What’s Holding Back Financial Wellness?

Financial wellness – it remains a hot topic among advisors – but among plan sponsors?

For all the coverage that the subject engenders – and it’s considerable in this space – it’s not unusual to find awareness gaps among plan sponsors, with perspectives ranging from ignorance to ambivalence to downright skepticism.

About a year ago, the Employee Benefit Research Institute (EBRI) conducted a survey of 250 large employers. At the time, the report claimed that while many employers were interested in offering financial wellness programs to their employees, there didn’t appear to be a consensus on the approach.

So, what’s changed in in the past year? Well, as it turns out, not much.

Once again EBRI surveyed large plan sponsors – this time in June 2019, the online survey of 248 full-time benefits decision-makers from companies with at least 500 employees (17% had more than 10,000). Last year’s survey canvassed employers with an “expressed interest in financial wellness initiatives” – and the 2019 version also notes that a “key criterion for participating in the survey was that employer respondents were screened to ensure that had some interest in offering financial wellness initiatives.”

Fertile ‘Grounds’?

And yet, even among a group that would seem to be fertile ground for these programs:

• Only about half report currently offering financial wellness initiatives (about the same as a year ago) – and though 20% say they are actively implementing and 29% interested in doing so – that’s also about the same as a year ago.
• Only one in four (23%) have created a score or metric. 
• Only a third (32%) have done a financial wellness needs assessment

Moreover, making a business case to management surged as a challenge for the programs, cited by 42% of respondents from 24% in last year’s survey. Little wonder since “Lack of Ability/Data to Quantify Value Added of the Initiatives” was cited as a top challenge by 41% of respondents, compared with 25% a year ago. And then there was “Lack of Staff Resources to Coordinate/Market Benefits” – cited by 43% of respondents, versus 27% in 2018.

Ultimately, there’s (still) apparently no real consensus around the definition of financial wellbeing; about a third defined it as (just) having access to assistance and resources that enable good financial decisions, about one in five (21%) defined it as (just) being equipped to achieve retirement security through planning and savings. Only 3 in 10 defined it as (actually) being comfortable or financially secure overall.

Of course, some of that (apparent) ambivalence might be explained by the reality that 29% of respondents describe their level of concern about employees’ financial well-being as “low” (another 49% say they have a “moderate” level of concern).

Or perhaps it’s the reality that while two-thirds (68%) of employers said that more than half of their employees were eligible for the financial wellness initiatives provided, only one-third (36%) of employers thought that a majority of their employees would actually make use of the benefits.

In fact, the top two challenges in offering financial wellness benefits were a lack of interest among employees (38%, compared with 43% a year ago), and complexity of the programs. This year the survey took that complexity question and found that while (just) 31% were concerned about the programs being complex for employees that utilize them – most of the concern had to do with complexity for the employer; just over a quarter (27%) cited complexity in implementing programs, and another quarter (25%) cited complexity in choosing the programs. Employers, it seems – even those with a propensity to consider these offerings – (still) find the (potential) complexity daunting.

Don’t get me wrong. The logic behind these programs is pretty straightforward; it’s about staving off bad financial health, which contributes to (and/or causes) a bevy of workplace woes: stress, which can lead to things like lower productivity; bad health and higher absenteeism; and even a greater inclination toward workplace theft, not to mention deferred retirements by workers who tend to be higher paid and have higher health care costs. It’s a here-and-now focus that speaks to the bottom line, even if the modest amount of academic research on the subject still struggles to make a quantifiable case.

But, at least in the EBRI survey results, it seems as though even the most engaged plan sponsors still don’t quite get it.
And until they do, they won’t.

- Nevin E. Adams, JD
 
See also: “What Plan Sponsors Want to Know About Financial Wellness,” “Building a Bottom Line on Financial Wellness,” and “8 Things to Know About the State of Financial Wellness.”

That Sinking Feeling...

You may have missed it – but we just passed the anniversary of the 1912 sinking of the now iconic RMS Titanic, at the time the world’s largest ocean liner.

Its passengers included some of the wealthiest people in the world, as well as a large number of emigrants seeking a new life in North America. On the ocean liner’s maiden – and only – voyage, it carried 2,244 people, 1,514 of whom would perish in the North Atlantic.

