Sunday, January 26, 2014

Safety “Net”

I’m one of those travelers who absolutely dreads cutting it to the last minute. Not that I haven’t been forced to do so, from time to time, but I’m generally the one chomping at the bit to get to the airport, or to hit the highway an hour before anyone else. In my defense, on more than one occasion that “cushion” has been the difference between catching a flight or not. Planning that only considers a “best” or “normal” scenario too often overlooks the unexpected—and sometimes that margin of error is all you have.

For over a decade EBRI has modeled the nation’s potential retirement savings shortfall, and the EBRI Retirement Readiness Ratings™ provide an assessment of how many Americans are at risk of running short of money for needed expenses in retirement. In contemplating expenses, that model considers the regular expenses of living in retirement, as well as uninsured medical expenses, and the potential costs of nursing home care.

However, we have also documented and quantified the role of Social Security, defined benefit and private retirement accounts on retirement income adequacy for Baby Boomers and Gen Xers with an eye toward replacing their preretirement wages and income. While this more traditional focus on income replacement may misstate an individual’s actual post-retirement financial situation, many financial planners work with this goal as a starting point, and it can provide valuable insights particularly when—as is the case with EBRI’s projections—it is able to leverage actual 401(k) data from the unique EBRI/ICI 401(k) database, the largest such repository in the world.

Indeed, based on a recent EBRI analysis, between 83 and 86 percent of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with current levels of Social Security retirement benefits, will be able to replace at least 60 percent of their age-64 wages and salary on an inflation-adjusted basis.

When the threshold for a financially successful retirement is increased to 70 percent replacement of age-64 income, 73–76 percent of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80 percent replacement rate, 67 percent of the lowest-income quartile will still meet the threshold; however the percentage of those in the highest-income quartile deemed to be “successful” relying on just these two retirement components slips to 59 percent, reflecting the progressive nature of Social Security.

As positive a result as that seems for many, when the same analysis is conducted for automatic enrollment 401(k) plans (with an annual 1 percent automatic escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88–94 percent at a 60 percent threshold; 81–90 percent at a 70 percent replacement threshold; and 73–85 percent at an 80 percent threshold.

That’s not quite the doomsday crisis scenario portrayed by many of the headlines in vogue today, though EBRI’s projections still show that a large number of Americans—even among those eligible for a 401(k) plan for 30 years—won’t be able to replace that pre-65 salary even at the various levels modeled, based on current savings patterns.

It does, however, illustrate the impact that changes in those current savings behaviors can have—and it underscores the significant role of Social Security as a vital safety net for the nation’s retirement security.

Nevin E. Adams, JD

“The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis” is available online here.

Saturday, January 25, 2014

Stocks Swayed by the Super Bowl?

Will your portfolio soar with the Seahawks, or get kicked by the Broncos? 

That’s what adherents of the so-called Super Bowl Theory—which maintains that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, whereas should a team from the old American Football League prevail, stock prices would be expected to fall—would likely predict.

Sure enough, last year’s victory by the Baltimore Ravens (who, it might be recalled, are really a legacy NFL team via their Cleveland Brown roots) coincided with a 29.6 percent gain for the S&P 500.  Moreover, the indicator has been correct 37 of the last 47 years, or nearly 79 percent of the time.
Not only has the Super Bowl Indicator consistently predicted the direction of the market, but returns when the old NFL wins and when the AFL wins are dramatically different, according to a recent report in the Wall Street Journal, which notes that the Dow has averaged a healthy 11.6 percent return in years in which the old NFL wins the Super Bowl and has declined by an average of 0.74 percent in years in which the old AFL prevailed.

Fare Way?
That the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII—the Baltimore Ravens (by way of NFL legacy Cleveland Browns) and the San Francisco 49ers—were NFL legacy, and thus an NFL legacy team would win regardless of the end result.

Of course, looking back over the years, the record is a bit, shall we say, “inconsistent.”  Consider that in 2012 a team from the old NFL (the NY Giants) took on—and took down—one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots).  And, in fact, 2012 was a pretty good year for stocks. 
The year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers—two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.

