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the memory of a trip where we were running late to our plane, and the rental car GPS, based on what appeared to be an outdated address for the return office, kept directing us to an address that was not only miles from the real office, but a place from which I wondered if we might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.

"Short" Changed

My wife is fond of recounting one of our early dates when we ran out of gas.  Now, we were in the heart of a Chicago suburb at the time, not the middle of nowhere, and while the hour was late, I continue to maintain that it was a simple case of my misreading the gas gauge in a relatively new car with which I hadn’t yet gained a full appreciation for just how far I could push such things.  My wife, of course, has always accused me of a more “nefarious” purpose.

It would be more difficult to explain such an outcome these days.  We’ve gone from vehicles that simply had a floating gauge and a range of red at the 1/8 tank line, to those that have a solid and then a blinking yellow light, to ones that beep and flash and tell you how many miles you have left before you run out.

As inconvenient as running out of gas late at night can be, it surely pales in comparison to the prospects of running short of money in retirement.  EBRI has, for more than a decade now, used highly sophisticated modeling techniques to gauge the retirement readiness of baby boomers and Gen Xers.  One of the primary outputs of EBRI’s Retirement Security Projection Model (RSPM)[i] is the production of Retirement Readiness Ratings (RRRs), which represent the percentage of simulated life-paths that do not run short of money in retirement.  The 2014 version of RSPM found that over half of baby boomer and Gen Xer households would not run short of money in retirement.  However, when the results were analyzed by preretirement wage quartile, we found that while 86.4 percent of the highest income quartile were projected to not run short, just 16.8 percent of the lowest income quartile would not.

While it is useful, certainly from a public policy perspective, to know not only how many but also what types of individuals are projected to run short of money in retirement, it begs the question: when will they run short?

A recent EBRI Notes article[ii] provides new results showing how many years into retirement baby boomer and Gen Xer households are simulated to run short of money, by preretirement income quartile and for a variety of assumptions, as well as taking into account the impact of the potentially catastrophic expenses of nursing home and home health care expenses.  Not surprisingly, it finds that those in the lowest income brackets are most likely to run short.

Moreover, while some in all income brackets—including the highest—may run short at some point during their retirement, the EBRI analysis also found that, when nursing home and home health care expenses are factored in, the number of households in the lowest income quartile that are projected to run short of money within 20 years of retirement is considerably larger than those in the other three income quartiles combined.

The EBRI analysis provides valuable insights for policymakers, providers and employers alike because, whether you’re concerned about running out of gas short of your destination – or short of money in retirement – it’s important that your gauges be accurate, and appropriate to the vehicle in which you’re riding there.

• Nevin E. Adams, JD

[i] A Brief Description of EBRI’s Retirement Security Projection Model® is available here.

[ii] The June EBRI Notes article, ““Short” Falls: Who’s Most Likely to Come up Short in Retirement, and When?” is available online here.

Pre-Existing Conditions?

Much has been made of the so-called employer mandate of the Affordable Care Act, and its postponements. Of course, as a recent EBRI publication points out, the mandate (currently slated to be enforced effective in 2015) applies only to employers with 50 or more full-time workers – and most of these employers already offer health coverage to their workers. Last year, 91 percent of employers with 50–199 workers offered coverage, as did 99 percent of employers with 200 or more workers, according to the EBRI analysis.

However, the Patient Protection and Affordable Care Act (PPACA) defines a full-time employee as one who works 30 or more hours per week, on average – well below the 40-hour-week threshold typically associated with full-time employment. As a result, there is concern that employers may respond by cutting back on health coverage for part-time workers or by decreasing part-timer hours to keep them below the 30-hour-week threshold.

The EBRI report notes that, overall, there were 20 million workers employed under 30 hours per week and 18.8 million employed 30–39 hours per week in 2012. Among those employed between 30 and 39 hours per week, 6.3 million (33.6 percent) had employment-based coverage from their own job. In contrast, 60.5 percent of workers employed at least 40 hours per week had employment-based coverage from their own job.

Has the PPACA led to a reduction in hours? The EBRI analysis finds that between 2006 and 2010 (the year that PPACA was signed into law), the percentage of workers employed fewer than 30 hours per week increased from 11.9 percent to 14.1 percent, while the percentage of workers employed 30–39 hours per week also increased, from 11.4 percent to 13.2 percent over the period. Since passage of PPACA, there has actually been a slight drop in the use of part-time workers, though this may be attributable to the drop in the unemployment rate.

Indeed, the percentage of workers with coverage through their own job has been trending downward since 2007 regardless of hours worked per week. However, in relative terms, the EBRI report notes that part-time workers have experienced a much larger decline in coverage than full-time workers. Between 2007 and 2012, workers employed 40 or more hours per week experienced a 3 percent reduction in the likelihood of having coverage from their own job, while those employed 30–39 hours per week experienced a 12 percent decline (those employed fewer than 30 hours per week experienced a 20 percent decline).

Among workers employed 30–39 hours per week, both those who worked for a large employer and those who worked for a small employer experienced a 9 percent decline in coverage between 2008 and 2012.

The data confirm that the recent recession resulted in an increased use of part-time workers, but since 2010 the percentage of workers employed less than 40 hours per week has declined slightly. The data also indicate that while both full-time and part-time workers have experienced drops in health coverage, part-time workers have been affected disproportionately.

The question, of course, is whether PPACA’s full-time worker definition will accelerate – or ameliorate – those trends.

• Nevin E. Adams, JD

“Trends in Health Coverage for Part-Time Workers, 1999–2012” is published in the May EBRI Notes at http://www.ebri.org/pdf/notespdf/EBRI_Notes_05_May-14_PrtTime-Rollovers.pdf

The "Hassle" Factor

Much is made these days of the application of behavioral finance and the implications for plan design, as well as the role of choice architecture in helping workers make “better” (if not more informed) benefit decisions.  Valuable as these insights have been, I think much of human behavior (or lack thereof) in these matters can be more simply explained.

