The Cost of Living

At a recent conference, our luncheon table got to talking about savings trends and the unique challenges of Millennials, specifically the impact of graduating with so much college debt.

While several at the table had graduated with (and since paid off) college debt, the sums paled in comparison to the kinds of figures bandied about in recent headlines — or did, until I loaded up an online calculator that allowed us to see what our college debt at graduation amounted to in today’s dollars. To the collective astonishment of the retirement experts at that table, the totals, adjusted for inflation, were very much in line with the figures reported for today’s graduates.

Factoring in those kinds of cost-of-living adjustments is, of course, a crucial aspect of retirement planning. Unlike Social Security, there is no annual cost-of-living “adjustment” for retirement savings—no systematic means by which those accumulated savings are increased to offset the increased costs of things like heating fuel, food and medicine. After all, managing to replace a targeted amount of preretirement income is of little consequence if, 10 years into retirement, that amount isn’t sufficient to provide for life’s necessities.

The bottom line is this: We’re well advised as savers to take into account the inevitable cost-of-living increases that occur over time, even in a period of low inflation. To their credit, most retirement savings calculators retain an inflation assumption that can help those future projections reflect potential realities (though you often have to provide that rate).

However, those adjustments are also often incorporated in a projected annual increase in pay (and deferral) that, for a significant number of American workers, may be little more than a quaint anachronism. Unfortunately, the cost of living moves on without our proactive involvement — unlike our rate of savings (in the absence of design changes such as contribution acceleration).  

Every generation has its own challenges, of course. And even if this newest generation of workers lacks the promise of a defined benefit pension (as noted previously, the realities of those promises were often something else altogether), a growing number will find themselves enrolled automatically upon hire and invested in a diversified asset allocation portfolio. Some will also find that their initial deferral is raised automatically each year.

Certainly the level of college debt is daunting for many, and may well dissuade some from saving for retirement, at least until some of that obligation is “retired” — as it did many of their parents.  Doubtless this newest generation of workplace savers feels that they are dealing with a set of extraordinary financial constraints, though those constraints may not be as unique as they may think once one takes the cost of living into account.

Not to mention the costs of living — in retirement.

- Nevin E. Adams, JD

"Missed" Deeds and 401(k) Fees

The Nov. 7 issue of The New York Times included a story about “Finding, and Battling, Hidden Costs of 401(k) Plans.” The story focused primarily on the plight of Ronald Tussey, the named plaintiff in Tussey v. ABB, Inc., one of the so-called “excess fee” revenue sharing cases.

Tussey, now 70, claims that he was told that his retirement plan was “free,” even though, according to the Times article, “middlemen¹ were deducting expenses from his savings.” The story also notes that Tussey “never thought that his retirement plan might be flawed,” and that “he trusted his company so much he kept his money in his 401(k) long after he left.”

Over the years, I have been astounded at the allegations of fiduciary misconduct in these revenue-sharing cases. Each has its own flavor, of course, but for the most part they have struck me not so much as the outcomes of bad acts, per se, but rather steps that should have been taken in keeping with their fiduciary duty to ensure that the fees and services provided are reasonable and in the best interests of participants and their beneficiaries.

In Tussey’s case, ABB (his former employer) is alleged to have been told by a consultant that they were paying too much for record keeping fees, and then did nothing about it — for instance, though their decision to close a balanced fund and force participants into age-appropriate target-date funds. The use of float was also challenged. Both of those charges were dismissed by the 8th U.S. Circuit Court of Appeals; just this week the U.S. Supreme Court declined to hear the case.

But the point of the Times article was all about fees,² outlining places and ways that readers can find out about the “…raft of obscure fees and services that few employees will be able to discern,” while also cautioning that none of those resources can help them figure out how much is too much. (That did not, however, keep the author of the article from redefining ERISA’s prudent man standard of care to mean “…finding a reasonable selection of low-cost funds and services.”)

A couple of weeks back, my wife and I met with our financial advisor to transfer and consolidate some small IRAs. Having attended to the basics, the conversation turned to investments, and then to a couple of fund recommendations. The advisor carefully outlined the expense ratios associated with the fund (which seemed reasonable to me), and then turned to the charges associated with investing in that fund. He didn’t call them a load, of course,  but that’s what it was, and a hefty one at that. And, Ronald Tussey’s status notwithstanding, I was reminded again just how lucky most 401(k) participants are.

Even if, as the article frets, participants aren’t able to find or understand thier 401(k) fees and don’t know what is reasonable — even if they assume such things are free — their retirement savings are under the care and oversight of a plan fiduciary. That fiduciary is personally responsible for ensuring that the fees and services are reasonable, is expected to engage the services of experts, if necessary, to make that determination, and is accountable not only for the things that are done wrong — the misdeeds — but for the “missed” deeds as well.

Nevin E. Adams, JD

1. “Middlemen” in this case seem to have been Fidelity Management Trust Company, the plan’s trustee and record keeper, as well as Fidelity Management and Research Company, the investment advisor to the Fidelity mutual funds on the plan.

2. Lending numerical support to their claims, the Times article cites a 2012 report on 401(k) fees by the left-leaning Demos advocacy group claiming that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees, according to its model. That model, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund. The report was authored by Robert Hiltonsmith, who some may recall being featured in the 2013 PBS Frontline special, “The Retirement Gamble.”  

Access "Able"

Though I’ve now spent more than three decades working with employment-based benefit plans, I’ve also worked for some very different employers, ranging from organizations that employed tens of thousands of workers to those that were a fraction of that size. Those organizations were all very different, of course, but they all had at least one thing in common: All offered a workplace retirement savings program.

That’s apparently not as common as one might think, certainly among smaller employers. In fact, a new study from the Employee Benefit Research Institute (EBRI) notes that the probability of a worker participating in an employment-based retirement plan increased significantly along with the size of his or her employer.

How significantly? Well, the EBRI report notes that for wage and salary workers ages 21‒64 who worked for employers with fewer than 10 employees, just 13.2% participated in a plan, compared with 57.0% of those working for employers with 1,000 or more employees. Filtering for those workers who are full-time, full-year, at employers with 1,000 or more workers, two-thirds (66.5%) participate, compared with just 16.9% at employers with fewer than 10 workers.

One is inclined to look for other explanations than employer size alone. Perhaps smaller employers pay less, or hire younger workers (who might also be paid less) — and those factors might play some role. However, the EBRI analysis found that, even controlling for age, workers at smaller employers still had persistently lower levels of participation across the age groups.

Moreover, across various earnings levels, workers at small employers (less than 100 employees) were less likely to participate in an employment-based retirement plan. Indeed, even among workers making $75,000 or more, a considerable disparity was found — just 27% of those in that income category working for the smallest employers participated in a plan, compared with 81% of those working for employers with 1,000 or more employees.

