with some last-minute savings scramble.

Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence some concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome.

ad space

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

We all live in a world of possibilities, of course. But as adults we realize — or should — that those possibilities are frequently bounded in by the reality of our behaviors. And though this is a season of giving, of coming together, of sharing with others — it is also a time of year when we should all be making our list(s) and checking them twice — taking note, and making changes to what is naughty and nice about our behaviors, savings and otherwise.

Yes, Virginia, there is a Santa Claus — but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, the investment markets, and tax incentives to save.

It’s time to do more than just make a list — but it’s a place to start. And there’s no time like the present.

Happy Holidays!

• Nevin E. Adams, JD

P.S., Incredibly, the Naughty or Nice site is STILL online (at http://www.claus.com/naughtyornice/index.php.htm) — so check it out — cause you just never know…

 

---

[i] Which should, of course, cast skepticism about the accuracy of their guesses as to what their retirement needs are, much less their current level of savings.

Things That Make Me ‘Mad as Hell’

  So, what kinds of things get your blood “boiling?”

Some of you will recall that back in 1976 there was a movie called “Network” with a big cast that got nominated for a bunch of academy awards including best picture and director (didn’t win), as well as best actress and actor (won both, as well as best supporting actress and several others). The underlying premise of the movie was one of corporate greed, more specifically the extremes to which TV networks would go to garner ratings. The most extreme was allowing an aging network anchor named Howard Beale to remain on camera after he said he was going to blow his brains out on national TV.

Well, he didn’t — but he did wind up being positioned as a kind of “mad prophet” ranting about the ills of society, leading up to an evening where he encouraged similarly frustrated viewers to go to their respective windows and shout “I’m mad as hell, and I’m not going to take it anymore!” While that frustrated call to action likely didn’t actually change anything — it apparently was good for ratings.

While we still have TV ratings (though I’m amazed at the mere slivers of population that these days constitute “winners” in the various time slots), these days it’s all about clicks, views, forwards, and impressions. 

And it was with that in mind last week I shared with those in attendance at the Leafhouse National Retirement Symposium (LNRS) a list of things that made me “mad as hell” — things that those in our industry generate, promote and often share as fact without any application of common sense, and no apparent appreciation for the damage done by their complicity in sharing such nonsense. 

Here's my list — of things that make ME “mad as hell” — in hopes that you’ll agree.

1. Reports that label as “abandoned,” unclaimed or “forgotten” account balances that have simply been “left behind.” See Talking Points: Third Time No Charm in ‘Forgotten Account’ Fantasy.

Seriously — does ANYBODY think that 20% of the total balances in the 401(k) universe is “forgotten?” And yet there were any number of retirement industry folks (and trade publications) that faithfully picked up and shared this third bi-annual report from Capitalize, which every year gets even bigger and more exaggerated (the “black magic” of compounding). 

Sure, there are SOME in that category — but TRILLIONS? This report is nonsense — and shame on you if you gave it legitimacy by passing it along with anything other than jaw-dropping incredulity. 

2. People who think “good faith compliance” with the law could include completely ignoring the law. See Talking Points: Braking ‘Breaking’ News.

Last month, the IRS surprised us all with the release of final regulations regarding the Roth “cap” on catch-up contributions. And then the rumors started. 

Let’s face it — the regulations were a LOOOONG time coming. So long in coming that there were some who were thinking (a) they weren’t coming at all, or (b) the IRS would simply push back the enforcement date (as they had previously). To their credit, most of the industry publications acknowledged the complexity of the read and indicated there would be more to follow. 

But then some misread the effective date of the final regulations (01/01/2027) as applying to the date on which the Roth cap on higher-income individuals would be applied — which had been set as 1/1/2026 in the preliminary regulations issued in January — and which the final regulations stated was NOT impacted by the final regulations. 

Worse — they somehow saw the IRS’ lenience in allowing for “good faith compliance” with the (admittedly) late issuance of the final regulations as allowing them to just ignore the 2026 date. And then there were the folks who, in their hurry to share that news, got on social media to do just that.

Folks — if you don’t KNOW the answer, don’t make matters worse (not to mention your credibility) by sharing it. 

