Data & Research October 23, 2015

A Few Years Makes Big Difference in Client Outlook

A Wells Fargo study finds those ages 55 to 59 have three times more saved, on average, than those in their 60s.
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While only a few years separate working Americans ages 55 to 59 from those in their 60s, there are sharp differences in the savings they have amassed and steps they have taken to prepare for retirement, according to the Wells Fargo & Company annual Retirement Study released during National Save for Retirement Week.

Joe Ready, head of Wells Fargo Institutional Retirement and Trust, tells PLANADVISER one of the findings of the study that surprised him is that those ages 55 to 59 have three times more saved, on average, than those in their 60s. The median savings of working Americans age 60 or older is $50,000 against a retirement savings goal of $300,000, while working Americans ages 55 to 59 have saved $150,000 toward a retirement savings goal of $500,000.

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The study also found working Americans age 60 or older started saving for retirement at an average age of 37, whereas those ages 55 to 59 started saving at an average age of 31. “That’s only six years, but that’s a big difference,” Ready says. “You can’t delay. The only way to get to retirement is to save your way there, and you need the benefit of time.”

According to the study findings, many working Americans put off saving because they assume they’ll have more time and money to save later in life. One-third of working Americans ages 55 to 59 say they “plan to save for retirement later in order to make up for not saving enough now,” as compared to 21% of those who are 60 or older with that same strategy. In addition, 63% of those ages 55 to 59 and half (49%) of those 60 or older say they “hope to earn more money in the future to save enough for retirement.”

More than half (54%) of the working 60-and-older group say they will work until “at least 70” in order to have enough savings for retirement as compared to 40% of those ages 55 to 59. However, working longer may not be the solution, as nearly half of the retired respondents (49%) say they retired earlier than planned. Many did so as a result of conditions beyond their control: 37% because of health, and 21% because of an employer decision. Only 7% retired earlier than planned because they had adequate savings.

“This confirms those two strategies—waiting to save until you have more income and working longer—often do not pan out,” Ready says.

NEXT: The benefit of consistent saving

The study looked at workers and retirees ages 40 and older and found slightly less than half of the of retirees (47%) and those age 40 or older and still working (45%) say they had/have saved for retirement consistently since the first day they started working, making these individuals “consistent savers.” Income level is not necessarily a factor to being a consistent saver, as 31% of those currently working with less than $50,000 in household income say they have consistently saved since they began working. The median retirement savings accrued by working Americans 40 years or older who have consistently saved is $160,000, compared to $60,000 saved by those who did not consistently save.

Consistent saving breeds a more optimistic outlook about the future: 71% of working Americans 40 or older who are consistent savers believe they will have enough saved to live comfortably through their retirement years, compared to 48% who are not consistent savers. In addition, 61% of working Americans 40 or older who are not consistent savers think their standard of living will drop in retirement as compared to 37% of consistent savers. About half (49%) of retired Americans who were not consistent savers did say their standard of living went down as compared to 28% of retired consistent savers.

Another notable finding: Half (51%) of the retired respondents in the study say they are spending “more than they expected” on health care in retirement.

Asked what those who waited to save later, or who were not consistent savers, can do to catch up, Ready says, “It’s never too late to save, and it’s our job to help them optimize where they are in the journey.” For those near retirement, he suggests increasing savings rates, saving up to the maximum allowed in both retirement plans and health savings accounts (HSAs), and taking advantage of catch-up contributions. “They may be closer to retirement but, hopefully, they are on other side of major expenses, such as saving for college,” he says. “They have five or 10 years to make a difference, and they can save nearly $30,000 a year pre-tax.”

NEXT: The value of defined contribution plans

Access to a 401(k) or other defined contribution (DC) plan makes a big difference in retirement savings. The survey found seven in 10 (69%) workers 40 or older have access to a 401(k) plan or other DC plan. Among those, three-quarters (73%) say they wouldn’t have saved as much for retirement if they did not have access to a DC plan.

Consistent savers with access to a DC plan have saved four times as much for retirement ($200,000 median) as compared to consistent savers without access ($50,000 median). A majority of workers with access (84%) feel more secure about their retirement because they are contributing to it. Six in 10 (61%) workers with access say they will be able to save enough through their DC plan to live comfortably in retirement.