But when you adjust for access to a plan — the percentage participating divided by the percentage working for employers that sponsor a plan — you find that those differences largely disappear. For example, while just 16.9% of those full-time, full-year employees who work at workers participate in a plan. That’s about 86% of the 19.5% of workers in that category whose employer sponsors a plan — which is nearly identical to the participation of private-sector employers with 1,000 or more employees.

A few years back the Maryland Lottery had a simple slogan: “You gotta play to win.” That’s a motto that those saving for retirement should take to heart.

However, when it comes to retirement plan participation, it looks like a lot of those who work for small employers aren’t yet getting a chance to “play.”

- Nevin E. Adams, JD

Room to Grow

Several months back we acquired an aquarium, and I looked forward to filling it up with all kinds and sizes of exotic fish – only to be disappointed to find out that, despite the massive displays of what appeared to be whole schools of fish in similar sized tanks at the pet store, our tank would only support a handful of the fish I had hoped to display. The reason; they need room to thrive and grow. The more fish you want to have (and live), the bigger the tank.

The IRS has now announced the new contribution and benefit limits for 2015. Most were increased, notably the annual contribution limits for 401(k), 403(b), and 457 plans (from $17,500, where it has been for the past two years, to $18,000) and the catch-up contributions for those over age 50 (from $5,500, where it has remained since 2009, to $6,000).

But since industry surveys suggest that “only” about 9%-12% currently contribute to those levels, does it matter?

It’s worth remembering, of course, that these adjustments only reflect increases in the cost of living; you’d need more than $6,000 to buy what that $5,500 catch-up contribution would have gotten you in 2009. Moreover, they are timed in such a way that those increases must accumulate to a certain level before the adjustment kicks in.

But why don’t more people max out on those contributions? Well, cynics might say it’s because only the wealthy can afford to set aside that much. But at Vanguard only 36% of workers making more than $100,000 a year maxed out their contributions. If these limits and incentives work only to the advantage of the rich, why aren’t more maxing out?

Limit 'Ed'

Those who look only at the outside of the current tax incentives generally gloss over the reality that there are a whole series of benefit/contribution limits and nondiscrimination test requirements. These rules are, by their very design, intended to maintain a balance between the benefits that these programs provide between more highly compensated individuals and the rest of the plan participants (those rules also help to ensure a broad-based eligibility for these programs). Surely those limits are working to cap the contributions of individuals who would surely like to put more aside, if the combination of laws and limits allowed.

In that vein, one of the comments you hear frequently from those who want to do away with the current retirement system is that the tax incentives for 401(k)s are “upside down,” that they go primarily to those at higher income levels, those who perhaps don’t need the encouragement to save. And from a pure financial economics perspective, those who pay taxes at higher rates might reasonably be seen as receiving a greater benefit from the deferral of those taxes. Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary.

However, drawing on the actual administrative data from the EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), the nonpartisan Employee Benefit Research Institute found that those ratios were relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000. In other words, while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes — and not “upside down.”

Again, what keeps these potential disparities in check is the series of limits and nondiscrimination test requirements: the boundaries established by Internal Revenue Code Sections 402(g) and 415(c), combined with ADP and ACP nondiscrimination tests. Those plan constraints were, of course, specifically designed (and refined) over time to do just that — to maintain a certain parity between highly compensated and non-highly compensated workers in the benefits available from these programs. The data suggest they are having exactly that impact.

But let’s think for a minute about a group that doesn’t get nearly enough attention. It’s the group — millions of working Americans, in fact — who are not wealthy, but they earn enough that Social Security won’t come close to replicating their pre-retirement income.

These middle, and upper-middle income individuals apparently aren’t the concern of those who want to do away with the 401(k) — but, their personal retirement needs notwithstanding, these are the individuals who in many, if not most, situations, not only make the decision to sponsor these plans in the first place — they make the ongoing financial commit to make an employer match.

Allowing those contribution limits to keep pace with inflation not only helps remind us all of the importance of saving more — like the right-sized aquarium, it also helps provide us all with a little more room to grow our retirement savings.

- Nevin E. Adams, JD

Just "Because"

As you may have heard (but may not), we recently celebrated National Save for Retirement Week. Of course, there’s no “magic” to a week dedicated to a focus on saving for retirement — even one that Congress has seen fit to acknowledge with a resolution.

That said, saving for retirement — which seems far away for some (though likely not as far away as some think) — is something that many find easy to defer for another day, a more convenient time, a more settled financial situation. We all know we should do it — but some figure that it will take more time and energy than we can afford just now, some assume the process will provide a depressing, perhaps even insurmountable target, while others don’t even know how to get started.

You deal with these objections all the time. However, in recognition of National Save for Retirement Week, here are five simple reasons why you, or those you care about, should save — and specifically save for retirement — now:

Because you don’t want to work forever.

If you want to stop working one day, you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t free.

Many people assume that expenses will go down in retirement, and they may for some. On the other hand, retirement often brings with it changes in how we spend, and on what — and that’s not necessarily less.

For example, research by the Employee Benefit Research Institute (EBRI) has found that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age (see “How Does Household Expenditure Change With Age for Older Americans?”).

Because you may not be able to work as long as you think.

In 1991, just 11% of workers expected to retire after age 65, according to the Retirement Confidence Survey. Twenty-three years later (2014), that same survey found that a third of workers report that they expect to retire after age 65, and 10% don’t plan to retire at all.

Expectations are one thing, but realities seem to be different. The RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned (49% in 2014), and many who retire earlier than they had planned often do so for negative reasons, such as a health problem or disability (61%) — things that are not within their control.

Because you don’t know how long you will live.

People are living longer and the longer your life, the longer your potential retirement, particularly if it begins sooner than you think. Retiring at age 65 today? A man would have a 50% chance of still being alive at age 81 (and a woman at age 85); a 25% chance of living to nearly 90; a 10% chance of getting close to 100. How big a chance do you want to take of outliving your money?

Because the sooner you start, the easier it will be.


- Nevin E. Adams, JD

Moving Targets

Before target-date funds were “cool” (or widely available), I had steered my mother toward an asset-allocation fund as a good place to invest her retirement plan rollover balance.

The logic was, I thought, impeccable: A professional money manager would be keeping an eye on and rebalancing those investments on a regular basis. The fee was reasonable, and the portfolio was split about 60/40 between stocks and bonds, which also seemed reasonable in view of her investment horizon. From time to time Mom would call and ask if we needed to rebalance that investment — and I confidently assured her that there was no need to do so, that the fund’s design took that into account.