3. Pretending like everybody used to have a defined benefit plan. See A Penchant for Pensions?

This one’s a “golden oldie” — a “myth” that keeps coming up. Indeed, in a recent Fortune article, Teresa Ghilarducci tried to explain away the lack of an apparent retirement crisis by claiming that older Boomers all had pensions.

The truth is that, at its peak, only 38% of workers in the private sector were ever covered by a pension. And “covered by” only means they worked for an employer that offered a pension. Only about 12% ever got a full pension from the plans they were covered by. You want to talk about a retirement crisis? Think about the one we’d have if we were relying on defined benefit plans.

4. Adding up 20 years’ worth of potential expense and presenting it as a lump-sum retirement savings target. See: Talking Points: A Health Care ‘Scare’

Are you ready to spend $86,000 on cable TV in retirement?

I know, crazy, right? And yet that’s the kind of math being used to get people’s attention about retirement these days. The most recent — an annual study by Fidelity that now estimates that a 65-year-old retiring in 2025 can expect to spend an average of $172,500 on health care and medical expenses throughout retirement. There are some lengthy caveats footnoted on that projection, but suffice it to say that the number is — and is certainly intended to be — an attention-grabber. 

And, let’s face it, a headline that said you’re going to need to spend $8,625 per year in retirement on health care (1/20 of $172,500) really doesn’t have the same impact — particularly if you are paying attention to what you are spending on health care prior to retirement, which may well be less than that.

In which case the headline might actually be something like “you might not have to spend as much in health care after retirement as you do now.”   

But where’s the panic button for THAT? 

5. Surveys that ask people who have never done a retirement-needs estimate to estimate the “magic number” they’ll need to save for retirement. See No 'Magic' in These 401(k) Retirement Numbers

Another annual report that makes my blood boil is one that purports to share a “magic” number for retirement, based on what survey respondents said they thought they’d need. As though they’d know.

It always garners a lot of coverage — generally climbs higher from the previous iteration — and is always positioned next to numbers from completely different people as to what they actually have accumulated, and always about half the magic number. 

There are many problems with reports like this — none of which the breathless reporting of the conclusions acknowledged:

(1) It’s an average — while we get some breakdown on age brackets, we know nothing about their incomes, where they live, their health, etc. What someone needs (or thinks they need) living in New York City is (or should be) considerably different from the projections of someone living in Dubuque, Iowa.   

(2) It’s based on what people “think” (who have probably not given this any real thought).

(3) It’s surveying completely different groups of people a year apart, so drawing a trendline is a predictable, but dubious reality.

Let’s face it, stories like this serve mostly to fuel the concerns that responsible human beings already have as they try to look ahead to future decades in a time of tremendous uncertainty.

If they weren’t nervous before they saw these headlines, they surely are afterwards. 

Next week: The rest of the list — and what you can do about it/them.

• Nevin E. Adams, JD

‘Scare’ Tactics

 Could someone please explain to me why the retirement industry keeps publishing ridiculous, uninformed and often ludicrous notions of retirement income needs?

Honestly, I have no earthly idea what value any rational thinking person would attach to the guesses that an uninformed public makes about retirement income needs. But then why any credible source would take those guesses and then AVERAGE them (cause you know how much more accurate an average is[i]) for publication is — well, it’s the kind of thing that makes my head hurt (particularly after repeated banging of my head on a table after reading another).

The latest I stumbled across came from BlackRock, which — based on a survey of “1,000 national registered voters in the United States” — declared that $2.191 million is the “average expected amount of savings needed for retirement.”

Seriously?

No wonder among that same group just 22% were deemed to be “extremely or very confident they will have enough money to live on throughout their retirement years.” I’m surprised it was that high.

Speaking of high, take just a second and apply the 4% drawdown “rule” to that wild-eyed estimate, and you’d find that produces $87,640 in annual income — on top of Social Security! Think people could muddle by on THAT?

Sadly, the sponsors of this survey have the ability to shrug, and say “well, that’s what people think.” But shouldn’t knowledgeable people in this industry have a responsibility to call “BS” on that kind of crazy assumption? 

Unfortunately, there’s not even a footnote here to suggest anything other than the perceived need is real — juxtaposed, I should add by the numbers this same (likely equally misinformed) group puts forth as the amount of savings they have.    

