Data & Research May 27, 2015

Habitual Saving Should Be a Goal for Participants

The Aegon Retirement Readiness Survey 2015 shows clearly that habitual savers are more prepared for retirement than peers saving only periodically—an effect which magnifies significantly over time.
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“The survey demonstrates the benefits of habitual saving and highlights the need for making it a global trend,” Mike Mansfield, manager of retirement research at the newly founded Aegon Center for Longevity and Retirement, told attendees of a media event announcing the findings of the Aegon Retirement Readiness Survey 2015.

Catherine Collinson, executive director of the Aegon Center for Longevity and Retirement, and president of the Transamerica Institute, shared that the 2015 findings reveal a slight continuing improvement in people’s sense of retirement readiness as measured by the Aegon Retirement Readiness Index (ARRI), created in 2012. The overall score was 5.9 out of 10, with India scoring highest at 7.0, Japan scoring lowest at 4.8, and the U.S. scoring 6.5.

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“We believe the slight increase is due to optimism in the improving economy rather than changes in behaviors,” Collinson said.

According to the survey report, as many as four out of 10 people are not saving anything for their retirement, but half of these non-savers have aspirations to save for retirement. Financial considerations such as receiving a pay raise (45%) or more generous tax breaks (33%) would help to unlock the savings potential of many non-savers. Simplifying investment products could encourage a further one-fifth of non-savers to start saving. 

Three-quarters of people who are habitual savers achieved a medium or high ARRI score compared with fewer than half (46%) of those who save on an occasional basis. “Habitual savers are role models for others to follow,” said Collinson.

She noted that many people still fail to properly plan for retirement—39% of survey respondents have no written strategy for retirement at all, and 43% have a strategy, but it is not written down. Nearly six-in-10 (59%) reported they do not have a backup plan if forced into retirement, 31% said they would rely on their savings (61%), and 30% would rely on their spouse’s income.

NEXT: How to encourage habitual saving.

Making habitual savings a trend is a shared responsibility between individuals, employers and governments, Mansfield contended. The survey report recommends governments can help by reducing the cost and regulatory burdens for employers to implement workplace savings plans, and by implementing reforms to enable employees to work longer and phase into retirement.

Employers can design plans to promote habitual savings by using automatic enrollment and automatic deferral escalation. They can adopt age-friendly workplace policies to encourage working longer and phasing into retirement, and offer financial wellness programs and engage advisers to help employees with financial planning.

Workers should save early and use financial planning tolls to establish a retirement strategy. Parents should teach their children to save early and habitually.

According to Collinson, the survey reveals a key opportunity for employees to encourage aspiring savers to become habitual savers—59% of aspiring savers find auto-enrollment at a 6% deferral rate appealing, and 53% find it appealing at an 8% deferral rate. She noted that aspiring savers tend to be younger and women— the median age is 35 years and 58% are female.

Collinson added that the survey shows employers make a major contribution toward improving the financial wellbeing of employees in retirement, but some offer benefits employees don’t know about. Employers need to promote more the available benefits and provide employees with financial planning and advice support, she suggested.

Providing employees the opportunity to stay in paid work is essential, Collinson said. Employees can boost their savings or bridge savings shortfalls by working longer. However, only 24% of survey respondents indicated their employers allow them to shift from full-time to part-time work, and only 19% said they are offered flexible retirement.

Finally, Collinson noted that health is a key determinant of a prosperous retirement—42% of respondents in excellent health indicated they are confident they will live comfortably in retirement, compared to 7% in poor health.

NEXT: Findings among U.S. respondents.

Among U.S. respondents, the survey found:

  • Thirty-one percent do not have a plan for retirement, 21% have a written plan, 44% have a plan that is not written;
  • Forty-two percent of retirement income is expected to come from the government, 29% from workplace retirement plans and 29% from savings and investments;
  • Forty percent have a backup plan if they are forced to retire early, 53% do not;
  • Of those who do have a backup plan, 59% say it is their own savings, 29% say it is their spouse’s income, and 26% say it is early withdrawals from retirement accounts;
  • Fifty-two percent are habitual savers, 20% are occasional savers, and 11% are aspiring savers;
  • Nineteen percent say they are saving enough for retirement, 15% are hardly saving at all;
  • Forty-four percent say a pay raise would encourage them to save for retirement, 30% say tax breaks will, and 27% each cite a retirement plan match from their employers and more certain economic conditions;
  • Seventy percent find automatic enrollment in a workplace retirement plan at a 6% deferral rate appealing; and
  • Thirty-four percent are very or extremely confident they will have a comfortable lifestyle in retirement, while 11% are not at all confident.

The Aegon Retirement Readiness Survey 2015 was conducted in 15 countries between February 6 and 23, among 16,000 survey respondents. There were 1,000 respondents per country—900 non-retired and 100 retired—except in China, where there were 2,000 respondents. The survey report is here.

Data & Research May 27, 2015

Report Dissects the Major DB Plan Expenses

A new survey report from Penbridge Advisors finds the largest expenses paid by defined benefit (DB) plan sponsors are attributable to the broad category of investment management—especially in the areas of alternative investments and active management.
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The findings are from Penbridge’s Defined Benefit Expense Survey, which follows the ongoing expenses and management practices of a set of 22 corporate DB sponsors in the United States. Data from the rolling survey shows that on a weighted average basis, pension investment management expenses were even higher than they are when measured on an unweighted average basis. This reflects relatively higher investment expenses paid by the largest plan sponsors, Penbridge says, most likely due to their higher allocation to alternatives and their greater use of active management.

The second-highest cost faced by DB plan sponsors comes in the form of Pension Benefit Guarantee Corporation (PBGC) premiums, followed closely by the cost of internal administration. Other significant expenses include trust and custody, investment advisory services and actuarial consulting.

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While large plans pay more for investment management, their total expense ratios tend to be lower than their smaller counterparts. According to Penbridge, most plans’ total expense ratios are between 0.50% and 1.50%, while the average expense ratio for all plans was 0.97%. When calculated on a weighted basis (i.e. based on plan assets), the average expense ratio was even better, at 0.73%. Penbridge says the numbers clearly indicate that larger plans operate more efficiently, despite facing investment costs that are often higher than their smaller counterparts.

Up Next: Who Foots the DB Plan Bill?

Penbridge finds the sources of payment for investment management, PBGC premiums and the numerous other pension plan expenses vary widely by plan. Survey respondents identified both plan assets and direct payment from plan sponsors as significant sources of payment for each plan expense category.

“These findings indicate that a complete view of a DB plan’s expenses is not available on a Form 5500,” the survey report explains. “Interestingly, in every expense category there are some plan sponsors who pay those expenses entirely from plan assets, and there are some who do not use plan assets at all. Relatively few expenses are paid partially from plan assets.”

In another important finding, Penbridge shows in-house pension management resources are seriously constrained. The average internal headcount devoted to DB plan management for all plan sponsors that participated in the survey was 2.5—compared with 3.8 for plans more than $1 billion; 2.1 for plans with $100 million to $1 billion; and 1.8 for plans less than $100 million.

“Anecdotally, sponsors across the size spectrum communicated an ability to focus only on the highest priority activities,” Penbridge notes. “Many of the plan sponsors that participated in the survey acknowledged the time spent completing the survey was extremely valuable in enhancing their benchmarking efforts, identifying potential cost savings, and improving overall plan governance.”

The survey results are based on comprehensive DB plan expenses gathered from 22 plan sponsors representing $52 billion in plan assets. Additional findings and informative graphics are available here.

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