Then at some point (though definitely between 2006 and 2008) that professional manager decided that a “better” allocation was to shift the asset allocation to be invested nearly entirely in stocks. Now, knowing how such things work, I can’t imagine that a shift that dramatic wasn’t clearly and concisely communicated to holders on a timely basis — or at least in a manner that the legal profession deemed sufficient. But by the time we realized what had happened — well, that reasonably priced professional fund management wound up feeling more like someone had decided to bet it all on “red.”

With that experience under my belt, and a wary eye on recent market movements, I couldn’t help but notice a Reuters report this week which noted that within the last year, several large target-date fund providers had increased the equity allocations of their TDFs. Now, honestly, I don’t know what their previous allocations were, much less where they currently stand, nor am I privy to the rationale behind these moves. I don't know if it's a broad-based shift across their entire family, or specifically focused on those with longer time horizons.

The Reuters piece is cautionary in tone — basically intimating that these moves might be underway at a time when the markets have peaked, with an undertow of concern that the timing could be problematic. Doubtless the headline will draw clicks, if not concern — after all, you don’t have to be very old or in this business very long, to remember that just prior to the onset of the 2008 financial crisis, several performance-lagging TDF managers made what seemed, at least in hindsight, to be a badly timed equity shift in their portfolios. Nor was it that long ago that we heard concerns expressed by participants, particularly older ones (and subsequently regulators on their behalf) who were, in the aftermath of that crisis, surprised to find just how much exposure their TDF investments had to those equity markets.  

Despite these concerns, TDFs have continued to gain prominence in retirement plans, and in retirement plan participant balances. Consider that nearly three-quarters (72%) of 401(k) plans in the EBRI/ICI 401(k) database included TDFs in their investment lineup at year-end 2012, and 41% of the roughly 24 million 401(k) participants in that database held TDFs. Consider as well that at year-end 2012, 43% of the account balances of recently hired participants in their 20s were invested in TDFs. Older workers have not been as inclined to invest in those options, though it may simply be that, as older workers, they aren’t as likely to have been defaulted there.

Whether or not this time will be different in result, only time will tell. But we can all hope that the communications about such shifts are understood and appreciated by plan participants and plan sponsors before the results make it too late to do so.

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

"Left" Overs

I’ve never been big on leftovers. Now, I know that many relish the taste of cold pizza for breakfast, while others swear that a desirable marinating takes place during storage. As for me, no matter how good the original dish, and despite the wonders of microwaving, I have a hard time getting excited about sitting down to a meal comprised of things that (at least in some cases) weren’t good enough to finish the first time.

When it comes to retirement savings, most still seem to “begin” with whatever is “left over” — after bills, living expenses, food and the like.

Not that we’re comfortable with that approach. A recent Wells Fargo/Gallup survey found that, taking their savings and Social Security income into consideration, more than two-thirds (69%) of investors say they are “highly” or “somewhat” confident they will have enough money to maintain their desired lifestyle throughout their retirement years. However, nearly half (46%) are still “very” or “somewhat” worried about outliving their savings, including 50% of non-retirees and 36% of retirees.

Nor is it a uniquely American issue; the Towers Watson Global Benefit Attitudes Survey found that in developed economies typically two-thirds of respondents believe their financial resources will support 15 years of retirement, but less than half are confident when considering 25 years into retirement.

So, how are we dealing with this worry about running out of money? Well, surveys are beginning to indicate that this uncertainty is already translating into extended work lives — or at least some expectation of being able to do so. Simply stated, for some, the “answer” to not having enough saved to retire is simply to work longer. Mathematically, those assumptions can produce a satisfying projected outcome. Unfortunately, like an assumption that your retirement investments will return 12% annually for the next 30 years, the data suggests that the reality of working longer is often undermined by circumstances beyond the individual’s control.

On the path toward more realistic assumptions, a growing number of providers now make available a projection as to how much monthly income a participant’s retirement savings would produce, and in May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has proposed that a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance. These efforts will doubtless make it easier for today’s workers to anticipate how much retirement income they will have available, based on certain assumptions.

As for those already in retirement — and unable to adjust assumptions— some studies have shown that retirees are adjusting to their income realities — though arguably those are the kind of reality adjustments most would rather not be forced to make.

For those with time to prepare ahead, while we know that the requirements of the “here and now” frequently intrude on our preparations for the “there and then,” there’s something to be said for taking the time now to think about what those retirement savings “leftovers” could taste like — and how small the portions could be.

- Nevin E. Adams, JD

"Working" Capital

In response to concerns that tomorrow’s retirees will run short of money, we are often told to save more, to work longer, or — as often as not these days — to work longer and save more. Certainly working and saving longer can do wonders in terms of stretching your retirement nest egg.

It should probably come as no surprise that American workers are expecting to work longer. The Retirement Confidence Survey notes that in 1991, just 11% of workers expected to retire after age 65. This year that was up to 33% of workers, and another 10% who said they don’t plan to retire at all.

However, the timing of the retirement decision is often not within an individual’s control. A recent survey conducted by Merrill Lynch and Age Wave found that a majority of retirees surveyed (55%) say they retired earlier than they had expected — just 7% later than they expected. Similar trends were found in EBRI’s 2014 Retirement Confidence Survey (RCS), where while more than one-in-five (22%) of workers say they plan to wait at least until age 70 to retire, only 9% of current retirees actually did so. In fact, going back to 1991, the RCS has found that the median (midpoint) age at which retirees report they retired has remained at age 62 throughout this time.

In fact, the RCS has consistently found not only that a large percentage of retirees leave the work force earlier than planned (49% in 2014), but that many retirees who retired earlier than planned cite negative reasons for leaving the work force when they did, including:

• health problems or disability (61%);

• changes at their company (such as downsizing or closure (18%); or 

• having to care for a spouse or another family member (18%). 

The Merrill Lynch/Age Wave survey cautions that while early retirement used to be equated with financial success, today’s retirees say that health problems are now the top reason for their early retirement (37%). In fact, the surveys indicate that the issues that seem to be triggering earlier-than-expected retirements not only serve to cut short working (and savings) careers, but bring with them additional expense.

Retirement planning requires a lot of assumptions — things like how much we’ll need to live, the return(s) on our investments, how long we’ll live in retirement, and when that retirement will begin.

However, the data also suggest that the assumption that we’ll be able to work to — much less through — the traditional retirement age of 65 may be one of the more optimistic.

- Nevin E. Adams, JD

Under Covered

Have you heard this one? “Only about half of working Americans are covered by a workplace retirement plan.”

Sure you have. It’s a statistic that is widely cited and reported, both in the mainstream press and on Capitol Hill. It comes from a reliable, objective source (the U.S. Census Bureau’s Current Population Survey) and conjures up a compelling need for action by advisors (and others) hoping and working to expand the availability of workplace retirement plans.