What’s at work is a concept a friend of mine described to me more than 20 years ago – something he called “the hassle factor.”  It was a philosophy he routinely applied in many aspects of his personal and professional life.  Simply stated, presented with a choice between doing something that is hard, time-consuming, complicated, or even inconvenient, and doing something else, my friend – and, in fairness, human beings generally seem to be – inclined to opt for the latter.

Of course, the “hassle factor” CAN be trumped by exterior needs or forces, as anyone who has endured the long lines at the DMV or sat through the background music on an interminably long customer service line can attest.  That said, things like an unduly complicated 401(k) enrollment form/process can certainly serve as a barrier to plan entry, and there’s every reason to expect that the same might apply when it comes time to exit the plan.

Job change is a point in time at which a lot of important decisions are made—some voluntary and some forced upon us—and the disposition of one’s retirement savings account certainly looms large among them.  A recent EBRI Notes article examined what workers age 50 and above did with their defined contribution account balances at the point of job change, looking at data from the Health and Retirement Study (HRS), a study of a nationally representative sample of U.S. households with individuals age 50 and over.  EBRI analyzed responses from 2008 and 2010 for this study.

In terms of demographic characteristics, no significant difference was found between men and women in terms of their DC account balances and what they chose to do with them at job change.  And while married or partnered individuals were less likely to withdraw their assets and more likely to roll them over into an IRA than singles, the differences were small.

The EBRI analysis did find that a decision to take a withdrawal in cash declined with higher account balances, higher incomes, existing ownership of an IRA, and higher financial wealth. Not surprisingly, the decision to cash out rose with individual debt levels.

However, among those who left their employer but remained in the workforce, the most common outcome was to leave their retirement account balance with their prior employer’s plan.  The EBRI report notes that, unlike the outcomes detailed above, there was no clear trend between the financial variables, and the decision to leave those DC balances in the prior employer plans.

As for what might explain that outcome, the report noted that it might simply be a decision to postpone taking the money until it was needed, or that there “may be behavioral factors, such as inertia, driving what might be seen as a ‘non-decision.’”

Or, as my friend might have been inclined to say, a non-decision based on the “hassle factor.”

• Nevin E. Adams, JD

“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?” is published in the EBRI May Notes, available here.

Source "Spots"

Individual retirement accounts (IRAs) have been around a long time – since the Employee Retirement Income Security Act of 1974 (ERISA), in fact[i].

Today IRAs represent nearly $6 trillion in assets, approximately a quarter of the $23.7 trillion in retirement plan assets in the nation. As an account type, they currently hold the largest single share of U.S. retirement plan assets with, as a recent EBRI publication notes, a substantial (and growing) portion of these IRA assets having originated in other tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans. Recognizing not only the significant growth but the increasing importance of these accounts to individual retirement security, the Department of Labor has proposed expanding ERISA’s fiduciary protections to these accounts.

To help better understand the trends driving this critical retirement savings component, the EBRI IRA Database, an ongoing project that collects data from IRA plan administrators across the nation, was created. For year-end 2012, it contained information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion. The EBRI IRA Database is unique in its ability to track individual IRA owners with more than one account, thereby providing a more accurate measure of how much they have accumulated in IRAs.

For example, a recent EBRI analysis[ii] notes that the average IRA account balance in 2012 in the EBRI IRA database was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29 percent larger than the unique account balance.

While almost 2.4 million accounts in the EBRI IRA database received contributions in 2012, compared with the 1.3 million accounts that received rollovers for that year, the amount added to IRAs through rollovers was 10 times the amount from contributions.

However, an annual-snapshot percentage of IRA contributions doesn’t show whether the same individuals were contributing over time, or if different people contributed in different years. Taking advantage of the ability to look at multiple years across multiple accounts of individual owners across the EBRI IRA database, the report notes that while approximately 10 percent of traditional IRA owners contributed at some point during the three-year period, only 6 percent contributed to their IRA each year. On the other hand, while approximately 25 percent contributed to their Roth IRA in any one year, 35 percent did so at some point over the three-year period.

Looking at the pace of contribution activity, the EBRI analysis found that among those who contributed to their IRA in each of the three years, the pattern seemed pretty consistent: 12.1 percent did so in 2010, 13.2 percent in 2011, and 13.1 percent in 2012. Looking at the specific sources of those contributions, among traditional IRAs, we find that the percentage that contributed to them rose from 5.2 percent in 2010 to 6.6 percent in 2012 – but among Roth IRA owners, 24.0 percent contributed in 2010, 26.0 percent in 2011, and 25.1 percent in 2012.

Consider too that, among traditional IRA owners, only 3.0 percent contributed all three years, compared with 15.0 percent of Roth IRA owners who did so. Moreover, Roth IRA owners ages 25–29 were the most likely to contribute in any year and all three years (56.1 percent and 24.3 percent, respectively). Indeed, more than 4 in 10 (43 percent) Roth owners ages 25–29 contributed to their Roth in 2012.

The EBRI analysis found significant differences in the distribution patterns among older IRA owners, specifically those ages 70 or older, due to the required minimum distribution (RMD) rules. Those rules require individuals to begin making withdrawals from traditional IRAs starting April 1 of the year following the calendar year in which they reach age 70½. However, the RMD rules do not apply to Roth IRAs, a factor that likely explains the continued increases in account balances for Roth owners in that age group.

In sum, while the gross accumulations of retirement savings in IRAs provide value in terms of quantifying an increasingly significant component of the nation’s retirement security, a focus that takes into account only aggregate movements, or isolated account holdings, one that ignores the original source(s) of the money in the account, and/or the accompanying restrictions, runs the risk of overlooking significant undercurrents.