Look, BlackRock is not the only — and probably not the last — to put forth this kind of nonsense. Northwestern Mutual did so last April — even having the temerity to label it a “magic” number (though they “only” said it was $1.46 million). This being an annual “event” of theirs, I’m sure an “update” is forthcoming. More’s the pity. 

One assumes that the purveyors of these data points see it as a “wake up” call to folks, a motivation. But I think this “scare tactic” — there’s really no other word for it — is more likely just another sign to regular folks that they’ll NEVER manage to reach it — and surely some, perhaps most, just give up, or don’t even try in the first place. Not to mention the encouragement it doubtless provides to those who want to proclaim the system is “broken.”

What people think they’ll need is one thing — but I would argue that we have a responsibility to help them understand what they really need. 

And it’s not exaggerated, uninformed “scare tactic” guesses.

• Nevin E. Adams, JD

 

---

[i] Averages are easy math — but misleading. In this case that average tells us nothing about the relative breakdown on age brackets, incomes, where they live, their health, etc.  What someone needs (or thinks they need) living in New York City is (or should be) considerably different from the projections of someone living in Dubuque, Iowa.   

A Need to 'Know' Basics

Back in the middle of the pandemic, my then 91-year-old mother was presented with two options—one a specialist recommended, the other favored by her trusted general practice physician. And of course, it was to be…her decision.

This kind of thing happens all the time in the medical field where such things often seem as much art as science, with a myriad of factors to consider, not the least of which is the skill and experience of the medical professionals putting forth their recommendations. Not that it’s limited to life-and-death decisions. Indeed, it’s the kind of decision with which we’re often presented; when that annual auto inspection detects a hitherto undetected major repair need, when that leaky toilet repair uncovers some long-standing, but unobserved water damage, when that last minute call to fix a water heater or air conditioner reveals that it might—but might not—last the season. Those things routinely involve experts of one sort or another turning to us relative (or complete) amateurs, presenting us with complicated choices that often involve a complex weighing of factors we may not even understand. And yet we do.

Or, if you’re a 401(k) participant these days, we just do it for you. 

But don’t retirement plan participants need to have some idea about what’s going on with their retirement savings? In a “do-it-for-you” default enrollment/investment paradigm, aren’t we basically creating a generation that simply trusts and accepts the decisions of their “betters”—who, to be honest, aren’t always deserving of that trust. Said another way, where’s the “check engine” light for your 401(k) account?

That brings me to the continued focus of the need for “financial literacy.” Long touted as something of a panacea for the apparent shortcomings of our education system when it comes to practical financial applications, I remain skeptical.[i] Not that it wouldn’t be nice to have participants who had a basic appreciation for the markets, the impact of fees, the balance between equity and fixed income, and perhaps even a fundamental understanding of what a mutual fund is. But I think financial “literacy”—though its definition is surely fluid—is perhaps a higher bar than needed for most.

I still think effective financial education begins early, and at home. Not about the markets, perhaps—but the basics of a budget, the discipline of an allowance—better still, one anchored on household obligations.[ii]    

That said, a recent acquaintance has suggested what I think is an outstanding idea—and perhaps a way to not only expand the knowledge of the current generation of savers, but to build for the future; take that financial literacy training you may already be doing for your 401(k) clients—and expand it (in a separate session) to include…their kids!

Odds are you’ll not only provide valuable insights to that next generation of savers—but I wouldn’t be at all surprised if you find that help fulfill their “need” to know as well!

What do you think? 

- Nevin E. Adams, JD

 

---

[i] See The Problem(s) with Financial ‘Literacy’.

[ii] Don’t get me wrong—IMO kids should also have things they do around the house to help as members of the family. 

The Fear of Finding Out

I hadn’t been to the dentist in a long time. A VERY long time.

Two weeks ago, and at the encouragement of my wife, I finally went back to the dentist. I hadn’t been since COVID, and that period provided a very good excuse for avoiding that visit. Turns out, I hadn’t been for quite a while before COVID—not so much intentionally, just life getting in the way.

That’s not completely accurate, of course. On the best of visits, trips to the dentist had never been exactly “pleasant,” though I’ve been fortunate to be in the hands of friendly, patient and—gentle—staff over the years. That said, my last visit had involved what wound up being a unexpected and relatively involved procedure that, while it remedied a painful (and potentially dangerous) situation, left me with a certain, shall we say, “fear of finding out”…

Now, avoiding the dentist didn’t prevent problems, of course. And many’s the day over the past several (gulp!) … years when I would tell myself that it would be better to catch—and fix—a problem early. But, concerned about what such a visit would find … well, I kept on finding reasons not to … find out.

