The Retirement ‘Hunger Games?’

  Retirement surveys tend to read like actuarial obituaries — a long litany of percentages chronicling regret, anxiety, and insufficient preparation. Unless, of course, you look at the underlying data.

The latest survey from Schroders[i] offers plenty of the former; inflation remains public enemy No. 1; healthcare costs continue to ambush expectations — and more than half of retirees apparently have no idea how long their money will last.

But wait.

Buried inside that grim arithmetic are some surprisingly encouraging signs — and you don’t have to look very far.

For instance, yes, the survey says that 58% of retirees[ii] don’t know how long their savings will last. Which means … 42% actually do (or at least claim to).

Given the complexity of retirement income planning — sequence risk, inflation assumptions, healthcare shocks, longevity projections, required minimum distributions, tax strategy, market volatility, and the occasional Congressional “enhancement” — it’s arguably remarkable (if just a tad unbelievable) that nearly half of retirees feel they have at least some handle on the runway ahead.

Likewise, while only 4% describe themselves as “living the dream,” another 37% say they’re “comfortable,” and 35% report life is “not great but not bad.”

Put differently, roughly 3 out of 4 retirees are somewhere between stable and genuinely content, despite years of inflation headlines and constant (dare I say incessant, strident) warnings about retirement catastrophe. Not that the press release positioning — or media reporting — conveys that sense.

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Yes, NEARLY 1 in 5 say they are struggling financially. But that means that more than 4 in 5 … aren’t.

And perhaps most notably, 79% say retirement gives them freedom to pursue passions and hobbies, while 68% say leaving work opened the door to trying new things.

That matters.

Because for years, retirement industry messaging by both the provider community AND the industry trade press (and don’t even get me started on mainstream media) has leaned heavily into fear: fear of outliving assets, fear of healthcare costs, fear of market crashes, fear of claiming Social Security “wrong,” fear of not saving enough, fear of spending too much, fear of spending too little. Signs of comfort or confidence are routinely dismissed as “naïve” or uninformed. Indeed, the industry’s dominant emotional tone has often been less “golden years” and more “financial Hunger Games.”

To be clear, the concerns reflected in the survey are real.[iii] Ninety percent worry about inflation eroding assets. Eighty-seven percent worry about healthcare costs. Eighty-one percent fear a major market downturn. Those aren’t irrational anxieties — especially when retirees report spending 16% of monthly income on healthcare alone, and most say they expected Medicare to cover more than it does.[iv]

Still, there’s an important distinction between financial pressure and personal despair.

• A rational retiree can be worried and happy.
• Concerned and fulfilled.
• Budget-conscious and optimistic.

The survey quietly reflects that complexity — but the positioning treats those as polar opposites.

And while nearly two-thirds (64%) of retirees wish they had done more planning, exactly how much planning for those kinds of uncertainties would anyone ever consider to be…enough?

In other words, the picture is neither utopia nor dystopia. And, despite the industry press coverage, retirement today appears to be what it has probably always been: a balancing act between financial uncertainty and personal freedom.

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The difference is that today’s retirees are navigating that balance in public, against a backdrop of inflation spikes, market volatility, and relentless media narratives warning that disaster is just one bad CPI report away.

Yet somehow, most retirees still manage to find meaning in their retirement.

And maybe that’s the real headline here. Or should be.

• Nevin E. Adams, JD

 

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[i] See Schroders Study Reveals How Retirees Are Responding to the Affordability Crisis.

[ii] While this retiree certainly knows how to do math and understands longevity tables, if push came to shove, you’d even find ME in that 58% — though I’m hardly clueless about the probabilities. It also makes me wonder if the 42% really do know.

[iii] Even the finding that only 32% currently work with a financial advisor cuts both ways as well. On one hand, it suggests millions may lack professional guidance at precisely the moment retirement income decisions become most consequential. On the other hand, it means nearly one-third are already working with advisors — in an era when retirees have unprecedented access to digital planning tools, educational resources, and increasingly sophisticated retirement income products.

[iv] A perspective I suspect most non-retirees might share with their current health plan coverage.

(Just Because) Survey Says?

 We’re often told (via surveys) of any number of retirement plan options that plan participants want. Should it matter?