Undercurrents that may provide a better understanding of the growth trends in this important savings vehicle and ultimately, of course, explain how – and when – these retirement savings are withdrawn.

• Nevin E. Adams, JD

[i] Originally designed as a means to provide workers who did not have employment-based pensions an opportunity to save for retirement on a tax-deferred basis, IRAs have undergone a number of changes over time. The Economic Recovery Tax Act of 1981 (ERTA) extended the availability of IRAs to all workers with earned income (including those with pension coverage), while the Tax Reform Act of 1986 (TRA ’86) brought with it some restrictions on the tax deductibility (and, in some cases, availability) of IRA contributions. A decade later the Taxpayer Relief Act of 1997 (TRA ’97) created a new type of nondeductible IRA—the Roth IRA—and allowed nonworking spouses to contribute to an IRA, subject to certain income restrictions.

[ii] The May 2014 EBRI Issue Brief, “Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database,” is available online here.

"Surface" Conditions

Our first home was in the Northwest suburbs of Chicago, a split-level (my wife’s preference), walking distance to the commuter train (my preference), and within our stipulated price range (“our” preference).  Much as we liked the house, we were not the first owners, and there were certain things we wanted to “fix.”  The first of these was the family room, where we figured to spend a lot of our time and which the previous residents had seen fit to line with pine paneling.  Our plan was to take down that paneling and replace it with wallpaper, to modernize and “open up” the room.

My previous experience with wallpapering was limited; in this case my job (as I understood it from my wife) was to take the lead in pulling down the paneling, and then to pretty much stand back and learn.  As I pulled back that first strip of paneling, I was nearly blinded by a flash of orange…which was from what turned out to be a misbegotten shade of 1970s floral print wallpaper which lay underneath the paneling.  “No problem,” my wife assured me; in fact, this might actually work to our benefit, she said, in that it implied that the previous owners would have treated the wall before putting up that paper.

Well, after 15 minutes of struggling to separate the paper from what lay beneath it, it was clear that they had NOT done so.  Moreover, one of the previous owners had apparently pasted the orange floral print over ANOTHER wallpaper, this one some hideous lime green.  Nor, as it turned out, was that the last of the layers (we stopped counting at six).  While we had made what we thought were reasonable conclusions about the size of the project based on the topline evidence, it was now clear that more—much more—was going on underneath (and apparently had been for some time).  Fortunately, we discovered that reality before I had ripped down so much paneling that we were committed to that course of action.

A growing concern for employers, workers, and policymakers alike is the changing composition of the American workforce and what that might mean for benefit plan designs, succession planning, and workforce management.

A recent EBRI Notes article examining the most recent U.S. Census Bureau data on labor-force participation notes that the labor-force participation rates of younger workers increased when those of older workers declined or remained low during the late 1970s to the early 1990s; and while both increased for a period of time in the latter half of the 1990s, as the labor-force participation rates of younger workers began to decline in the late 1990s, the rates for the older workers continuously increased.  The report explains that, in 1997, workers ages 25–54 accounted for 83.9 percent of all workers ages 25 or older, while those ages 55–64 accounted for 12.0 percent, and those ages 65 or older, 4.1 percent.  However, by 2012, the fraction of older workers expanded; those ages 55–64 represented nearly 1 in 5 workers, while those 65 or older constituted 7.0 percent of the labor force.  Meanwhile, the percentage of workers 25 or older represented by those ages 25–54 slipped to 73.8 percent.

However, a closer examination of trends within the group ages 55 and older reveals some additional patterns of interest.  For those ages 55–64, the upward trend in the 1990s and into the 2000s was driven almost exclusively by the increased work force participation of women, while the male participation rate was flat to declining.  That is, until you look at the rate for those ages 65 or older, where the EBRI analysis shows that labor-force participation increased for both males and females over that period.

So, while it’s not clear whether older workers are filling a workforce gap or closing off opportunities for younger workers, older workers— notably older female workers— are certainly more plentiful in the labor force today, with potential workforce planning implications.

Ultimately, of course, it’s important to know what the numbers are and to examine the trends those numbers suggest over time.  However, and as the EBRI analysis reveals, sometimes you can’t fully understand the topline trends—and shouldn’t commit to a course of action—without first knowing what’s underneath.

• Nevin E. Adams, JD

The April EBRI Notes article “Labor-force Participation Rates of the Population Ages 55 and Older, 2013” is available online HERE.

Myth Understandings

A frequent criticism of the 401(k) design is that it was “never designed” to provide a full retirement benefit, unlike, as it’s often stated or implied, the defined benefit plan.

Moreover, while there is a very real tendency to focus on the CURRENT balance[i] in a defined contribution/401(k) plan and treat that as the ultimate outcome, for reasons I’ve never really been able to understand, people tend to think and talk about defined benefit (DB) plans in terms of the benefit they are capable of providing, rather than the actual benefits paid.

However, the data show that some of the common assumptions about defined benefit pensions are out of line with the realities, including:

Once upon a time, everybody had a pension.

“Coverage” is a hot topic among policymakers these days, or more accurately, the lack of it. One of the most frequently invoked criticisms of the current system is that so many American workers don’t have access to a retirement plan at work. But in 1979, only 28 percent of private-sector workers participated in a DB plan, with another 10 percent participating in both a DB and defined contribution (DC) plan. By any measure, that’s a long way from “everybody.”

The reality is that more private-sector workers are participating in a workplace retirement plan today than in 1979.

People used to work for the same employer their whole careers.

My kids think their generation is the first to anticipate having many employers during their careers, but the reality is that American workers, certainly in the private sector, have long been relatively mobile in the workforce. Median job tenure of the total workforce has hovered at about five years since the early 1950s (in fact, as EBRI’s latest research points out, the average median job tenure has now risen, to 5.4 years).[ii] The data on employee tenure—the amount of time an individual has been with his or her current employer—show that career jobs never existed for most workers and have continued not to exist for most workers.

