Saturday, April 18, 2015

On Retirement Plans and Plans for Retirement

When is a plan not a plan? When you have a retirement plan at work, apparently.

The good news is that the 2015 Retirement Confidence Survey shows a strengthening of retirement confidence — at least among those who had some kind of retirement plan (DB, DC or IRA). Indeed, among that group, the number saying they were very confident has doubled since 2013.

The bad news? Well, there doesn’t seem to be much in terms of substantive savings accumulations1 or planning behaviors to account for this uptick in confidence.

Consider that fewer than half (48%) of workers report they and/or their spouse have tried to calculate — even a single time — how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

In other words, while many have (or had) a retirement plan, they don’t seem to have a plan for retirement. 

On the other hand, workers reporting that they or their spouse have a DC, DB or IRA plan are twice as likely as those who do not have such a plan (60% vs. 23%) to have tried to do a calculation to estimate what they will need to finance retirement. And despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (33% vs. 12% who have not done a calculation). Moreover, worker households with a retirement plan are more likely than those without such plans to report having saved for retirement (90% vs. 20%).

That said, after a quarter century reading and studying the RCS, several things are clear:

Those who have made the effort2 — even a feeble one — to figure out how much they need in retirement are more confident, and likely better off in the long run, since they tend to set higher savings goals.

Those who work with an advisor are more confident, and likely better off in the long run, since they also tend to set more realistic (i.e., higher) savings goals.

And perhaps most importantly, those who have access to a retirement plan are not only more confident, they are probably better off, since they tend to have actual sources of income on which to draw in retirement.

But ultimately, while having a retirement plan may provide some quantifiable increase in confidence about retirement, it’s having a plan for retirement — and acting on it — that grounds that confidence in reality.

Nevin E. Adams, JD


1. While much will likely be made of the relatively low/modest savings amounts reported by RCS respondents, without knowing individual factors like age or income, it’s impossible to discern whether those amounts are woefully inadequate, or reasonable. 

2. Those plans for retirement need to be reconsidered on a regular basis, since many are forced (or choose) to leave the workforce earlier than planned.

Saturday, April 11, 2015

3 (More) Pervasive Retirement Myths - an Academic Perspective

Last week I highlighted three “myths” about the retirement system that will not die — all the more distressing because they are perpetuated by retirement industry pundits. Here are three more that (mostly) aren’t perpetuated by those who actually work with retirement plans, but by academics.  Academics who, sadly, are often listened to, and cited by those who regulate and legislate these programs.

The Match Doesn’t Matter

This doubtless comes as a surprise to those of us who work with retirement plans and retirement plan participants. More precisely, there are a few studies out there that suggest that a matching contribution doesn’t have a very strong impact on participation. The study that is cited most often in support of this one is one conducted several years ago in conjunction with H&R Block, where individuals were offered a financial incentive to take their tax refund and deposit it in an IRA. Most didn’t — and thus the notion that the promise of the match doesn’t produce (much) in the way of participation.

Now, if you find yourself saying, “But that’s not really an analogous situation to 401(k) saving” — well, you wouldn’t be the only one to think so.

But even if it has only a modest impact on the decision to participate, the data clearly suggests that it has a big impact on the rate of savings — and on the savings accumulations itself.

You Can Plug the Leakage Problem by Limiting Loans

Preventing “leakage” has become a constant drumbeat of many in our industry, their passion fueled by estimates of the enormity of the problem that seem limited only by the imaginations of those clamoring to solve it. As recently as a week ago, I was at a conference where a respected researcher went so far as to suggest that we are losing as much as $1 in leakage for every $2 contributed into the system. I kid you not.

Now, the “out” for these wild exaggerations is that nobody knows for sure, and so — if you’re looking for them — you see those estimates footnoted with disclaimers like “author’s calculations.” Or sometimes they come right out and admit that it’s based on a “host of simplifying assumptions.”

Don’t get me wrong — “leakage” can be a threat to an individual’s retirement security. But when the nonpartisan Employee Benefit Research Institute (EBRI) looked into the matter in testimony provided to the ERISA Advisory Council last year, it was cashouts — not loans or hardship withdrawals (even including the impact of a six-month suspension of contributions) — that turned out to be approximately two-thirds of the leakage impact.

So, if you want to solve the real leakage problem, you might want to start by accurately assessing the size of the problem, rather than just making numbers up. And then you might look for ways to make it easier for folks to keep their savings in the system at job change.

And let’s not forget — locking people’s money up with no access until retirement may solve the leakage problem. But it could also lead to a reduction in the amount of money people save in the first place.

The 401(k)’s Tax Incentives Are ‘Upside Down’

One of the comments you hear from time to time is that the tax incentives for 401(k)s are “upside down” (or as it has been more colorfully described, “out of whack”) — that is, they go primarily to those at higher income levels, who perhaps don’t need the encouragement to save. And from a pure financial economics perspective, those who pay taxes at higher rates might reasonably be seen as receiving a greater benefit from the deferral of those taxes.

Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary. However, drawing on the actual administrative data from the massive EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), EBRI Research Director Jack VanDerhei has found that those ratios hold relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000.

In other words, while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes. They are not “upside down.” Now this is the outcome — the balances — not just focused on the contributions, the amount(s) going in, which is what most of the criticism focuses on.

As retirement plan advisors are well aware, these programs are subject to a series of limits and nondiscrimination test requirements: the boundaries established by Code Sections 402(g) and 415(c), combined with the ADP and ACP nondiscrimination tests. Those plan constraints were, of course, specifically designed (and refined) over time to maintain a certain parity between highly compensated and non-highly compensated workers in the benefits available from these programs. The data suggest they are having exactly that impact.

More recently, the “fairness” of these incentives has been questioned since they “only” go to workers who are covered by workplace retirement plans (though, as I pointed out last week, those numbers are often distorted as well). A better solution might be to expand those covered by such plans, rather than to undermine the diligence of those who are saving.

You’re less likely to hear these statements in your earshot — they tend to show up in academic forums, and sometimes in legislative hearings — forums where “decorum” might suggest avoiding confrontation.

But this is not just an academic exercise. And no one is well served — even the often well meaning academics who are trying to help improve the current system — by perpetuating misunderstandings.

- Nevin E. Adams, JD

Saturday, April 04, 2015

3 Pervasive Retirement Industry Myths

Ours is a complex and complicated business — constantly changing and evolving. And yet, there are key fallacies about today’s retirement system — and how it compares with what used to be — that will not go away.

Back in the good old days being “covered” by a pension plan meant you would actually get a full pension benefit.

We’re routinely told that “once upon a time” individuals used to work for a single employer their entire career, and that most of those workers were “covered by a workplace retirement plan, frequently a defined benefit pension.”

While defined benefit plans were certainly more common a generation ago, they were not as ubiquitous as is often assumed (see here).  

Moreover, while some workers did spend their working career at a single employer (and some still do, particularly in the public sector), the data show that for the very most part we have long been a nation of relatively short-tenured workers. How short? Well, the median job tenure in the United States — how long workers stay at one job — has hovered around five years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years, but that’s because women are staying in their jobs longer; job tenure for men has actually been dropping.

What that means is that even workers who were “covered” by a pension plan in the private sector weren’t working with that employer long enough to get much — or any — of that promised pension benefit.

Only half of American workers have access to a workplace retirement plan.

Speaking of coverage, this is one of those statements that, while technically accurate, is somewhat misleading. Applied to all workers, that is what the National Compensation Survey (conducted by the U.S. Department of Labor’s Bureau of Labor Statistics) indicates. But it includes all workers, including very young, very low-income, part-time and part-year workers.

If you focus on full-time, full-year wage and salary workers ages 21-64, an analysis by the Employee Benefit Research Institute (EBRI) noted that in 2013, two-thirds of those workers — workers who might reasonably be expected to be covered by a voluntary workplace retirement plan under current law — did, in fact, work for an employer that sponsored a plan.

The average 401(k) balance tells us…anything.

Let’s say I told you that the average 401(k) balance in a survey sampling was $130,000 — would that be good or not?

What if I then told you that our sampling consisted of an individual who is 25 years old and has a 401(k) balance of $5,000, and an individual who is 64 years old and has a 401(k) balance of $255,000? How might that change your response? Would that tell you anything meaningful about the retirement readiness of that group?

Of course not — but surveys and coverage of those surveys routinely purport to glean a sense of retirement readiness from those kind of numbers. Despite the reality that they are comprised of savings totals for workers with a wide range of age, tenure, and savings rates — totals that are simply added together, and then divided by the number of workers in the sample.

The math on 401(k) averages is easy. The conclusions often drawn from that math, iffy. At best.

So, the next time you’re at an industry event and hear someone (who should know better) repeat one (or more) of those statements, or interviewed by a reporter who puts one (or more) of those presumptions forth as “proof” of the current system’s shortfalls, keep in mind that the data tells a different story.

And one that isn’t told often enough.

- Nevin E. Adams, JD

Wednesday, April 01, 2015

At Long Last, Retirement Confidence Surges

New nonpartisan data has uncovered a major uptick in retirement confidence, as millions of Americans with access to workplace retirement plans finally took advantage of the wide array of resources long available to them.

Those tools included the use of online calculators and the help of plan advisors. “I was always too busy to take advantage of these resources,” noted survey participant Jack V. Copeland. “Frankly, with all the negative coverage about retirement shortfalls and such, I didn’t see much point.”

