Client Service July 25, 2019

The Retirement Crisis Is a Coverage Crisis

For those workers who are offered a retirement savings plan at work, the U.S. retirement system functions pretty well; solutions are needed, however, to extend coverage to millions more Americans.
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Art by Simone Virgini


Headlines often say there is a retirement crisis in this country, but in reality it is an impending retirement crisis that sources say policymakers and retirement plan advisers, working with their sponsor clients, can take measures to avoid.

“We have a retirement challenge that is very serious, and if we don’t act, it will migrate from a challenge to a crisis,” says Roger Ferguson, chief executive officer of TIAA in New York. There are three components to this challenge, he says: a coverage gap, a savings gap and a guaranteed income gap.

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Coverage Gap

Among those workers who are offered a retirement savings plan, the system works pretty well, says Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association (DCIIA) in West Palm Beach, Florida. “But we have to continue to close the retirement savings coverage gap,” Minsky says. “We need to broaden the pool of people who have access to workplace retirement savings plans.”

Only about half of Americans are offered a workplace retirement savings plan, Ferguson says, which means those who are not offered one are going to be totally dependent on Social Security, which he contends will not be enough. This means that employers that currently do not offer a workplace retirement savings plan need to seriously consider doing so, he says.

In many cases, small businesses do not offer retirement plans, and it is difficult for advisers to serve small plans profitably. That is why many retirement plan industry insiders are hopeful that the SECURE Act, which would eliminate the common nexus required of open multiple employer plans (MEPs) and expand eligibility to part-time workers, might encourage more small businesses to make a workplace retirement plan available to their employees and enable advisers to serve this market profitably.

Once a company begins offering a retirement plan, it should automatically enroll participants into the plan at a meaningful deferral rate, 6% or higher, and include automatic escalation, says Jeff Winn, managing partner at International Assets Advisory in Orlando. It is incumbent on plan advisers and sponsors to encourage and enable people to save as much as they can, Winn says.

Eventually, predicts Mike Swann, client portfolio manager, defined contribution team at SEI Investments in Oaks, Pennsylvania, the government will require employers to offer retirement plans and mandate that workers participate in them.

Savings Gap

“Sponsors are really the ones that should be doing the education on the importance of saving for one’s retirement,” Winn says. “They have stepped up to the plate with low-cost investments, primarily due to fee compression, but if there is any area where they are falling down on, it is educating people about the critical need to save adequately for retirement.” Obviously, retirement plan advisers can play a central role in helping sponsors get the word out.

To put this in perspective, the Federal Reserve and the Government Accountability Office (GAO) have estimated the retirement savings shortfall in the U.S. to be between $4 trillion and $7 trillion, Ferguson says.

“A recent GAO report says that 30% of households where the head is between the ages of 55 and 64 have no retirement savings or a defined benefit plan, and among those who do have savings, the median savings is $104,000, which translates into $310 a month in income,” he says. “That tells you the degree to which the savings shortfall is serious. Companies need to help their employees understand the critical need to save, and encourage them to start early.”

Guaranteed Income Gap

Retirement plan advisers also need to help sponsors consider offering in-plan annuities that guarantee lifetime income, Ferguson says. “People are living longer, which means they need to be provided guaranteed income that they cannot outlive,” he says. “More than half of 65-year-old men will live to age 85, and one-third will reach age 90. Two-thirds of 65-year-old women will live to age 85 and half to age 90.”

Ferguson says he is encouraged that the SECURE Act includes a safe harbor provision for in-plan annuities, which he says are the most cost-effective way to purchase them.

“For most Americans, being able to guarantee a level of lifetime income is of nearly paramount importance,” says John Lowell, a partner with October Three in Atlanta. While in-plan annuities are rare, he is hopeful that the increasing discussion about the need for steady, reliable retirement income will lead to plan designs that facilitate in-plan annuities.

Retirement plan advisers and sponsors can also help encourage lawmakers to shore up Social Security, says Ric Edelman, executive chairman of Edelman Financial Engines in Fairfax, Virginia. For those Americans who make $40,000 or less, Social Security will provide a substantial amount of their money in retirement, he says. Those making more will see a lower replacement ratio, potentially much lower.

“The typical American retire gets the bulk of their income from Social Security, and if Congress does not act, in 2035, the benefits will be cut by 23%, meaning that $1,400 a month will become $1,000,” Edelman says. “Should that occur, millions of American retirees would lose their homes and be unable to buy adequate medicine or food. We would face an economic crisis the likes of which we have not seen since the Great Depression.”

This is why Edelman has launched the Funding Our Futures coalition, which advisers and sponsors can join, he says. The coalition, which currently has more than 40 members, is working to educate Americans about how the Social Security trust fund is in danger of being depleted so that they will turn to their Congressional representatives to ask them to take action. “Nobody gets elected cutting Social Security benefits or raising Social Security taxes,” he notes. “We need to create the political will to solve the problem.”
Client Service July 19, 2019

Retirement Readiness From a Global Perspective

Advisers across the developed world adhere to similar philosophies and policies when it comes to helping people plan for retirement.
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Art by Nicole Xu


In the United States, the average deferral rate in defined contribution (DC) retirement plans is 8.6%.