On the other hand, 2010 turned out pretty well for the markets—a year when the New Orleans Saints bested the Indianapolis Colts, though it was, after all, another Super Bowl featuring two teams with NFL roots (the Colts by way of the storied Baltimore Colts franchise).  That was also the case in 2009 when both the Arizona Cardinals and the Pittsburgh Steelers shared NFL roots (the Arizona Cardinals by way of once upon a time being the St. Louis Cardinals), AND in 2007, when the S&P 500 rose 3.53 percent as the Indianapolis Colts beat the NFL legacy Chicago Bears 29-17, as well as in 2006 when the Pittsburgh Steelers defeated these same Seattle Seahawks; that turned out to be a good year for equities, with the S&P 500 closing up more than 13 percent.
Patriot Gains

Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21. According to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55 percent.   
Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9 percent gain that year, sacking the indicator for another loss.

Consider also that, despite victories by these same (AFL legacy) Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams and the Baltimore Ravens, did nothing to dispel the bear markets of 2000 and 2001, respectively.
In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC(1). 
And, not having entered the league until 1976, wherever they began, can the Seahawks truly be considered a “legacy” NFL squad?

Investor adherents to this market theory are presumed to be pulling for the NFC’s Seahawks over the old AFL (and new AFC Champion) Denver Broncos in Super Bowl XLVIII.  On the other hand, when Denver won its back-to-back Super Bowls in 1998 and 1999 (2), the Dow and S&P did pretty well; and in 2006—when the Seahawks made their only other Super Bowl appearance and lost—the S&P 500 gained nearly 16 percent. 
Regardless, it looks like it could be a good game—and whether you are a proponent of the Super Bowl Theory or not, would be one in which whoever wins, we all will!

-          Nevin E. Adams, JD

(1) In fact, Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.
(2) Ignoring, of course, the Super Bowls Denver lost (and the markets “won”) in 1978, 1987, and 1988 and 1989 – the latter still the widest margin of loss (55-10) in Super Bowl history)

Sunday, January 19, 2014

"Left" Overs

On more than a few occasions in my youth, I would misplace some object of importance. Generally it was just something I set aside for just a moment in pursuit of some more interesting endeavor—and sometimes it was something I set down and forgot about until much later.

Regardless, being unsuccessful in locating the object, I was frequently inclined to suspect that the culprit responsible for the disappearance was my mother, who—as mothers do, spent more than a little of her existence picking up objects that had been left unattended in unsuitable places. There were, however, times when she had played no role in the “disappearance,” and she’d admonish me to look more diligently—that “it didn’t just get up and walk away on its own…”

Now, while there were times when I was certain that the object in question had done just that, once I was able to retrace my steps, to recall where I had been and when—and, inevitably, there it was.
That said, I wasn’t always happy to find things where I left them; comic books don’t hold up well in the rain, for instance, and fragile objects left in the reach of younger siblings (or pets) can have a frustratingly short shelf life.

Retirement plan sponsors, and those who support their efforts, have worked long and hard to engage participants with the management and oversight of their retirement plan balances, with mixed results. However, even the most engaged participants seem to struggle to find the time, inclination, or discipline to revisit those initial investment choices, much less to do so at the appropriate times. In fact, left to their own devices, it’s likely that many—perhaps most—retirement plan participants looking to see how their balances are invested would find them right where they “left” them at that initial enrollment meeting (though with proportions shifted by the markets in the interim).

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target date of his or her retirement.

Though their mark was being made prior to the sanction of the design as a qualified default investment alternative (QDIA) in the Pension Protection Act of 2006, target-date fund availability and usage have soared along with the ensuing expanded adoption of automatic enrollment. Indeed, nearly three-quarters (72 percent) of 401(k) plans in the EBRI/ICI 401(k) database included target-date funds in their investment lineup at year-end 2012, and 41 percent of the roughly 24 million 401(k) participants in that database held target-date funds. Among participants who were offered target-date funds as a plan option, 60 percent held them at year-end 2012, and target-date fund assets represented 22 percent of the assets of plans offering such funds in their investment lineups.