Most recently, we’re assured that participants are clamoring to have access to private market investments. Before that, it was cryptocurrency — and for what seems like months now it’s all been about retirement income. Apparently vast majorities of participants are eager to have access through their 401(k) to an array of complex financial instruments to which they have, thus far, been largely (or totally) barred — or so surveys say.

Indeed, I’ve always been amazed that organizations are able to find so many ostensibly knowledgeable participants to weigh in on these complex topics — particularly since there is an abundance of (other) surveys that suggest that when it comes to financial matters, participants are, largely, clueless.

Not that that seems to dampen their collective interest in these new options — though when given a chance to put their money where their mouth is, participants seem to be about as cautious as you’d expect (want?) largely financially clueless individuals to be.  Doubtless the questions posed in these survey instruments are less complex than the actual decision points turn out to be.   

So, why bother asking participants what they (think they) want in the first place?

It’s not that there isn’t value to be gleaned in assessing participant sentiment but — as noted above, the actual take-up rate on those products, even when offered by a plan, has traditionally been…disappointing, certainly from the standpoint of the manufacturers of those offerings.

Manufacturers that, it bears noting, inevitably turn out to be the sponsors of these surveys claiming that participants want what they rarely seem to take. That doesn’t make them irrelevant, of course, nor does it mean that the results are hopelessly biased — but it is, I would argue, worth some caution in blindly embracing (or sharing) the results, even when a reputable canvassing body is involved. At a minimum, a visible footnote acknowledging that specific “interest” in the outcome seems warranted.

The reality is that these types of surveys are rarely designed to actually gauge participant interest — savvy product manufacturers have likely already done some of that alongside the inevitable market and profit margin projections. Rather, they are a means to create and/or fuel public awareness, but perhaps more specifically to encourage plan sponsor/fiduciary consideration on the path to the ultimate acceptance of options they might otherwise be disinclined to entertain.

Prudent plan fiduciaries should, of course, take note of such things — but arguably with a grain of salt, certainly as it pertains to their specific workforce. However fervent the interest of a group of unrelated individuals might be, that doesn’t make it relevant for those under your care.

Indeed, ERISA’s standard of care is a high threshold, one that requires that the services engaged not only be reasonable in terms of fees and applicability, but solely in the best interests of plan participants and their beneficiaries.

And, as any parent can attest, sometimes those in our care want things that don’t meet that standard, whatever their opinion may be at the time.

Regardless, plan fiduciaries shouldn’t feel coerced into incorporating options just because a sponsored survey says (some) participants want it — participants who, of course, might not know what they’re asking for. Because, after all, prudent plan fiduciaries are expected to.

- 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

 

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[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.   

No ‘Magic’ in These 401(k) Retirement Numbers

 Last week, a new report claimed to find a big jump in a so-called “magic” number for retirement, based on what survey respondents said they thought they’d need. As though they’d know.

It garnered quite a bit of coverage, including an article in The Wall Street Journal (and a comment from none other than Teresa Ghilarducci). While the “magic” number of $1.46 million didn’t seem astronomical (Professor Ghilarducci even commented that people often OVER-estimate their needs), that number jumped dramatically from $1.27 million a year ago—something the authors attributed to concerns about inflation.

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.

The good news is—this time—most industry “voices” pushed back on this “magic” number, albeit for different reasons. Mostly they cast shade on the notion that any one number would be right for everyone, and/or they preferred to rely on a percent of pay gauge. But those struck me as “nibbles” around the edge of the report; valid criticisms to be sure, but more about the result than the process used to produce it. 

Meanwhile, stories like this serve mostly to fuel the concerns that responsible human beings already have as they try to look ahead to a future decades ahead in a time of tremendous uncertainty. If they weren’t nervous before they saw these headlines, they surely are afterwards.

Now, those of us in this industry see—and produce—reports like this all the time. We look at those gaps (even the misperceived ones) as a challenge, an opportunity, a goal to strive for, a gap to close.  And thank goodness we do.

But while I wouldn’t for a moment suggest that those gaps don’t exist for some, nor would I advocate obscuring those realities, it would be naïve to think that those who want to shut down or “defund” private retirement plans don’t see these types of reports as an admission of failure, if not guilt. 