I wrote recently about the 33^rd Annual Retirement Confidence Survey, published by the Employee Benefit Research Institute (EBRI) and Greenwald Research, which found both workers’ and retirees’ confidence in having enough money to live comfortably throughout retirement dropped—and while it was the sharpest decline in confidence since the so-called Great Recession—it wasn’t as sharp as one might have expected under the circumstances (high inflation, volatile markets, uncertain job environment).

But below that headline (and, let’s face it, “confidence” can be a fluid sentiment), that same survey found that (only) about half of workers have “tried to figure out how much money” they would need to have saved by the time they retire so that they could live comfortably in retirement. Which calls to mind the question; is their confidence (or lack thereof) a function of them having made that assessment[i]—or is it more a case of “ignorance is bliss?” Or are they simply afraid to find out?

Well, as Greenwald Associates CEO Lisa Greenwald recently reminded me, not only are those already in retirement more confident about their prospects, retirement confidence also tends to be higher among those who have actually made the assessment—even when, based on the limited objective information available (including the aforementioned “guessing”)—there might not be a “rational reason” underpinning that sentiment at the moment. 

As it turned out, my trepidations about my return to the dentist weren’t unfounded; there was some work that needed to be done that wasn’t pleasant, and yes, it might have been less unpleasant if I had made that visit earlier. On the other hand, now that I’ve been, I have a sense of how things stand, and I no longer have to worry about how bad it MIGHT be. Yes, I have already made my next six-month checkup—and yes, I’m not nearly as concerned about that visit as I was this past one.

Yes, despite the “fear of finding out”—be it a trip to the dentist, the doctor, or a retirement needs assessment—there is something to be said for having a professional assessment, of having a sense of what has to be dealt with—so that you can. 

- Nevin E. Adams, JD 

---

[i] On the other hand, in previous years when that question was asked (and the number having made an effort to determine need nearly identical) the RCS found that the most common method of ascertainment was—guessing (45%).

Conversation "Starters"

 This weekend is, of course, Father’s Day—but my dad’s decision to retire was driven more by time than timing. 

Like many of his generation, once he got to 65, it was time to “retire.” He didn’t have a pension (fortunately for him, my mother did), though he had Social Security, and savings in a 403(b) plan that he contributed to later in life—reluctantly—once he saw Mom’s modest savings in her 403(b) account grow.  

My dad was a man of (very) few words—at least spoken words. Conversations with him generally required… effort. Oh, he’d respond to direct questions, but his answers tended to be short and—well, direct. Again, like many of his generation, mostly he was content to let my mother be the conversationalist in family settings.   

So, when Dad turned to me one weekend afternoon for some input on his retirement planning—well, I was surprised. Not that it didn’t warrant a discussion, mind you—but it was not something we had ever discussed—and more’s the pity. That said, I dived into the financials, played through some spreadsheet projections, and—at the end of what I hoped was an educational and enlightening discussion of his options and trade-offs, their upsides and potential downsides—when I was sure that I had been able to unwind and demystify the maze and presented him with a straightforward presentation of alternatives, there was this long pause—and then, he turned to me and, as politely as he could, said, “I just want to know how much money I’ll have to live on every month.”

That, of course, was also the mindset of many in my dad’s generation—not how much we’ll need, but how much we’ll actually have. Ultimately, of course—certainly at the brink of retirement, that’s the reality of living in retirement. 

Now, the 32^nd annual Retirement Confidence Survey, published by the Employee Benefit Research Institute (EBRI) and Greenwald Research, finds that nearly three quarters (73%) of American workers feel confident in their ability to live comfortably in retirement—indeed, 28% feel very confident (though nearly 6 in 10 say that preparing for retirement makes them feel stressed). While that assessment predated the recent market tumult (and there has been some correlation between the markets and retirement confidence over the years), much less the sustained inflation “bite,”[i] Americans’ confidence in retirement has proven to be pretty resilient—and this despite the persistent finding that many haven’t taken the time to do even a single estimate of their projected needs[ii]—and, at least traditionally, that included measures as unscientific as “guessing.”

