The Financial Accounting Standards Board (FASB) has issued
an Invitation to Comment (ITC) to solicit feedback about the financial
reporting issues it should consider adding to its agenda.
The Board has identified major areas of financial reporting
in need of improvement:
How Retirement Plan Sponsors Can Address Cognitive Decline
SSGA contends there are things retirement plan sponsors can do to help
participants prepare for retirement before their mental capacity begins
to wear away.
Financial advisers may have to deal
with retired clients’ cognitive decline, but State Street Global
Advisors (SSGA) contends there are things retirement plan sponsors can
do to help participants prepare for retirement before their mental
capacity begins to wear away.
SSGA reached out to Harvard
behavioral economist David Laibson, who has done pioneering work on the
ways aging affects financial decision-making. Laibson identifies two
kinds of intelligence that evolve over a person’s lifetime: Fluid
intelligence—the ability to learn and adapt, which declines rapidly over
time; and Crystallized intelligence—wisdom learned from experience,
which increases over time.
Cognitive performance, which draws on
both fluid and crystallized intelligence, peaks when people are in their
50s. Laibson explored the connection between people’s age and the
interest rates they paid for loans, and his research suggests people are
better at making financial decisions in middle age then get worse at
it.
Fredrik
Axsater, global head of defined contribution at SSGA, who is based in
San Francisco, tells PLANSPONSOR, “Anything that we do within our
business focuses on making retirement work. Taking into account the
aging brain to help people make the right decisions at the right time is
important.”
NEXT: What can plan sponsors do?
Laibson’s work shows that young investors don’t have as much
crystallized intelligence, which can be seen in financial literacy
scores for younger retirement plan participants, Axsater notes. He
suggests plan sponsors use automation—auto enrollment and auto
escalation. “Younger participants realize that saving and saving early
is important, but they don’t necessarily do it themselves,” he says.
SSGA
advocates holistic approaches to financial wellness, but Axsater says,
while raising financial literacy is a good thing to do, participants are
more receptive to education at “inflection points” in their lives, such as getting married or buying a home.
Laibson’s
research suggests that around age 50, it starts to make sense for
participants to plan on what their financial needs in retirement will
be, according to Axsater. It is time to engage participants. Typically,
he notes, participants start to make decisions about retirement in their
60s. Participants need to make retirement planning decisions earlier.
Axsater
recommends that plan sponsors provide in-plan retirement income
strategies that include some form of annuitization—a feature that is
easy or automatic for active plan participants. “I think plan sponsors
should evaluate all different forms of periodic payments, but we see
in-plan annuities that are part of a default are more effective,” he
says. “If trying to address longevity risk, deferred annuities are best.
He adds that this is what plan sponsors should do to move participants
from hope in what they can do in retirement to being able to predict
what their income will be in retirement.
In conclusion, Axsater says he just came back from Australia where he
met with retirement leaders. “The challenge of how we can help
participants take care of their savings after retirement is universal.”