Reference ‘Points’

Several years back, I was talking with a colleague about the current state of the U.S. economy – and as a comparison point, I pointed to the mid-1980s. “I wasn’t even born then,” she said. At which point I realized that what I considered to be a relevant point of comparison was, to my coworker, ancient history.

That memory comes back to me every year with the release of Beloit College’s annual “Mindset List.” As that coworker discussion reminds me, a lot can change in (just) 18 years, but these same 18 years also make up the mindset – or “event horizon” ­– of today’s entering college students.

The kids many of you just dropped off at college – the Class of 2022 – were (for the most part), born in 2000, the first year of the new millennium. The folks that compile this list know that those differences in experience and points of reference have an impact on the (perceived) relevance of the points we might try to make in college teaching – and even in terms of financial matters, saving, and, yes – retirement.

For example, those students that were just dropped off at college:

• Have always been able to refer to Wikipedia.
• Have always known a world where U.S. troops were stationed in Afghanistan.
• Will never fly TWA or Swissair airlines (much less Eastern Airlines or Piedmont Airlines).
• Have always seen Priuses on the highways.
• Have never used a spit bowl in a dentist’s office.
• Have never had to deal with “chads,” be they dimpled, hanging or pregnant.
• Have always used lightbulbs that were shatterproof.

When it comes to retirement, the Class of 2022 also stands to have a different perspective. For them:

• There have always been 401(k)s.
• There has always been a Roth option available to them (401(k), 403(b) or IRA).
• They’ve never had to sign up for their 401(k) plan (since, particularly among larger employers, their 401(k) automatically enrolls new hires).
• They may never have to make an investment choice in their 401(k) plan. (Their 401(k) has long had a QDIA default option to go with that auto-enroll feature.)
• They’ve always had access to target-date funds, managed accounts, or similar vehicle that automatically allocates (and, more significantly, re-allocates) their retirement investments.
• They’ve always had fee information available to them on their 401(k) statement. (It remains to be seen if they’ll understand it any better than their parents.)
• They’ve always been able to figure out how much they need to save for a financially secure retirement (though they may not be any more inclined to do so than their parents).
• They’ve always been able to view and transfer their balances online and on a daily basis (and so, of course, they mostly won’t).
• They’ve always worried that Social Security wouldn’t be available to pay benefits. (In that, they’re much like their parents at their age.)
• Many have never had to wait to be eligible to start saving in their 401(k). (Their parents typically had to wait a full year.)

Despite those differences, the class of 2022 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role Social Security will play, and – eventually – how and how fast to draw down those savings.

But perhaps most importantly, they’ll have the advantage of time, a full career to save and build, to save at higher rates, and to invest more efficiently and effectively.

And, with luck, have an advisor available to answer their questions along the way.

- Nevin E. Adams, JD

‘Automatic’ Transmission: Does Auto-Enrollment Create Leakage?

Most people view automatic enrollment in a 401(k) as a good thing¹ – but apparently it has a heretofore unappreciated “dark” side.

At least that was the focus of a headline in a recent Wall Street Journal article (subscription required) that asked (and answered) the provocative question: “401(k) or ATM? Automated Retirement Savings Prove Easy to Pluck Prematurely.”

That is at least how the Journal chose to position its coverage of a study based on a single firm’s experience with automatic enrollment. That study, according to the Journal, serves to “answer a question that has long concerned employers that put workers into 401(k) plans and give them the option to drop out, rather than requiring them to sign up on their own: Will auto-enrolled workers treat their 401(k)s like automated-teller machines?”

Now, I’ve heard a lot of questions over the years from plan sponsors about automatic enrollment – but never that one.

Regardless, the Journal says that the study provides an affirmative response to the question – but (and you can almost hear the disappointed sigh) “…not to the extent that the workers spend all their gains from auto-enrollment.” Nor is it the first time that the Journal has taken aim at automatic enrollment.²

Now the researchers themselves – John Beshears, David Laibson and Bridget Madrian of Harvard, and James Choi of Yale – have solid retirement plan researcher “cred.” And, comparing employees hired in the 12 months after the introduction of automatic enrollment to those hired in the 12 months prior, they find that automatic enrollment increases total potential retirement system balances by 7% of starting pay eight years after hire.

On the other hand, they also find that leakage “in the form of outstanding loans and withdrawals that are not rolled over into another qualified savings plan” (more on that in a minute) also increase – by 3% of starting pay, which they say offsets approximately 40% of the potential increase in savings from automatic enrollment. Of course, even then, they acknowledge that the “net effect is that automatic enrollment increases retirement system balances by 4-5% of first year pay eight years after hire.”

‘Ample’ Turnover?

Here’s the thing: This is the experience at a single firm. Granted, it’s described as a large (approximately 7,500-participant), Fortune 500 financial services firm – but it’s one that the researchers concede has high turnover. It’s also, based on the salary information provided, one with relatively modest income workers. And automatic enrollment did “work” – transforming the plan’s participation rate from 62% to 98%.

So, this employer adopts automatic enrollment in a plan of modest income workers – creating more, albeit arguably smaller account balances – for a workforce that has high turnover – and since they have smaller balances, more likely to be below the cashout thresholds, and thus resulting in a higher number of termination payout “leakage.”

Cash Out ‘Cache’?

The Journal tries to craft a picture that automatically enrolled participants are more likely to cash out than other participants – and arguably they may well be less committed to the savings proposition. In fact, the study found (and the Journal article notes) that more than half of the auto-enrolled participants – 59% – cashed out their savings (largely driven by terminations), while among those who signed up for the plan on their own, the figure was 43%.

But was it automatic enrollment – or the smaller balances that resulted from a 3% default contribution rate at termination – that produced that result? I think we can all sense what the answer is – but the researchers note that a greater proportion of the automatically enrolled workers had balances below the $1,000 cashout threshold. Lest we need any further affirmation, even then, the researchers note that those net results “mask substantial differences across those who remain employed at the firm versus those who separate” – with the former seeing relatively little impact from leakage.

Change ‘Ranges’

And while the researchers don’t make much distinction in the impact of different types of leakage, the nonpartisan Employee Benefit Research Institute (EBRI) has previously considered the issue, and found that 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). How much more? Well, cashouts at termination were approximately two-thirds of the leakage impact.

Even the best researchers are limited by the amount and quality of the data. While they are careful to outline those factors in the study, the coverage of such things tends to gloss over the details that might impact the broad-based applicability of the results – things like the fact that these results are from a single employer, with high turnover and modest-incomes, a combination that may well mean that the amount – and impact – of the leakage is exacerbated.

Ultimately, the point of the study might well be a call to make it easier for individuals with smaller balances to leave their employer without cashing out their savings.