And that has implications for pension benefits.

Everybody who had a pension got a full benefit.

Those who know how defined benefit plan accrual formulas work understand that the actual benefit is a function of some definition of average pay and years of service. Moreover, prior to the mid-1980s, 10-year cliff vesting schedules were common for DB plans. What that meant was that if you worked for an employer fewer than 10 years, you’d be entitled to a pension of … $0.00.

As noted above, the American workforce has, since the end of World War II, been relatively, and consistently, mobile. Between 1987 and 2012, among private-sector workers, fewer than 1 in 5 have spent 25 years or more with one employer. Under pension accrual formulas, those kinds of numbers meant that, even among the workers who were covered by a traditional pension, many would actually receive little or nothing from that plan design.

And that’s for those who were covered in the first place[iii].

People used to get more retirement income from pensions than they do today.

There are undoubtedly different challenges ahead for retirees than for prior generations – longer lives, higher health care costs, the pressures of affording long-term care – but when it comes to sources of retirement income for those over the age of 65, there has been remarkably little change over the past several decades.

Social Security is and has been a consistent source, representing somewhere between 40 and 45 percent of aggregate income (excluding non-periodic distributions from DC plans and IRAs) during most of that time, and into the current time, according to data from the Census Bureau. Pension annuity income, which constituted about 16 percent of aggregate income in 1976, rose to as high as 21 percent in the early ’90s – about where it stands today.

There’s no question that some Americans in the private sector have derived, and will continue to derive, significant retirement income from DB plans, and DB plans did and can deliver for the portion of the population that does stay with one employer/plan for a full career[iv].

The data show, however, that many Americans were not covered by those plans, even in the “good old days,” and that even many of those who were covered, for a time anyway, were not likely to receive the full benefit that the design was capable of delivering because they didn’t have, or take advantage of, the opportunity.

Sound familiar?

Nevin E. Adams, JD

[i] Worse, that 401(k) balance is frequently an AVERAGE 401(k) balance, which includes the relatively small balances of those who have just started saving with those who have had a full career to save. That’s why reports from the EBRI/ICI 401(k) database have long differentiated average and median balances by age and tenure. See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012.”

[ii] See “Employee Tenure Trends, 1983–2012.”

[iii] Expectations for pension benefits appear to exceed the reality, even among workers. The 2014 Retirement Confidence Survey found that while 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 31 percent report that they and/or their spouse currently have such a benefit with a current or previous employer. See here. 

[iv] For an analysis of possible outcomes from DB and 401(k) plans, see “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans.”

Work "Forces"

A couple of years ago, my wife and I sat down with an advisor to revisit our financial plan.  Having gathered all the requisite information regarding assets, debt, insurance, and retirement savings, he turned to me and asked how long I planned to work.

Being in a profession that I not only enjoy, but one relatively unbounded by physical constraints; having some appreciation for the various financial trade-offs associated with the decision to retire, yet desirous of the ability to have more leisure time with my family—conscious of the fact that I have made a career studying and writing about such decisions—I paused to reflect….

And then my wife, with a smile on her face, laughed and said, “Oh, he’s going to work forever!”

Well, that wasn’t the answer I had in mind, but apparently I’m not the only one rethinking retirement.  In 1991, just 11 percent of workers expected to retire after age 65, according to the Retirement Confidence Survey (RCS)[i]. Twenty-three years later, in 2014, 33 percent of workers report that they expect to retire after age 65, and 10 percent don’t plan to retire at all. At the same time, the percentage of workers expecting to retire before age 65 has decreased, from 50 percent in 1991 to 27 percent.  Those expectations notwithstanding, the median (midpoint) age at which workers expect to retire has remained stable at 65 for most of the 24-year history of the RCS.

Moreover, a recent EBRI Notes article[ii] confirms that the labor-force participation rate for those ages 55 and older rose throughout the 1990s and into the 2000s when it began to level off, but with a small increase following the 2007-2008 economic downturn.  While for those ages 55-64 the upward trend was driven almost exclusively by the increased labor-force participation of women, among those age 65 or older, the rate increased for both males and females over that period.

The report notes, however, that the labor-force participation rates of younger workers increased when those of older workers declined or remained low during the late 1970s to the early 1990s, but as the labor-force participation rates of younger workers began to decline in the late 1990s, the rates for the older workers continuously increased – suggesting either that older workers filled the void left by younger workers’ lower participation, or that the higher representation in the workforce by older workers served to limit the opportunities for younger workers, either directly or perhaps by discouraging them from pursuing employment.

As the EBRI report notes, this upward trend in labor-force participation by older workers is perhaps related to workers’ desire for continued access to employment-based health insurance, to provide some additional years of employment to accumulate savings and/or pay down debt, or maybe even simply because they want to work.

Whatever their motivation(s), these trends highlight a number of key concerns for employers and policy makers: Will workers who want—or need—to increase their financial resources by working longer be able to find jobs?  How might workforce management (and health care costs) be affected by those decisions?  What could delayed workforce entry mean to the retirement savings accumulations of younger workers?

Ultimately, of course, and as the trends tracked and analyzed by EBRI have long indicated, the road through retirement is often influenced by the paths we take to retirement—and when, how, and if we are able to make the transition.

• Nevin E. Adams, JD

[i] See “The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans.”

[ii] The April EBRI Notes article, “Labor-force Participation Rates of the Population Ages 55 and Older, 2013,” is available online here.

"Crisis" Management

“Houston, we have a problem.”

That’s perhaps the most famous quote from one of my favorite movies—the 1995 “Apollo 13,” the story of the ill-fated moon landing mission of the same name. As the third such undertaking, it was a mission that the nation largely ignored—until that mission ran into trouble. Trouble in this case meant having an oxygen tank explode two days into their trip to the moon, which led to a reduction in power, loss of heat in the cabin, a shortage of drinkable water, and ultimately the need to jury-rig the system that removed carbon dioxide from the cabin.