In reviewing the Census Bureau data, the Employee Benefit Research Institute (EBRI) recently noted that, in 2011, 78.5 million workers worked for an employer or union that did not sponsor a retirement plan. That is the “less than half” number cited, and reported, with such vigor.

However, when you look at the data underlying that aggregate number, you find it includes:

• 8.9 million people who were self-employed (and thus arguably are prevented from being covered by their own inaction);
• 6.2 million who were under the age of 21 (who, being under ERISA’s mandated age coverage level, would logically not be “covered”);
• 3.9 million who were age 65 or older (and beyond “normal” retirement age);
• just over 31 million who were not full-time, full-year workers; and
• 16.8 million who had annual earnings of less than $10,000.

When you take those factors into account, it’s pretty easy to see logical reasons why so many workers are not “covered.” When you filter out the overlap between those categories — situations where workers fall into several of those categories simultaneously (for example, workers who are under age 21, have less than $10,000 in annual earnings and are not full-time, full-year workers) — there are about 42.4 million workers whose lack of coverage might logically be attributed to being in one or more of those categories. And yes, that’s more than half of the “uncovered” workers in the CPS analysis.

Not that there isn’t a gap in coverage — unpublished estimates from EBRI drawn from the March 2013 Current Population Survey suggest that approximately 20 million private sector workers earning between $30,000 and $100,000 per year don’t have access to a retirement plan at work. That’s a gap that needs to be filled, and advisors, working with plan sponsors and providers, are working to do so every day.

So yes, claiming that “fewer than half of working Americans have access to a workplace retirement plan” is technically accurate. But while it makes for a compelling headline, it represents a gap in news coverage of the issue that hinders our understanding of the real factors underlying the data, and in the process undermines our ability to address it.

- Nevin E. Adams, JD

"Class" of 74

Pensions were not on my mind in 1974, certainly not on Labor Day of that year.  While I was pondering my new college textbooks, President Gerald Ford, less than a month in that role, signed into law the Employee Retirement Income Security Act of 1974 – better known to most of us as ERISA. Little did I know at the time that that law – and the structure it provided to the nation’s private pension system – would, in the years to follow, play such an integral role in my life.

ERISA did not create pensions, of course; they existed in significant numbers prior to 1974.  Rather, it was designed to regulate what was there and would yet come to be – to protect the funds invested in those plans for the benefit of participants and beneficiaries with a consistent set of federal standards.  And, as part of that protection, to establish the Pension Benefit Guaranty Corporation (PBGC).  As President Ford said at the time, “It is essential to bring some order and humanity into this welter of different and sometimes inequitable retirement plans within private industry.”

Has ERISA “worked”?  Well, in signing that legislation, President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.”  Today that system has grown to exceed $17 trillion, covering more than 85 million workers in more than 700,000 plans.

The composition of the plans, like the composition of the workforce those plans cover, has changed over time.  While much is made about the perceived shortcomings in coverage of the current system, the projections of multi-trillion dollar shortfalls of retirement income, the pining for the “good old days” when everyone had a pension (that never really existed for most), the reality is that ERISA—and its progeny—have unquestionably allowed more Americans to be better financially prepared for a longer retirement. 

Forty years on, ERISA – and the nation’s retirement challenges – may yet be a work in progress.  But, by any measure, this “class of 74” has done the nation a great service.

-          Nevin E. Adams, JD

"Working" It Out

It is routinely reported that 10,000 Baby Boomers are retiring every day, and yet surveys continue to indicate that Americans plan to postpone retirement.

This raises the question: are more older Americans working?

A recent Wall Street Journal article notes (subscription required) that one of the biggest changes in the U.S. labor market over the past two decades has been the increasing number of people working over the age of 55. As recently as 1993, only 29% of people that age were in the labor force, but by 2012 more than 41% of that age group were still in the labor force, the highest since the early 1960s.

It’s hard to find a workplace survey these days that doesn’t find workers planning to work past the traditional retirement age of 65. For example, a recent survey by the Federal Reserve found that fewer than one in five workers age 55 to 64 planned to follow the traditional retirement model of working full time until a set date and then stop working altogether.

A recent report by the Employee Benefit Research Institute (EBRI) noted that the percentage of civilian, noninstitutionalized Americans near or at retirement age (age 55 or older) in the labor force declined from 34.7% in 1975 to 29.4% in 1993. However, since then the overall labor-force participation rate of this group has increased steadily, reaching 40.5% in 2012 — the highest level over the 1975-2013 period — before decreasing to 40.3% in 2013.

Venus and Mars?
The labor-force participation rate for men ages 55 and older followed the same pattern through 2010, falling from 49.4% in 1975 to 37.7% in 1993 before increasing to 46.4% in 2010, roughly where it stood in 2013. On the other hand, the labor-force participation rate of women in this age group was essentially flat from 1975 to 1993 (23.1% and 22.8%, respectively). But after 1993, the women’s rate also increased, reaching its highest level in 2010 (35.1%), where it remained though 2013.

The increase in labor-force participation for the age groups below age 65 was primarily driven by the increases in female labor-force participation rates, as the male labor-force participation rates of those ages 55-59 and 60-64 were lower in 2013 than they were in 1975. In contrast, female labor-force participation rates for those ages 55-59 and 60-64 increased sharply from 1975 to 2013, despite some leveling off in 2010-2013.

The Journal article draws on some Department of Labor data that show that while there are fewer men working at every age, at any given age, more men were working in 2013 than in 2000. By way of example, the article notes that at the turn of the century, about 66% of 60-year-old men and 20% of 70-year-old men were still in the labor force — participation rates that stand today at 72% and 25%, respectively.

So, while there are clearly more people retiring, and thus more not working, there also appear to be more older individuals (on a percentage of workforce basis) working today — though perhaps not as many as once thought they might.

When You Assume...

The use of assumptions was the focus of a recent report from the Employee Benefit Research Institute (EBRI), which not only highlighted the assumptions used in two separate retirement studies, but illustrated a real problem with their results.

The EBRI report examined two earlier  studies — one by Pew Trusts, the other by the Center for Retirement Research at Boston College — that purported to show that the retirement prospects for Gen Xers were worse than those of the Baby Boomers. The EBRI report not only highlighted the questionable assumptions, but took the time to quantify the impact (see “EBRI Report Calls Out Pew, CRR on Retirement Conclusions”). Such public criticisms are a rarity, as evidenced by the media coverage accompanying the release of the EBRI report.

As recently as a few years ago, I would have assumed that findings published by credentialed individuals associated with a reputable institution of higher learning could be taken at face value, if only because I assumed that if their methodologies were flawed, their findings would be taken to task by other similarly credentialed individuals.
Sadly, that does not seem to be the case.