There are plenty of good stories to tell—and every day there’s an individual (perhaps many individuals) who confidently step off into retirement, buttressed by a history of consistent saving and encouraged by the support and guidance of a qualified retirement plan advisor. It’s a story that nobody seems interested in covering, but one in fairness that we don’t spend much time sharing, either.

I’d ask today that, in the future, you pause before sharing this kind of “the sky is falling” headline with your networks. Let’s start sharing the realities of the plans you work with, the retirement successes of the workers you support, the impact that holistic focus on financial wellness is having on the finances and emotional stress of those you serve… 

It may not be “magic”—but it sure matters.

- Nevin E. Adams, JD

‘Still’ Standing: 6 Key Industry Trends to Watch

The Plan Sponsor Council of America recently released its 62nd Annual Survey of Profit-Sharing and 401(k) Plans, documenting a record high rate of savings, alongside an uptick in Roth contributions and other trends. However, sometimes the things that don’t change can be just as telling…

Target-date trends (still) dominate, but… 

Let’s face it – target-date funds are one of the most common items on a plan investment menu today (the PSCA survey noted that it’s the option in which assets are most frequently invested) and – in no small part due to their prevalence as a default investment alternative – continue to garner a lion’s share of new contribution dollars, if older savers (perhaps more precisely, longer-tenured savers) haven’t embraced (or more accurately, been defaulted into) the option with as much enthusiasm. That said, while more than two-thirds (68.6%) of respondents offer a target-date fund option, that’s actually down 5% in the past two years.

Interestingly enough, the PSCA survey found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement. Additionally, actively managed TDFs outnumber passive by more than two-to-one among plans with fewer than 5,000 participants. That is reversed among plans with more than 5,000 participants.

Robo-advice (still) isn’t making much headway.

Just 1 in 10 (10.9%) of plan sponsor respondents provide participants with access to a robo-advisor, and if that’s somewhat higher (approximately 15%) among larger programs, the vast majority do not.

However, it may be worth noting that 15.6% who don’t currently say they are considering the option, particularly among smaller programs – though in last year’s survey, that was 17.2%.

Automatic enrollment (remains) a large-plan feature.

Fewer than a third (30.5%) of the smallest programs offer the feature, and only about half (56%) of plans with 50-199 participants, compared with roughly three-quarters among larger programs. On the other hand, roughly a decade ago – when the Pension Protection Act of 2006 was new – only about a third (35.6%) of respondents to the PSCA survey offered automatic enrollment. But then, it’s now been a decade… 

Not that it’s not been considered – but asked why those that didn’t offer the feature had made that choice, the predominant reason given was satisfaction with participation rates.

However, among the largest (> 5,000 participants), the most cited rationale was… cost.

Once participants are enrolled, they (still) tend to “stick.”

The percentage of participants who opt out of automatic enrollment programs in private sector retirement plans has always been relatively small, generally 5-10%, and in this year’s PSCA survey some 70% say that the opt-out rate remains 5% – or lower.

That stands in some contrast with the data we have seen with the early state-run plan options, where the opt-out rate has been in the 25% and higher range, though those programs lack an employer match and the nurturing that employment-based plans typically provide. And, arguably, the 75% who “stick” there are better off than with no plan at all.

Financial wellness is (still) largely a large plan feature. 

While nearly half (45.8%) of the largest (5,000 or more participant) programs claim to have a “comprehensive financial wellness program,” only about a quarter (27.1%) of those with 1,000-4,999 participants do, as do only 22% of those with between 200-999 participants.

For all the coverage that the subject engenders – and it’s considerable in this space – it’s not unusual to find awareness and interest gaps among plan sponsors, with perspectives ranging from ignorance to ambivalence to downright skepticism, even among large plan sponsors. The data here (and in other surveys of plan sponsors) suggest that the concept/focus is far from universal.

Traditional success measures (still) dominate.

Participation rates remain the dominant success measure of plans of all size: 87.6% overall, and more than 95% of the largest programs, cite that benchmark. Deferral rates rank second – 75.8% overall, but higher among larger plans, with average account balances a distant, but (to my eyes, anyway) a remarkably robust third.