Arguably, Apollo 13 didn’t have a “problem”; they had a crisis, and one that threatened their very lives.

While we’re a few years removed from the financial crisis that led to the so-called Great Recession, “crisis” is a word much bandied about these days. Crisis is, after all, one of those descriptors that cry out for swift and decisive action—and the industry of employee benefits has its fair share. Thus, whether it’s the looming retirement crisis some see (or see for some) on the horizon, the crippling impact of college debt on the finances (and future financial security) of younger Americans, or the health care crisis that the ACA was designed to forestall (or that some say is destined to create), we are all challenged and confronted—by those at nearly every point along the political spectrum—with the urgency of the need to address the “crisis.”

But do these circumstances constitute a “crisis”? A review of the dictionary definition of crisis reveals the following perspectives: “A crucial or decisive point or situation; a turning point”; an “unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change”; a “sudden change in the course of a disease or fever, toward either improvement or deterioration.”

On May 15, the Employee Benefit Research Institute will host its 74th Policy Forum, titled “‘Crisis’ Management: Uncertainty and the Workplace.” We’ll examine the current and projected future state of retirement readiness, employment-based health care, and the role that approaches such as financial wellness can play in alleviating the strains of uncertainty.

It promises to be an interesting and insightful discussion—one that you can expect to learn from and profit by participating, whether you’re looking for ideas to help stave off a systemic crisis, to better understand the current and future environment of employment-based benefits and the policies that could have an influence, or for ways to improve the current system(s).

It may or may not be a crisis—but these are topics whose resolution could well affect all our lives.

Reserve your place today at http://www.ebri.org/register/.

- Nevin E. Adams, JD

[1] Iconic as it might be, the movie’s most famous quote, “Houston, we have a problem”, wasn’t an accurate quote. According to NASA audio files, Astronaut Jack Swigert first said, “OK Houston, we’ve had a problem here.” Mission Control said, “This is Houston. Say again, please.” Then Jim Lovell said, “Ahh, Houston, we’ve had a problem.”

Because “we’ve had” implies the problem has passed, movie director Ron Howard chose to use “we have”.  

Reference 'Points"

We started setting money aside for our children’s college education relatively early, but as they began actually considering their options, it was clear that our savings wouldn’t be enough to cover the expense at some of the schools on their lists. Moreover, while all three wouldn’t all be in college at the same time, there was enough overlap to make it “complicated.”

While we didn’t want to limit our kids’ college choices, we had certain real world constraints—and so we told them how much we could contribute to their college expenses, and that they were free to make up the difference between that figure and the actual expense of the college they chose through their own work, scholarships, and/or debt. As a practical matter, defining our “contribution” may have taken some options off their lists, but, certainly in hindsight, it seemed to give them focus and some real-world context—a reference point—for one of the biggest financial decisions of their lives.     
Employers have been interested in and have tried to implement the “defined contribution” concept for health benefits in a number of different ways. The Revenue Act of 1978 started it with Sec. 125 and flexible spending accounts and “cafeteria plans.” A recent EBRI Issue Brief outlines some of the more recent history, the introduction of health reimbursement arrangements (HRA) in 2001, health savings accounts (HSA) in 2004, and the more recent trend toward private health insurance exchanges, where employers provide a fixed amount of money for workers to use toward the cost of health coverage.

However, the primary focus of the report is another defined contribution approach called reference pricing (RP), under which plan sponsors either pay a fixed amount or limit their contributions toward the cost of a specific health care service. If a plan member chooses a health care provider or service that costs more, he or she must pay the difference in price. Reference pricing is receiving more attention and consideration today because of growing plan sponsor interest in managing health care costs, but the approach is still relatively new; in 2012, 11 percent of employers with 500 or more workers were using some type of RP, and another 16 percent were considering it.

How might such an approach impact cost? EBRI’s analysis indicates that the potential aggregate savings could reach $9.4 billion if all employers adopted reference pricing for the health care services examined in the paper, some 1.6 percent of all spending on health care services among the 156 million people under age 65 with employment-based health benefits in 2010.

As the report notes, savings from reference pricing materializes through the combination of 1) patients choosing providers at the reference price, 2) patients paying the difference between the reference price and the allowed charge through cost sharing, and 3) providers reducing their prices to the reference price. Obviously, any increase in prices among providers below the reference price would reduce the potential for savings.

From an employer perspective, the approach establishes a cost threshold for the service(s) selected, but as the EBRI analysis notes, plan sponsors should obviously consider a number of issues as they weigh adopting reference pricing, including how the reference price is determined and how providers may react. Communication to plan members is also key to effective use of reference pricing.

For plan members, it could represent the potential for expanded choice with some pricing context—but, as with my kids’ college selection process, they’ll likely need more data on prices and quality in order to make truly informed decisions.

Nevin E. Adams, JD

The full report is published in the April EBRI Issue Brief, “Reference Pricing for Health Care Services: A New Twist on the Defined Contribution Concept in Employment-Based Health Benefits” available online here.

Needs "Assessments"

My eating habits have always tended toward what my mother politely calls “finicky.” Oh, she tried repeatedly over the years to broaden my horizons but without much success. My wife has similarly tried to expand and improve my dietary choices over the years, but even with the admonition of needing to set a good example for my kids, (my) old habits die hard. In exasperation, she’ll frequently say, “Have you ever even tried _____?”

One of the more surprising findings from the 2014 Retirement Confidence Survey was that fewer than half of respondents indicate they (or their spouse) have EVER tried to calculate how much money they will need to have saved so that they can live comfortably in retirement.

What’s even more surprising, of course, is that that percentage has held fairly consistent for the past decade, “peaking” at 53 percent in 2000, before slipping to 38 percent in 2002.[1] It’s recovered since, of course, but still—in this day and age, with so many free and easy-to-access tools available, despite the pressures of daily life and finances, it’s hard to imagine that so many have still not even bothered to make a single attempt to do so.