In hindsight, the Titanic seems a textbook example of a disaster that could have been avoided: There were plenty of warnings about sea ice (as many as six), but the ship was traveling near her maximum speed (though it’s a movie myth that they were trying to set a speed record) when lookouts sighted the iceberg that did her in with a “glancing” blow – that nonetheless opened 6 of her 16 compartments to the sea (the ship was designed to stay afloat with four of her forward compartments flooded). And let’s not forget that she went to sea with a lifeboat rescue system designed to ferry passengers to relief vessels and return for more, not to hold the entire ship’s company while help arrived.

‘Flat’ Lines

I’ve not yet seen anyone link the nation’s retirement prospects to the Titanic, though the headlines routinely portray its condition in similar tones. Even today, it’s hard to believe that, despite the enormous expenditure of time and treasure, the retirement plan coverage “gap” – the number of workers with access to a retirement plan at work – has basically been flat… for the past 40 years.

Now, we all know that most of that coverage gap is self-inflicted. Nothing stops those uncovered individuals from stopping by their local financial services institution to open a retirement savings account – or taking the time to go online or boot up an app to do the same without leaving the comfort of their home. But we also know the realities of human behavior. And yet, despite all the alarmist headlines about retirement gaps and shortfalls, where’s the sense of urgency (see below)?

We know that even modest income workers are 12 times more likely to save for retirement if they have access to a plan at work than they are to take the time to open that IRA. Little wonder that in recent years the Retirement Confidence Survey (RCS) published by the Employee Benefit Research Institute (EBRI) and Greenwald Associates has noted a strong relationship between retirement confidence and retirement plan participation. How strong? Well, workers reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer are more than twice as likely as those without any of these plans to be at least somewhat confident – we’re talking 75% with a plan vs. 34% without.

It’s not that those who have an opportunity to save for retirement don’t have challenges – in making the sacrifices that allow them to save (while others don’t), in dealing with the inevitable emergency draws on finances (that elusive $400 that surveys routinely say individuals can’t amass in a crisis), or in trying to withdraw funds in a manner that will sustain them throughout retirement.
But having access to a retirement plan at work matters – and not just in confidence.

History tells us that the passengers on the Titanic had plenty of time to get to safety – but they ran short of lifeboats (more tragically, some of the lifeboats they did have weren’t fully utilized!).

Here’s hoping that an increased awareness of the impact of employer-sponsored plans encourages more to build these retirement “lifeboats” – and that those workers who are given the opportunity afforded by these programs, aided by tools like automatic enrollment, contribution escalation, and qualified default investment alternatives – take full advantage.

While there’s still time to do so.

- Nevin E. Adams, JD
 
Author’s Note: Several years ago, there was an NPR report titled, “Why Didn’t Passengers Panic on the Titanic?” in which David Savage, an economist and Queensland University in Australia, compared the behavior of the passengers on the Titanic with those on the Lusitania, another ship that sank at about the same time. Both were luxury liners, and both had a similar number of passengers and a similar number of survivors. The biggest difference in the reactions in these two similar circumstances, Savage concludes in the report, was time: The Lusitania, struck by a U-Boat torpedo, sank in less than 20 minutes, while the Titanic took approximately two and a half hours. Time enough, in the case of Titanic, according to Savage, for social order to prevail over “instinct.” 

4 Reasons Why an Average 401(k) Balance Doesn’t ‘Mean’ Much

In recent days, we’ve gotten updates on average savings rates and 401(k) balances, and while for the very most part the reports have been positive and “directionally accurate,” I’ve always taken such findings with a grain of salt. Not so many in the press.

Indeed, the press coverage of those reports is generally quite negative, in the “how can people possibly retire on those small amounts” vein.

Here are four things to keep in mind about those “average” 401(k) balances.

Your average 401(k) balance may not be based on very many plans or participants.

Some reports of plan design trends and average balances may do so based on a relatively small customer base, and/or homogenous plan size. That doesn’t mean the results are without value – but let’s face it, sample size matters in discerning trends. The average 401(k) balance in a universe of 50 plans is surely less instructive than one that is a hundred times that size. In all surveys, sample size matters. And when it comes to averages, it matters a lot.

Your average 401(k) balance includes some very different people and circumstances.

Your average “average 401(k) balance” includes a broad array of circumstances: participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. You might even have situations where ex-participants (who have zero balances in this plan, but might have balances elsewhere) are included in the mix. Those are all factors with enormous impact in terms of evaluating retirement income adequacy, and yet, because it is an average of so many varied circumstances, the result is almost never “enough” to provide anything remotely resembling an adequate source of retirement income.