The Pew report, though it went to some pains to determine appropriate rates of return to project out the future balances of both Boomers and Gen Xers, chose to completely ignore any future contributions.  Not so big a deal for those on the cusp of retirement perhaps, but what about those Gen Xers (defined as those Individuals born between 1965 and 1974) who are (just) 40? That’s at least a quarter century of contributions — and earnings on those contributions — completely disregarded by the Pew assumptions. Think that might tend to produce a lower retirement readiness conclusion about that demographic?

As for the report by CRR, the EBRI report explains how it relies on “wealth-to-income patterns by age group from the 1983–2010 Federal Reserve Surveys of Consumer Finances (SCF).” That certainly sounds like a credible source, but it also happens to be based on self-reported information and a perspective of 401(k)-plan designs and savings trends that pre-date the impact of automatic enrollment plan features that followed the passage of the Pension Protection Act of 2006. Not that you’ll find that acknowledged in the report, even in the footnotes. And yet data from the CRR’s NRRI are routinely cited in industry reports.

Projections about the future inevitably require some assumptions, and the EBRI report does as well. But it not only lays out its assumptions in great detail, it provides a wide range of findings associated with those various assumptions so that readers can draw their own conclusions based on the scenario(s) they think most likely to occur.

There’s an old adage that points out the inherent dangers in relying overly much on assumptions. It cautions that one should “never assume, because when you assume, you make an ‘ass’ of ‘u’ and ‘me.’”

That goes double for those who blindly rely on research findings drawn from assumptions poorly constructed and/or undisclosed.

Nevin E. Adams, JD

• See an earlier analysis of the Pew Trust report here.

• You can find a more comprehensive explanation of some of the issues associated with the CRR’s NRRI here.

Lessons Learned

I joined EBRI with a passion for the insights that quality research can provide, and a modest concern about the dangers that inaccurate, sloppy, and/or poorly constructed methodologies and the flawed conclusions and recommendations they support can wreak on policy decisions.  While my tenure here has only served to increase my passion for the former, on (too) many occasions I have been struck not only by the breadth of assumptions made in employee benefit research, but just how difficult – though not impossible – it is for a non-researcher to discern those particulars.

We have over the past couple of years devoted some of this space to highlighting some of the most egregious instances, but as I close this chapter of my professional career, I wanted to share with you a “top 10” list of things I have learned in my search to find reliable, objective, actionable research:

1. There are always assumptions in research; find out what they are. Garbage in, garbage out, after all (the harder you have to look, the more suspicious you should be).
2. Just because research validates your sense of reality doesn’t make it “right.” But just because it invalidates your sense of reality doesn’t necessarily make it right, either.
3. Take the conclusions of sponsored research with a grain of salt.
4. Self-reported data can tell you what the individual thinks they have, but not necessarily what they actually have.
5. Sample size matters. A lot.
6. “Averages” (e.g., balances/income/savings) don’t generally tell you much.
7. There’s a certain irony that those who propose massive changes in plan design, policy, or tax treatment, frequently assume no behavioral changes in response.
8. When it comes to research findings, “directionally accurate” is an oxymoron.
9. In assessing conclusions or recommendations, it’s important to know the difference between partisan, bipartisan and nonpartisan.
10. In an employment-based benefits system, the ability to accurately gauge employee response to benefits change is dependent on the reaction of the employers who provide access to those benefits.

One of the things that I’ve always loved about the field of employee benefits was that there was always something new to learn, and with each position along the way I have gained a new and fresh perspective.  I’ll always treasure my time here as a member of the EBRI team, the opportunity I’ve had to contribute to this body of work – and I’m looking forward to continuing to draw on EBRI research for insights and analysis in my new position, as I have for most of my professional career.

That said, I’ll close by commending to your attention one of my favorite “lessons” – a quote attributed to Mark Twain, and one worth keeping in mind along with the 10 “lessons” above:

“It’s easier to fool people than to convince them they have been fooled.” 

Here’s to not being fooled.

- Nevin E. Adams, JD

"Repeat" Performance

A few months back, I was intrigued to catch several episodes of “Cosmos,” an updated version of the classic 1980 Carl Sagan series.  Along with the significantly expanded and enhanced visuals and (to me, anyway, generally annoying) animations, the series recounted the work, travails and accomplishments of Edmond Halley, who, even today, is probably best remembered for the comet whose 75-year cycle he identified and which still, as Halley’s Comet, bears his name.

Halley wasn’t the first to see the comet, of course – in fact, it had been recorded by Chinese astronomers as far back as 240 BC, noted subsequently in Babylonian records, and perhaps most famously shortly before the 1066 invasion of England by William the Conqueror (who claimed the comet’s appearance foretold his success).  Halley noted appearances by the comet in 1531, 1607 and 1682, and based on those prior observations – and the application of the work and mathematical formulas of his friend Isaac Newton – predicted the return of the comet in 1758, which it did, albeit 16 years after his death in 1742.

Of course, the importance of repeated, measured observations isn’t restricted to celestial phenomena.  Consider that individual retirement accounts (IRAs) currently represent about a quarter of the nation’s retirement assets; and yet, despite an ongoing focus on the accumulations in defined benefit (pension) and 401(k) plans that have, via rollovers, fueled a significant amount of this growth, a detailed understanding as to how these funds are actually used during retirement has, to date, not been as well understood.

To address this knowledge shortfall, the Employee Benefit Research Institute has developed the EBRI IRA Database, which includes a wealth of data on IRAs including withdrawals or distributions, both by calendar year and longitudinally, which provides a unique ability to analyze a large cross-sectional segment of this vital retirement savings component, both at a point in time and as the individual ages and either changes jobs or retires.  Indeed, as a recent EBRI publication notes, the rate of withdrawals from these IRAs is important in determining the likelihood of having sufficient funds for the duration of an individual’s life, certainly where these balances are a primary source of post-retirement income.

Previous EBRI reports[i] have explored this activity for particular points in time, but a recent EBRI analysis[ii] looked for trends in the withdrawal patterns of a longitudinal three-year sample of individual post-retirement withdrawal activity, specifically those age 70 or older (in 2010), the point at which individuals are required by law to begin withdrawing money from their IRAS.

The EBRI analysis concluded that, when looking at the withdrawal rates for those ages 70 or older, the median of the average withdrawal rates over a three-year period indicated that most individuals are withdrawing at a rate that not only approximates what they are required by law to withdraw, but at a rate that is likely to be able to sustain some level of post-retirement income from IRAs as the individual continues to age.

Furthermore, the report notes that an examination of these trends over this period suggests that, based on the resulting distribution of average withdrawal rates over time as a function of the initial-year withdrawal rate, the initial withdrawal rate for those in this age group appeared to be one that these individuals are likely to continue to make the next year.

