Data & Research August 4, 2014

Advisers Can Break Down Savings Barriers

Having an actual plan makes a big difference to achieving retirement goals, and having an actual adviser makes a big difference in having that plan, research says. 
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Nearly a quarter of Baby Boomers (22%) report having no savings for retirement, according to data from the “IRI Fact Book 2014” from the Insured Retirement Institute (IRI), which the institute is billing as a primer on the latest retirement income trends and strategies.

Among those Boomers who said they do have savings for retirement, four out of 10 reported having saved less than $100,000. According to “Age of Opportunity: Americans Transitioning into Retirement,” a study by The Hartford cited in IRI’s book, one in three retirees state that if they could change just one aspect of their retirement, it would be to save more money and be better prepared financially (see “As Long As They’re Healthy…”).

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IRI contends that while automatic enrollment and automatic deferral escalation features in employer-sponsored retirement plans have helped retirement savings levels take an upward swing, they may still not be enough to ensure adequate savings. Individuals need to be more engaged in retirement planning, the report says. Seeking help from a financial adviser is one of the most effective ways for workplace savers to become more proactive, IRI says.

A number of factors—increased responsibility placed on individuals for structuring their own retirement income, coupled with the recent headwinds from the financial crisis, the subsequent recession, and a slow economic recovery—have created a set of economic conditions that have negatively affected the retirement savings behaviors of Baby Boomers, the report says.

In a section of the report titled “Barriers to Saving,” IRI examines some inhibitors to saving for retirement and how potential changes to tax policy can exacerbate these impediments. IRI researchers also explore how working with an adviser can help achieve desired levels of savings and how annuities can help as sustainable retirement income vehicles in the defined contribution plan context.

Key Findings

The “Barriers to Savings” section found the following:

  • 21% of Boomers have stopped contributing to a retirement plan;
  • 20% have had difficulty paying the mortgage/rent in the past 12 months;
  • 54% stated they would be less likely to save if federal income taxes increased; and
  • 39% stated they would be less likely to save if capital gains taxes increased.

Given the above findings, IRI recommends that tax policy should follow a do-no-harm principal, contending that tax increases will dampen Boomers’ retirement savings. If tax deferral for growth within retirement plans is reduced or eliminated, 40% of Boomers would be less likely to save for retirement.

Increases in federal income taxes and capital gains taxes would have an even stronger negative effect on Boomers’ retirement saving behaviors, IRI says. The reason for such negative effects on savings is that these increases would reduce the after-tax income of workers, putting additional stresses on already stressed family budgets.

There are ways to overcome the barriers, IRI says in its report. Those who work with an adviser and set up a plan tend to fare better. Among Boomers who work with a financial adviser, 74% had determined a savings goal. IRI found that having a plan for retirement increases retirement confidence levels. Nearly half of Boomers with a plan (49%) prepared by an adviser said they were extremely or very confident they will have enough money to live comfortably throughout retirement. In comparison, just 20% of Boomers whose advisers did not prepare a written savings and investing plan expressed confidence. 

Nearly 43% of Boomers who have consulted an adviser reported that they are very or extremely confident they will have enough money to live comfortably throughout retirement, compared with 33% who have not consulted a financial adviser. The difference in confidence levels stems from having prepared a financial plan with an adviser. IRI found that among Boomers working with a financial adviser, 75% stated that the financial adviser prepared a retirement plan.

The IRI Fact Book 2014 offers recent retirement income research, industry data and sales reports for the variable and fixed annuity markets. This edition focuses on explaining features of annuity products and outlines considerations for financial advisers for including insured retirement strategies in retirement income plans. The IRI Fact Book 2014 can be downloaded from the website of the IRI.

