Sunday, February 23, 2014

"Off" Putting

I’ve never been very keen on going to the dentist.  As important as I believe dental hygiene to be, I’ve come to associate my visits with the dentist with bad things: some level of discomfort, perhaps even pain, a flossing lecture from the hygienist, at the very least.  Most of which is readily avoided by doing the things I know I should be doing regularly – brushing, flossing, a better diet.  And knowing that I haven’t done what I should have been doing, I have good reason to believe that my visit to the dentist will be a negative experience – and so I put it off.

However, it’s not as though the postponement makes the situation any better; if anything, the delay makes the eventual “confrontation” with reality worse. 

That’s what retirement planning is like for many: They know they should be saving, know that they should be saving more, but they hesitate to go through the process of a retirement needs calculation because they are leery of the “pain” of going through the exercise itself, or perhaps even afraid that their checkup will confirm their lack of attentiveness to their fiscal health.  And, like the postponed dental visit, putting it off not only does nothing to rectify the situation, the passage of time (without action) may even allow the situation to worsen.

Indeed, the Retirement Confidence Survey (RCS)[i] has previously found that workers who have done a retirement needs calculation tend to be considerably more confident about their ability to save the amount needed for a financially comfortable retirement than those who have not done so, despite the fact that those doing a calculation tend to cite higher retirement savings goals.  In the 2013 RCS, 31 percent who have done a calculation, compared with 14 percent who have not, say they are very confident that they will be able to accumulate the amount they need, while 12 percent who have not done a calculation, compared with 3 percent who have, report they are not at all confident in their ability to save the amount needed for a financially comfortable retirement.

Next week we’ll commemorate America Saves Week[ii], an annual opportunity for organizations to promote good savings behavior[iii] and a chance for individuals to assess their own saving status.  Not because saving is something you should do once a year, or that reconsidering your financial goals and progress is well-suited to a particular week on the calendar, but because it IS something that should be done regularly in order to be effective.

Over time, I have found that when I make (and keep) regular dentist appointments, those visits are much less painful, and considerably less stressful than the times when I have gone “too long” between appointments.

Similarly, regular savings checkups – like those inspired by events like America Saves Week – can be a lot less “painful” than you might think.

Nevin E. Adams, JD

You can assess your savings plan here.

For a list of six reasons why you—or those you care about—should save, and specifically save for retirement now, see “Sooner or Later“:

[i] Information from the 2013 Retirement Confidence Survey (RCS) is available online here. Organizations interested in underwriting the 2014 RCS can contact Nevin Adams at nadams@ebri.org.  

[ii] America Saves Week is an annual event where hundreds of national and local organizations promote good savings behavior and individuals are encouraged to assess their own saving status. Coordinated by America Saves and the American Savings Education Council, America Saves Week is February 24–March 1, 2014, a nationwide effort to help people save more successfully and take financial action. More information is available at www.americasavesweek.org.

[iii] Organizations interested in building/reinforcing a workplace savings campaign can find free resources at www.asec.org  including videos, savings tips, and the Ballpark E$stimate® retirement savings calculator, courtesy of the American Savings Education Council (ASEC).

Sunday, February 16, 2014

Model “Hones”

After a winter filled with predictions of winter weather that never quite measured up to the forecasts, the nation’s capital (and the Southeast) finally got a taste of what those in the Midwest and Northeast have been contending with for weeks.  Not that there haven’t been close calls here, but up until this week, the multitude of factors that have to come together to produce a significant snowfall here—hadn’t.  Much to the discomfiture of those who ply their trade making such predictions, it should be noted.

While Mother Nature can be notoriously fickle, technologies like Doppler radar are able to discern with greater precision real-time activity which can be fed into sophisticated computer models that draw on the experience of the past to extrapolate a series of potential outcomes—some deemed more likely than others.  Projected outcomes that, despite the recent experience here, do an increasingly accurate job of helping each of us plan our daily commute or that vacation a couple of weeks hence.