That’s hardly the fault of a plan design that helped a third more workers who weren’t saving do better. But it seems that if there’s the slightest possibility of a potential downside, the negative coverage is… automatic.

- Nevin E. Adams, JD

Footnotes

1. There are some administrative issues with automatic enrollment – see Why Your Recordkeeper Might Not Be an Automatic Enrollment Fan. ↩
2. Earlier this year the Journal, in an article plainly titled, “Downside of Automatic 401(k) Savings: More Debt” (subscription required), cited another academic study noting that automatic enrollment has “pushed” millions of people who weren’t previously saving for retirement into those plans – but quickly cautioned that “many of these workers appear to be offsetting those savings over the long term by taking on more auto and mortgage debt than they otherwise would have.” And back in 2013, the Journal had an article titled, “Mixed Bag for Auto-enrollment,”  claiming that “employees who are automatically enrolled in their workplace savings plans save less than those who sign up on their own initiative.” That article, in turn, built on – and cited – a 2011 article that suthoir Anne Tergesen jaw-droppingly titled, “401(k) Law Suppresses Saving for Retirement.” In the case of the latter, Tergesen glommed on to one of 16 possible scenarios, and focused on the notion that some workers would simply rely on the mechanics of automatic enrollment’s 3% default, rather than picking the higher rate that they might if they filled out an enrollment form (encouraged by things like education meetings and incentivized by things like a company match). ↩

‘Multiple’ Choices: All MEPs Not Created Equal

Delegates to last week’s NAPA DC Fly-In Forum had a lot to learn and say about a wide array of topics – but multiple employer plans (MEPs) dominated the discussion.

The reason, as has been noted in previous coverage on NAPA Net, is the Small Business Employees Retirement Enhancement Act, introduced earlier this month by Sen. Tom Cotton (R-AR), which includes provisions regarding so-called “open” MEPs, a type of employee benefit plan that can be maintained as a single plan in which two or more unrelated employers participate. This is a concept that has received bipartisan support on Capitol Hill, and of which the American Retirement Association has been largely supportive, viewing it as a device that could broaden coverage by encouraging employers to offer a plan.

However, under this bill, employers that have 100 or fewer employees who earned at least $5,000 during the preceding year and that participate in a pooled employer plan (PEP) registered with the Labor Department (though exactly what, if any, validation would occur as part of this registration is currently unclear) would not be considered a fiduciary to that plan – including with respect to the selection and monitoring of any plan service provider or any investment under the plan.

That’s right – for the first time since the passage of ERISA in 1974, the employer – in what remains an employment-based retirement system – would basically have no fiduciary role.

Barriers ‘Riff’

The proponents of this approach apparently think this level of involvement is a barrier to small employer adoption of these plans. There’s just one problem; that doesn’t seem to be the case when you actually survey employers who aren’t offering a plan as to why that’s the case.

For example, consider a 2017 survey of employers by Pew Charitable Trusts. Among those employers, 37% cited “too expensive to set up” as a “main” reason, and 71% as a reason. A lack of resources to administer the plan was cited by 22% as a main reason, and 63% as a reason. “Employees not interested” was a reason for half the respondents, and a main reason for 17%. Nearly a quarter (22%) noted they hadn’t even thought about it. Concerns about fiduciary liability? Not even on the list.

These trends have been pretty consistent over time. As far back as 2003 in the Small Employer Retirement Survey published by the nonpartisan Employee Benefit Research Institute, employers cited uncertain revenue (27%) as a top reason, costs of setting up/running a plan (16%), employees not interested (12%), and a concern that too much of the plan’s benefit would go to short-term workers (also 12%). Where did fiduciary concerns rank? Once again, they weren’t even on the list.

One place where fiduciary concerns were mentioned was a 2015 survey by the Transamerica Center for Retirement Studies. However, that survey found that concerns about fiduciary liability was cited by just 13% of employers – the very last item on their list of reasons (except for “other”). It was dwarfed by reasons like company is not large enough (58%), cost concerns (50%), employees not interested (32%), company/management not interested (27%), and concerned about administrative complexity (19%).

In sum, the issues that are holding employers back – and that have long held employers back – don’t have anything to do with fiduciary liability.

The good news is that when you look through those survey results to the things that are actually holding employers back, there are things that an open MEP could help solve, issues like cost and administrative complexity.

What Could Go Wrong?

Indeed, those who fail to appreciate the importance of employer involvement would be well advised to recall the case of Matt Hutcheson, who, after years of lecturing the industry on the importance of fiduciary standards, was sentenced to 17 years in prison by a federal judge in Boise, ID on 17 counts of a wire fraud scheme to steal $5 million of pension funds he oversaw to enrich himself and his family as well as buy a cash-strapped resort. An estimated 250 people lost money as part Hutcheson’s misconduct, with one person losing $950,000.

See, it wasn’t a regulator that detected Hutcheson’s criminal acts, and it sure wasn’t the MEP he was running – it was a plan sponsor.

Doubtless, those looking to insulate the plan sponsor from fiduciary liability are focused on removing what they think – or have been told – is a barrier to plan adoption, and thus see the elimination of that role as a step on the path to increasing retirement plan coverage. Doubtless there are MEP providers willing to assume the “transfer” of that responsibility.

The result, however, is more likely akin to removing a barrier between a fox and the henhouse.

- Nevin E. Adams, JD
 
Note: A 2012 GAO report notes that the Labor Department has said the potential for inadequate employer oversight of the MEP is greater because employers have passed along so much responsibility to the entity controlling the MEP, and that potential abuses might include layering of fees, misuse of the assets, or falsification of benefit statements. One pension expert also observed that small businesses do not extensively research retirement plans or actively seek them out. As a consequence, marketing may be the biggest determinant of MEP growth.

7 Reasons Retirement Income Solutions Stall

A recent report suggests that participants are “clueless” about decumulation. And who can blame them?

Actually, the issue is perhaps more basic than a decumulation strategy. The report – by Cerulli Associates – based that conclusion on a survey that merely asked 401(k) investors who were at least 45 what they planned to do with those savings when they retired. In response, a quarter said they didn’t know, and another quarter said they planned to consult with an advisor – an alternative that Cerulli characterized as “a marginally more prepared version” of the same response.

I’ve long noted that while workers love pensions, they hate (or are at least ambivalent about) annuities – and while there’s a bit of hyperbole there, at least as things stand today, writ large, plan sponsors still seem to be keeping retirement income options at arm’s length – and by that I mean outside the plan’s distribution options. Participant interest and takeup is even less enthusiastic – which only serves to affirm the plan sponsor reluctance.

