Saturday, August 09, 2014

Lessons Learned

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

We have over the past couple of years devoted some of this space to highlighting some of the most egregious instances, but as I close this chapter of my professional career, I wanted to share with you a “top 10” list of things I have learned in my search to find reliable, objective, actionable research:
  1. There are always assumptions in research; find out what they are. Garbage in, garbage out, after all (the harder you have to look, the more suspicious you should be).
  2. Just because research validates your sense of reality doesn’t make it “right.” But just because it invalidates your sense of reality doesn’t necessarily make it right, either.
  3. Take the conclusions of sponsored research with a grain of salt.
  4. Self-reported data can tell you what the individual thinks they have, but not necessarily what they actually have.
  5. Sample size matters. A lot.
  6. “Averages” (e.g., balances/income/savings) don’t generally tell you much.
  7. There’s a certain irony that those who propose massive changes in plan design, policy, or tax treatment, frequently assume no behavioral changes in response.
  8. When it comes to research findings, “directionally accurate” is an oxymoron.
  9. In assessing conclusions or recommendations, it’s important to know the difference between partisan, bipartisan and nonpartisan.
  10. In an employment-based benefits system, the ability to accurately gauge employee response to benefits change is dependent on the reaction of the employers who provide access to those benefits.
One of the things that I’ve always loved about the field of employee benefits was that there was always something new to learn, and with each position along the way I have gained a new and fresh perspective.  I’ll always treasure my time here as a member of the EBRI team, the opportunity I’ve had to contribute to this body of work – and I’m looking forward to continuing to draw on EBRI research for insights and analysis in my new position, as I have for most of my professional career.

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

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

Here’s to not being fooled.

- Nevin E. Adams, JD

Saturday, August 02, 2014

"Repeat" Performance

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

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

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

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

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

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

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

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

And we won’t have to wait 75 years to see how it turns out.
  • Nevin E. Adams, JD
[i] See “IRA Withdrawals, 2011” online here.   See also ““Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” online here
[ii] See “IRA Withdrawals in 2012 and Longitudinal Results, 2010–2012” online here

Saturday, July 26, 2014

Look-Back "Provisions"

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

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

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

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

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

It’s one thing to anticipate that eventual cessation of paid employment, and something else altogether to make the preparations – to choose to save – and to be confident that you’ll be able to look back with satisfaction one day knowing that you have the financial resources to enjoy it.
  • Nevin E.  Adams, JD
Your organization can be part of the 25th Retirement Confidence Survey.  Survey underwriters serve as a member of the survey’s Advisory Board, along with the opportunity to participate in the review and update of the 2014 questionnaire; have the opportunity to participate in a pre-release, underwriters’ briefing on the results of the survey; are able to utilize the survey materials and findings for your research, marketing, communications, and product-development purposes – and you’ll be acknowledged as an underwriter of this, the 25th Retirement Confidence Survey, among other benefits.  For more information, contact us at nadams@ebri.org.

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

Saturday, July 19, 2014

The Status Quo

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

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

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

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

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

EBRI research has previously been able to leverage its extensive databases and survey data (including the long-running Retirement Confidence Survey) to both capture  potential responses to these types of proposals and, more significantly, to quantify their potential impact on retirement security today and over the extended time periods over which their influence extends.  In recent months, that research has provided insights on the full breadth of:
  • A retirement savings cap[ii],
  • The proportionality of savings account balances with incomes[iii], and
  • The impact of permanently modifying the exclusion of employer and employee contributions for retirement savings from taxable income, among other proposals[iv].
While we can’t be certain what the future brings, considering the likely responses to policy changes is a critical element in any comprehensive impact assessment – not only because the status quo is rarely a dependable outcome, but because, after all, those who assume the status quo are generally looking to change it.
  • Nevin E. Adams, JD
[i] From Urban Institute and Brookings Institution:  Flattening Tax Incentives for Retirement Saving“Our findings should be interpreted with caution. Actual legislation for flattening tax incentives requires more than the simple adjustments discussed here. For instance, if a credit-based approach is used, then the laws would need to ensure some recapture of those benefits for those who made contributions one year and withdrew them soon thereafter.

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

[ii] See “The Impact of a Retirement Savings Account Cap

[iii] See “Upside” Potential

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

Saturday, July 12, 2014

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.

Saturday, July 05, 2014

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

Saturday, June 28, 2014

"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.