Now, as it turned out, my analysis of my dad’s situation (stripped of all the fancy “upside potential” possibilities) affirmed his retirement decision—or at least it didn’t put him off it. I’ve wondered from time to time since what he would have done if it hadn’t. My guess is that, like many Americans confronted with those same realities, he’d have “adjusted.” To this day, I feel really lucky that he didn’t have to (if mostly because my mom’s planning compensated for his lack thereof). 

If it’s a conversation you haven’t (yet) had with your parents—or kids—perhaps it’s time you did.

- Nevin E. Adams, JD

---

[i] Though, a third of workers and half of retirees who feel less confident cite inflation and the cost of living as the reason for their declining retirement confidence. 

[ii] However, and while it’s far from optimal, the most recent RCS did find that more than half (58 percent) ages 55 or older have tried to calculate how much money they will need to have saved so that they can live comfortably in retirement.

Data "Minding"

Just when you thought retirement plan projections couldn’t get any worse…

Last week the National Institute on Retirement Security released a report – “Retirement in America | Out of Reach for Most Americans?” that claimed that the median retirement account balance among all working individuals is… $0.00. Moreover, that same report claims that “57 percent (more than 100 million) of working age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension.”

It’s not the first time the NIRS has produced reports finding significant problems with the nation’s private retirement system. Indeed, this report “builds on previous NIRS research published in 2015,” though the conclusions presented here seem unusually stark.
Then, as now, the NIRS conclusions rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF) and the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP). The report’s authors acknowledge that the latter “oversamples” lower-income household which, as the report notes, are less likely to be covered by, or to participate in, an employer-sponsored retirement plan.

‘Self’ Sufficient?

The issues with self-reporting have been well-documented – so much so that even the report’s authors acknowledge (albeit in a footnote) that it “…can be problematic for the reporting of account balances and participation in particular types of retirement plans, such as DB pension plans.” In fact, previous research by Irena Dushi, Howard M. Iams and Jules Lichtenstein using SIPP data matched to the Social Security Administration’s (SSA’s) W-2 records found that the DC pension participation rate was about 11 percentage points higher when using W-2 tax records compared with respondent survey reports, “suggesting that respondents either do not understand the survey questions about participation or they do not recall making a decision to participate in a DC plan.” Those authors also found inconsistencies between the survey report and the W-2 record regarding contribution amounts to DC plans. In fact, those researchers found that about 14% of workers who self-reported nonparticipation in a defined contribution (DC) plan had, in fact, contributed (per W-2 records), while 9% of workers self-reported participation in a DC plan when W-2 records indicated no contributions.

Supplementing SIPP survey reports with actual information on tax-deferred contributions in W-2 records, the researchers found that the percentage of employees who were offered a retirement plan increased from 72% in 2006 to 75% in 2012, whereas the participation rate in any retirement plan among all private-sector workers increased from 58% to 61% over this period (a difference that may seem small, but is statistically significant at the 5% level).

Participation, Rated

Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Moreover, when it comes to assessing retirement readiness, the NIRS analysis extrapolates target retirement savings needs based on a set of age-based income multipliers – income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement, although this year the report’s authors acknowledge that those are “rule-of-thumb multipliers and are not based on detailed projections of the income needs of individuals,” all of which, in the authors’ words means that their “analysis in aggregate terms, is broadly suggestive rather than definitive.”

Median, Well…

However, much of the data – and key elements, such as wealth, income, participation and retirement savings – that underlie the conclusions is “self-reported” which, as noted above, even the report’s authors acknowledge “…can be problematic…”. It is perhaps a necessary “evil” when seeking to draw broad-based conclusions from limited samplings, but – particularly when sweeping generalizations are posited based on the medians of such samplings, when labels like “typical” are affixed and assumed without explanation – well, let’s just say that caution in applying the conclusions seems well-advised.

Not that the report is completely off the mark; it points out that those with access to retirement plans are significantly better off than those who lack that access, but also that retirement plan coverage has languished at about the 40% level in the private sector for some time now. Clearly solutions that help work to close this coverage gap, and provide more workers with an easier opportunity to save (let’s face it, nothing stops folks from walking down to their local financial services institution and opening an IRA, but the data suggests that those with access to a plan at work are 12 times more likely to do so) are needed.