The provider community is nonplussed, and no wonder. There are plenty of surveys out there suggesting that participants want lifetime income options (though, let’s face it, many of those are sponsored or conducted by providers of those options), no shortage of academic studies that suggest participants would benefit from their availability (if not their mandate), the occasional legislative proposal to expand and/or mandate them as a distribution default, and even ongoing, if modest, support from regulators who also clearly favor the option.

And yet the reality is that when actually given the choice (and in fairness, most DC plans don’t offer anything remotely resembling a true retirement income option), the vast majority of participants don’t avail themselves of the option. Even those in defined benefit plans seem inclined to “take the money and run” given the chance.

Here are some thoughts on why – and what might have to change.

They don’t know how much they’ll need.

For more than 25 years, the nonpartisan Employee Benefit Research Institute (EBRI) has, in its Retirement Confidence Survey, chronicled just how few individuals have even hazarded a guess as to how much income they will need in retirement.

Let’s face it, if you don’t know how much you’ll need, it’s pretty hard to get comfortable that the amount you’re quoted as a monthly payment amount will be “enough.”

They don’t know how much they can get from what they have saved.

Back in May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking 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.

That proposed rulemaking hasn’t gone any further, although a number of recordkeepers have undertaken to provide an estimate on statements based on certain assumptions. What that means today is that some participants at least have the opportunity to get at least a rough approximation of what their current balance might produce in terms of monthly income. Some have gone so far as to project what that might look like at retirement age.

But that’s not all participants, or all plans – and it’s generally limited to a projection based on the balance on that particular recordkeeper’s platform. And for some at least, it’s perhaps a disquieting number.¹

They’re afraid they’ll lose out.

Perhaps the most common aversion workers have to committing to retirement income is the pervasive sense that they’ll hand over this big lump sum – which is for many, the most money they have seen in their lives, a sum they may have spent their whole career accumulating – to some large insurance company, and then run out of life before they get (all) their money “back.”

Though the alternative – running out of money before you run out of life – is surely no less disconcerting.

There are some “reframing” alternatives to this behavioral finance impediment – things like allowing workers to buy into the annuity over time, rather than all at once, and studies have suggested that a consumption framework (rather than a focus on investments and return) might have an impact.

They’re afraid that the annuity provider will go out of business.

The annuity industry is quick to point out that this has never happened, that the industry has a robust state oversight structure, and that in the unlikely event that at some point in the distant future, if the firm you’ve chosen to do business with does fall upon hard times, there’s a good chance that other firms would, as part of a managed reorganization, pick up the pieces (including your monthly payment).

They feel like it’s “all or nothing.”

For participants, the annuity decision has traditionally been presented as either/or; either take a lump sum, or take that lump sum in the form of an annuity. Enter Qualified Longevity Annuity Contracts, or QLACs.

Though widely touted as a viable alternative by regulators, the take-up rate on the alternative to “all or nothing” appears to be largely in the latter category. Arguably, the lack of availability in workplace retirement plans isn’t helping any – and for some, if trying to figure out the “right” answer for a monthly payment can be complicated, figuring out how much to do as a partial solution is likely to be almost as much of a problem.

It’s (really) complicated.

The good news is, there are a lot of options when it comes to buying an annuity. The bad news is, there are a lot of options when it comes to buying an annuity.

There’s little question that participants need help structuring their income in retirement – and little doubt that a lifetime income option could help them do that. That said, the biggest impediment to adoption may simply be that (industry surveys notwithstanding) participants don’t seem to be asking for the option. And when they do have access, most don’t take advantage. Even when DB plan participants have a choice, they opt for the lump sum.

Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments, be it the overweighting of small probabilities, mental accounting – or simply the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

They don’t know how to find help.

As an industry, we bemoan worker inattentiveness to the sufficiency of their retirement savings accumulations – and that’s with the aid and assistance of workplace retirement savings education, defaults for decisions like contribution amount and investments, and increasingly the availability of a retirement plan advisor.

Let’s face it: When it comes to making a decision about a lifetime income option, or even evaluating the option, most workers are – still – literally on their own.

- Nevin E. Adams, JD
 
Footnote

1.  While the so-called “common wisdom” might be that participants might be put off by the small numbers, in its 2014 Retirement Confidence Survey, EBRI found that, presented with a projection based on their balances and assumptions similar to those proposed by the Labor Department at the time, more than half (58%) thought that the illustrated monthly income was in line with their expectations. ↩

5 Plan Committee Lessons from the Second Continental Congress

As we prepare to celebrate the Declaration that marks the birth of this nation, it seems a good time to reflect on some lessons from that experience that hold true even today.

Inertia is a powerful force.

By the time the Second Continental Congress convened, the “shot heard round the world” had already been fired at Lexington, but many of the representatives in Philadelphia still held out hope for some kind of peaceful reconciliation. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to take on the world’s most accomplished military force.

As human beings we are largely predisposed to leave things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, generally speaking, and in the absence of a compelling reason for change, inclined to rationalize staying put.

Little wonder that we often see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general hesitation to undertake an evaluation of long-standing providers in the absence of severe service issues, and reluctance to adopt potentially disruptive (and, admittedly, often expensive) plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries are bound by a higher obligation – that their decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.

Selection of committee members is crucial.

The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with delegates selected by processes ranging from extralegal conventions, ad hoc committees, to elected assemblies – with varying degrees of voting authority granted to them, to boot. Needless to say, that made reaching consensus even more complicated than under “ordinary” circumstances.

Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals – and, certainly in the case of ERISA fiduciaries, if those individuals lack the requisite knowledge on a particular issue, they need to access that expertise from individuals who do.

Know that there are risks.

The men that gathered in Philadelphia that summer of 1776 came from all walks of life, but it seems fair to say that most had something to lose by signing on to a declaration of independence. True, many were merchants (some wealthy, including President of Congress John Hancock), and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants. As Ben Franklin is said to have commented just before signing the Declaration, “We must, indeed, all hang together, or most assuredly we shall all hang separately.”

It’s not quite that serious for ERISA plan fiduciaries. However, there is the matter of personal liability – not only for your actions, but for those of your fellow fiduciaries – and thus, you might be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. So, it’s a good idea not only to know who your co-fiduciaries are – but to keep an eye on what they do, and are permitted to do.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, with the possible exception of the Gettysburg Address (which was heavily inspired by the former), its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned, and perhaps unprecedented. Putting that declaration – and the sentiments expressed – in writing gave it a force and influence far beyond its original purpose.