Of course, while the median withdrawal rates suggest many individuals would be able to maintain the IRA as an ongoing source of income throughout retirement, further study is needed to see if these individuals are maintaining those withdrawal rates over longer periods of time.  Moreover, the integration of IRA data with data from employment-based defined contribution retirement accounts currently underway as part of initiatives associated with EBRI’s Center for Research on Retirement Income (CRI) will allow for an even more comprehensive picture of what those who may have multiple types of retirement accounts do as they age through retirement.

And we won’t have to wait 75 years to see how it turns out.

• Nevin E. Adams, JD

[i] See “IRA Withdrawals, 2011” online here.   See also ““Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” online here. 
[ii] See “IRA Withdrawals in 2012 and Longitudinal Results, 2010–2012” online here. 

Look-Back "Provisions"

My wife and I recently celebrated our wedding anniversary.  It was a special day, as they all are, but as I thought back on the events of our life together, I was struck by the realization that I have now been married for about half my life.  Not that I didn’t expect to remain married, or to live this long; if someone had asked on my wedding day if I thought I’d still be alive and married this many years hence, I’m sure that I would have expressed confidence, likely strong confidence, in both outcomes.  However, if someone on that same day had asked me to guess then where I would be living now, what I would be doing, or what my income would be (or need to be)—well, my responses would likely have been much less certain.

In just a few weeks we’ll be making preparations to launch the 2015 Retirement Confidence Survey (RCS)[i].  It is, by far, the longest-running survey of its kind in the nation.  Indeed, this will be its 25^th year.  Think for a moment about where you were a quarter century ago, what (or if) you thought about retirement, what preparations you had made… then consider for a moment what you have done in the years since.  Are you where you thought you would be?  Are you more – or less – confident about your prospects for a financially secure retirement?  Have you planned toward a specific retirement date or age?  Has that changed over the years – how, and why?

Through the prism of that near-quarter-century window, the RCS provides a unique perspective to view in the here and now, and to look back over time on how American workers – and retirees – have viewed their preparations, readiness, and confidence about retirement.  It has also provided those who are working to help improve and/or ensure those prospects insights into those collective preparations, or lack thereof. Moreover, the RCS has offered the ability to gauge potential responses to specific regulatory, administrative and legislative alternatives, both real and envisioned – a critical real-world filter to balance the theoretical world in which academics often imagine we live and respond, or as they often assume, won’t respond[ii].

Retirement confidence is, of course, a state of mind at a point in time, unique to individual situations, and as past waves of the RCS have shown, it’s not always based on a realistic assessment of where you are or what lies ahead.  That said, the RCS offers more than a sentiment snapshot, and those who look not only to feel better about retirement but to have a basis for that feeling need look back no further than the pages of that report.

The RCS has outlined the impact that real-world actions can have on confidence: having saved for retirement, having sought professional investment advice, having made a determination as to how much is needed for retirement, and – as last year’s RCS findings emphasized — having some kind of retirement savings account.  Little wonder that those who have undertaken those steps are more confident of the outcomes.

It’s one thing to anticipate that eventual cessation of paid employment, and something else altogether to make the preparations – to choose to save – and to be confident that you’ll be able to look back with satisfaction one day knowing that you have the financial resources to enjoy it.

• Nevin E.  Adams, JD

Your organization can be part of the 25^th Retirement Confidence Survey.  Survey underwriters serve as a member of the survey’s Advisory Board, along with the opportunity to participate in the review and update of the 2014 questionnaire; have the opportunity to participate in a pre-release, underwriters’ briefing on the results of the survey; are able to utilize the survey materials and findings for your research, marketing, communications, and product-development purposes – and you’ll be acknowledged as an underwriter of this, the 25^th Retirement Confidence Survey, among other benefits.  For more information, contact us at nadams@ebri.org.

[i] More information about the Retirement Confidence Survey is available online here.

The Status Quo

While the prospects for “comprehensive tax reform” may seem remote in this highly charged election year, the current tax preferences accorded employee benefits continue to be a focus of much discussion among policymakers and academics.

The most recent entry was a report by the Urban Institute which simulated the short- and long-term effect of three policy options for “flattening tax incentives and increasing retirement savings for low- and middle-income workers.”  The report concluded that “reducing 401(k) contribution limits increases taxes for high-income taxpayers; expanding the saver’s credit raises saving incentives and lowers taxes for low- and middle-income taxpayers; and replacing the exclusion for retirement saving contributions with a 25 percent refundable credit benefits primarily low- and middle-income taxpayers, and raises taxes and reduces retirement assets for high-income taxpayers.”

However, and to the authors’ credit, the report also noted that “the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates[i].”

In previous posts, we’ve highlighted the dangers attendant with relying on simplistic retirement modeling assumptions, the application of dated plan design information to future accumulations, and the choice of adequacy thresholds that, while mathematically accurate, seem unlikely to provide a retirement lifestyle that would, in reality, feel “adequate.”

However, one of the more pervasive assumptions, particularly when it comes to modeling the impact of policy and/or tax reform changes, is that, regardless of the size and scope of the changes proposed, workers – and employers – will generally continue to do what they are currently doing, and at the current rate(s), for both contributions and/or plan offerings.  Consequently, there is talk of restricting participant access to their retirement savings until retirement, with little if any discussion as to how that might affect future contribution levels, by both workers and employers, and there are debate about modifying retirement plan tax preferences as though those changes would have no impact at all on the calculus of those making decisions to offer and support these programs with matching contributions.  Ultimately, these behavioral responses might not only impact the projected budget “savings” associated with the proposals, but the retirement savings accumulations themselves.

EBRI research has previously been able to leverage its extensive databases and survey data (including the long-running Retirement Confidence Survey) to both capture  potential responses to these types of proposals and, more significantly, to quantify their potential impact on retirement security today and over the extended time periods over which their influence extends.  In recent months, that research has provided insights on the full breadth of:

• A retirement savings cap[ii],
• The proportionality of savings account balances with incomes[iii], and
• The impact of permanently modifying the exclusion of employer and employee contributions for retirement savings from taxable income, among other proposals[iv].

While we can’t be certain what the future brings, considering the likely responses to policy changes is a critical element in any comprehensive impact assessment – not only because the status quo is rarely a dependable outcome, but because, after all, those who assume the status quo are generally looking to change it.

• Nevin E. Adams, JD

[i] From Urban Institute and Brookings Institution:  Flattening Tax Incentives for Retirement Saving:  “Our findings should be interpreted with caution. Actual legislation for flattening tax incentives requires more than the simple adjustments discussed here. For instance, if a credit-based approach is used, then the laws would need to ensure some recapture of those benefits for those who made contributions one year and withdrew them soon thereafter.