This conclusion that the average is woefully inadequate as a retirement income measure is the main point, and often the only point, that is reiterated somewhat incessantly (and generally without the caveats about its somewhat tortured compilation) in the press.

Your average 401(k) balance doesn’t include the same people.

People change jobs all the time, and with astonishingly persistent regularity. High-turnover plans and plans in high turnover industries, almost by definition, will pull down averages. And when workers change jobs, they “start over” in their new employer’s plan. The bottom line is that the average 401(k) balance from a year ago almost certainly doesn’t include exactly the same participants. So exactly how valid are trendlines in average balances among completely different individuals?

Mitigating the distortions inherent with these averages, the nonpartisan Employee Benefit Research Institute (EBRI) makes a point of reporting on consistent 401(k) savers, specifically in its most recent analysis, participants who were part of the EBRI/ICI 401(k) database throughout the five-year period of 2010 through 2015. Their report finds that this consistent group had median and average account balances that were much higher than the median and average account balances of the broader EBRI/ICI 401(k) database. How much higher? Nearly double at the average, and consistent participants had nearly four times the median account balance of the broader group.

Makes you wonder about all those conclusions based on the averages of inconsistent participants…

Your average 401(k) balance doesn’t include the same plans.

It’s not just workers who move around – 401(k) plans change providers all the time. And when they change providers, their plan and participant balances move as well. So, if in 2015 your plan (and 401(k) balances) were being recordkept by Provider A, those balances would be picked up in their report of average 401(k) balances. Now, you change to Provider B in 2016. All of a sudden your plan’s account balances “disappear” from Provider A’s reporting – and now show up in the numbers reported by Provider B. The net effect? Well, that could mean that the average balances as reported by Provider A decrease – not because of any change in savings behaviors, but simply because a plan (and its accompanying balances) have moved to a different provider’s base.

Yes, I’d say that your average 401(k) balance is, generally speaking, mathematically accurate – and, at least in terms of ascertaining the nation’s retirement readiness, nearly completely useless.

- Nevin E. Adams, JD

3 Ways to Get Your Automatic Enrollment Plan Out of its Rut

Inertia is a powerful force in nature, and in human behavior. Even the most proactive and engaged plan designs (and plan designers) can, over time, slide from being in a groove to being in a rut.

Here are three ways to reinvigorate automatic plan designs.

1. Auto-enroll all Eligible Participants

Over the past decade a growing number of plans have embraced automatic enrollment, in the process not only simplifying and streamlining the process, but also expanding the number of individuals who are saving for retirement. These days, new hires, regardless of their age, are routinely defaulted not only into the plan itself, but also into some type of qualified default investment alternative, whether it be a managed account, target-date fund, or balanced fund.

However, those who have been employed for some time are often not accorded that convenience. Instead, perhaps because they are presumed to have previously made a decision not to participate, it is assumed that if they were to have changed their mind, or have changed circumstances, they would take it upon themselves to enroll on their own. Or perhaps in some cases, the very success of automatic enrollment gives pause because adding all those existing workers to the plan (along with matching employer contributions) brings with it financial consequences.

Regardless, and certainly if the plan has had automatic enrollment in place for new hires for a time, the better way, it seems to me, is to offer the same opportunity to all eligible workers.

2. Auto-escalate Employee Contributions

While there is evidence that this is changing, for nearly as long as there have been automatic enrollment plans (and it goes back to the early 1980s at least), the default contribution rate has been 3%. Now, regardless of how that became the default of record, eventually becoming ensconced in the auto-enroll safe harbor of the Pension Protection Act of 2006, there’s one thing on which nearly everyone will agree: a 3% rate of savings is almost certainly not enough.

Having embraced the automatic enrollment design (and, with luck, extended that to all eligible workers), you can make automatic enrollment better by helping participants save more by automatically increasing their rate of savings by 1% or 2% per year. There is some evidence that, with a three- to four-year lag, plans that have adopted automatic enrollment do move on to add auto-escalation as an option. But think of the missed retirement savings and security in the interim.

3. Reenroll at Least Once – and Maybe More

A common practice in moving from one recordkeeper to another has been to “map” similar fund options from the old platform to comparable (if not identical) funds on the new platform. In recent years, this mapping process has been improved by not just copying over existing fund choices (which may not be optimal, and may not have been reviewed or updated in a long time), but by reenrolling everybody in the plan to an age-appropriate asset allocation fund, such as a target-date fund.