Ultimately, the recommendations put forth by the NIRS report authors – to strengthen social security, expand access to workplace retirement plans, and expand the saver’s credit – should serve to narrow the gaps in retirement plan access and adequacy.

Even if the data that outlines the situation – and purports to justify those actions – leaves something to be desired.

- Nevin E. Adams, JD

Pay Me Now, or Pay Me Later

Many years ago, there was a commercial (for car oil filters, as I recall) that cautioned, “You can pay me now, or pay me later” – in other words, spend a little now on an oil filter, or pay lots later on to fix the damage done by not doing so. It’s a mantra that I’ve heard employed to encourage retirement savings – but these days it might have a new twist.

We now have a second survey of plan sponsors expressing concern about the impact that switch from the current pre-tax preferences accorded 401(k)s would have on participation.

That member survey by the Committee on Investment of Employee Benefit Assets (CIEBA) found that 78% of the 61 member respondents believed that a switch to an all-Roth system would negatively affect participation rates in their 401(k) plans. In that sense, it roughly mirrored the findings of a survey by the Plan Sponsor Council of America (PSCA) which found that more than three-quarters of the 443 employer respondents to the survey said they strongly agreed with the statement that eliminating or reducing the pre-tax benefits of 401(k) or 403(b) retirement savings plans would discourage employee savings in workplace retirement plans.1

While at least two other employer surveys are reportedly in the field and/or pending release, we (still) don’t know how participants will actually respond. However, it doesn’t require a massive leap of imagination to think that there might be a negative response of some magnitude to the federal government “taking away” the benefit of saving on a pre-tax basis that is, after all, what Section 401(k) of the Internal Revenue Code was all about.

Roth Rising?

Ironically, we find ourselves at a time when the availability of the Roth option in plans is at an all-time high, when providers like T. Rowe Price note that they have seen the biggest one-year increase in Roth contribution offerings in its clients’ 401(k) plans in 2016 – 61% of the plans for which it provides recordkeeping services – while Vanguard notes that two-thirds of the plans it recordkeeps now offer the feature, compared with 49% as recently as 2012.

Now, I realize that there is a difference between having the opportunity to contribute on a Roth basis, and having no option but to contribute on that basis. I’ve no doubt that there are individuals living paycheck-to-paycheck who would find the loss of the here-and-now tax preference to be a hardship. Individuals who, confronted with a Roth mandate, might indeed reduce their retirement savings in order to put food on the table, pay the rent, or put gas in the car so they can get to work.

Those concerns aren’t new, of course. For years they were – and in many cases still are – invoked as reasons to go slow, or go “low” on embracing automatic enrollment. Real as they may be, we also know what that means for retirement security.

Indeed, the surveys that have asked individuals about tax preferences – to the extent they are specific at all – nearly always focus on one particular aspect: deferring current taxes on contributions. The Roth advantages of not paying taxes on the accumulated earnings and the freedom from being forced to take RMDs aren’t even mentioned. Nor do most discussions about post-retirement drawdowns acknowledge that some large chunk of those retirement savings will be due Uncle Sam.

That said, it’s not as though the Roth doesn’t have its own set of tax preferences – and the closer one gets to retirement, the better they look. The odds that tax rates in retirement will be lower, particularly for younger workers, these days seems a quaint notion. Not surprisingly, Vanguard notes that nearly a third (30%) of Roth participants in Vanguard plans were in the age cohort of 34 or younger – and that’s without being defaulted in that direction.

Don’t get me wrong – like most of us, I’d rather have the choice than not. Nor would I diminish the communication challenge ahead if the long-standing 401(k) pre-tax preferences were capped or eliminated.

But of late, every time I see one of those reports about the average 401(k) account balances of those in their 60s, I can’t help but think that somewhere between 15% and 30%, and perhaps more, won’t go toward financing retirement, but will instead go to Uncle Sam and his state and municipal counterparts. And on a frequency dictated by the required minimum distribution schedules of the IRS.

And I can’t help but wonder how many plans for retirement don’t factor in that tax “cut.”

Nevin E. Adams, JD

1.  I draw comfort from the findings in both surveys that very few employers indicate that they would discontinue or diminish their current programs if a shift, full or partial, to Roth would occur.