Additionally, the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates. For instance, employees may save more in response to improved incentives, in which case the benefits to low lifetime income households would be greater than we find. On the other hand, employers might reduce their contributions in response to some of the policy changes outlined. In this case, the tax and savings benefits we find would be overstated.  While our policy simulations are illustrative, addressing these behavioral responses would be a chief concern in tailoring specific policies to create the best incentives.”

[ii] See “The Impact of a Retirement Savings Account Cap”
 
[iii] See “Upside” Potential
 
[iv] See “Tax Reform Options: Promoting Retirement Security”, and “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances”

Map "Quests"

I’ve been hooked on the convenience of GPS systems ever since the first time one was included in the price of a rental car on a family trip in unfamiliar territory. After all, it combines the opportunity to tinker with electronic gadgetry alongside the convenience of not having to do much in the way of pre-planning trip routes—not to mention avoiding the need to stop and ask for directions (that is frequently associated with not doing much in the way of pre-planning trip routes).

There are, of course, horror stories about drivers who have blindly followed GPS instructions without paying attention to the evidence of their eyes. My family still chuckles at the memory of a trip where we were running late to our plane, and the rental car GPS, based on what appeared to be an outdated address for the return office, kept directing us to an address that was not only miles from the real office, but a place from which I wondered if we might never return.

As a growing number of Americans near, and head into, retirement, policymakers, retirement plan sponsors, and individual workers alike increasingly wonder—will Americans have enough to live on when they retire? Unfortunately, as a recent EBRI publication[1] explains, the answers provided are as diverse, and sometimes disparate, as the projection models that produce those results.

While it is not always clear from their results, some of those models limit their analysis to households already retired, while others focus on households still working, but old enough that reasonably accurate projections regarding their future wages and prospects for accumulating retirement wealth are obtainable. Still others attempt to analyze the prospects for all working households, including those whose relative youth (and distance from retirement) makes accurate, long-term predictions somewhat problematic.

Moreover, there are varied definitions of retirement income adequacy. As the EBRI report explains, some either (1) model only the accumulation side of the equation and then rely on some type of preretirement income replacement rate measure as a threshold for success, or (2) make use of a so-called “life-cycle” model that attempts to smooth/spread some type of consumption-based utility over the decision-maker’s lifetime.

The problem with the former is that, since very few households annuitize all (or even most) of their individual accounts in retirement, a replacement-rate focus overlooks the potential risk of outliving their income (longevity risk). And while the annuity purchase price relied upon in a replacement-rate target does depend on an implicit assumption with respect to (at least some) future market returns, it does not typically account for the potential investment risk. Additionally, and as previous EBRI research has demonstrated, one of the biggest financial obstacles in terms of maintaining retirement income adequacy for households that might otherwise have sufficient financial resources at retirement age is the risk of long-term care costs for a prolonged period. In the real world, few retirees have long-term care insurance policies in place that would cover the potentially catastrophic financial impact of this exposure—and thus, simply adding the cost of long-term care insurance into a replacement-rate methodology will vastly underestimate the potential severity of this exposure.

As for the life-cycle smoothing model, the EBRI report notes that approach typically produces extraordinarily low levels of “optimal” savings for low-income individuals at retirement, and while some households may, in fact, have no choice but to subsist at those levels in retirement, from a public policy perspective EBRI chose instead to establish a threshold that would allow households to afford average expenditures (for retirees in the appropriate income category) throughout their retirement, while at the same time accounting for the potential impact of uninsured long-term care costs.

EBRI’s Retirement Security Projection Model^®[2] takes a different—arguably unique and more realistic—perspective. Rather than relying on an individual’s projected ability to achieve an arbitrarily designated percentage of his or her preretirement income as a proxy for retirement income adequacy, RSPM grew out of a multiyear project to analyze the future economic well-being of the retired population at the state level, focused on identifying the point at which individuals would run short of money and perhaps become a financial obligation of the state.

As valuable a resource as a GPS can be, it can quickly become a nuisance—or worse—if the input destination point is incorrect, or the mapping system is out of date. Similarly, those who want a financially secure retirement may find that relying on a model based on flawed assumptions or outdated “destinations” may find themselves short of their goal and with little time to do anything about it.

Nevin E. Adams, JD

[1] See ““’Short’ Falls: Who’s Most Likely to Come up Short in Retirement, and When?” online here.

[2] A brief description of EBRI’s Retirement Security Projection Model® can be found online here.

Picture "WIndow"

As an individual who spends a lot of his time writing (and reading the writing of others), I’ve always had reservations about the notion that “a picture is worth a thousand words,” though I’ll grant you that an image, a well-crafted graph, or even a flow chart can, in certain instances, more quickly and more effectively convey an idea or concept than words alone.

I remember a conversation with a friend of mine a couple of years ago about EBRI’s Lillywhite Award. My friend, who had been something of a mentor to me over the years, was asking me about the award, the selection process, and what type of individual/accomplishments we were seeking to acknowledge. I tried as best I could to go over the history and purpose of the award: that it was established in 1992 to celebrate contributions by persons who have had distinguished careers in the investment management and employee benefits fields and whose outstanding service enhances Americans’ economic security. That it was intended to recognize lifetime or long-term contributions to the fields of pension/retirement administration, investment management, legislation, marketing, research-education, consulting on investments or benefits, or publications/reporting.

And then I mentioned Ray Lillywhite, for whom the award is named, and—in an instant—my friend “got it.”

Ray was a true pioneer in the pension field. For decades he guided state employee pension plans, and helped found numerous professional organizations and educational programs, finally retiring from Alliance Capital at the age of 80 after a 55-year career in the pension and investment field. Throughout his career, Ray exemplified not only excellence, but also innovation in lifelong achievements, teaching, and learning.

While I never had the pleasure of meeting Ray in person, it has been my great fortune to meet and benefit from the work, education and guidance of a number of Lillywhite Award recipients over the course of my career: Principal Financial Group’s CEO Larry Zimpleman, who was last year’s recipient; Stanford University’s Bill Sharpe; Pension & Investments’ Mike Clowes; Russell Investment’s Don Ezra; and, of course, EBRI’s own Dallas Salisbury, to name a few.

These individuals, as well as the rest of the long and distinguished list of EBRI Lillywhite Award recipients[1] do indeed help paint a picture of what the award was designed to acknowledge—individuals who have each, in their own unique way, influenced the direction of employee benefits, and over the course of their careers helped make things better for others, whose “outstanding service enhances Americans’ economic security.”

Indeed, a picture” may, or may not, always be worth a thousand words. But sometimes a “picture” can be worth more than mere words can say.