Plan fiduciaries are sometimes cautioned (often by legal counsel) about committing to writing certain decisions, notably an investment policy statement. In fairness, the law does not require one, though ERISA basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, plan sponsors (and the advisors they work with) find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing – rather than being crafted at a point in time when you are desperately trying to make sense of the markets. That said, and in the defense of caution, if there’s something worse than not having an IPS, it’s having an IPS that isn’t followed.

There is an old ERISA adage that says, “Prudence is process.” However, an updated version of that adage might be “prudence is process – but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members – both past and future – with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were.

Those might not serve to inspire future generations – but they can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted – properly documented, of course.

Actions can speak louder than words.

As dramatic and inspiring as the words of the Declaration of Independence surely were (and are), if they never got beyond the document in which they appeared, it’s unlikely we’d be talking about them today. Indeed, it’s likely that, without the actions committed to in that Declaration, their signatures on the document would have only ensured that they wound up on the gallows.

Anyone who has ever had a grand idea shackled to the deliberations of a moribund committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we’ll commemorate this week.

While plan committee meetings may sometimes seem like little more than obligatory (and tedious) reviews of arcane information, it’s worth remembering that those decisions affect people’s lives – and, ultimately, their financial independence.

- Nevin E. Adams, JD

What’s (Really) Hindering Millennials’ Retirement Savings?

I’ve learned two things about Millennials over the years: first, that there are few things they find more bothersome than having Boomers tell them what they should be doing – and if there is anything more bothersome than the first, it’s being called “Millennials.”

Setting that aside, I was recently asked to participate in a forum focused on the challenges to retirement savings faced by Millennials. That event, “The Millennial Perspective: An Intergenerational Discussion on Retirement Savings,” was sponsored by Women for a Secure Retirement (WISER), centered on the organization’s iOme Challenge to develop a comprehensive proposal to address the challenges Millennials face in saving for retirement.

Of course, the definition of a Millennial has proven to be surprisingly elusive over time. But those in the forum were willing to accept the definition recently put forth by the Pew Research Center, that it would apply to those born between 1981 and 1996 – which, of course, means that the oldest in that demographic are hardly “kids” (aged 37 in 2018).

Retirement Roadblocks

My panel was tasked with discussing issues regarding financial education, savings and “retirement roadblocks” for this group. And indeed, there are a number of obstacles to savings generally, and retirement saving specifically, for this demographic. Specifically cited were:

Lack of “traditional” employment. This has manifested itself both in higher unemployment rates, and more in so-called 1099 employment in the “gig” economy. This can, of course, create an issue both in the income from which to save, and a…

Lack of access to retirement plan at work. This, of course is a significant hindrance. After all, we know that workers are significantly more likely to save if they have the opportunity to do so via a workplace retirement plan like a 401(k) – 12 times more likely, in fact. But even when they have access to a plan at work, they can still be hindered by a…

Lack of eligibility for a retirement plan at work. While a growing number of plans allow immediate eligibility for employee contributions (58.5%, according to the Plan Sponsor Council of America’s 60th Annual DC Survey), others don’t – and some plans still maintain a year’s wait. And that can be a problem when it comes to…

Job turnover. Millennials are widely regarded as job hoppers, and relative to their elders they may be – not so when their elders were younger. Going back to the end of the second World War, job tenure has been remarkably consistent – so yes, Millennials do change jobs, and while that doesn’t make them unusual, it can make it harder for them to save, particularly when there are…

Other priorities. Let’s face it, we talk about retirement saving as having an “accumulation” phase, but the early stages of most working careers is focused on a broader accumulation strategy – household goods, a car, a house, furniture, etc. And, for many those priorities also include paying down the debt that helped pave the way. Those obligations have, along with shorter job tenures, long been part of the earlier stages of our careers – and still are…certainly when it comes to thinking about…

Retirement. That’s right – retirement. Or more precisely the word itself, which conjures up images of a distant time and an “elder” you that – nifty little aging apps notwithstanding – isn’t something that most Millennials (or, arguably Boomers) have top of mind. In fact, our industry has long bemoaned the complexity of retirement as a savings goal – not only because it’s likely to be as variable as the individuals considering it, but also because it is so hard for an individual to picture, to imagine as a tangible goal. So, yes – we can, with a little effort – put a dollar figure on “retirement” – but juxtaposed next to that much-needed vehicle to get to work, that home with which to house a growing family, that college debt repayment… well, “retirement” is likely to be viewed more as abstract concept than tangible goal.

Perhaps a better way to think of this particular savings goal is to see it as the point at which you have financial resources sufficient to provide the freedom to pursue the avocation of your dreams, to work the hours you want (or don’t), from the location(s) you desire – or even the freedom to quit “working” altogether.

Janis Joplin once told their Boomer parents that “freedom is just another word for nothing left to lose.” But it seems to me that for Millennials, and perhaps for all of us, freedom – financial freedom – is “just” another word for everything to gain.

- Nevin E. Adams, JD
 
See also:

• Things That the ‘Common Wisdom’ About Millennials Gets Wrong
• 6 Things You Should Know About Those Millennial Participants
• So, How Much Should a 35-Year-Old Have Saved?

Feel Lucky?

One of my favorite cinematic quotes is from that Clint Eastwood classic, “Dirty Harry.”

It comes at the very beginning of the movie – there’s a bank robbery in process, and Clint Eastwood (in the personage of Inspector “Dirty” Harry Callahan) is trying to wolf down a hot dog when the commotion starts up. Harry, clearly irritated, gets up and heads out, and proceeds to shoot it out with the robbers, and then strolls over to the one who is still breathing, who has a shotgun within reach. Harry proceeds to point out the attributes of his .44 Magnum as he wonders aloud if he still has any bullets left, as the wounded robber contemplates his chances of getting to his shotgun before Harry pulls the trigger. At that point, Harry reminds him: “You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?”



When reading the various surveys of workers who seem confident about their retirement prospects – or don’t – when most haven’t even tried to figure out how much they will need – I can almost hear Harry Callahan in the background. They might not feel lucky, but they’re acting as though they will be.

Last week the nonpartisan Employee Benefit Research Institute (EBRI) published an Issue Brief highlighting some of the outcomes that EBRI’s Retirement Security Projection Model (RSPM) has projected in recent years. The RSPM was developed to help state governments figure out if their residents would run short of money in retirement – based on a concern that to the extent they did, the social safety net might have to be patched.

Now such models¹ must, of necessity, rely on certain assumptions, but unlike a number of other models out there, EBRI’s has a significant advantage – being able to draw on actual, anonymized administrative data of tens of millions of 401(k) participants for the retirement savings component, whereas others lean on self-reported samplings. Moreover, rather than rely on the extrapolation of measures like replacement rates, EBRI’s RSPM considers a household to “run short of money” or experience a retirement savings “shortfall” if it doesn’t have enough money to cover actual projected expenses in retirement – including an aspect that most models completely ignore: uncovered long-term care expenses from nursing homes and home health care.

