Friday, September 12, 2014

"Working" Capital

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

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

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

In fact, the RCS has consistently found not only that a large percentage of retirees leave the work force earlier than planned (49% in 2014), but that many retirees who retired earlier than planned cite negative reasons for leaving the work force when they did, including:
  • health problems or disability (61%);
  • changes at their company (such as downsizing or closure (18%); or 
  • having to care for a spouse or another family member (18%). 
The Merrill Lynch/Age Wave survey cautions that while early retirement used to be equated with financial success, today’s retirees say that health problems are now the top reason for their early retirement (37%). In fact, the surveys indicate that the issues that seem to be triggering earlier-than-expected retirements not only serve to cut short working (and savings) careers, but bring with them additional expense.

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

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

- Nevin E. Adams, JD

Friday, September 05, 2014

Under Covered

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

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

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

However, when you look at the data underlying that aggregate number, you find it includes:
  • 8.9 million people who were self-employed (and thus arguably are prevented from being covered by their own inaction);
  • 6.2 million who were under the age of 21 (who, being under ERISA’s mandated age coverage level, would logically not be “covered”);
  • 3.9 million who were age 65 or older (and beyond “normal” retirement age);
  • just over 31 million who were not full-time, full-year workers; and
  • 16.8 million who had annual earnings of less than $10,000.
When you take those factors into account, it’s pretty easy to see logical reasons why so many workers are not “covered.” When you filter out the overlap between those categories — situations where workers fall into several of those categories simultaneously (for example, workers who are under age 21, have less than $10,000 in annual earnings and are not full-time, full-year workers) — there are about 42.4 million workers whose lack of coverage might logically be attributed to being in one or more of those categories. And yes, that’s more than half of the “uncovered” workers in the CPS analysis.

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

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

- Nevin E. Adams, JD

Tuesday, September 02, 2014

"Class" of '74


Pensions were not on my mind in 1974, certainly not on Labor Day of that year.  While I was pondering my new college textbooks, President Gerald Ford, less than a month in that role, signed into law the Employee Retirement Income Security Act of 1974 – better known to most of us as ERISA. Little did I know at the time that that law – and the structure it provided to the nation’s private pension system – would, in the years to follow, play such an integral role in my life.
ERISA did not create pensions, of course; they existed in significant numbers prior to 1974.  Rather, it was designed to regulate what was there and would yet come to be – to protect the funds invested in those plans for the benefit of participants and beneficiaries with a consistent set of federal standards.  And, as part of that protection, to establish the Pension Benefit Guaranty Corporation (PBGC).  As President Ford said at the time, “It is essential to bring some order and humanity into this welter of different and sometimes inequitable retirement plans within private industry.”

Has ERISA “worked”?  Well, in signing that legislation, President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.”  Today that system has grown to exceed $17 trillion, covering more than 85 million workers in more than 700,000 plans.
The composition of the plans, like the composition of the workforce those plans cover, has changed over time.  While much is made about the perceived shortcomings in coverage of the current system, the projections of multi-trillion dollar shortfalls of retirement income, the pining for the “good old days” when everyone had a pension (that never really existed for most), the reality is that ERISA—and its progeny—have unquestionably allowed more Americans to be better financially prepared for a longer retirement. 
Forty years on, ERISA – and the nation’s retirement challenges – may yet be a work in progress.  But, by any measure, this “class of 74” has done the nation a great service.

-          Nevin E. Adams, JD

Saturday, August 23, 2014

"Working" It Out

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

This raises the question: are more older Americans working?

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

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

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

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

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

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

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

Saturday, August 16, 2014

When You Assume...

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

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

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

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

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

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

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

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

Nevin E. Adams, JD

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

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

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