As you might expect, some are more likely to do a retirement savings needs calculation than others. Married workers are more likely to have done so than singles, and the likelihood of doing the calculation increases with household income, education, and financial assets. Moreover, workers reporting that they, or their spouse, have an IRA, defined contribution, or defined benefit retirement plan are more than twice as likely as those who do not have these to have done a calculation (56 percent vs. 25 percent).

There do appear to be benefits—both emotional and tangible—to doing a retirement needs calculation. Consistent with prior RCS findings, despite having set higher savings goals,[2] workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (25 percent vs. 13 percent who have not done a calculation in this year’s survey). In fact, a previous EBRI analysis found that those using an online calculator appeared to set more adequate savings targets, as measured by the probability of not running short of money in retirement.[3]

So, why haven’t more done a retirement needs calculation? Perhaps they’re nervous about the time and energy it might take to do one; maybe they’re worried they don’t know enough to do the calculation; it might even be, particularly if they’ve made no preparations for retirement, that they are afraid to find out the answer.

Whatever their rationale, a great place to start figuring out what they -or you- will need is the BallparkE$timate,^® available online at www.choosetosave.org[4]

It’ll be good for you—will likely improve your retirement prospects—and you might even enjoy it.

Nevin E. Adams, JD

More information from the 2014 Retirement Confidence Survey, the longest-running survey of its kind in the nation, is available in the March 2014 EBRI Issue Brief, “The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans,” online here.

[1] Even among those who have made an attempt, the methods of calculation reported have been quite “varied”—according to the 2013 Retirement Confidence Survey, workers often guess at how much they will need to accumulate (45 percent), rather than doing a systematic retirement needs calculation. Eighteen percent each indicated they did their own estimate or asked a financial advisor, while 8 percent each used an online calculator or read or heard how much was needed.

[2] Workers who have done a retirement savings needs calculation tend to report higher savings goals than workers who have not done the calculation. In this year’s RCS, 29 percent of workers who have done a calculation, compared with 15 percent of those who have not, estimate they need to accumulate at least $1 million for retirement. At the other extreme, 17 percent of those who have done a calculation, compared with 37 percent who have not, think they need to save less than $250,000 for retirement.

[3] See “A Little Help: The Impact of On-line Calculators and Financial Advisors on Setting Adequate Retirement-Savings Targets: Evidence from the 2013 Retirement Confidence Survey,” online here.

[4] Organizations interested in building/reinforcing a workplace savings campaign can find a variety of free resources at www.choosetosave.org, courtesy of the American Savings Education Council (ASEC). Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, ASEC. The website and materials development have been underwritten through generous grants and additional support from EBRI Members and ASEC Partner institutions.

"Expected" Values

Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement. Much of that focus has, of course, been driven by concerns that those individuals won’t have enough resources accumulated to fund those retirements. More recently, there has been a sense that one way to help provide a different perspective on these retirement savings would be to provide participants with an estimate of what their current or projected savings would produce in terms of a retirement income stream.

In May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, 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.

As noted in a recent EBRI Notes article[i], there appears to be little empirical evidence on the likely impact of such a lifetime income illustration on defined contribution participant behavior. In an attempt to provide some additional evidence with respect to potential defined contribution participant reaction to lifetime income illustrations similar to those proposed by EBSA, EBRI included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those provided by the EBSA’s online Lifetime Income Calculator.

Of course, any such projection is necessarily required to make a number of critical assumptions—including future contribution activity, future rates of return, future asset allocation, and future annuity purchase prices. Moreover, the estimates we provided were different in several aspects, notably:

• Rather than using normal retirement age for the calculation, we asked their expected retirement age.
• Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
• Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.

What we found was that fewer than 1 in 10 (8 percent) of the defined contribution participants said the monthly amount was much less than expected, though another 1 in 5 (19 percent) said it was somewhat less than expected[ii].

However, more than half (58 percent) thought that the illustrated monthly income was in line with their expectations.

Considering those results, it is perhaps not surprising that the vast majority (81 percent) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17 percent replied that hearing this information would lead them to increase the amount they are contributing. Similarly, the vast majority (89 percent) did not believe this information would impact their expected retirement age.

They may not have been much surprised by the results, but the vast majority of respondents said the retirement income projection was useful; more than 1 in 3 (36 percent) respondents thought that it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49 percent thought it was somewhat useful. Moreover, the utility of the projection appeared to transcend the results; 90 percent of those whose illustrated values were lower than expected found the estimates somewhat or very useful, and nearly as many (86 percent) of those whose values were equal to what they expected also found the estimates somewhat or very useful. Even among those who felt the values were higher than expected, 79 percent found the estimates somewhat or very useful.

I’ve heard from several in the industry since the results were released who were surprised – that the survey respondents weren’t surprised. It is, of course, possible (as the article explains) that these respondents’ current participation in employment-based plans has already provided them the education and information necessary for an appreciation both of the projected total and the monthly income estimate, and thus a greater alignment of those projections with their expectations. It could also be that, having given some thought to the subject of savings and retirement over the course of the interview, they had more realistic expectations.

Of course, whether those expectations about living on those amounts in retirement will turn out to be realistic remains to be seen.

• Nevin E. Adams, JD

[i] The EBRI March 2014 Notes article, “How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey,” is available online here.

[ii] There were some interesting differences by income level; combining the “much less” and “somewhat less” categories, we found that 42 percent of those in the lowest quartile for illustrated monthly income indicated that the value was less than expected, versus only 9 percent of the highest quartile.

Bargain Based

My father had many admirable personality traits, but he also had his quirks. He was buying in bulk at warehouse stores well before it was “cool” to do so (and before many of the current generation of such stores existed), and he was an earlier adopter of generic food brands. And, yes, sometimes he bought generic food and paper stocks in bulk. While the quality of such offerings has doubtless improved dramatically over the years, I still shudder at the memory of my first sip of generic cola.