Not that the new research, published by the Oxford Newfound Institute of Nihilism (ONION), didn’t uncover retirement savings shortfalls among survey participants. However, with workers now taking the time to assess their personal situation, savings rate and projected retirement income needs, developing plans to address the situation rather than simply worrying about their dim prospects for retirement savings success became the order of the day. Previous research had shown that fewer than half of workers had made even a single attempt to assess their retirement needs, and many of those had simply guessed.

Ironically, despite this newfound and dramatic increase in confidence, the new retirement savings goals were not only more likely to produce a successful outcome, they were generally higher than the goals previously set by workers who had gone through the process.

Some of the most dramatic impacts were recorded by participants in plans where employers had not only provided for automatic enrollment immediately upon hire, but who applied automatic enrollment retroactively to existing hires as well. “All these years, I just assumed my employer thought it was too late for me to start saving,” said one long-time worker who had just been automatically enrolled under such a program.

A separate, plan sponsor-focused report found that the renewed focus and confidence translated into tangible workforce management benefits as well. “We found that a growing number of older workers were simply hanging on to their old jobs, afraid to retire because they had no idea how much they would need to have in retirement,” observed one. “Now, for the first time in a long time, we’re seeing workers actively plan for their retirement date with confidence. We should have done this years ago!”

No foolin’.

- Nevin E. Adams, JD

Note: Sure it's April Fool’s, but while the post above has a certain tongue-in-cheek character, the implications are not as fictional as you might think. In fact, they are well within the realm of a very potential reality for millions more — with a little help from plan advisors, their plan sponsor clients and the cooperation of plan participants.

Saturday, March 21, 2015

The Gaps in Retirement Savings "Gaps"

As spring follows winter, so apparently do dire predictions about the nation’s retirement prospects.

For example, the Center for Retirement Research (CRR) at Boston College now claims we are looking at a $7.7 trillion dollar “retirement gap” for American workers, up from $6.6 trillion five years ago. Meanwhile, a new report by the National Institute on Retirement Security (NIRS) on what it called the “Continuing Retirement Savings Crisis” didn’t cite a specific aggregate gap, but a year ago NIRS employed a similar approach to suggest that that gap was likely somewhere between $6.8 trillion and $14 trillion.

While these outcomes are cited widely (the CRR’s as recently as last week in a U.S. Senate hearing), the underlying methodologies and assumptions are worth understanding. 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.

There’s no question that there is a gap between what Americans are likely to need to live comfortably in retirement and the resources available to fund it. The non-partisan Employee Benefit Research Institute (EBRI) recently updated its EBRI Retirement Readiness Rating and found that the retirement savings gap was $4.13 trillion for all U.S. households (not just those who have retirement plan balances, though it uses actual 401(k) data for those who do have such plans, rather than relying on self-reported estimates), where the head of the household is between 25 and 64, inclusive. That may be well short of the projections offered by the NIRS and CRR, but it’s a big number, nonetheless.

Indeed, considering the enormity of that gap, policymakers — and Americans generally — might well feel like throwing up their hands and despair of ever closing it (indeed, earlier this month NIRS published a survey indicating that 86% of Americans believe the nation faces a retirement crisis).

What is unfortunately often lost in the trillion-dollar gap headlines (and the concurrent surveys that, unsurprisingly, talk about our deteriorating confidence about our retirement) is that not everyone has a retirement savings gap. Ironically, considering their differing methodologies, the CRR, NIRS and EBRI all put the number at about 50%. (EBRI’s number, which in its assumptions and use of actual data seems more conservative, says the number at risk of running short of money in retirement is in the low 40% range.)

How big is the gap at an individual level? The EBRI analysis breaks it down into manageable numbers: For those on the verge of retirement (Early Baby Boomers), the deficits vary from an aggregate of $19,304 (per individual) for married households, to $33,778 for single males and $62,734 for single females. If you look only at the individuals who do have gaps (EBRI’s projections, which take into account the potential costs of nursing home care and living expenses based on real experience, rather than arbitrary replacement ratios, indicate that about 57% will have sufficient retirement income), the gap for Early Boomers ranges from $71,299 per individual for married households to $93,576 for single males and $104,821 for single females.

Not surprisingly, those eligible to participate in workplace retirement plans fare better. Also not surprisingly, those who have jobs are more likely to have incomes and access to a workplace retirement plan — and those who work for larger employers are more likely to have both larger incomes and access.

However, even EBRI’s estimates include a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars. For those seeking to understand, and perhaps craft solutions for, the current projected shortfalls, this is an important distinction, and one given short shrift by a headline’s focus on the aggregate.

There are, of course, broad policy changes that can, and have, made a big difference, nationally and at a plan level — things like automatic (and immediate) enrollment, contribution acceleration and prudent selection of a default investment option, not to mention ideas (or legislation) that expand access to those plans.