 Nevin E. Adams, JD

EBRI’s Lillywhite Award acknowledges the best of the best in the investment management and employee benefits fields. I’m betting you know, admire, and would like to acknowledge the contributions they’ve made. If so, I’d encourage you to nominate them for this prestigious award—today, online here.  

More information about the EBRI Lillywhite Award is online here.

[1] The list of previous EBRI Lillywhite Award recipients is online here. 

"Free" Money?

While I appreciate the convenience of gift cards, giving them always feels a bit lazy. As a recipient, however, I very much appreciate the flexibility and the freedom to buy, within the limits of the card, pretty much anything—sometimes things for which I wouldn’t even have thought to ask much less buy for myself. And, arguably, in at least a couple of cases, things I SHOULDN’T have bought, and probably wouldn’t have bought, if it hadn’t felt like “free” money.

That very human inclination to spend our own money more judiciously than what we are given underpins the growing interest in consumer-directed health plans, such as the now decade-old health savings account (HSA), or its slightly older cousin, the health reimbursement arrangement, or HRA[i]. Both are designed to provide workers the ability to pay for health care-related expenses with funds drawn from the account – and yet, EBRI’s 2013 Consumer Engagement in Health Care Survey (CEHCS)[ii] found evidence that adults with an HSA were more likely than those with an HRA to exhibit a number of cost-conscious behaviors related to use of health care services.

Specifically, the analysis found that those with an HSA were more likely than those with an HRA to:

• report that they asked for a generic drug instead of a brand name (52 percent HSA vs. 49 percent HRA);
• check the price of a service before getting care (41 percent HSA vs. 34 percent HRA);
• ask a doctor to recommend less-costly prescriptions (40 percent HSA vs. 38 percent HRA);
• develop a budget to manage health care expenses (32 percent HSA vs. 22 percent HRA); and
• use an online, cost-tracking tool provided by the health plan (27 percent HSA vs. 21 percent HRA).

Moreover, the 2013 CEHCS also found that adults with an HSA were more likely than those with an HRA to be engaged in their choice of health plan, when they had a choice. They were, according to the analysis, more likely to report that they had talked to friends, family, and colleagues about the plans; used other websites to learn about health plan choices; and were more likely to have consulted with both their employer’s HR staff and an insurance broker to understand plan choices, among other things.

HRAs and HSAs are very similar, so why might those differences in behavior occur between those covered by the two plan types? Consider that an HRA is an employer-funded health plan that reimburses employees for qualified medical expenses, in contrast to the HSA, which can have both employer and employee contributions. HRAs are generally “notional” accounts maintained by the employer, and while funds unspent at the end of each year can be carried over for future use, that option is at the employer’s discretion.

On the other hand, and as the EBRI report notes, an HSA is owned by the individual and is completely portable, with no annual “use-it-or-lose-it” rule. Additionally, those who do not use all the money in their HSA during their working years can use it to pay out-of-pocket expenses after they retire.

Said another way, for most people the HSA balance probably feels like it is “their” money[iii], and they spend it accordingly, while their HRA feels more like a gift card with an expiration date. It’s certainly not “free” money, but it may feel that way to them.

• Nevin E. Adams, JD

[i] Overall, 26.1 million individuals with private insurance, representing 15 percent of the market, were either in an HRA or an HSA-eligible plan.  See “Who Has “Consumer-Driven” Health Plans?“

[ii] “Consumer Engagement Among HSA and HRA Enrollees: Findings from the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey,” is published in the June EBRI Notes here.

[iii] In many cases it is, of course, literally funded by their contributions.

"Out" Takes

My first car wasn’t anything special, other than it was my first car. It was an older model Ford, ran reasonably well, with one small problem— it went through oil almost as quickly as it did gasoline. At first I attributed that to being a function of the car’s age, but as the leakage grew, I eventually dealt with it by keeping a couple of quarts of oil in the trunk “just in case.” Eventually, I took the car to a dealership—but by the time they finished estimating the cost of a head gasket repair, let’s just say that, even on my limited budget, I could buy a LOT of oil by the quart, over a long period of time, and still be ahead financially.

“Leakage”—the withdrawal of retirement savings via loan or distribution prior to retirement— is a matter of ongoing discussion among employers, regulators, and policy makers alike. In fact, EBRI Research Director Jack VanDerhei was recently asked to present findings on “The Impact of Leakages on 401(k) Accumulations at Retirement Age” to the ERISA Advisory Council in Washington.[1]

EBRI’s analysis considered the impact on young employees with more than 30 years of 401(k) eligibility by age 65 if cashouts at job turnover, hardship withdrawals (and the accompanying six-month suspension of contributions) and plan loan defaults were substantially reduced or eliminated. The analysis assumed automatic enrollment and (as explicitly noted) no behavioral response on the part of participants or plan sponsors if that access to plan balances was eliminated.

Looked at together, EBRI found that there was a decrease in the probability of reaching an 80 percent real income replacement rate (combining 401(k) accumulations and Social Security benefits) of 8.8 percentage points for the lowest-income quartile and 7.0 percentage points for those in the highest-income quartile. Said another way, 27.3 percent of those in the lowest-income quartile (and 15.2 percent of those in the highest-income quartile) who would have come up short of an 80 percent real replacement rate under current assumptions WOULD reach that level if no leakages are assumed.

The EBRI analysis also looked at the impact of the various types of “leakage” individually. Of loan defaults, hardships, and cashouts at job change, cashouts at job change were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). The leakages from cashouts resulted in a decrease in the probability of reaching an 80 percent real replacement rate of 5.9 percentage points for the lowest-income quartile and 4.5 percentage points for those in the highest-income quartile. That effect from cashouts—not loans or hardship withdrawals—turns out to be approximately two-thirds of the leakage impact.

However, and as the testimony makes clear, it’s one thing to quantify the impact of not allowing early access to these funds—and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes, perhaps by reducing contributions,[2] potentially offsetting some or all of the prospective gains from restricting access to those funds.

Because ultimately, whether you’re dealing with an old car or your retirement savings account, what matters isn’t how much “leaks” out—it’s how much you put in, and how much you have to “run” on.

Nevin E. Adams, JD

[1] EBRI’s testimony for the ERISA Advisory Council, U.S. Department of Labor Hearing on Lifetime Participation in plans is available online here.  

[2] An EBRI/ICI analysis published in the October 2001 EBRI Issue Brief found that, “[o]n average, a participant in a plan offering loans appeared to contribute 0.6 percentage point more of his or her salary to the plan than a participant in a plan with no loan provision.” Testimony provided to the ERISA Advisory Council testimony notes that it’s likely that a similar relationship exists with respect to the availability of hardship withdrawals. See “Contribution Behavior of 401(k) Plan Participants,” online here.