Arguably, predictions about retirement readiness are even more complicated than weather forecasting, though there are certain similarities.  Done properly, they require a foundation in knowing the actual resources available to individuals—and an ability, through the use of sophisticated computer models, to forecast the impact of current behaviors on future outcomes.  Those models must also consider the likelihood and timing of certain external factors, and their impact on resources, and to project if (or when) those resources will run short against lifespans and circumstances as unique and variable as the American population.

Of course, those computer models require updating on a regular basis to properly account for changes in assumptions (and realities).  A recent EBRI Issue Brief[1] noted that, due to the increase in financial market and housing values during 2013, the probability that Baby Boomers and Generation Xers would NOT run short of money in retirement increased between 0.5 and 1.6 percentage points (when aggregated by age cohort), based on the Employee Benefit Research Institute (EBRI) Retirement Readiness Ratings (RRRs).[2]

EBRI’s analysis, which analyzes the major factors that cause retirement outcomes to differ, and their impact, found that, among other things, eligibility for participation in an employer-sponsored 401(k)-type plan remains one of the most important factors for retirement income adequacy.  In fact, Gen Xers in the lowest-income quartile with 20 or more years of future eligibility in a defined contribution plan are half as likely to run short of money as those with no years of future eligibility.

Not surprisingly, the report also noted that the risks of a long life and high long term-care costs drive huge variations in retirement income adequacy—and suggested that annuities and long-term care insurance could mitigate much of the variability in retirement income adequacy at or near retirement age.

Of course, while a broad-based forecast is sufficient for the local weather, and a broad-based sense of the nation’s retirement readiness is powerful fodder for purposes of setting public policy goals, individual forecasts—in order to be accurate—require more customized inputs.[3]  

Nevin E. Adams, JD

[1] “What Causes EBRI Retirement Readiness Ratings™ to Vary: Results from the 2014 Retirement Security Projection Model®” is available online here.

[2] EBRI’s proprietary Retirement Security Projection Model® (RSPM), unlike many other models, takes into account a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of age and income) as well as health insurance and out-of-pocket, health-related expenses, plus stochastic expenses from nursing home and home-health care (at least until the point such expenses are covered by Medicaid).  A chronology of the EBRI Retirement Security Projection Model® is available online here.  

[3] Fortunately, individuals who want a sense of their retirement readiness can check out EBRI’s BallparkE$timate,® along with the other materials available at www.choosetosave.org

Sunday, February 09, 2014

"Common" Sense

At a time when the nation’s legislative wheels seem mired in partisanship, the last week of January turned out to be a busy one for retirement plan proposals.

First the president unveiled his myRA concept in the State of the Union (along with a reference to an automatic IRA proposal previously included in the White House’s annual budget), followed a day later by introduction of the Retirement Security Act of 2014, a bipartisan proposal by Sens. Bill Nelson (D-FL) and Susan Collins (R-ME). A day after that, Sen. Tom Harkin (D-IA), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, formally introduced the Universal, Secure, and Adaptable (USA) Retirement Funds Act of 2014, an updated version of his 2012 proposal.

All three were intended to expand and improve the retirement savings of Americans—although, as you might expect, the three take quite different approaches. Consider that the myRA calls for the development of a “new retirement savings security” to encourage savings in a kind of Roth IRA, while Sen. Harkin’s proposal would require employers above a certain size to offer a whole new type of retirement savings plan (and would impose some new threshold enrollment and withdrawal requirements on existing 401(k)s, as well). As for the Nelson/Collins proposal, it seems to be largely focused on lowering or removing certain current regulatory and administrative barriers to smaller employers offering retirement plans.

Despite their varied approaches to the commonly-stated goal of expanding retirement savings, all three do have one other key commonality: All look to leverage the success of the work place and systematic payroll deductions in fostering retirement savings. Of course, that’s a foundation whose worth previous EBRI research has documented:¹ the impact that eligibility for a work place retirement plan can have on retirement readiness,² as well as the additional help that automatic-enrollment designs can provide.

