Americans (Still) Clueless About Retirement – But Know They’re Not Doing Enough

A new survey finds that Americans don’t know how much they will need to fund their retirement, and think they should be saving about five times more than they are. Little wonder they are also more likely to second guess their financial decisions than any other major life decision.

The study, “Finances in Retirement: New Challenges, New Solutions,” by Bank of America Merrill Lynch, concludes a four-year, 50,000-respondent investigation focused on understanding the transforming nature of retirement through seven interconnected “life priorities” – family, work, health, home, giving, leisure and finances.

Among the findings from this latest survey of more than 4,800 respondents:

  • While most Americans realize retirement will be the biggest purchase of their lifetime, 81% say they do not know how much money they will need to fund their retirement.
  • Americans are saving only a fraction of what they think they should: 5.5% vs. 25% of their annual income (after taxes).
  • More than half of Millennials feel a secure retirement is beyond reach, though only 30% of Boomers (who, let’s face it, are closer to that goal line) feel this way. Of course, Millennials expect 65% of their retirement income to come from personal sources, including savings and continued employment, far more than earlier generations, which might have something to do with their concerns.
  • While most people say they want to live to the age of 90, only 27% of pre-retirees age 50+ feel financially prepared to fund a retirement that lasts 10 years, let alone 20-30 years.
  • Nearly two-thirds (65%) of Americans say the language of finance is confusing and not user-friendly (don’t you wonder about the other 35%?).
  • Americans are seven times more likely to say that talking about personal finances is taboo than they are to say it can be discussed openly. Only 11% feel comfortable discussing their personal finances.

Behavioral Financing?

Ninety-one percent say they would make healthier choices to reduce potential expenses in later life, and the same percentage would use more generic medications and supplies.

Sixty-eight percent say they would consider purchasing long-term care insurance.

Three in four say they would downsize their home to both lower ongoing costs and benefit from the equity, while 67% would be willing to move to a less expensive location and 47% would consider selling their home and renting an apartment.

Ninety percent of people would be willing to cut back on basic expenses and save more, while 77% would increase use of tax-protected retirement accounts. Two-thirds would sell belongings or real estate that they no longer need, and three in five would adjust the timing of their Social Security benefits.

One positive thought: Among those who are saving for retirement, 46% said that what got them started in the first place was an employer offering a retirement savings plan.

Have You Called in Sick – When You Weren’t?

What’s the weirdest excuse you’ve ever used – or had used on you?

Perhaps PTO has made it easier to take off for that “mental health” day (or golf date) – but have you ever made up a more “legitimate” sounding excuse, er, reason for taking off? And if so, how did it turn out?

What’s the weirdest excuse you’ve ever given for taking off work? And what’s the weirdest reason that has ever been given to you?

How Much Might Longevity Income Annuities Matter?

New research considers the potential impact of longevity income annuities, and finds some real benefits in retirement security.

Back in 2014, the Treasury Department issued a rule that essentially allows employees to convert part of their IRA or 401(k) balances into a longevity annuity. Under that rule, an IRA or 401(k) can allow participants to use $125,000 or up to 25% of their IRA or 401(k) — whichever is less — to buy a longevity annuity.

The research paper, “Putting the Pension Back in 401(k) Plans: Optimal versus Default Longevity Income Annuities,” considered the impact of including these LIAs — deferred annuities which initiate payouts not later than age 85 and continue for life — in the menu of plan payout choices.

The researchers compared that optimal LIA allocation to two default options that plan sponsors could implement. In the first, no LIA is available, while in the second, at age 65 the individual can convert some of her 401(k) account assets to the LIA that begins paying benefits as of age 85. Subsequent sensitivity analysis comparing results for people with different lifetime income profiles concluded that an approach where a fixed fraction over a dollar threshold is invested in LIAs would be preferred by most to the status quo, while enhancing welfare for the majority of workers.

They conclude that both women and men benefit in expectation from the LIAs, and even less-educated and lower-paid persons stand to gain from this innovation. Moreover, they note that plan sponsors wishing to integrate a deferred lifetime annuity as a default in their plans can do so to a meaningful extent, by converting as little as 10% or 15% of retiree plan assets, particularly if the default is implemented for workers having plan assets over a reasonable threshold.