Despite what I would consider to be pretty stringent assumptions on expenses, the RSPM projects that more than half — 57.4% — of all U.S. households (not just those covered by employer-sponsored retirement plans) will not run short of money in retirement. Oh, and that’s assuming that they come up with 100% of those expenses.

But what if you wanted to assume that, confronted with those expenses in retirement, individuals cut back on their spending – say to just 90% of the projected expenses? Well, even if you leave in place the full assumptions about nursing home and home health care costs, under that scenario the percentage of households projected to have sufficient retirement resources increases to more than two-thirds (68.1%). What if you assume that retirees only spend 80% of the cohort average for deterministic expenses? At that point, 82.1% would have enough financial resources. If you are willing to ignore the potential impact of long-term care costs, three-quarters (75.5%) of households will have sufficient financial resources in retirement to meet 100% of projected expenses.

That doesn’t mean that access to a retirement plan doesn’t matter. The report notes that among Gen Xers, those who have 20 or more years of future eligibility (including years in which employees are eligible but choose not to participate) are simulated to have a 72% probability of not running short of money in retirement. Those in that same group with no future years of eligibility are simulated to have only a 48% probability of not running short of money in retirement.

In fact, as you might expect, eligibility for a workplace retirement plan is one of the most – if not the most – important aspects that affect retirement success.

Now, as promising as those results seem, one shouldn’t draw too much comfort. Those who come up short will do so by varying amounts, and some by quite large amounts. Indeed, when you add up all those shortfalls, it amounts to $4.13 trillion in 2014 dollars.

And yet, applying what strike me as remarkably conservative retirement expense assumptions, and drawing from real-world actual administrative savings data, it seems that a good number of us can – assuming we keep doing what we are doing – anticipate a financially successful retirement.

Which brings us back to “Dirty Harry”: “Do you feel lucky? Well, do ya?”

If you are eligible for a retirement plan at work, the answer would seem to be – yes!

- Nevin E. Adams, JD

Two of the most commonly cited projection models are the Center for Retirement Research (CRR) at Boston College and the National Institute on Retirement Security (NIRS). Both rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF), and while both track the progress of American retirement readiness by examining how individuals in the SCF did over time, they fail to acknowledge that doing so compares the balances and readiness of two completely different groups of individuals at different points in time. The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers — income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement. But then, the math is easier. ↩

(Re) Solving the Retirement Crisis

Several weeks back, I was invited to participate in a group conversation on retirement and the future.

The group of 15 (they’re listed at the end of the document that summarized the conclusions) that Politico pulled together was diverse, both in background and philosophies, and included academics, think tanks, advocacy groups, and the Hill. It was conducted under Chatham House rules, which means that while our comments might be shared, they wouldn’t be specifically attributed. That latter point was helpful to the openness of the discussion, where several individuals had opinions that they acknowledged wouldn’t be supported by the groups they represent.

The conversation touched on a wide range of topics, everything from the key challenges to the current system, the private sector’s role in addressing these problems, the individual’s role (and responsibility) for securing their own retirement, government’s role and the potential for current congressional proposals to have an impact.

In view of the diversity of the group – the complexity of the topics – and the 90-minute window of time we had to thrash things about – you might well expect that we didn’t get very far. And, at least in terms of new ideas, you’d be hard-pressed to say that we discussed anything that hadn’t come up somewhere, sometime, previously. But then, this was a group that – individually, anyway – has spent a lot of time thinking about the issues. And there were some new and interesting perspectives.

The Challenges

It seems that you can never have a discussion about the future of retirement without spending time bemoaning the past, specifically the move away from defined benefit plans, and this group was no exception. There remains in many circles a pervasive sense that the defined contribution system is inferior to the defined benefit approach – a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And while you can wrest an acknowledgement from those familiar with the data, almost no one talks about how few of even those covered by those DB plans put in the time to get their full pension.

Beyond that. there was a clear and consistent understanding in the group that health care costs and concerns were a big impediment to retirement savings, both on the part of employers and workers alike. People still make job decisions based on health care – on retirement plan designs, not so much. And when it comes to deciding whether to fund health care or retirement – well, health care wins hands down.

College debt was another impediment discussed. Oh, individuals have long graduated from college owing money – but never so many, and likely never so much (though you might be surprised what an inflation-adjusted figure from 20 years ago looks like). It is, for many, an enormous draw on current income – and one that has a due date that falls well before when retirement’s bill is presented for payment.

Women have a unique set of challenges. For many, the pay gap while they are working is exacerbated by the time out of the workplace raising children. They live longer, invest more conservatively, and ultimately bear higher health care costs – and increasingly find themselves in the role of caregiver, rather than bringing home a paycheck.

For many in the group, financial literacy still holds sway as a great hope to turn things around. There are plenty of individual examples of its impact, though the current research casts doubt on its widespread efficacy. Surely a basic understanding of key financial concepts couldn’t hurt (though don’t even get me started on the criteria that purports to establish “literacy”) – but it’s a solution that is surely at least a generation removed from the ability to have a widespread impact.

On a related note, the group was generally optimistic about the impact that the growing emphasis on financial wellness could have, both in terms of encouraging better behaviors, and a heightened awareness of key financial concepts. The involvement of employers, and employment-based programs seems likely to enhance the impact beyond financial literacy alone.

Resolving Recommendations

Ultimately, the group coalesced around four key recommendations:

The significance of Social Security in underpinning America’s retirement future – and the critical need to shore up the finances of that system sooner rather than later. The solution(s) here are simple; cut benefits (push back eligibility or means-testing) or raise FICA taxes. The mix, of course, is anything but simple politically – but time isn’t in our favor on a solution.

The formation of a national commission to study and recommend solutions. I’ll put myself in the “what harm could it do?” camp, particularly in that, to my recollection, nothing like this has been attempted since the Carter administration. We routinely chastise Americans for not taking the time to formulate a financial plan – perhaps it’s time we undertook that discipline for the system as a whole.

Requirements matter – but don’t call it a mandate. Since it’s been established that workers are much more likely to save for retirement if they have access to a plan at work (12 times as likely), but you’re concerned that not enough workers have access to a retirement savings plan at work, there was little doubt that a government mandate could make a big difference. There was even less doubt that a mandate would be a massive lift politically. And not much stomach in the group for going down that path at the present.

Expanded access to retirement accounts. While the group was hardly of one mind in terms of what kind of retirement account(s) this should be, there was a clear and energetic majority that agreed with the premise that expanding access is an, and perhaps the – integral component to “securing retirement” for future generations.