My childhood encounters with generic products notwithstanding, I’ve generally not been as particular about generic drugs. Oh, sure, when you have a migraine, there’s still something to be said for the confidence (if not reality) in reaching for the name brand pain reliever. But when it comes to prescription drugs, if there’s a cheaper, generic alternative, I’m generally amenable to the switch.

A greater sensitivity to cost is, in fact, one of the aspects of consumer-directed health plans (CDHP) touted by proponents, who contend that providing participants with an account and subjecting their health insurance claims to high deductibles will induce enrollees who would likely be spending more of their own money (than might be the case with traditional health coverage) to make more cost- and quality-conscious health care decisions. On the other hand, CDHP skeptics caution that these individuals lack the kind of information they need to make good decisions—and, worse, might make cost-centric choices that aren’t the best health care choices, and might even prove to be less cost-efficient (and even more expensive) over the longer term.

Using data from a large employer that implemented a CDHP, fully replacing traditional managed-care health insurance with a health savings account (HSA), new research[i], conducted through the EBRI Center for Research on Health Benefits Innovation (EBRI CRHBI)[ii], found that moving to the HSA-eligible plan reduced the number of brand name prescriptions filled. However, it also found that the move reduced the number of generic prescriptions filled. Previous EBRI research showed that while prescription drug use went down, it also resulted in decreased use of maintenance medications for chronic disease and a worsening of adherence.

As the EBRI report explains, while reductions in prescription-drug utilization can result in pharmacy expenditure savings for employer plan sponsors, increases in downstream medical costs may eclipse those benefits. In view of the potential for these kinds of unintended offsets, it notes that CDHPs and other plan designs that raise patient cost-sharing for prescription drugs might want to consider some alternative strategies that can bolster adherence and mitigate the potential impact.

Sometimes less is more – but only after you take into account all the costs. And sometimes you find that “less” is no bargain.

• Nevin E. Adams, JD

[i] “Brand-Name and Generic Prescription Drug Use After Adoption of a Full-Replacement, Consumer-Directed Health Plan With a Health Savings Account” was published in the March EBRI Notes, available online here.

[ii] The following organizations provide the funding for EBRI CRHBI: American Express, Ameriprise, Aon Hewitt, Blue Cross Blue Shield Association, Boeing, Deseret Mutual, Federal Reserve Employee Benefits System, General Mills, Healthways, IBM, JP Morgan Chase, Mercer, and Pfizer.

Security "Blanket"

“How do they expect to retire on THAT?”

In the several days since the 2014 Retirement Confidence Survey(1)  hit the streets, I think I’ve heard that question more than any other. “That” in this case is the widely cited finding of the survey that 36% of respondents have less than $1,000 (aside from home equity and defined benefit plan) saved – and that’s up from 20 percent in that category in 2009 and 28 percent a year ago(2).

So, how does that group expect to retire?

We can’t know for certain, but there are several things that might offer a better understanding. First, many of those probably AREN’T expecting to retire on that, at least not any time soon; many are young (about half of the 25-34 age group are in this savings range).

Second, they may not be “expecting” to retire; about 16 percent of those with less than $15,000 set aside say they’ll “never” retire, compared with 7 percent of total respondents).

Most of the individuals in this group are, as you might expect, lower-income.  More than 60 percent reported household income of $25,000/year or less. 

Even if they are expecting to retire some day, they may have concerns about that reality. This group of low/non-savers, for the very most part, had NO retirement account – 80 percent of the 36 percent were in that category. Respondents with no retirement account not only tended to have much lower confidence levels, they were also more likely to think they needed to be saving 50 percent of their current paycheck to achieve a financially comfortable retirement – a perception that might be a reality for this group, based on their reported savings.

Finally, while the trend line for this particular group isn’t encouraging, it’s worth noting that Social Security was cited as a major source of income for nearly two-thirds of the current retiree respondents to the 2014 RCS (as it has been over the history of the RCS), even though current workers tended to have lower expectations for the primacy of Social Security benefits in their retirement income stream. One need only look to the replacement rates that Social Security is projected to provide to appreciate the significance of that program as a retirement income source for many, particularly low- and middle-income workers(3). In fact, a recent EBRI analysis of data from the HRS indicates that Social Security provides more than half the total household income for more than half those ages 65-74, as it does for roughly two-thirds of the households over that age (4).

Indeed, one might well wonder how people expect to live on savings of less than $1,000 in retirement. However, the data suggest that many – already are.

Nevin E. Adams, JD

(1) The 2014 Retirement Confidence Survey is available here.

(2) The RCS is, of course, a snapshot at a point in time. It’s important to keep in mind that the savings reported are not necessarily what those respondents will have a year from now, or certainly a decade hence. It’s also important that projections about future retirement security consider not just where things stand at a static point in time, but, as EBRI’s Retirement Savings Projection Model (RSPM) does, the impact of future events and changes in behavior.  More information on the RSPM is online here. 

(3) See “Annual Scheduled Benefit Amounts for Retired Workers With Various Pre-Retirement Earnings Patterns Based on Intermediate Assumptions, Calendar Years 1940-2090.”

(4) See “Income Composition, Income Trends, and Income Shortfalls of Older Households” online here.

”Background” Check

We’ve never invested in a vacation home, but for a number of years now, my family has made relatively regular trips to Gettysburg, Pennsylvania. And while we’ve visited many places over the years, Gettysburg remains special, both because there are places that we know, and have visited many times, and because there are (still) things to discover. Over time we’ve also shared that experience with friends and members of our extended family, and their participation adds an additional, fresh perspective, even to sites we have visited many times before.