From age 85 onward, both groups with LIAs enjoy additional income compared to the non-LIA group. For example, from age 85, the college-educated women receive an annual LIA payment for life of $7,790, while female high-school graduates are paid $2,610 per year. The HS dropout receives the least given her small purchase, paying out only $680 per annum. For men, the optimal LIA purchase at 66 generates an annual benefit of $11,100 for the college-educated, $5,210 for HS grads, and a still relatively high annual benefit of $2,510 for HS dropouts. In other words, the researchers say, “the LIA pays a reasonably appealing benefit for those earning middle/high incomes during their work lives.”

The researchers found that introducing a longevity income annuity to the plan menu is attractive for most DC plan participants who optimally commit 8-15% of their plan balances at age 65 to a LIA that starts paying out at age 85. Moreover, that optimal annuitization boosts welfare by 5-20% of average retirement plan accruals at age 66 (assuming average mortality rates), compared to not having access to the LIA.

As for why: With the LIA, all groups of women and men withdraw more and retain less in their retirement plans post-retirement compared to those without access to lifelong benefits.

What Will Q3 Participant Statements Show?

September has long been known as the worst month for U.S. stock performance (despite several well-chronicled October declines). How did average 401(k) balances fare this year?

Well, as it turns out, the average account balance for younger (25-34), less tenured (1-4 years) workers actually rose 2.0% in September, adding to the1.4% increase in August, according to the nonpartisan Employee Benefit Research Institute (EBRI).

As for older (55-64) workers with more seniority (20-29 years of tenure), their average account balance was up, albeit just 0.4%, though that was better than the 0.1% increase the month before. All in all, particularly withJuly’s surge, consistent 401(k) participants should find those third quarter statements to be a nice surprise.

Older, higher tenured participants tend to have larger account balances, and the movement in average balance tends to be more influenced by market moves than contribution flows.

Those estimates were based on the actual contribution records and investment choices of several million consistent participants in the EBRI/ICI database. Drawing from that database, which includes demographic, contribution, asset allocation and loan and withdrawal activity information for millions of participants, EBRI has produced estimates of the cumulative changes in average account balances — both as a result of contributions and investment returns — for several combinations of participant age and tenure.

The Limits of ‘Hire Me’

Having previously written about how advisers can use the “hire me” approach to explain their services and fees without becoming a fiduciary, ERISA attorney Fred Reish outlines some clarifications on the concept.

Reish notes that recently he has seen confusion about the extent and scope of the “hire me” concept when advisers use it to explain their services and fees without becoming a fiduciary, as long as the adviser doesn’t discuss specific products or platforms. Specifically, in a recent blog post, Reish explains that this is because people want to extend “hire me” to all kinds of scenarios, and thereby limit their fiduciary status and legal exposure.

Reish cites a recent example where he was asked if an adviser could tell an IRA owner that the adviser would charge 1% per year to help select, manage and monitor individual variable annuities. He notes that that approach might work if the IRA owner initially told the adviser that he wanted to hire someone to search for individual variable annuities. However, if the “suggestion” that an individual variable annuity would be appropriate comes from the adviser, that would likely result in fiduciary status for identifying the particular type of investment to be made (and, therefore, cause the loss of the non-fiduciary “hire me” approach), he explains.

Reish offers a word of caution: “…if you intend to use ‘hire me’ to market your services, keep in mind that it is to describe your services and fees, but without a suggestion that any particular product, investment or platform, be used by the IRA owner.”

From the preamble to the fiduciary regulation:

“An adviser can recommend that a retirement investor enter into an advisory relationship with the adviser without acting as a fiduciary. But when the adviser recommends, for example, that the investor pull money out of a plan or invest in a particular fund, that advice is given in a fiduciary capacity even if part of a presentation in which the adviser is also recommending that the person enter into an advisory relationship. The adviser also could not recommend that a plan participant roll money out of a plan into investments that generate a fee for the adviser, but leave the participant in a worse position than if he had left the money in the plan. Thus, when a recommendation to ‘‘hire me’’ effectively includes a recommendation on how to invest or manage plan or IRA assets (e.g., whether to roll assets into an IRA or plan or how to invest assets if rolled over), that recommendation would need to be evaluated separately under the provisions in the final rule.”

