Sunday, March 25, 2012

“Counter” Intuitive?

When one considers the impact of changes in tax policy on retirement plan savings, it is perhaps natural to assume that those who pay more taxes would respond to changes in the taxation of their contributions and/or savings. However, what’s probably not as obvious to many is that lower-income workers could also be significantly impacted. Indeed, as noted in the March 2011 EBRI Notes, “…behavioral economics has shown that the reaction of employees in situations similar to this are often at odds with what would have been predicted by an objective concerned simply with optimizing a financial strategy.”(1)

As part of the 2011 Retirement Confidence Survey, workers were asked about the importance of tax deferrals in encouraging them to save for retirement. Quoting from the November 2011 EBRI Issue Brief, “If one were to look at this from a strictly financial perspective, one would assume that the lower-income individuals (those most likely to pay no or low marginal tax rates and therefore have a smaller financial incentive to deduct retirement savings contributions from taxable income) would be least likely to rate this as ‘very important.’ However, those in the lowest household income category ($15,000 to less than $25,000) actually have the largest percentage of respondents classifying the tax deductibility of contributions as very important (76.2 percent).”

Additionally, asked how they would likely respond if their ability to defer those taxes was eliminated, it was the lowest-income category ($15,000 to less than $25,000) that reacted most negatively—with 56.7 percent indicating they would reduce the amount they would save in these plans (see

As part of the 2012 Retirement Confidence Survey,(2) participants were asked about their likely response to a different set of federal tax modifications included in a specific proposal. (3) Those participant responses were subsequently integrated with those of plan sponsor respondents to a 2011 AllianceBernstein survey(4) to the changes contemplated under that same proposal. The proposal author’s analysis had largely assumed status quo in terms of plan design changes (by plan sponsors) and contribution flows (by both individual participants and employers) in response to those changes.

In fact, the average percentage reduction for 401(k) participants in the two smallest plan size categories (less than $1 million and $1–$10 million in assets) were more than 1.5 times the value of the average percentage reduction for participants in any of the larger plan-size categories (regardless of the income level of the 401(k) participants). Striking as those results are, there is a ripple effect on participant savings to be considered as well.

A new EBRI study uses the EBRI-ERF Retirement Security Projection Model® (RSPM), and with a database of tens of thousands of 401(k) plans and millions of participant accounts, to provide baseline analysis. That analysis indicates that the cumulative impact of reported plan sponsor modifications and individual participant reactions would result in an average percentage reduction in 401(k) balances of between 6–22 percent at Social Security normal retirement age for workers currently ages 26–35. That analysis also indicates that an even larger average percentage accumulation reduction would result for participants in small plans.(5)

Those participant and plan sponsor responses may be counter-intuitive to some—but it’s the type of response - and impact - that shouldn’t be overlooked.

- Nevin E. Adams, JD

(1) See “The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income: Results from the 2011 Retirement Confidence Survey.”

(2) See “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings.”

(3) It’s not the first time EBRI has undertaken such an analysis, of course. EBRI has looked at preliminary evidence of the impact of these “20/20 caps” on projected retirement accumulations under a set of assumptions—see “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations”, and “Tax Reform Options: Promoting Retirement Security,” EBRI Issue Brief, No. 364, November 2011. EBRI also provided testimony before the Senate Finance Committee on the issue, online here. Research Director Jack VanDerhei also submitted testimony to the Senate Finance Committee on “The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income: Results From the 2011 Retirement Confidence Survey," .

(4) AllianceBernstein, 2011, “Inside the Minds of Plan Sponsors” Research.

(5) That integration of sentiment with EBRI’s extensive 401(k) database and modeling capabilities provided a unique perspective on the full potential impact of these changes on cumulative savings amounts, which was outlined in our recent March 2012 EBRI Notes article, “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances.”

Sunday, March 18, 2012

'Good' Vibrations

Last week the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc., unveiled the 22nd annual Retirement Confidence Survey (RCS).

Among the things we have learned after doing this survey for more than two decades: People’s confidence about retirement frequently seems out of line with the financial resources they indicate they have on hand to fund it. Of course, most (56%) of this year’s respondents admit neither they nor their spouse have made even a single attempt to determine how much they need to achieve that comfortable retirement—so it shouldn’t be too surprising that, asked how much they think they need to have saved in order to provide for a comfortable retirement, many hold forth a number that seems lower than some might expect.

While we spent a fair amount of time this week discussing the results with reporters, one question that came up repeatedly was “Why do you do this survey? What do you hope people take from it?”

The survey itself is meaningful both for the kinds of issues it deals with: Questions that, as in this year’s RCS, deal not just with confidence as a “feeling” but also the criteria that underlie and influence that sentiment. It looks at the perspective both of those already in retirement, as well as those still working and heading toward that milestone. It also (with a perspective based on two decades of conducting this particular survey) offers insights on how those feelings and factors have changed over time.

Those good reasons notwithstanding, this past week EBRI reminded reporters that the RCS has found that people who have taken the time to do a retirement needs assessment are generally more confident than those who haven’t done so, and not necessarily because they find that they are in better shape than they’d thought. In fact, most report that they set higher savings goals AFTER they had done the assessment—and were THEN more confident in their situation.