And maybe even this one.

- Nevin E. Adams, JD

p.s. I'm on the left, towards the top of the picture above.  Right next to Teresa Ghilarducci!

So, How Much Should a 35-Year-Old Have Saved?

You may have missed it, but there was a bit of a “twitter storm” regarding retirement last week.

More specifically, a relatively innocuous post about how much a 30-year-old should have saved toward retirement got a lot of 35-year-olds stirred up. The CBSMarketwatch article quoted Fidelity as saying that you should have a year’s worth of salary saved by the time you’re 30 – but the real point of controversy appears to have been driven by the premise that by the time you’re 35, you were supposed to have twice your salary saved.¹

The point, of course, is that it’s easier if you start early. But honestly, devoting 15% of your pay to retirement savings at any age is a daunting prospect, much less at a point when college debt and the prospects of a mortgage, kids and setting aside money for the kids’ college savings loom large. If this is “easy,” imagine what hard looks like!

I’ve been a consistent saver over my working career – never missed an opportunity to save in a workplace retirement plan, never worked for an employer that didn’t offer one, and always contributed at least enough to warrant the full employer match. And yet, I went a long time in my working career before I was able – having, among other expenses, law school debt, a mortgage, and three kids to help get through college – to set aside 15% for retirement (sadly, by the time I could afford to save at that level in my 401(k), the IRS “intervened”).

I don’t know how my 35-year-old self would have reacted to the article, or the twitter post, though I suspect I, like many of those who responded to the “tweet,” would have been a tad incredulous.

Ultimately, of course, the answer to how much you “should” set aside for retirement – regardless of your age – is largely dependent on what kind of retirement you plan to have, and when you plan to start having it. And, regardless of age, taking the time to do even a rough estimate on what you might need to quit working (or start retiring) is going to be time well spent.

Because while it’s possible to “catch up” later – it can be hazardous to count on it.

- Nevin E. Adams, JD

Footnote

Controversial as this premise clearly was to those in the targeted demographic, it’s really just math. To get there, Fidelity assumed that a individual starts saving a total of 15% of income every year starting at age 25, invests more than 50% of it in stocks on average over his or her lifetime, and retires at age 67, with an eye toward maintaining their preretirement lifestyle – but you might be surprised at what even these arguably aggressive goals produced in terms of a replacement ratio at age 67. ↩

Life's Lessons

Life has many lessons to teach us, some more painful than others – and some we’d just as soon be spared. But as graduates everywhere look ahead to the next chapter in their lives, it seems a good time to reflect on some of the lessons we’ve learned.

Here are some nuggets I’ve picked up along the way….

1. Be willing to take all the blame – and to share the credit.
2. There actually are stupid questions.
3. Shun those who are cruel – and don’t laugh at their “jokes.”
4. Never say you’ll never.
5. Be on time.
6. “Bad” people eventually get what’s coming to them. But you may not be there to see it.
7. Always sleep on big decisions.
8. Sometimes the grass looks greener because of the amount of fertilizer.
9. Never email in anger – or frustration. And be extra careful when using the “Reply All” button.
10. If your current boss doesn’t want to hear the truth, it may be time to look for a new one.
11. Never pass up a chance to say “thank you.”
12. If you wouldn’t want your mother to learn about it, don’t do it.
13. Never assume that your employer (or your boss) is looking out for your best interests.
14. Bad news doesn’t generally age well.
15. There can be a “bad” time even for good ideas.
16. Your work attitude often affects your career altitude.
17. When you don’t have an opinion, “what do you think?” is a good response. And sometimes even when you do.
18. You can be liked and respected.
19. Comments that begin “with all due respect” generally don’t include much.
20. Sometimes the questions are complicated, but the answer isn’t.

Remember as well that that 401(k) match isn’t really “free” money – but it won’t cost you a thing.
And don’t forget that you’ll want to plan for your future now – because retirement, like graduation, seems a long way off – until it isn’t.

Got some to add? Feel free to add in the comments.

Congratulations to all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD

First Hand Experience

Our view during Super Bowl XLVII.

There are some things in life that have to be experienced first-hand.
Several years back, my daughter won an all-expenses-paid trip to the Super Bowl for two – and, to my delight, she chose to invite me to go with her.

Now, I’m sure some of you have been to a Super Bowl, but it was my first (and, considering ticket prices, I’m guessing my last). And while I’m sure the view from the comfort of home and a big screen TV offered a “better” view of Beyonce’s halftime show, there are things (and people) you see when you are at the event that don’t make a TV producer’s selection (particularly when you happen to be at the Super Bowl where the field lights went out for 34 minutes). Let’s face it, it’s one thing to say you watched the Super Bowl – and something else altogether to say you were there!

You wouldn’t know it from the headlines, but there’s actually a lot going on here in our nation’s capital. Like a smoldering ember, in no time at all, and with little warning, things can go from (apparent) nothingness to regulation or legislation that can have a dramatic impact on our lives and livelihoods (remember Rothification?). It’s a dynamic that’s easy to miss when you “swing by” for a visit – but one that our Government Affairs team works very hard all year long to keep up – and to keep NAPA members up-to-date and informed.

We’re fast approaching our sixth annual DC Fly-In Forum. I remember attending the first one as a “special guest,” and being struck even then by the quality of the program and speakers. More importantly, the room was full then – as it continues to be – of the nation’s leading retirement plan advisors, networking and engaging not only with each other, but with some of the most influential voices in Washington.
This year – with the ink not quite dry on the SEC’s Regulation Best Interest proposal, and with the status of the Labor Department’s fiduciary proposal unresolved (for the moment), we are slated to have SEC Commissioner Hester Peirce, and have invited Assistant Secretary of Labor Preston Rutledge to join us. We’ve lined up a special session on advisor-focused litigation with the Wagner Law Group’s Tom Clark. And Rep. Richie Neal (D-MA) – a long-time proponent of retirement savings, ranking member of and a potential Chairman of the Ways and Means Committee (should the House “flip”), and author of a “game-changing” retirement plan proposal – will also be part of this year’s Fly-In. We’ll also have what promises to be a highly interactive and engaging discussion about a new proposal to shore up retirement security via mandatory add-on savings accounts.

And that’s not all.

The 2018 mid-term elections are just around the corner — and the keynote speaker at the NAPA DC Fly-In Forum will help approved delegates understand what it might bring. We’re talking about CNN Chief National Correspondent John King, anchor of “Inside Politics.”

And that’s (still) not all.

