Financial Consequences of COVID-19 Differ Across Generations

Tailored financial advice is now more vital than ever for participants at all stages of the retirement savings journey, experts say.

Art by Andrea D’Aquino

Workers aren’t just concerned about the hits to their emergency savings account during and post-COVID-19. They’re financially stressed about retirement, too. 

In response to the current crisis, Baby Boomers, Generation Xers and Millennials have shifted their viewpoints on what their financial futures will look like. According to a recent study by the Transamerica Center for Retirement Studies, about one in four workers has lost some confidence in their retirement savings since the beginning of the pandemic, and, across the three generations, this decline in confidence increased with age: 20% of Millennials now feel unsure, while 25% of Gen Xers and 32% of Baby Boomers do.

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An Edelman Financial Engines study found half of the workforce has felt significant financial stress since the start of the pandemic. By April, one in three workers had already made changes to their finances, whether to their emergency savings accounts, investment allocations, personal loans or retirement accounts.

As workers turn their attention toward their income and paychecks—with many having just enough emergency savings to squeeze by—retirement is taking a backseat. This de-emphasis on defined contribution (DC) plan and pension savings creates adverse repercussions for retirement readiness.

“People are focused on the income coming in,” explains Matthew Rutledge, a research fellow at the Center for Retirement Research at Boston College.

Baby Boomers

Baby Boomers, those who are just at the cusp of retirement or who are already phasing into their post-employment years, are facing the toughest setback—with some pushing back their retirement or, in some cases, working through it. A survey by TD Ameritrade found 15% of American workers have already made the decision to pause their retirement start date, and 51% are considering balancing their income shortfall as a result of the crisis by taking a job during retirement. The Transamerica study reported that 52% of workers expect to work past age 65 or, rather, not retire at all.

Others may decide to leave the workforce sooner than they planned; Rutledge says. For example, navigating an unfamiliar work environment may drive older, experienced teachers to retire earlier or some may consider the dangers of returning to work once schools re-open to be too great. Opting for an early retirement will be the only option for some, but it may have financial consequences.

Still, offering sustainable options for employees, along with tailored educational resources and tools to get through the current market climate, can help the financial situation for all, and especially for Boomers. Offering retirement education and advice can incentivize workers to allocate money to their retirement accounts or at least to pay attention to them.

The Transamerica study found two-thirds of workers actually want more retirement education and advice from their employer. Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies, says she believes implementing tailored programs customized to age increases education and understanding.

Kelly O’Donnell, executive vice president and head of workplace at Edelman Financial Engines, believes working with a dedicated financial planner is one of the most effective tips for workers, and especially those so close to retirement. “We know that retirees and those getting close to retirement are most concerned on the market volatility,” she says. “That group has a level of complexity surrounding their retirement where they are better off working with a financial planner.”

Generation X

For those in Gen X, who are in their prime earning years, the effects of COVID-19 have also weighed on their current and future finances. Coupled with the fact that many are juggling careers and families—with some also handling home schooling and caring for aging parents—most are simply not thinking about retirement.

“It’s so critical for them to focus on the long term, and yet, of the three generations, they’re the most likely to be distracted,” Collinson says. Twenty-five percent of these workers say their confidence in retirement savings has plummeted since the start of the pandemic.

Sixty-nine percent of Gen Xers said they would like to receive information and advice from their employers on how to achieve their retirement goals. Gearing education toward the middle group, while also implementing savings programs or loan options, can substantially help. Taking advantage of DC plan loan options rather than withdrawing from retirement accounts allows participants to pay themselves back while decreasing the potential loss in savings. “The ability for workers to take out a loan and pay themselves back is a very powerful tool,” Rutledge says. “The best lender a worker can have is themselves.”

Millennials

Older Millennial workers found themselves entering the workforce in the middle of the Great Recession. Once they landed a job, adding money to a DC plan was an actionable step they could take to prepare for the future, Collinson says. The median age that Millennial investors started saving for retirement was 24, while Generation Xers began their savings at 30 years old, and Boomers at age 35, the Transamerica study notes. “There is tremendous growth among Millennials’ household savings in their retirement accounts,” Collinson adds.

The Edelman Financial Engines survey found Millennials faced higher stress than other groups, as many had just begun their financial recovery from 2008’s recession. “Older Millennials were getting their footing again,” notes O’Donnell. “And now they’re moving backwards again with this crisis.”

For younger Millennial investors, the market recession due to COVID-19 has been their first real downturn, whereas Gen Xers and Boomers have survived multiple bear and bull markets. After exhausting their emergency savings—if they had any to begin with—some Millennial investors turned to their retirement accounts for more income. Advisers can turn towards education on emergency savings, believed to be one of the most important considerations for workers, and especially Millennials, going forward.

Generation Z

While the workforce has largely encompassed Boomers, Gen Xers and Millennials, it’s worthy to note a new group slowly entering the workplace: Generation Z. Just as each age group is defined through major global events—Boomers were born after World War II; Generation X following the Vietnam War and Civil Rights Movement; and Millennials at the turn of the new millennium—the events of 2020 are likely to define the youngest workforce, Collinson says.

Gen Zers, who have already been deemed as responsible savers, will likely emphasize emergency and retirement savings after witnessing the effects of the most recent crisis. A study by the Center for Generational Kinetics (CGK) found 35% of Gen Zers are planning to begin saving for retirement in their 20s. Of those already in the workforce, 88% are already actively portioning some of their income to retirement on a monthly basis, according to a Betterment for Business report. “Gen Zers are thinking about retirement and how their financial plan is performed,” Edward Gottfried, a group product manager of Betterment for Business, previously told PLANADVISER. “They feel the same financial uncertainty that those in other age cohorts are feeling.”