That is why EBRI joined many others in 1995 to establish the American Savings Education Council (ASEC), and then the ChoosetoSave(r) program and the BallparkE$timate(r). Millions of Americans have used the BallparkE$timate(r) at to help them climb the hill to savings and greater financial security, and according to the RCS, a more realistic view of the future.

There’s something to be said for knowing the size and extent of what was previously unknown, particularly when it comes to setting a financial goal as complex as planning for retirementcan seem.

If the annual publication of the RCS does no more than remind individuals of the importance of taking the time to do so, then it’s not only good information—it’s information that does some good.

- Nevin E. Adams, JD

Results of the 2012 Retirement Confidence Survey (RCS) are now available online HERE

Sunday, March 11, 2012

“Managing” Expectations

On March 13,(1) the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc., will unveil the 22nd annual Retirement Confidence Survey (RCS)—the longest-running annual retirement survey of its kind in the nation. Indeed, the RCS is unique in offering a perspective on retirement that is now as long as the retirement of those living to average life expectancy at 65.

Consider that back in 1996, the sixth annual RCS found that 24 percent of retirees were not confident that they would have enough money to live comfortably throughout their retirement years, and more than 1 in 5 said their lifestyles were worse than when they first retired (with nearly 1 in 10 calling them "a lot worse"). The report noted that “[t]wo-thirds of those working then predicted they would work after they ‘retire,’ and nearly 40 percent of those say they think they'll need to for financial reasons, to pay the bills and make ends meet.”

Five years later, the 2001 RCS noted that the percentage of individuals who say they have personally saved for retirement decreased from 75 percent in 2000 to 71 percent, though that was still better than the 59 percent cited in 1998. At the time, the RCS noted that the “changes in individual behavior regarding retirement savings may in part be attributed to recent declines in consumer confidence, employment, the economy, and the equity markets.”

While a press release about the 2006 RCS stated that “RCS data over the past 12 years continue to show that retirement confidence overall among workers does not seem to be affected by either stock market performance or varying economic conditions,” subsequent events—notably the 2008 financial crisis—did seem to undermine confidence levels.

The 2010 RCS acknowledged that Americans’ confidence in their ability to afford a comfortable retirement had plunged to a new low at the same time that the recent declines in other retirement confidence indicators appeared to be “stabilizing.” And yet, just one year later, the 2011 RCS cautioned, “Instead of making fundamental adjustments to their spending and saving patterns in response to the decline in confidence, workers continue to change their expectations ”.

How we view—and anticipate—retirement can have a dramatic impact on that reality, and the RCS provides valuable insights into the perspectives of those heading toward, and those already dealing with, the realities of retirement.

What matters, of course, isn’t one’s confidence about having a financially secure retirement. What matters is having taken the time and energy to actually do something about it.

Nevin E. Adams, JD

(1) Full results of the 2012 RCS will be available online at the morning of Tuesday, March 13.

Sunday, March 04, 2012

“Difference” Strokes

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.

However, the timing of the retirement decision is often not within an individual’s control. In fact, the Retirement Confidence Survey has consistently found that a large percentage of retirees leave the work force earlier than planned. In fact, nearly half (45 percent) of retirees reported that they were in this situation in 2011 (see EBRI Issue Brief No. 355, March 2011, The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting “the New Normal”).

Real-world data have shown (and shown for some time now) that the median retirement age for Americans is not even as old as 65 (it’s been 62). Still, EBRI research has shown that working longer – even working past the age of 65 – is no guarantee of a financially satisfying retirement. In fact, a June 2011 Issue Brief titled “The Impact of Deferring Retirement Age on Retirement Income Adequacy” ) notes that, even if a worker delays his or her retirement until age 80, just 61.7% of the lowest preretirement income quartile households would have a 50 percent probability of not running out of money in retirement.

What Matters

The research notes that how workers fare financially after retirement is directly tied to three factors: their salary level at retirement, how long they work beyond 65, and whether they save in a defined contribution retirement plan during their working lifetime. In fact, the report notes that “a major factor that makes a difference” in their ability to meet basic and uninsured health-care costs in retirement is “whether they are still participating in a defined contribution plan after the age of 65.” How much difference? At least a 10 percentage point difference in the majority of the retirement age/income combinations.

Ultimately, the research should remind us of a couple of things: first, that the assumption that we’ll be able to work past “normal” retirement age is just that—an assumption. Second, and more important, even if that assumption pans out, it cannot be assumed that it will, in and of itself, prove to be sufficient.

But finally, and significantly, there is at least one thing individuals can exercise some control over in the “here and now” – their current—and continued—participation in defined contribution plans.

And that’s something that can directly—and significantly—make a difference in building a financially viable retirement.

- Nevin E. Adams, JD

(1) Admittedly, except for those in the lowest income quartile, this would be a small percentage of the population, depending on your expectations of success (see “Short” Comings ). Still, according to the EBRI Retirement Security Projection Model (RSPM) baseline results, the lowest preretirement income quartile would need to defer retirement age to 84 before 90 percent of the households would have a 50 percent probability of success.

You can read more about how these factors impact retirement income adequacy HERE