On March 18, EBRI and Greenwald & Associates will release the results of the 24^th annual Retirement Confidence Survey (RCS). With a perspective longer than many retirements, it’s likely to garner a lot of attention, as well it should. The focus tends to be on retirement confidence (or the lack thereof), specifically at the extremes—those “very” and “not at all” confident in their prospects for a financially comfortable retirement.

Attention will also likely be given to what can be done to improve the levels of confidence. Previous iterations point to some consistent factors: having more retirement savings is perhaps the most obvious connection to retirement confidence, as is participation in a workplace retirement savings plan (which, as you might expect, is linked to having more retirement savings). The RCS has also found that something as fundamental as having taken the time to do a calculation of retirement needs has a positive effect on confidence, even though those who had done such an assessment tend to set higher savings goals.

For this year’s RCS, as we do every year, we make it a point to ask a battery of consistent questions, to develop trend lines that allow us to see how attitudes change over time, throughout a wide variety of market and regulatory cycles, not to mention the advent of transformative technologies such as the Internet. Of course, we also include certain topical questions to get a current sense of worker—and retiree—responses to things such as prospective tax law changes, plan design features like automatic enrollment and contribution acceleration, and the use of various technologies in retirement planning. We’ve asked not only how much they have saved, but how much they think they should have saved, and—more recently—how much they think they should be saving now to provide that financially secure retirement.

Perhaps most importantly, we pose those questions to both current workers and current retirees, so as to gain a unique and informative perspective on the realities of retirement from those already living it, alongside the expectations of those for whom retirement remains a future event.

There’s a particular spot on the Gettysburg battlefield where we always try to take a family picture—the background doesn’t change, but it’s interesting to watch how much we’ve changed over the years.

Similarly, the RCS provides an invaluable and consistent background—along with a fresh and interesting perspective of today’s environment, as well as insights on future trends—that can help us all better prepare for a more financially secure retirement.       

- Nevin E. Adams, JD 

Note: The results of the 2014 Retirement Confidence Survey (RCS) will be available at 8 a.m. ET on Tuesday, March 18, at www.ebri.org.  Information and findings from prior surveys are available at www.ebri.org/surveys/rcs.

Pet "Smart"

I’ve had both cats and dogs in my family over the years, and while each of our individual pets has had a unique personality, there are some attributes that seem to apply to each species, regardless of the individual animal. One of the most obvious is their approach to food.  For example, you can leave your cat alone in an apartment for a weekend with a supply of food and water sufficient to last for a few days, and odds are when you return home, there will still be some left.  But leave your dog alone in the same apartment with the same additional allotment of food and water, chances are it won’t last 30 minutes.  And in those circumstances, if you have both a cat and a dog in that apartment, odds are the latter will eat the former’s food as well.

Animal psychologists have a variety of explanations for why dogs and cats approach food the way they do, generally citing either a confidence of its future availability, or a concern that if it’s not consumed now, it will disappear.

Experts have long been worried about how quickly individuals would spend through their savings in retirement, whether those rates of spending would too rapidly deplete savings, and if those rates would be sufficient to sustain a reasonable post-retirement lifestyle.

A recent analysis[i] of activity within the EBRI IRA database[ii] found that just over 16 percent of traditional and Roth IRA accounts had a withdrawal in 2011, including 20.5 percent of traditional accounts.  The report notes that this percentage was largely driven by activity among traditional IRAs owned by individuals ages 70½ or older where the individuals were required by law to make withdrawals from their tax qualified accounts or pay significant tax penalties.

Significantly, for those at the RMD age, the withdrawal rates at the median appeared close to the amount required by law to be withdrawn, though some were significantly more. And while the highest 25 percent did appear to be taking out amounts in excess of those required by law, the report notes that some of these accounts could be the focus of the owners’ withdrawals instead of other accounts owned by them.

A separate EBRI analysis[iii] of the University of Michigan’s Health and Retirement Study (HRS) found that at age 61, only 22.2 percent of households with an individual retirement account (IRA) said that they took a withdrawal from that account, but that the pace slowly increased to 40.5 percent by age 69 before jumping to 77 percent at age 71.  That EBRI analysis also found that the percentage of households with an IRA making a withdrawal from that account not only increased with age, but also spiked around ages 70 and 71, a trend that, the report explains, appears to be a direct result of the required minimum distribution (RMD) rules in the Internal Revenue Code.

IRAs are, of course, a vital component of U.S. retirement savings, holding more than 25 percent of all retirement assets in the nation, according a recent EBRI report. A substantial and growing portion of these IRA assets originated in other employment-based tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans.

While the median withdrawal rates evident in the proprietary EBRI IRA database suggest that many individuals are highly likely to maintain the IRA as a source of income throughout retirement, further study is needed to see if these rates hold up over time as their owners age further into retirement, and to evaluate whether those rates, in conjunction with other resources, are adequate to provide a reasonable, if not comfortable, post-retirement lifestyle. 

In the months ahead, we’ll not only be looking at this withdrawal behavior over time, but, as part of EBRI’s Center for Research on Retirement Income (CRI), we’ll be examining how IRA owners with a 401(k) plan draw down those assets across accounts, leveraging the unique ability of EBRI’s databases to link individuals’ IRAs and 401(k) accounts.

After all, it’s not just pets that consume more wisely when they have confidence in the future of that next meal.

Nevin E. Adams, JD

---

[i] See “IRA Withdrawals, 2011” online here.
 

[ii] The EBRI IRA Database, an ongoing project that collects data from IRA plan administrators, contains information for2011 on 20.5 million accounts with total assets of $1.456 trillion.  In this particular analysis, only withdrawals from the accounts identified as traditional or Roth IRAs in the database are examined, a total of 15.3 million accounts with $1.11 trillion in assets.  More information on the database, and EBRI’s research centers is online here.

[iii] See “IRA Withdrawals: How Much, When, and Other Saving Behavior” online here.