It remains to be seen whether the legislative proposals will go anywhere—and the potential impact of myRA on motivating new savers is also uncertain. Just this week, Senate Majority Leader Harry Reid (D-NV) introduced a proposal on defined benefit pension smoothing—not to provide any kind of help for retirement, but as a way to pay for a three-month extension of unemployment benefits.

But as America Saves Week nears, the activity on Capitol Hill serves as an additional reminder that a good place to start—any time, with or without the incentives of legislative change—is to Choose to Save. ®³

Nevin E. Adams, JD

¹ The January EBRI Notes, “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,” is available online here.

² See “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” online here, and “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” online here.

³ You can find a wide variety of tools and resources—including the popular and widely recommended Ballpark E$timate—at http://www.choosetosave.org/

Sunday, February 02, 2014

Motion "Sensers"

I’m not sure exactly when I was introduced to the concepts behind Sir Isaac Newton’s laws of motion.  While behavioral finance has laid claim to the concept of (and means of combatting) inertia in benefit plan design, Newton’s first law of motion (sometimes called “the law of inertia”)—first published in the late 1600s—reminds us that (in layman’s terms), an object at rest remains at rest; or perhaps more precisely, an object continues to do whatever it happens to be doing unless a force is exerted upon it.

However, the one I remember most from earlier days is the third law of motion—the notion that for every action there is an equal and opposite reaction.  To this day, I have a “Newton’s cradle” at my desk.

While Newton’s laws were intended to explain the motion of objects, they do seem to have application in matters of human interaction as well.  One need only look at the increasingly strident levels of partisanship on Capitol Hill to appreciate the stridency of “equal and opposite” reactions.

A recent EBRI publication[1] noted that recent decisions by some employers to eliminate health benefits for spouses who were eligible for coverage through their own employer could represent a “tipping point” in employment-based health benefits.  While the report noted that in 2012, 7 percent of employers did not cover spouses when other coverage was available to them, it also cautioned that as of late 2012–early 2013, another 8 percent of large employers were reporting that they planned to exclude spouses from coverage when other coverage was available.

These decisions come at a time when employers are wrestling with how to control the rising cost of providing health benefits to workers, in part due to the requirements of the Patient Protection and Affordable Care Act of 2010 (PPACA).[2]  In fact, one large employer that recently made the decision to drop spousal coverage under those circumstances specifically said, “since the Affordable Care Act requires employers to provide affordable coverage, we believe your spouse should be covered by their own employer.”

EBRI’s analysis indicates that the costs of covering spouses may well represent a tempting cost reduction target for some.  The report notes that, in 2011, policyholders spent an average of $5,430 on health care services, compared with $6,609 for spouses, and—even adjusting for factors such as gender, age, and overall health status—found that spouses still have health care costs that are roughly 7 percent higher than policyholders.

The report cautions, however, that while “first-mover” firms may save money in the short run by eliminating working spouses from their plan, those costs could come back to them over time as other employers embrace that approach—basically returning policyholders to their coverage who heretofore were covered as spouses in other programs.

Ultimately, any savings from those moves will depend upon each firm’s composition of couples and their respective employment statuses.  Indeed, given prevailing levels of cost sharing, the report notes that employers might end up worse off under a change in spousal coverage policies, particularly since employers generally subsidize employee-only coverage more than they subsidize family coverage.

As the EBRI report reminds us, decisions about benefit plan design, like so many other decisions, should be made thoughtfully—and with an eye toward the realization that, for every action there can be an equal, opposite, and sometimes greater, reaction.

Nevin E. Adams, JD

[1] “The Cost of Spousal Health Coverage” is available online here.

[2] PPACA requires that employers with 50 or more workers provide health coverage to workers and dependent children until they reach age 26. It does not, however, require employers to provide health coverage to spouses, whether or not they are eligible for other health insurance.