While Gen Zers have a long way to go until retirement, O’Donnell notes how even those starting out can benefit from the advice of a financial planner. Implementing a sidecar savings account, or other emergency savings vehicle, will aid even younger workers take ahold of their finances.

The Power of Advice

To encourage savings among all age groups, David Stinnett, principal and head of Vanguard Strategic Retirement Consulting, notes the importance of adding automatic features, such as auto-enrollment, auto-escalation and re-enrollment features, with the addition of advice. “Implementing automatic increase, defaulting people into TDFs [target-date funds] and, if you haven’t already, considering adding advice as a feature to the plan, can certainly help all generations,” he says.

For advisers, Stinnett says ensuring clients aren’t panicking, and continue to not do so, will support their financial recovery moving forward. Coming out of the pandemic, he suggests focusing on appropriate asset allocation, and aiming towards aggressive savings goals to get back on track.  

According to the Edelman Financial Engines study, more than third of U.S. workers said they would benefit from financial advice during the crisis. Plan advisers working with employers must understand the demographics of the plan, along with the needs, solutions and objectives of the employer, states O’Donnell. It’s about working with the employer and participants to determine what is essential to their experiences. “Targeting personalized messages and solutions to where people are in their financial journey is extremely important,” she continues. “For someone who can’t pay their bills or are thinking about taking out a loan, there are different solutions for them than for those who are moving their retirement egg out because of market volatility, or the possibility of losing a job in the household.”

Consider How CITs Can Fit Into Your Practice

Collective investment trusts (CITs) can help clients address fee pressures, support an increased focus on fiduciary obligations, provide a means to build white-labeled investments and more.

The COVID-19 pandemic has taken a tremendous economic toll on businesses and individuals, forcing people to evaluate critical issues, including how well their retirement plan can weather this storm—and potential future shocks. Though a busy and challenging time, this is an opportune moment for plan advisers to ensure that their plan sponsors and participants have access to low-cost, flexible investment vehicles.

Collective investment trusts (CITs) are an option deserving of a fresh look from advisers for use in defined contribution (DC) and defined benefit (DB) plans. Once the industry’s best-kept secret, CIT assets totaled more than $3 trillion in 2018, up 64% from 2011, according to data from Cerulli Associates. CITs have been seizing greater market share of late, in part because of the fee advantages they can present relative to mutual funds.

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For those advisers not in the know, CITs offer several key features for consideration.

They can help address industry-wide fee pressures. There is a marked focus on reducing fees, in general, for plan participants. Compared to mutual funds, CITs generally have lower administrative, marketing and distribution costs. Overall, CITs have simpler disclosure statements and do not require an investor prospectus. Finally, a trustee can create separate share classes with advisers for use by plan sponsors that can result in even lower fees. Ultimately, it is the plan participant that will see the savings. 

CITs can support an increased focus on fiduciary obligations. The CIT trustee will always be an Employee Retirement Income Security Act (ERISA) Section 3(38) fiduciary, which may provide the plan sponsor with additional protection. Section 402(c)(3) of ERISA allows plan sponsors to delegate responsibility for selecting, monitoring and replacing plan assets to an investment manager that meets the requirements of Section 3(38). Also, the CIT trustee is a regulated financial institution responsible for managing and monitoring the CIT’s advisers and managers, approving and monitoring compliance with the investment policy and making sure the investments meet the CIT guidelines.

CITs can provide lower-cost active management options. Although plan participants may be reluctant to look at active management options because they are often associated with higher fees, CITs can help advisers shift the dialogue to active management and bring relatively low-cost alpha to investors.

They create the potential to develop white-labeled products. Some advisers have been using CITs as building blocks in creating their own products. This enables advisers and plan sponsors to change sub-advisers and underlying investments without the need to distribute Sarbanes-Oxley blackout notices, which can slow down the process and increase costs for participants.

Working on CITs can reinforce relationships with fund managers. CIT providers can offer lower fee classes to plan sponsor clients of advisers that hold broader relationships with the CIT fund manager. With a continued focus on demonstrating their value to clients, access to these kinds of relationships can be important.

The CIT market is becoming even more transparent. Because of the ongoing work of entities such as the Nasdaq Fund Network, there are now hundreds of searchable CIT tickers available to the general public.

Even with the growth of CITs, much work remains to be done to encourage their use in retirement plans. For example, federal law prohibits almost all 403(b) plans from accessing CITs, although legislation has recently been introduced to ease such prohibitions. This is particularly difficult because 403(b) plan participants are typically the people most in need of innovative retirement strategies.

Industry stakeholders should continue encouraging educational efforts around CITs to help plan sponsors gain greater awareness and consideration for this investment vehicle in their portfolios. The impact of COVID-19 has reminded us all that the retirement space must continue to innovate. CITs can be a reduced-cost option for all working Americans during this economic crisis and into the future.

 

Author’s note:

Wilmington Trust, N.A. serves as the trustee of the Wilmington Trust Collective Investment Trust and maintains ultimate fiduciary authority over the management of, and investments made in, the WTNA Funds. Wilmington Trust is a registered service mark. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank and certain other subsidiaries of M&T Bank Corporation, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management and other services.

 

Editor’s note:

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

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