Data & Research July 13, 2010

Rich Americans Could Also Deplete Retirement Nest Egg

Some 64% of Americans in the two lowest pre-retirement income levels will be running short of money after 10 years in retirement, a new study found. 
Reported by

news release from the Employee Benefit Research Institute (EBRI) about its 2010 EBRI Retirement Readiness Rating also indicated that after 20 years of retirement, 29% of those in the next-to-highest income level will run short of money, as will more than 13% of those in the highest-income level.

The highest income Americans are at the lowest risk of running short of money in retirement, but many in the highest income category still face significant risks of not being able to pay basic expenses and uninsured medical expenses for the remainder of their lives, EBRI said.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

According to EBRI, nearly half of early Baby Boomers—56 to 62—are at risk of not having sufficient income to pay for basic retirement expenditures and uninsured medical expenses, and nearly the same fraction of “Generation Xers” are in a similar position.

“As the private-sector retirement plan system evolves from a largely paternalistic one to a system in which workers must make their own decisions, policymakers need to understand what percentage of the population is likely to fail to achieve retirement security under current conditions,” said Jack VanDerhei, EBRI Research Director and principal author of the study, in the news release. “Even more important is to identify which of those households still have time to modify their behavior to achieve retirement security, and how they need to proceed.”

Effect of DC Eligibility 

 When the results of the analysis are classified by future eligibility in a defined contribution plan the differences in the “at-risk” percentages are quite large, EBRI said in the news release. For example, Gen Xers with no future years of eligibility have an “at-risk” level of 60%, compared with only 20% for those with 20 or more years of future eligibility. 

The analysis also models how much additional savings would need to be contributed from 2010 until age 65 to achieve adequate retirement income 50%, 70%, and 90% of the time for each household. 

The EBRI Retirement Readiness Rating is based on EBRI’s Retirement Security Projection Model 

More about the study is here. 

Key Findings  

Key findings, according to the Employee Benefit Research Institute news release, about its 2010 EBRI Retirement Readiness Rating include:

How Long Money Will Be Enough in Retirement: The analysis shows how long early boomers’ retirement money will not fall short, by preretirement income quartiles, assuming retirement at age 65.

After 10 years of retirement: 

  • Lowest-income quartile: 41%
  • Next-lowest quartile: 23%.
  • Third income quartile: 13%.
  • Highest-income quartile: 5%.

After 20 years of retirement: 

  • Lowest-income quartile: 57%
  • Next-lowest quartile: 44%.
  • Third quartile: 29%.
  • Highest-income quartile: 13%.

Those “At Risk” of Running Short of Money, by Age: Includes 2010 and then 2003 figures for the percentage chance of being at risk.

  •  Early Boomers (ages 56–62): 47.2%,  59.2%
  • Late Boomers (ages 46–55): 43.7%, 54.7%
  • Generation Xers  (ages 36–45): 44.5%,  57.4% 
In Practice July 13, 2010

Custom TDFs the Prime DCIO Opportunity

Cerulli Associates contends the growth opportunity for defined contribution investment only (DCIO) asset managers lies within custom target-date funds built for large plans (those with between $100 million and $500 million) and mega plans (those with more than $500 million in assets under management).
Reported by

In the Cerulli Edge—Retirement Edition 2Q 2010, Cerulli said custom target-date funds are expected to grow rapidly within these plans, and asset managers that are properly positioned with product appropriate for investment sleeves of these custom products will reap the rewards.  

Outside of custom target-date funds, Cerulli forecasts IO opportunity within the lower part of the large-plan segment and the upper part of the mid-size plan segment (plans between $50 million and $100 million). Combined, the portions of these segments currently contain more than $25 billion in assets under management (AUM), according to the report.  

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Cerulli also believes there are targeted product openings for DCIO managers. These include the anticipation of product placement in sleeves for open-architecture, custom target-date funds (particularly in fixed investment and alternatives), the ability to address plan sponsor cost concerns with collective trust fund (CTF) strategies geared to target-date approaches, fulfillment of gaps for portfolio inflation-protection, and the design of guarantees connected to income generation from DC assets.  

Cerulli’s proprietary data estimates the IO portion of private DC assets at almost $2 trillion for year-end 2010. These assets represent 60% of the entire market for private DC, and with a five-year compound annual growth rate (CAGR) of 8%, DCIO appears to be a key component of DC asset growth.   

Cerulli said it projects that as a percentage of private DC assets, proprietary assets will drop from their 2003 percentage of 45% to an estimated 33% in 2010, while IO assets will increase from 42% to an estimated 60% during the same period.  

When analyzing providers for IO opportunity, Cerulli suggests asset managers consider that some are less likely to accommodate external managers than others and be aware of the proprietary nature of most firms’ target-date mutual funds.  

The company found that many firms may be unintentionally targeting plan segments that offer less opportunity. Forty percent of firms cited targeting smaller plans (those with assets of less than $25 million), while 37% plan to focus on mid-sized plans (those with assets under management of $25 million to $99 million).  

When Cerulli asked IO asset managers to assess the most important factors for achieving success, the majority responded that strong partnerships with DC platforms serve asset flows best. Investment performance and vehicle offerings that meet plan sponsor needs were rated 21% each as the important success factor.  

The Cerulli Edge—Retirement Edition 2Q 2010 also discusses findings on what advisers deem the most important factors in choosing a DC plan provider and adviser changes to retirement income strategies in response to market conditions.  

For a copy of the report, email CAMarketing@cerulli.com.

«