Could Re-enrollment Surge Boost Nonproprietary TDFs?

Plan sponsors are applying re-enrollment schemes to bring their participants into TDFs, according to a new survey.

Nearly half (42%) of those polled said their organization was likely to conduct a re-enrollment within the next year, though only one in five said that re-enrollment needs to take place in order for their plan participants to increase the likelihood they have the necessary savings upon retirement.

More than a third (37%) of those planning to conduct a re-enrollment in the next 12 months also plan to shift to more custom TDFs in the same time frame, according to SEI’s Institutional Group survey of more than 230 DC plan sponsors with plans ranging in size from $25 million to over $5 billion.

Proprietary Split

That survey also finds that DC plan sponsors are evenly split when it comes to using TDFs offered by their recordkeeper and “off-platform” choices, but the gap widens by plan size.

For example, while 46% of the plan sponsor respondents were using non-recordkeeper or custom TDFs, nearly two-thirds (64%) of those plans with over $1 billion in assets are offering non-recordkeeper TDFs (23% offer custom TDFs). The percentages are nearly a mirror image among plans with less than $100 million in assets – 68% rely of TDFs provided by their recordkeepers, while just a third use either non-recordkeeper provided or custom TDFs.

In fact, nearly 4 in 10 (38%) of the mega plans (over $1 billion in assets) said they feel plan sponsors should not be offering their recordkeepers’ TDFs.

Plans with between $300 million and $1 billion in DC plan assets were the lowest user of custom TDFs. They also had the lowest rate of participants investing in that option. More than half (58%) of survey respondents said they would like to see more of their participants using the TDFs they offer. Nearly three-quarters (73%) said less than half of their participants use the TDFs they offer in their plan.

More than three-quarters of those polled said they offer between 6 and 15 funds in their TDF series.

The poll was conducted by SEI’s Defined Contribution Research Panel in December 2015 and completed by 231 executives representing DC plans ranging in size from $25 million to over $5 billion. This summary is the second of three parts.

Could Re-enrollment Surge Boost Nonproprietary TDFs?

Plan sponsors are applying re-enrollment schemes to bring their participants into TDFs, according to a new survey.

Nearly half (42%) of those polled said their organization was likely to conduct a re-enrollment within the next year, though only one in five said that re-enrollment needs to take place in order for their plan participants to increase the likelihood they have the necessary savings upon retirement.

More than a third (37%) of those planning to conduct a re-enrollment in the next 12 months also plan to shift to more custom TDFs in the same time frame, according to SEI’s Institutional Group survey of more than 230 DC plan sponsors with plans ranging in size from $25 million to over $5 billion.

Proprietary Split

That survey also finds that DC plan sponsors are evenly split when it comes to using TDFs offered by their recordkeeper and “off-platform” choices, but the gap widens by plan size.

For example, while 46% of the plan sponsor respondents were using non-recordkeeper or custom TDFs, nearly two-thirds (64%) of those plans with over $1 billion in assets are offering non-recordkeeper TDFs (23% offer custom TDFs). The percentages are nearly a mirror image among plans with less than $100 million in assets – 68% rely of TDFs provided by their recordkeepers, while just a third use either non-recordkeeper provided or custom TDFs.

In fact, nearly 4 in 10 (38%) of the mega plans (over $1 billion in assets) said they feel plan sponsors should not be offering their recordkeepers’ TDFs.

Plans with between $300 million and $1 billion in DC plan assets were the lowest user of custom TDFs. They also had the lowest rate of participants investing in that option. More than half (58%) of survey respondents said they would like to see more of their participants using the TDFs they offer. Nearly three-quarters (73%) said less than half of their participants use the TDFs they offer in their plan.

More than three-quarters of those polled said they offer between 6 and 15 funds in their TDF series.

The poll was conducted by SEI’s Defined Contribution Research Panel in December 2015 and completed by 231 executives representing DC plans ranging in size from $25 million to over $5 billion. This summary is the second of three parts.