For me – and for dozens of advisors who have participated over the past five years – the most impressive aspect of our Fly-In Forum is the second day, where delegate-advisors have an opportunity, assisted (and prepped) by the NAPA GAC team, to meet with legislators and their staff on Capitol Hill, to share your perspectives, ideas and concerns, based on your front-line, real-life experiences working with retirement plans, plan sponsors and participants.

Whether you’ve done this a dozen times, or have never had the opportunity, the NAPA DC Fly-In Forum is an amazing “first-hand” experience. For those ready to get off the sidelines and contribute to a real difference in retirement policy, you won’t find a better “ticket” than the NAPA DC Fly-In Forum.

I can’t promise it will be quite like going to the Super Bowl – but then, you never know.

p.s.: Seats are filling up fast for the NAPA DC Fly-In Forum, July 24-25.
PLEASE NOTE: Delegates to the Forum must:

• be a NAPA member;
• be responsible for $100M+ in plan assets, 10+ plans and 2,000+ participants; and
• have 5+ years of experience servicing retirement plans.

You can apply today at http://napadcflyin.org.


- Nevin E. Adams, JD

Crisis "Management"

Rarely a week goes by that a headline, survey or academic paper doesn’t proclaim the reality of a retirement crisis with the certainty generally reserved for topics like the existence of gravity, or the notion that the sun will rise in the east.

And certainly based on the data cited, there would seem to be a compelling case that trouble lies ahead for many. That said – as was pointed out by Andrew Biggs at the recent Plan Sponsor Council of America conference – the reality is that good, reliable data is hard to come by. Indeed, many of the reports cited in those headlines rely on what you would expect to be a reliable source; the Census Bureau’s Current Population Survey, or CPS.¹ Unfortunately, that reliable source turns out to be not-quite-so-reliable. It suffers from relying on what people tell the survey takers, but perhaps more significantly, Biggs, resident scholar at the American Enterprise Institute, pointed out that the survey only counts as income in retirement funds that are paid regularly – like a pension. “Irregular” withdrawals from retirement accounts – like IRAs and 401(k)s – aren’t included.

In fact, when you compare what retirees report to the IRS with what they report to the Census Bureau, only 58% of private retirement benefits are picked up, according to Biggs. Now, who do you suppose gets a more accurate read; the IRS² or the Census Bureau? And yet, the CPS data serves as the basis for a huge swath of academic research on retirement savings.

Social ‘Security’

Biggs noted that IRS data also draws into question some of the “common wisdom” on things such as dependence on Social Security. Consider that the Social Security Administration – who arguably has “skin” in the game – claim that a third of retirees are heavily dependent – to the tune of 90% or more of their income – on Social Security. However, a study based on IRS data found that only 18% of retiree households are heavily dependent on Social Security, and just one in eight retirees receive 90% or more of their income from Social Security. Don’t get me wrong – Social Security is clearly a vital and essential component of our nation’s retirement security – but the IRS data indicates that, for most, it isn’t a primary source at present.

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but data suggests that most retirees aren’t exactly burning through their retirement savings. Not that some aren’t drawing down too rapidly, mind you – and that’s a valid concern. But many, perhaps most – aren’t.

Data suggests that today’s retirees are actually in pretty good shape. In addition to the IRS data cited above, that sentiment is borne out by any number of surveys (perhaps most notably the Retirement Confidence Survey, published by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald Associates) that continue to find that those already in retirement express a good deal more confidence about their financial prospects than those yet to cross that threshold. And certainly, the objective data available to us suggests that today’s retirees are better off than previous generations, though their retirement – and potential health issues – may at some point take a toll.

Still, in 2014, 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 positive impact of plan design features like automatic enrollment and annual contribution acceleration.

Not that there isn’t plenty to worry about; reports of individuals who claim to have no money set aside for financial emergencies, the sheer number of workers entering their career saddled with huge amounts of college debt, the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work (though not as enormous as some claim)…

That said, I shudder every time I hear an industry leader or advisor stand up in front of an audience and proclaim that there is a retirement crisis – because, however well-intentioned – they are almost certainly providing “aid and comfort” to those who would like to do away with the current private system as a failure, not a work in process.

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.

However, what seems even more likely is that those who do run short will be those who didn’t have access to a retirement plan at work.

- Nevin E. Adams, JD
 
Footnotes

1. Nor is that the only shortcoming in that widely utilized source. The nonpartisan Employee Benefit Research Institute (EBRI) has pointed out that a change in survey methodology in 2014 has produced some questionable plan participation results from the CPS – a finding subsequently validated by the Investment Company Institute. ↩
2. Not that IRS data can’t be misapplied. ↩

Means 'Tested'

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but the data suggests that most retirees aren’t exactly burning through their retirement savings.

I remember my one and only conversation with my father about retirement income. He had already decided to quit working, and had gathered his assorted papers regarding his savings, insurance, etc. for me to review. Determined to “dazzle” Dad with my years of accumulated financial acumen, I proceeded to outline an impressive array of options that offered different degrees of security and opportunities for growth, the pros and cons of annuities, and how best to integrate it all with his Social Security.

And when I was all done, he looked over all the materials I had spread out before him, then turned to me and said – “so how much will I have to live on each month?”

See, my dad, like many in his generation, were accustomed to living within their means. And, according to new research, he isn’t the only one.

The study shows that retirees generally exhibit very slow decumulation of assets. More specifically, the nonpartisan Employee Benefit Research Institute (EBRI) found that within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets; those with between $200,000 and $500,000 immediately before retirement had spent down just 27.2%. Retirees with at least $500,000 immediately before retirement had spent down only 11.8% within the first 20 years of retirement at the median.

Those with pensions were much less likely to have spent down their assets than non-pensioners. During the first 18 years of retirement, the median non-housing assets of pensioners (who started retirement with much higher levels of assets) had declined just 4%, compared with a 34% decline for non-pensioners.

The median ratio of household spending to household income for retirees of all ages hovered around 1:1, inching slowly upward with age – a finding that the EBRI researchers said suggests that majority of retirees had limited their spending to their regular flow of income and had avoided drawing down assets, which explains why pensioners, who had higher levels of regular income, were able to avoid asset drawdowns better than others.

Not that that’s necessarily a heartening result, since those pensioners, arguably having guaranteed income for life, such as a pension, doesn’t lead them to spend down their assets. Indeed, of all the subgroups studied, pensioners have the lowest asset spend-down rates – though one might well expect that, with that pension “cushion” they might be more inclined to dip into their savings and “splurge.”

Why are retirees not spending down their assets? The EBRI report offers a number of reasons:

• People don’t know how long they are going to live or how long they have to fund their retirement from these assets.
• Uncertain medical expenses that could be catastrophic if someone has to stay in a long-term care facility for a prolonged period.
• A desire to pass along assets to heirs.
• A lack of financial sophistication – people don’t know what is a safe rate for spending down their assets, and are thus erring on the side of caution.
• A behavioral impediment – after building a saving habit throughout their working lives, people find it challenging to shift into spending mode.