Reenrollment has some logistical and communications issues, of course. It is a bit like moving every year, and if not nearly as complicated (or costly) as actually changing recordkeepers, it can be challenging to explain, particularly to participants who themselves have slipped into a rut. And you might well be advised to leave participants who have voluntarily elected to opt out of the reenrollment once (or twice) where they elected to be.

But if as a plan sponsor/fiduciary you have liability for the fund choices participants have made (and, outside of a 404(c) safe harbor, you do), wouldn’t you want to take advantage of the opportunity to help participants invest their retirement savings in a fund that is overseen by professionals, rebalanced on a regular basis and invested with some sensitivity to their retirement timing?

Or, as the foregoing suggest, at least have a process in place that not only reminds them of the advantages – but nudges them toward a better result.

- Nevin E. Adams, JD

See also:

• Is Automatic Enrollment Still Going… or Slowing?
• 3 Things You Should Know About Automatic Enrollment
• Are Auto Engagements Over?

Titanic Proportions

This weekend marks the 100th anniversary of the sinking of the now iconic RMS Titanic, at the time the world’s largest ocean liner. Its passengers included some of the wealthiest people in the world, as well as a large number of emigrants seeking a new life in North America. On the ocean liner’s maiden—and only—voyage, it carried 2,244 people, 1,514 of whom would perish as a result of a decision to carry only enough lifeboats to accommodate about half those on board. Despite that, the tale of Titanic’s closing hours is generally one of an orderly, “women and children first” evacuation, with the band playing on while passengers stood in line and waited their turn.

In an NPR report this week titled “Why Didn’t Passengers Panic on the Titanic?” David Savage, an economist and Queensland University in Australia, compared the behavior of the passengers on the Titanic with those on the Lusitania, another ship that also sunk at about the same time. Both involved luxury liners, both had a similar number of passengers and a similar number of survivors. But on the Lusitania, passengers panicked—and the survivors were mostly those who were able to swim and get into the lifeboats. The biggest difference in the reactions in these two similar circumstances, Savage concludes in the report, was time: The Lusitania, struck by a U-Boat torpedo, sank in less than 20 minutes, while the Titanic took approximately two and a half hours. Time enough, in the case of Titanic, according to Savage, for social order to prevail over “instinct.”

I’ve not yet seen anyone link the nation’s retirement prospects to the Titanic, though the importance of starting to save early, establishing a plan, and having a goal all fit within the moral of that example: Act while you have time, as you may not always have all the time you need, or the resources to take advantage of it. But what kind of time do Americans have?
The concept of measuring retirement security—or retirement income adequacy—is an extremely important topic, and EBRI has been working with this type of measurement since the late 1990s. When we modeled the Baby Boomers and Gen Xers in 2012, approximately 44 percent of those households were projected to have inadequate retirement income for basic retirement expenses plus uninsured health care costs; so the glass is more than half full, but just a bit. That’s a big percentage, but it’s still an improvement of 5‐8 percentage points over what we found in 2003, when the glass was, indeed, half empty. The improvement occurred despite the impact of the 2008 financial crisis, and the subsequent “great recession.”

In part, that is because the passage of time allowed more funds to be saved, but that improvement is largely due to the fact that in 2003 very few 401(k) sponsors had automatic enrollment (AE) provisions in place, and participation rates among the lower-income workers (those most likely to be at risk) was quite low. However, with the uptick in adoption of AE the past few years after passage of the Pension Protection Act (PPA), participation rates have often increased to the high 80 or low 90 percent—and that stands to make a big difference in shoring up the retirement financial security of many of those who need it the most. In fact, EBRI simulation results show that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a plan design relying on voluntary enrollment, and that over time (as automatic escalation provisions took effect for some of the workers) that number would increase to 85 percent.

The tragic loss of life on the Titanic is generally attributed to a shortage of lifeboats, while on the Lusitania, it was the lack of time to get people into the lifeboats available. For many of those looking ahead to retirement, plan design changes such as automatic enrollment and contribution acceleration look to be a real retirement life-saver, as they encourage both early action and the effective use of time.

- Nevin E. Adams, JD


While the lack of retirement income adequacy for the lowest-income households is a matter of concern, so is the rate at which they will run “short” of money during retirement. Indeed, as documented in our July 2010 Issue Brief (“The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects,”41 percent of early boomers in the lowest income quartile could run short of money within 10 years after they retire.

More information is included in recent testimony by Jack VanDerhei, EBRI research director, before the Senate Banking Committee, on "Retirement (In)security: Examining the Retirement Savings Deficit" (T-171), available online here.