Participating in a DC plan is becoming the equivalent to a formal retirement plan. Four in 10 workers (38%) say participating in a 401(k) plan is their current retirement plan, 30% say that their plan for retirement is a comprehensive savings and investment plan constructed with a financial professional, and 17% say their retirement plan is Social Security.

Satisfaction with 401(k) plans is high, as 72% of workers 40 or older, regardless if they currently have access to a 401(k), are satisfied with the 401(k) as a retirement savings vehicle. However, there is interest among workers in getting more help with their 401(k) plans, with half (53%) of workers with access saying they would like more help from their 401(k) plan to make sure they’re making the best choices for their retirement. When asked what they would do with it if they were to leave their job in the next 12 months, 68% of workers enrolled and contributing to a 401(k) would roll it over and 30% would leave it alone. Just 1% of workers say they would cash it out.

“The power of the 401(k) comes across in this data, and it’s clear that people get the most benefit when they utilize it right at the start of their working life,” said Ready in a press release. “Access to payroll deductions for automatic saving, institutionally-priced investments, and education helps participants achieve positive results for their retirement.”

On behalf of Wells Fargo, Harris Poll conducted a total of 1,251 telephone interviews between July 13 and August 10, with 851 workers age 40 or older who are currently employed and 400 retirees.

The Markets October 22, 2015

TDFs Can Be the Vehicle for Alternatives in a DC Plan

A white paper discusses some of the ways plan sponsors can put alternative assets into a DC plan.
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As plan sponsors search for ways to find value and diversify asset classes in their defined contribution (DC) plans, many have considered offering alternative assets as an option. These assets provide the benefits of diversification and low correlation to traditional asset class performance. However, concerns about the scalability, liquidity and valuation needs of DC plans have inhibited their use as a viable investment option.

In “Adding Alternatives to DC Plans,” Northern Trust explores the operational and plan structure options available to plan sponsors that wish to include alternative assets in their plans.

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Three possible solutions—target-date funds (TDFs), a combining of defined benefit (DB) and DC assets into a unitized structure, and indexation—are explored in the paper.

Target-date funds are one of the best ways to incorporate alternative asset classes into DC plans, says the Defined Contribution Institutional Investment Association (DCIIA), which also recommends using a bundled alternative assets portfolio, or adding alternatives on a standalone or index basis.

White labeling, or moving away from brand-name mutual funds to more generically named ones customized to a specific defined contribution plan, is a path that is gaining traction among these plans. It can increase the plan’s flexibility, help it cut costs, streamline investment menus and reduce participant confusion over investment choices. This approach can also let plans use their existing plan managers and potentially achieve higher alpha.

Alternative assets are increasingly held inside target-date maturity funds, including white labels. Commingled DB/DC structures are increasingly used to house more alternative investments—real estate investment trusts (REITs), currencies and commodities wrapped into investment vehicles such as hedge funds, private equity, mutual funds, exchange-traded funds (ETFs) or separate accounts. This also can be structured so that the alternatives are excluded from the cash flow of the target-date fund, which is necessary because alternatives do not accommodate daily liquidity.

According to Tom Lauer, defined contribution asset servicing consultant at Northern Trust, a number of clients want to put alternatives into TDFs for their defined contribution plans but for various reasons can’t get it done. Some solutions can allow these clients to work around perceived challenges.

Clients ask about the best methods for dealing with liquidity and valuation challenges as interest in including alternatives has increased, Lauer says. “We tell our clients that there are ways to structure their plans that allow them to take advantage of alternative assets,” he says. “Some clients find it appropriate to integrate defined benefit and defined contribution plan assets in order to leverage scale and provide participants with access to alternatives.”

“The key to increasing the mix of options plan sponsors offer is having a well-defined operational strategy that focuses on the needs of the plan participants,” says Pete Cherecwich, head of corporate and institutional services in the Americas at Northern Trust.

“Adding Alternatives to DC Plans” can be downloaded from Northern Trust’s website.

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