Now, the EBRI research was based on government data from the U.S. Health and Retirement Study to track retirees born between 1931 and 1941 with assets ranging from stocks, bonds, mutual funds, real estate and CDs to savings and checking accounts (individual homes were excluded). That’s “greatest generation” territory – retirees who were, as my father, accustomed to living within their means. Even then, it’s not all sunshine and unicorns; some retirees are indeed running out of money in retirement – though, at the same time, instead of spending down, a large – and to my ears, largely unacknowledged ­– number of retirees are continuing to accumulate assets throughout retirement.

But I’d still argue that the question “how much will I have to live on each month” winds up being a lot easier to answer at retirement – if you’ve been thinking about it pre-retirement.

- Nevin E. Adams, JD

The Chicken or the Egg?

It is a question that has puzzled philosophers and scientists for centuries: which came first – the chicken or the egg? Similarly, an updated version of a classic survey of retirement confidence finds some interesting attributes among those who are more confident about their prospects – but are those attributes a result of that confidence, or is it the confidence that preceded them?

The 28th annual Retirement Confidence Survey (RCS) from the non-partisan Employee Benefit Research Institute (EBRI) and Greenwald Associates found that Americans are feeling a bit better about their retirement prospects.
However, the RCS also found – as it has in previous years – that certain factors are tied to higher confidence, specifically if they have access to a defined contribution plan, are relatively free from debt, are already retired – or, in a new finding from this year’s RCS – that they are healthy.

Now, the connection between access to a retirement plan and savings is well established. An updated analysis by EBRI finds that even those with modest incomes – those making between $30,000 and $50,000 – are nonetheless a dozen times more likely to save if they have access to a retirement plan at work.

More intuitive is the negative impact that debt, particularly heavy debt, can have on retirement savings, not to mention the impact on confidence about that savings, or more precisely, the lack thereof.

As for the new finding in this year’s RCS, 6 in 10 workers who are confident about their retirement prospects say they are in excellent or good health. As for those who are not confident about retirement, only 28% report such good health. The same is true for retirees: 46% of confident retirees are in good health, compared to just 14% who are not confident. What’s less clear is whether they are confident because they are healthy, or healthy because they are confident (or have a reason to be).

In fact, those of us still looking ahead to retirement can draw some comfort that those in retirement are – and have consistently been – more confident about retirement. Indeed, in this year’s RCS, a full three-quarters of retirees are very or somewhat confident they will have enough money for retirement – and that’s as high as that metric has been going all the way back to 1994 (except for last year, when 79% were that confident).

Of course, retirees were also more than twice as likely (39% versus 19%) as workers to have tried to calculate how much money they would need to cover health care costs in retirement – and those who had were less likely to have experienced higher-than-expected health costs and are more likely to say that costs are in line with their expectations.

Ultimately, there’s nothing like actually living in retirement to provide a solid sense of what it costs to live in retirement. When it comes to retirement confidence, it may not always be obvious as to whether the chicken or the (nest) egg came first.

But it seems to me that a "bird" in the hand is nearly always worth two in the bush…

(Too) Great Expectations?

My schedule – and aversion to crowds – means that I rarely see a new movie the first weekend it comes out (a rare exception – Avengers: Infinity War this weekend).

While this means that there are times when I’m the only one in the office the following Monday who hasn’t seen the latest blockbuster (and thus can’t offer an opinion), more often than not, it’s also spared me the time, money (and potential aggravation) of rushing out to see a movie that is more likely to be up for a “Razzie” than an Oscar.

However, I’ve also found myself in situations where the hype surrounding a new blockbuster is so compelling that it builds up my expectations beyond the reality – leaving me… underwhelmed.

Doubtless that was the sense of many in reading the Best Interest Regulation proposal published by the Securities and Exchange Commission last week. Those who had hoped that a uniform fiduciary standard might emerge were surely disappointed, as were those who might have anticipated that the SEC’s proposal might step up and fill a gap potentially created if the 5th Circuit’s ruling was unchallenged. There is, of course, an irony in a Regulation Best Interest that doesn’t define “best interest,” and understandable concerns that a standard that leans so heavily on “reasonable” tests is portrayed as an objective standard.

On the other hand, all will surely find comfort in the acknowledgement that “cheapest” isn’t deemed equivalent with “best,” and some will certainly be reassured by the “principles-based” emphasis, not to mention the acknowledgement of the Labor Department’s fiduciary rule and Best Interest Contract Exemption (BICE) and the latter’s stated objectives as consistent with Regulation Best Interest, even if the latter doesn’t create fiduciary status.

Odds are, if you liked the Labor Department’s fiduciary rule and its structures, you won’t be satisfied with the SEC’s take. On the other hand, if you thought the DOL went too far, the SEC’s proposal might well be more in line with your expectations. And yet, the lingering uncertainty as to the when – or if – of the SEC’s response – and the (at last until lately, relative) certainty of the Labor Department’s approach has led many firms to institute processes and procedures suited for the latter, not the possibility of the former.

Arguably, the vast majority of advisors committed to serving workplace retirement plans were well along the path of satisfying ERISA’s compensation strictures, and the Best Interest Contract Exemption (BICE) – with all its shortcomings – provided a means for the rest to work their way there. What many found most confounding about the Labor Department’s fiduciary rule was its extension of oversight to IRAs, notably the enormous IRA rollover market – and, in that regard at least, the SEC proposal seems to be reasserting its authority. Will that be an area of “compromise” between the agencies? Time will tell.

Ultimately, the current SEC proposal – and bear in mind, this is really just a starting point – is bound to disappoint more than it pleases, if only because it introduces an element of uncertainty at a particularly critical time. Many, having waited nearly a decade for the proposal to emerge, doubtless hoped it would be more proscriptive in scope and/or detail. Indeed the industry commentary thus far seems to be a sense that it feels half-finished, rushed to press, perhaps even opportunistic in its timing, what with the ink on the 5th Circuit’s decision still damp. Let’s face it, even the SEC commissioners who supported its publication did so with cautioning commentary, if not outright reluctance.

That said, having waded through the 1,000-plus pages twice and half again, one can’t be help but be struck by the amount of space in those 1,100 pages dedicated to questions from the proposal’s authors – questions that merit consideration and thoughtful response.

The work may be unfinished, it may be unsatisfying in scope or clarity, but we now have a window (albeit a short one) – and an invitation – to comment, inform, and yes, perhaps even remedy those shortfalls.

- Nevin E. Adams, JD