How to Contribute Amid Retirement ‘Challenges’

In the fourth story in this quarter’s PLANADVISER In-Depth, plan advisers discuss the challenges and opportunities they see in the U.S. retirement system.

Retirement plan advisers are aware of recent dialogue about a “retirement crisis” in the U.S., sometimes getting questions from plan sponsors about how it is or is not relevant to their participants.

Plan advisers, by and large, feel the “crisis” language often used surrounding retirement security is overblown. They point, for one, to the many Americans who feel secure in their retirement plans. In addition, they note advancements and innovations in the past few decades that have strengthened workplace savings.

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They also acknowledge, however, that many participants are either currently facing retirement shortfalls or may find themselves falling short if they don’t course-correct soon. Helping those people, they believe, will come from the retirement industry in coordination with policymakers. But they also put a lot of that pressure on themselves and their peers in the services and guidance they are providing to plan sponsor clients and participants.

Retirement Challenge

Jania Stout, a senior vice president in OneDigital’s retirement and wealth division, says she aligns more with the idea of a “retirement challenge,” as opposed to a “crisis.”

“Having been in this industry for 30 years, I haven’t seen individuals facing extreme hardship … due to insufficient retirement savings,” she says. “However, there are certainly people who aren’t living the retirement lifestyle they envisioned or who find themselves working well into their 60s and 70s when they had hoped to be retired.”

Stout believes the “real issue” is the millions of workers who do not have access to retirement savings programs, a challenge she believes the industry can address.

Jean Duffy, a senior vice president and financial adviser with CAPTRUST, also views the retirement situation as challenged, in part due to changes to the retirement system that have occurred in the past few decades.

“The world has changed,” Duffy says. “People do have to be responsible for their own retirement plans, and we have to help them.”

She says the status of retirement security depends in large part on “who you are talking to.” She notes that some current retirees are set up well with a combination of workplace pensions, defined contribution savings and Social Security. Meanwhile, younger generations are familiar with workplace savings programs and have access to financial wellness programs and education.

The most challenged group, she believes, are those within five to 15 years of retirement, who fell between the age of pensions and DC plans.

“People closer to retirement are probably the ones that are going to be the most challenged,” she says. “We have a tsunami of retirees coming at us every day—that’s a lot of people who are going to enter the world of retirement, and as an industry, and a consultancy, we need to deal with that.”

One way the industry can help, Duffy says, is by continuing to push for greater savings deferrals in workplace plans. She advocates with her clients to institute automatic enrollment rates of 6%—instead of 3%—and automatic increases that go up to 15%.

Another area for improvement is more personalized financial education and budgeting, particularly when it comes to creating a consistent stream of retirement income. In her practice at CAPTRUST, Duffy says, they hold retirement readiness seminars for participants that go over ways to set up a steady stream and how to combine that with Social Security and Medicare.

“The No. 1 thing that an adviser will ask you is: ‘How much money do you need [per] year?’” she says. “If you tell me you want to travel four times [per] year, then we need to take one approach. If you say you are going to live in a cabin and go hunting and fishing for food, then we can plan for [less] income replacement.”

Education, Communication

Chad Goerner, a senior vice president, corporate retirement director and senior institutional consultant with RBC Wealth Management, points to the “significant contribution” that the U.S. retirement system has made in setting up Americans for the chance to retire on time. He sees the focus now on putting those tools such as the 401(k) and planning tools to work.

“It is our job as advisers to work with plan sponsors to find effective ways to use the tools we have through plan design, effective communication and investment management to address the needs of plan participants,” he says.

While auto-enrollment and auto-escalate features have been effective in getting people to save, Goerner calls that just “part of the playbook in the retirement savings game.” He stresses that plan sponsors need have their own education and communication programs for participants and not just rely on programs teed up by plan recordkeepers and providers.

“We quarterback the design of custom education programs in conjunction with the plan provider and measure results each year,” Goerner says of RBC’s advisory practice. “This way, we can begin to see measurable improvements.”

Advisers can also play a role in showing plan sponsors the long-term benefit of investing in education and communication for employees.

Stout of OneDigital says her team hosts a “retirement journey” series for participants that gets thousands of attendees to think about their retirement. Those series focus in part on budgeting, she says.

“While it’s not the most exciting topic, it’s crucial for ensuring financial security in retirement,” Stout says. “Additionally, we provide education to pre-retirees on the emotional aspects of retirement—a topic that doesn’t get nearly enough attention, but it’s one of my favorite areas to cover.”

New Retirement Reality

“While ‘crisis’ may be a sensational term, there are certainly valid concerns surrounding the concept of ‘traditional retirement’ as we know it,” says Craig Stanley, a financial adviser and the lead partner for retirement plan consulting in Summit Group 401(k) Consulting, an Alera Group company.

Stanley points to the “changing nature of retirement itself” due to people expected to live well past the traditional retirement age of 65. This longevity may mean people need to consider ‘hybrid’ retirement, in which they take on reduced work schedules instead of full retirement.

“While this shift can be challenging to embrace, it’s something we discuss with employees during one-on-one sessions to help them broaden their view of what a happy, healthy retirement could look like,” he says. “Ultimately, the biggest challenge ahead might not be financial, but cultural: society’s willingness to accept a new, more flexible definition of retirement that aligns with modern realities.”

He also speaks with clients about the potential “uncertain future” of full Social Security payments being counted upon as part of their retirement income planning.

“With the projected insolvency date of 2033 fast approaching, it’s important to prepare employees for the possibility that Social Security may not be as dependable as it once was,” he says. “Encouraging individuals to plan conservatively by setting realistic savings targets, without heavily relying on Social Security, is crucial.”