American workers with access to such plans have saved and invested substantial assets for retirement, many of them utilizing the help of expert financial advisers. Reports show the mean 401(k) account balance has soared 466% in the last 10 years.

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But how do these figures compare to other nations? Are there takeaways advisers and investors can derive from studying the saving/investing behaviors of citizens of other countries?

The 2019 Aegon Retirement Readiness Survey, conducted with the Transamerica Center for Retirement Studies and Longevidade Mongeral Aegon, seeks to answer these questions. In the survey report, Aegon analysts rank employees’ reported levels of retirement readiness in markets around the world. Those who feel best prepared for retirement achieve higher numbers on a scale of 1 to 10.

In the survey, the United States has an index rate of 6.6. India earned the highest score out of the 15 countries studied, at 7.8, despite that country’s challenges with massive wealth inequality. Brazil came in at 6.5, and China and the United Kingdom score 6.2 each. Among those in the bottom of the cohort included Japan at 4.9; 5.4 for Spain and 5.6 in France.

“Our research has shown that countries in which defined contribution [DC] plans are better established, for example in India, the United States and the United Kingdom, tend to have a higher percentage of individuals who say that they always make sure they are saving for retirement,” says Dick Schiethart, external communications manager for Aegon.

According to the survey, 61% of respondents in India are habitual savers, identified as those who have crafted a written retirement plan, are adding to their retirement savings, and are on track to meet their financial goals. Forty-six percent of respondents are habitual savers in the United Kingdom, 53% in the United States and 34% in Brazil.

“Habitual savers are better prepared for retirement across a range of measures compared to other groups of savers, including their awareness of the need to plan financially for retirement, having a written plan and feeling confident that they will have a comfortable retirement,” Schiethart adds.

Pensions and Government Savings

Aside from the cultural expectation that individuals should be setting aside assets to fund their own retirements, investors in these countries are often required to participate in workplace savings plans by their respective governments.

While the United Kingdom obliges all employers to automatically enroll their workers into a pension plan at a minimum contribution of 3%, India mandates pension plans for the country’s private sector of workers, separated into three channels. These include a life insurance plan, a defined benefit (DB) plan with employer and government contributions, and a DC plan with contributions from workers and plan sponsors. Brazil, taking a different approach, requires private sector workers and others to accrue savings via their social security system.

For India, the multifaceted retirement system results in an average income replacement ratio of 99%, according to a 2017 report by the Organization for Economic Co-operation and Development (OECD). Other countries with the highest income replacement ratios include Italy at 93% and Portugal at 95% of working wages, though it should be noted that these countries are experiencing far lower economic growth rates compared with India.

When it comes to improving retirement retention in the U.S., the government can learn and apply certain strategies implemented globally. Catherine Collinson, CEO and president of the Transamerica Center for Retirement Institute, who also collaborated on the Aegon report, suggests the U.S. government can require employers to offer auto-enrollment in retirement plans, along with continuing efforts to improve retirement plan auto-portability.

Advisers’ Global Role

Similar to the U.S., advisers in markets around the world are generally required to meet similar fiduciary standards, as detailed in a recent World Economic Forum report.

In Australia, advisers are subjected to the Australian Future of Financial Advice (FoFA) reforms, holding them to fiduciary standard that requires they serve the best interests of clients. In the United Kingdom, advisers cannot accept commissions from pension or retirement service providers paid for by clients, and are required to disclose how their advisory services are compensated.

In India, the increased rate of retirement readiness among workers could stem from the high trust placed on financial advisers. A 2018 CFA Institute Investor study revealed 71% of the country’s workers trust their advisers, the highest percentage of the 12 countries surveyed. Additionally, 83% of the investors believe their investment firms are “very well prepared or well prepared for a financial crisis.”

“Investor trust is a helpful way to measure the effectiveness of the investment industry in meeting the needs of its clients regardless of the market,” says Rebecca Fender, head of Future of Finance at the CFA Institute. “In general, you can imagine there is correlation between investor trust and high performance, as we have seen in developing markets recently. By contrast, when returns are lower, fees are scrutinized more, and firms need to prove their value even more to maintain trust.”

Even as the CFA Study revealed only 48% of U.S. investors and participants trust their advice professionals, 67% of plans are satisfied with their adviser/consultant relationships, according to a J.P. Morgan study.

“Some of the best value-add opportunities that an adviser or consultant brings is knowledge and best practices taken from across client segments,” says Anne Lester, portfolio manager and head of retirement solutions for J.P. Morgan Asset Management. “The benchmarking and perspective advisers provide provides clients with another view on plan performance and participant outcomes that is very different from what asset managers or a recordkeeping platform may provide.”

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