That said, ultimately the retirement savings gap is an aggregation of individual savings gaps. And as advisors well know, you close those one individual at a time.

- Nevin E. Adams, JD

Saturday, March 07, 2015

The Trouble With Tibble

Ours is a complex business. For one thing, it’s fraught with potential peril for inattentive plan fiduciaries, many of whom find themselves tasked with the responsibilities of the role (frequently as part of a much wider range of responsibilities) with little in the way of background, training or explanation to help.

And then you have the defendants in the Tibble v. Edison International case: a large ($2 billion-plus) plan that not only had an investment committee, but also one separate from the benefits administration function. Moreover, that investment committee had access to the services of an investment advisor (Hewitt’s investment consulting arm) to review, select and monitor funds and, according to the findings of the lower courts, a review process that was attentive to the requirements of an investment policy statement (IPS).

What they did not do was ask about the availability of lower-priced institutional shares.

However, that wasn’t the issue before the U.S. Supreme Court this past week. Rather, the Court was asked to decide how to apply ERISA’s statute of limitations to the action of selecting these funds. Three of the retail class funds were added as plan investment options in 1999; three more were added in 2002. The plan sponsor plaintiffs had successfully argued before the 9th Circuit that when the suit was brought in 2007, the funds which were added in 1999 had been on the plan menu for more than six years — beyond ERISA's statute of limitations. At issue was whether the prudence of that older selection could be challenged.

In the presentations before the Supreme Court, both parties agreed that there was a fiduciary duty to review plan investments, and both parties were willing to concede that the initial review and selection of an investment fund should be more extensive than just considering the retention or replacement of a fund that was already on the investment menu. It was the nature and extent of that review that consumed much of the discussion during the hearing.

In the initial ruling in the case, the district court said there had to be a change in circumstances significant enough to make the continued investment in that investment option an imprudent one, and cited legal precedent for its view. The discussion last week noted precedents in the 9th, 4th and 11th Circuits saying that change would have to be tantamount to adding a new fund. In Tibble, there doesn’t appear to have been a change in the funds on the menu per se, but rather, the mere existence of lower-cost institutional shares.

However, the Assistant to the Solicitor General, appearing in support of the plaintiffs’ position as a friend of the court, told the justices that in its assessment, the ongoing monitoring of investment options was "not limited to circumstances in which the fund changed so much that it's like a new fund is being put in place.” 

It remains to be seen how the Supreme Court’s view of the level of review and the circumstances that trigger it will affect the outcome of this case. We’ll have an answer by June.

That said, the words that linger in my mind — and that I think plan fiduciaries should remember — also came from the Assistant Solicitor General: “You have a duty to look on a periodic basis and, really, how are you going to know if there have been changes unless you looked.”

How indeed.

- Nevin E. Adams, JD

Saturday, February 28, 2015

The Importance of Having a Plan

Over the course of my career, I’ve had the opportunity to participate in any number of “projects,” and to manage more than a few.

Some were explicitly tagged as such at the start, while others simply expanded to fit that name. Most of those projects turned out well; others faded into the woodwork after a time; some drew to a close after “redefining success;” and a couple actually “crashed and burned.” A lot of variables determine whether a project will be a success or failure, but in my experience, projects that lack either a limited budget and/or a specific timeframe are doomed from the outset.

I was therefore interested in some of the findings from the 8th annual America Saves Week survey this week. The survey, sponsored by the Consumer Federation of America, the Employee Benefit Research Institute (EBRI) and the American Savings Education Council (ASEC), found that more than half (57%) of those with a savings plan with specific goals said they were making good or excellent progress meeting their savings needs — nearly three times the number without a plan.

Moreover, nine-in-ten of those with a plan were spending less than their income and saving the difference (compared with only half of those without a plan), and more than twice as many (65%) of those with a plan said they were saving enough for retirement as among those without that specific savings plan (31%).

While those gaps were found between those who had a specific, individual, savings plan with specific
goals, it’s long been established that having access to a retirement plan at work makes a big difference in terms of whether people save for retirement or not — and the impact transcends income, gender and age. In fact, data prepared by the nonpartisan EBRI shows that more than 70% of workers earning from $30,000 to $50,000 participated in employer-sponsored retirement plans when a plan was available, whereas less than 5% of those middle income earners without access to an employer-sponsored plan contributed to an IRA. In other words, middle class workers are 15 times more like to save for their families’ retirement at work than on their own.

During this America Saves Week, it’s important to reinforce the importance of saving. However, it may be even more important to remember the positive impact of having a specific plan.

Not to mention the positive impact of having access to a retirement plan at work.

- Nevin E. Adams, JD

See also: “4 Things You Need to Know if You are Not Saving for Retirement.” 

For an idea as to the impact that eligibility for participation in a workplace retirement plan can make, see “Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model.”