Reflecting the growing popularity of automatic enrollment, at year-end 2012, nearly 54 percent of the account balances of recently hired participants in their 20s were in balanced funds (a significant subset of which is in target-date funds), compared with 7 percent in 1998. Moreover, at year-end 2012, 43 percent of the account balances of recently hired participants in their 20s were invested in target-date funds, compared with 40 percent at year-end 2011.

The impact of these shifts, chronicled in the extensive EBRI/ICI 401(k) database, is already manifested in the increasingly diversified portfolios of newer hires and younger participants. Beyond that initial allocation decision, the TDF design incorporates an ongoing rebalancing over time, one that shifts the underlying portfolios such that they are less focused on growth and more focused on income over time—a rebalancing that occurs automatically, and without requiring the input or involvement of the participant-investor.

That is likely to have a significant impact over time, because with retirement investments, as with life, we often plan to come back and revisit our choices more often than time (or life) allows.

Nevin E. Adams, JD

“401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012” is available online here.
In 2011, an EBRI Issue Brief provided an informative examination of the use of target-date funds (TDFs) by a consistent group of 401(k) participants in plans that offered them in 2007 through 2009. See “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007–2009,” online here.

Sunday, January 12, 2014

Penny Whys?

We tried to introduce our kids to money and financial concepts relatively early. We encouraged them to save some of their monetary gifts, let them put the money in the offering plates at church, and provided them with a modest allowance for chores commensurate with their age and abilities. For all that, they never really seemed to fully appreciate the “value of money” until they started earning a paycheck outside the home (I knew they were “getting” it, when they wanted to know who FICA was!).

Perhaps because of their early education, there weren’t massive behavioral changes. I was pleased to see their spending on gifts for family members rise with their income and, after an initial spending “spurt” (likely attributable to a sense of newfound wealth), they seemed to settle in. But what happened next was that, while they would spend money on others, they tended to hold back. In fact, what seemed to emerge was not so much a pattern of setting money aside, but a reluctance to spend; not so much saving, as hoarding. Indeed, it was interesting to see how they reacted to spending now that it was their own money.

One of the premises underlying the introduction of consumer-driven health plans is that they do a better job of “engaging” the participant/consumer in the cost(s) of their health care decisions, either in providing a finite amount of financial resources from the employer for that purpose, designing the plan so that the worker has a more direct financial involvement in the decision, or both. In fact, the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey (CEHCS) found evidence that adults in a consumer-directed health plan (CDHP) and those in a high-deductible health plan (HDHP) were more likely than those in a traditional plan to exhibit a number of cost-conscious behaviors.

However, one of the policy concerns with those designs is that individuals would make medical decisions based on expense, rather than medical necessity. Indeed, recent research by the EBRI Center for Research on Health Benefits Innovation (CRHBI) notes that medication adherence—which has been shown to produce substantial savings as a result of reductions in hospitalizations and emergency room use—is known to be affected by out-of-pocket cost to patients.

That EBRI CRHBI study, published in a recent issue of The American Journal of Managed Care,
examined the impact of adopting a health savings account (HSA) consumer-directed health plan (CDHP) on medication adherence for individuals with five chronic conditions disease. Based on the experience of a large manufacturer that replaced all of its existing health insurance options with a CDHP-HSA, the research found that in the first year under the new plan, the number of prescriptions filled, the proportion of days covered, and the proportion of patients who were adherent declined for all conditions except asthma/COPD. While the effects diminished some in the second year for those with diabetes, the levels persisted among those with hypertension, dyslipidemia, and depression.

These findings have important policy implications, in that—notwithstanding the presence of HSAs and employer contributions—medication utilization and adherence declined when high deductibles were imposed.

As the article explains, if these reduced levels of medication adherence for chronic conditions are sustained, it is likely that they will increase medical costs and adversely impact worker productivity. Certain regulatory changes might permit some mitigation of the impact, by supporting CDHP design changes that would provide first-dollar coverage for chronic disease medications for participants using HRAs. Moreover, it suggests that employers may need to provide education and ongoing support to encourage appropriate use of account funds so that prescription drug use for chronic conditions remains a priority for their workers.