Data & Research August 4, 2014

Re-enrollment Can Set Participants on Right Path

In an effort to combat participant inertia, more plan sponsors are considering the process of re-enrollment, says a recent brief from J.P. Morgan Asset Management.
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The brief, “Understanding Re-Enrollment: Benefits for Participants and Plan Sponsors,” defines the term re-enrollment as a process by which retirement plan participants are notified that their existing assets and future contributions will be invested in the plan’s qualified default investment alternative (QDIA), which is usually a target-date fund (TDF), based on the participant’s date of birth. Participants are automatically moved into the QDIA on a certain date unless they make a new investment election during a specified time period.

“There are three types of QDIAs that plan sponsors can choose from—a managed accounted service, a balanced (risk-based) portfolio, or a suite of target-date funds,” Catherine Peterson, head of Retirement Insights at J. P Morgan Asset Management, tells PLANSPONSOR. She explains that based on industry data, the majority of plan sponsors select the suite of TDFs as their QDIA. In this case, each defaulted participant is mapped to the most appropriate target-date fund based on their age. For example, if a participant was born between 1959 and 1963, they would be mapped to a 2025 fund, assuming a retirement age of 65.

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Plan sponsors that use re-enrollment usually see an increased adoption of TDFs, according to the J.P. Morgan paper. With re-enrollment, the adoption rate can be between 55% and 85%, while plan sponsors that just add TDFs as a new option in their investment lineups see adoption rates of 5% or less, even after the passage of several years.

The Benefits of Re-Enrollment

Peterson says re-enrollment has benefits for both plan participants and plan sponsors. “There are a number of reasons why plan sponsors would want to do a re-enrollment, chief among them is the opportunity to help improve the outcomes of their plan participants,” she explains. “For participants that are re-enrolled into a target-date fund, benefits include professional management of their assets, which incorporates age-appropriate asset allocation decisions and provides diversification. Another valuable benefit is the potential for improving participant confidence and engagement in how they are saving for retirement.”

Carrying out a re-enrollment not only helps get participants into a diversified portfolio, according to the brief, but also helps to ensure their asset allocation changes with them over time.

Re-enrollment may benefit plan sponsors in a number of ways, the New York-based Peterson says, including the improved confidence that their participant base is appropriately invested within the plan and an increase in overall participant satisfaction with the plan.

Another key re-enrollment benefit for plan sponsors is the fiduciary protection that plan sponsors receive from conducting a re-enrollment that redeploys participant assets into the chosen QDIA. The fact that many plan sponsors are unaware of this benefit may help explain why re-enrollment is an underutilized strategy, she says.

Executing a Re-Enrollment

According to Peterson, the first step in doing a re-enrollment is clear communication, which may begin with sending employees an e-mail or flyer that announces the re-enrollment and provides information about what to expect and important dates. This initial communication should take place 60 days prior to the default date, she says. That would be followed by more detailed information describing the investment options and process for opting out, which would be sent out 30 days prior. Other required notices would also be sent out at this time.

Sending out a reminder at least one week prior to the default date is recommended to reinforce key messages about saving and investment, Peterson says, as well as to ensure that participants are aware of important deadlines.

Working closely with service providers to capitalize on best practices is important, Peterson says. While the timeline for re-enrollment varies by plan and recordkeeper, it is typically a 60- to 90-day process.

Reactions from Participants

According to Peterson, many plan participants respond positively about re-enrollment, since it simplifies investing decisions for these employees. She says an effective participant communication strategy is critical to prevent participant misunderstanding or dissatisfaction.

The communication process should explain what is happening, what actions participants need to take and what will happen if they do not take action, says Peterson.

“Communication materials should also address different types of investors,” she says. “For those who lack the time or desire to make investment decisions, a target-date fund may be appropriate for them. Those participants will not have to take any action, and can allow their assets and future contributions to default into the age-appropriate target-date fund.”

For those participants who prefer to actively manage their investments, they can either choose to opt out of the re-enrollment process or make a new investment election, Peterson says.

A copy of the J.P. Morgan brief on re-enrollment can be found here.

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