For all the talk about an expanding focus on outcomes, income replacement ratios are a distant fourth, although 42% of the largest programs (those are the ones with the financial wellness programs, after all) do track this benchmark. Of course, particularly with a voluntary approach to retirement saving, employers may well be hesitant to establish as a benchmark of success the attainment of a goal that is not only unique to each individual, but generally outside of their ability to control or influence.

Though we can hope that participants – who do have some control over that outcome – are paying attention.
Industry surveys, particularly those with a broad range of plan types and providers and the perspective of decades that PSCA’s survey spans, provide an invaluable sense and appreciation of not only where things stand, but also how far we’ve come.

And sometimes, even when the trend is more or less status quo, and perhaps even more so, their real value lies in helping us see where we need to be.

- Nevin E. Adams, JD
 
More information about the Plan Sponsor Council of America’s 62^nd Annual Survey of Profit Sharing and 401(k) Plans is available at www.psca.org.

Lies, Damned Lies, and Statistics

I am fortunate enough to have access to a vast array of studies, research, and surveys about this business. Even more fortunate to have access to a PLANSPONSOR research arm that provides an opportunity not only to gather and analyze, but to pose our own questions to a remarkably diverse audience. Still, as Mark Twain once famously wrote, “There are three kinds of lies: lies, damned lies, and statistics.” (1)

We recently ran coverage of a survey that spoke to trends among defined benefit plans. That engendered the following response from a reader:

Isn't it interesting how perspective can rule the most simple things? The article you refer to that shows defined benefit plans decreasing in number is such a case. Mercer deals with the larger corporate plan sponsors. Their plans are underwater for numerous reasons and are being terminated in wholesale lots. On the other hand, small companies are making defined benefit plans the plan du jour. There are several reasons for this; larger tax deductions, demographics, insecurity with Social Security, the investment experiences of 1999-2002, the desire for a "guaranteed" benefit, etc. Our company is the largest pension administration firm in Florida, and we have set up five defined benefit plans to every three defined contribution for four consecutive years. Our experience has been shared by virtually all TPA's in the small-company market all over the country.

Now, I have no independent validation of that reader’s claims, but I heard from a number of advisers and providers that support smaller employers that the rumors of the defined benefit plan’s demise is, to draw on another quote from Mr. Twain, “greatly exaggerated”.

In our business, we must constantly guard against the favorable positioning of some survey results vis-à-vis the interests of a sponsoring organization; or the extrapolation of too much conclusion from too small, or unscientific, a sampling. Generally speaking, I favor sharing as much information/insights as possible—with as much full disclosure about the size of the sampling and/or the interest(s) of the sponsoring organization as possible. In our coverage, we try very hard to position—as high in the story as possible—the size of the sampling, the sponsoring organization, and where it seems applicable (and not obvious), some indication of possible motivation in putting out the information. It’s not that they necessarily would be pushing a specific result—sometimes it just influences their perspective on the proper conclusion to be drawn from the data.

Surveys Say

The challenge, of course, is that some data are simply more available. Larger providers tend to have larger client bases, and client bases of larger clients, to draw on, and/or larger budgets to pay other organizations to gather that information (generally from plans that fit their targeted plan demographics). Moreover, the use of “averages” frequently, if unintentionally, obscures the reality in small samplings. And when averages are averaged—well, it’s Katie, bar the door!

In my experience, human beings are inclined to focus on surveys that reinforce their own version of reality, rather than one that challenges it. Still, market trends are a significant motivator of plan sponsor behavior. That’s not illogical, IMHO—in an environment where complex financial decisions fraught with personal and professional risk are the order of the day, “what everyone else is doing” can offer a compelling reality check. But only if the reality is real—and not just “lies, damned lies, and statistics.”

- Nevin E. Adams, JD

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When considering data that purports to offer insights, it’s worth knowing:

Who sponsored/conducted the survey?
What are they selling?
Is the conclusion supported by the data?
Does that conclusion “fit” with those drawn by similar surveys?
How unbiased is the survey sampling?
How scientific is the survey sampling?
How similar is the survey sampling to your perspective/size?


(1) While the original quote is attributed to Benjamin Disraeli, Twain popularized it in the U.S. in “Chapters from My Autobiography.”