Goerner of RBC says plan advisers must also be tuned into the future of retirement planning and education in order to take advantage of innovations and developments as they arise.

“Retirement income and managed account solutions are important areas of discussion that advisers must be well versed in, as they will most likely be the next frontier in improving participant outcomes,” he says.

More on this topic:

Who Is Most at Risk for Retirement Shortfall?
Social Security: Beyond the Headlines
Define ‘Crisis’
2025’s Tax Sunset and DC Plans

Social Security: Beyond the Headlines

The third story in this quarter’s PLANADVISER In-Depth considers the current state of Social Security.

Concerns over the state of Social Security have long been running rampant, and not without reason: This year, an average of 68 million Americans per month will receive a Social Security benefit that will add up to roughly $1.5 trillion for the year, according to the Social Security Administration.

The worry over dwindling benefits stems from the state of Social Security’s Old-Age and Survivors Insurance Trust Fund, which is expected to only be able to pay full benefits until 2035 by the most recent update. As if that date were not close enough, the administration updates the forecast every year, some years moving it even closer.

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The uncertain future of the benefit so many Americans rely on has some wondering: Is the sky really falling on Social Security, or are the heightened concerns a fear tactic used for various purposes, including to drum up business among retirement and investment providers?

Social Security Update

While the exhaustion of the trust fund that pays out Social Security is worrisome, it does not mean the benefit is going bankrupt. There are multiple sources of funding for Social Security, including Federal Insurance Contributions Act payroll taxes. But 2021 marked the first year that it was necessary to start drawing down on Social Security reserves, and that will continue until the fund is exhausted. After that, the program will only be able to pay 79% of scheduled benefits, according to the administration.

“Congress has a decade still to take some action,” says Mary Beth Franklin, a Social Security expert and head of RetirePro LLC. “Unfortunately, from the lawmaker standpoint, they love to keep kicking this down the road.”

The longer you kick that can down the road, the more options for the future of Social Security that go away, she adds. For instance, some of the money from the trust fund is invested in “special issues” of the U.S. Treasury, which pay about 2.4% interest. While there had been calls to invest that money in the stock market instead, if the trust fund goes to zero without action from Congress, there will not be money to invest.

Other potential changes, like increasing the age at which people can take Society Security or removing the cap on how much of earnings can be taxed, would only help a little, Franklin says. Realistically, there will have to be a combination of these—and other—moves.

How Fearful Should Savers Be?

Despite headlines that Social Security is going to disappear, experts say it likely will not. As Franklin points out, there is still time for legislators to act, and even if the reserves are exhausted, nearly 80% of benefits will continue to be paid out.

Does that mean there are some fear tactics being used so that people will put more money in their retirement plans?

“There’s no question that’s the case from our industry,” says George Fraser, a senior partner in the Fraser Group, a division of Benefit Commerce Group, an Alera Group company. “I don’t think that providers, advisers and investment managers spend nearly enough time talking about the base of Social Security and how important it is to most people in this country.”

The data backs that up: Only 13% of plan sponsors offer a Social Security optimization tool for participants, according to research by PGIM published last year.

Fraser is not alone in his belief that Social Security should be considered a fixed asset class, not a luxury for older Americans alone. Josh Cohen, managing director and head of client solutions for PGIM DC Solutions, told PLANADVISER earlier this year that Social Security is not going away and “needs to be considered part of your total retirement picture.”

Even so, the fears of Social Security being depleted are unlikely to leave the national conversation. In a recent survey, the National Institute on Retirement Security found that 90% of Americans say it is important for the next government leaders to solve the Social Security financial shortfall.

Employer’s Role in Maximizing Social Security

A recent survey from Charles Schwab of 1,000 U.S. 401(k) plan participants showed that while confidence in Social Security may be waning, participants still expected it to make up a significant portion of income in retirement: 22%, according to workers who are 10 years from retirement, compared with 37% of the income they expect to come from their 401(k)s. Younger workers—those who 11 years or longer from retirement—expect just 13% of their income in retirement to come from Social Security, compared with 45% from retirement savings.

“One of the best things people can do is have that level of planning done,” says Marci Stewart, head of client experience at Schwab Workplace Financial Services. But employers also play an important role, especially considering a significant share of workers are using health savings accounts and company stock plans to save for retirement, according to Schwab’s study.

Exploring those benefits can help people do the planning that’s necessary and cover any shortfall if there is one, Stewart says. Employers can also engage employees in financial education to provide clarity on Social Security and its misconceptions, including specifics of how benefits become diminished the earlier they are taken.

Because there are ways to maximize Social Security so that—shortfall or no shortfall—savers can make the most of it. The first step is to make savers understand what their checks will actually look like, Fraser says. You can check the estimated amount of your benefit via the Social Security Administration’s website, multiply it by 12 to see what you will receive in a year and multiply that by 20 to see how much you can expect over a 20-year retirement. This provides a baseline; then you can start making practical changes to a plan as needed.

“Married couples have the most options,” Franklin says. “They should think of claiming Social Security as a household decision, rather than two individual decisions.”

She usually tells married couples that the spouse with the bigger benefit should wait until age 70 to claim their benefit while the other spouse claims reduced benefits early to bring some income into the household.

For some people, it can also make sense to draw down on their 401(k) or individual retirement account first, so they can snag a bigger benefit later, Franklin adds.

More on this topic:

Who Is Most at Risk for Retirement Shortfall?
How to Contribute Amid Retirement ‘Challenges’
Define ‘Crisis’
2025’s Tax Sunset and DC Plans

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