There’s an old saying that cautions against being “penny wise and pound foolish”—the tendency to conserve relatively small amounts, only to be wasteful when it comes to larger expenditures. It is, after all, one thing to set money aside for a rainy day, and another altogether to trigger a rainy day by not spending enough on the right ones.

Nevin E. Adams, JD

[1] “Findings from the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey” is available online here.

[2]  “Medication Utilization and Adherence in a Health Savings Account–Eligible Plan” is available online here.

Sunday, January 05, 2014

"Whether" Forecast

This is the time of year where, in many parts of the county, the weather—and weather forecasters—dominate the nightly news coverage, certainly when the predictions are dire.  Indeed, having had the opportunity to live in several different parts of the country, I can assure you that the bigger the projected snowfall, the more hyped the coverage.

Several weeks back, the local meteorologists were all agog about an impending snowfall in the Washington, DC area—a snowfall  initially projected at 2–4 inches of accumulation, but that was quickly revised to 3–5 inches, and then to 4–7 inches.  The local mass transportation systems sprang into action, announcing alternative schedules, state officials advised those who didn’t need to be on the roads to stay home, non-emergency federal employees in the area were granted an excused absence, while others were directed to telecommute.

As it turned out, it did snow—but not much, and certainly not in the amounts that had garnered all the attention.  Afterwards, meteorologists were quick to point out that accumulations had matched projections in some areas, although those areas were relatively small and generally far removed from major metropolitan centers.  Ultimately, more were affected by the weather forecast than the weather itself.

Dire predictions are also common about the retirement prospects for Americans.  A recent headline proclaims “Americans Are $6.8 Trillion Short On Retirement Savings,” a figure that the article proceeds to tell us amounts to $113,000 per household “for those on the eve of retirement” —that is, those ages 55 to 64.

Actually, that $6.8 trillion is the low end of a range published by the National Institute on Retirement Security (NIRS) about six months ago,[1] and is close to the $6.6 trillion estimate of the Center for Retirement Research (CRR), which we have commented on previously (see “Rely-Able?”)  The NIRS projections were largely derived by looking at self-reported retirement account balances, financial assets and net worth from the Federal Reserve’s 2010 Survey of Consumer Finances, 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.

For public policy purposes, EBRI has long defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement. Working from that definition as a starting point, along with an assumption that retirement represents the cessation of paid employment and begins at age 65[2], we have projected that approximately 44 percent of Baby Boomer and Gen-Xer households are simulated to be at risk of running short of money in retirement, assuming they retain any net housing equity until other financial resources are depleted.  Our most recent assessment of that total aggregate gap between needs and available resources is $4.6 trillion, with an individual average of approximately $48,000.[3]

That is, of course, still a large gap, though one considerably smaller than that highlighted in the article.  While it represents a lot of households—it also includes 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.[4]  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.

A lot of science goes into making weather projections, and yet a temperature difference of a mere degree or two can be the difference between a modest rainfall or a blizzard of epic proportion.  Beyond those reality variables, imprecise modeling assumptions can distort forecasts, producing their own disruptions.

When it comes to effective retirement policy, it is, of course, important to be able to quantify just how big the nation’s retirement savings shortfall is.  It is, however, perhaps even more important to remember that whether an individual shortfall exists will be a combination of individual circumstances, as well as varying degrees of preparation, access, and needs.

Nevin E. Adams, JD

[1] The NIRS report, “The Retirement Savings Crisis: Is it Worse than We Think?” is available online here.

[2] EBRI has also performed analysis on retirement ages other than 65. 

[3] EBRI recently submitted congressional testimony on “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis.”  Included in that testimony was an analysis of the probabilities of successful retirement by income quartile for both voluntary and automatic enrollment 401(k) plans.   You can read it online here.   

[4] Nearly one-half (49.1 percent) of Gen Xers are projected to have at least 20 percent more than is simulated to be needed, for example, while about 1 in 5 (19.4 percent) are projected to have less than 80 percent of what is needed. See “All or Nothing? An Expanded Perspective on Retirement Readiness,” online here