Five Tips to Help Advisers Encourage Saving

During “America Saves Week,” plan advisers can help their plan sponsors turn up the savings to better prepare for retirement.

The focus on plan outcomes is an important perspective for plan advisers, says Christine Marcks, president of Prudential Retirement. “In the past, a lot of what the adviser was focused on was investments,” she tells PLANADVISER. “But now plan advisers that are well schooled in plan design, in investments in these retirement income options, can bring a lot of value to the plan sponsors they’re working with.”

A great starting point to take up with a plan sponsor is plan design, Marcks says. The adviser needs to spend time working with the plan sponsor on a plan that reflects the employer’s objectives for work force management and their budget,” Marcks says.

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When it comes to contribution rates, Marcks says the usual 3% to 6% rates just don’t cut it. Auto features play a big part in helping improve savings rates. “Employees really need to be saving 10% to 15% of pay to have a sufficient nest egg for retirement,” she points out.”Our recommendation is help employees get started with auto enrollment and then use auto increases when they receive salary increases.”

Plan sponsors that believe their workforce can handle an initial enrollment of more than 3% of salary should consider starting employees at 6%. Marcks is reassuring on the issue of whether workers will balk at a higher deferral rate. “Research shows that employees will continue on that contribution path,” she says. Six percent as opposed to 3% will move them closer to that goal of 10% to 15%, another point advisers can raise with their plan sponsors to encourage them to turn up deferral rates.

The plan adviser is an important player, and should be tapped to select a default investment option that is simple and reflects an employee’s risk tolerance and years to retirement. Target-date funds (TDFs) and asset-allocation solutions are both appropriate.

Employees should know what their retirement savings will produce when they start using it for retirement income, Marcks says. She recommends working with a provider that can give participants a projection. “We know that making that translation between retirement savings and retirement income drives higher and better savings behaviors,” she says.

Show, Don’t Tell

Actual income in retirement is a key consideration. Employers that do not offer a defined benefit plan should strongly consider adding an option to the plan that offers guaranteed income—something that allows the employee to construct a personal pension plan. On average, Marcks says, when plans include a guaranteed withdrawal benefit and illustrate what that would translate to in retirement, “participants contribute 38% more because they can see the impact on their retirement income.”

According to the Center for Retirement Research at Boston College’s 2012 National Retirement Risk Index, the number of workers at risk of being unable to maintain their pre-retirement standard of living once they retire has risen over 20%, from 44% in 2007, to 53% in 2010.

Scary figures about insufficient retirement savings do not seem to resonate with plan participants, Marcks says. Instead, show them how the assets they have accumulated translate into actual retirement income. “That’s when they realize how much they need to have saved to be ready for retirement. That’s a real wakeup call,” Marcks says.

When they go through retirement income calculation. 20% of participants increase the amount they contribute by five percentage points, from 4% to 9%. Turning up the deferral rate at age 32 or 33 can have a profound impact. “That’s the powerful moment of truth for them,” Marcks says.

Prudential Retirement is a business unit of Prudential Financial Inc. Established in 2007, America Saves Week is an annual week-long event coordinated by the America Savings Education Council and the Consumer Federation of America during which more than 2,000 organizations across the U.S. work together to promote good savings behavior.

More America Saves coverage is here.

Stronger Economy, Weaker Savings

A joint survey from four retirement industry advocacy groups, released as part of America Saves Week, finds improving macroeconomic conditions haven’t reversed widespread savings challenges.

The seventh annual national survey assessing household saving—released by Consumer Federation of America (CFA), America Saves, the American Savings Education Counsel, and the Employee Benefit Research Institute (EBRI)—finds most Americans continue to face significant personal savings challenges. When asked if they were making progress in meeting their savings needs, only about one-third (35%) of U.S. workers say they are making “good” or “excellent” progress. That compares with nearly two-thirds (63%) who report making either “fair” or “no” progress towards savings benchmarks.

Stephen Brobeck, executive director of CFA and a founder of America Saves, says the story of Americans’ retirement readiness is a story of thirds: Only about one-third of Americans are living within their means and think they are prepared for the long term financial future. Another one-third are living within their means but are not prepared for a long term future, the last one-third are struggling to cover expenses on a day-to-day basis. Brobeck adds that, while most Americas are meeting their immediate financial needs, many also say they are worse off than they were several years ago.

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Results from the survey are not all negative, though. While only about one-third of Americans feel prepared for their long term financial future, a much larger percentage say they are at least paying their bills and saving a little. About two-thirds (68%) reported they are spending less than their income and saving the difference. This figure is up from 65% in 2013, though much lower than the 73% observed in 2010. In a conference call with reporters, the study authors pointed to a number of familiar causes for the downturn in savings rates, such as the lingering effects of the financial crisis and tepid job and wage growth.

Another positive result in the report shows nearly two-thirds of respondents (64%) say they “have sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit,” and about three-quarters (76%) say they are reducing their consumer debt, or are consumer debt-free. These two numbers are about where they were last year, survey authors say, though they are lower than in 2010, when 71% said they had sufficient emergency savings and 79% said they were reducing consumer debt or were consumer debt-free.

The researchers say these numbers reveal the continuing struggles of the American middle class. While unemployment rates have come down, jobless and underemployment rates are still high compared with historic levels. More importantly, real wages have been stagnant for a long time, and fewer middle class families are building wealth successfully through home ownership. According to the survey, the proportion of workers who say they “are building equity in their home or other property” declined from about two-thirds (68%) in 2010 to little more than half (54%) this year. And the proportion of those homeowners who say they expect to pay off their mortgage debt before they retire fell from about four-fifths (78%) in 2010 to only about two-thirds (68%) today.

Dallas Salisbury, EBRI CEO and president, says another factor in this decline may be the decreasing percentages of workers who report having a written savings and spending plan in place. This year’s survey finds the proportion of workers with a “savings plan with specific goals” slipped to 51% in 2014, down from 55% in 2010 and 54% in 2013. In addition, the proportion of those with a spending plan which allows sufficient savings for adequate retirement income replacement declined from 46% 2010 to 40% in 2014. 

This year’s survey also finds sharp differences in retirement readiness and income replacement adequacy exist between middle class households with incomes above and below the $50,000 level. For those with more than $50,000 in annual income, 82% of workers say they are able to spend less than their income and save the difference, while just 69% of those making less than $50,000 report the same. Similar gaps exist with workers’ ability to reduce consumer debt or start an emergency savings fund this year.

“The group hit the hardest by the Great Recession and its aftereffects have been moderate income households,” Brobeck explains. “The rest of the middle class was not damaged as severely, and lower income households were protected somewhat by the social safety net.”

Researchers timed their survey release to fall during America Saves Week, an annual event that brings together nearly 2000 government, business, and non-profit organizations to promote good savings behavior. America Saves, managed by the Consumer Federation of America (CFA), and the American Savings Education Council (ASEC), managed by EBRI, coordinate the effort. 

More information about the survey and America Saves Week, is available at www.americasavesweek.org.

A free savings assessment tool developed alongside the study for America Saves Week is available here.

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