Data & Research February 27, 2014

One in Three Participants Needs Advice

The investment options are unfamiliar to a third of plan participants and the wide variety of choices is confusing, which can mean an opportunity for education and advice.
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Menu construction is a good place for plan advisers to start, according to David Ray, managing director, head of institutional retirement plan sales at TIAA-CREF. “A lot of research shows that too many options are too many options,” Ray tells PLANADVISER.

Another finding from the TIAA-CREF Investment Options Survey mirrors other studies: 18% of survey respondents say they have too many investment choices.

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Citing research by Sheena Iyengar, a Columbia Business School professor known for her investigations on choice, Ray notes that with every 10 new options offered, enrollment in a plan drops 1-1/2% to 2%. The best approach is to keep the menu simple, he says. While there is no one magic number that works for all plans, Ray suggests the right number is probably in the range of five to 10.

The need to tinker with menu lineups and investment vehicles may mean that it’s more of a challenge to engage participants, but Ray says the numbers of participants who admit to feeling confused mean opportunity for plan advisers.

Several factors operate in today’s defined contribution (DC) landscape, Ray says. First, the changing emphasis from defined benefit (DB) to defined contribution (DC) shifted the risk, but not the best practices, Ray feels. One basic goal of a DB plan is provide income replacement in retirement, but DC plans are not necessarily set up that way.

The focus in DC plans has been mainly on accumulation of assets, but this could be changing. More advisers are starting to ask questions about income replacement in retirement, Ray says.

A Retirement Policy Statement

Outcome is gaining attention, and plan advisers should suggest that plan sponsors create a retirement policy statement to help shift the focus to outcomes. It is more common to focus on these intentions with the investment policy statement, Ray says, paying attention to how investments are performing. But the real question should be how the plan is performing.

“It’s not about the best-performing investments,” Ray says. A retirement policy statement would outline the employer’s vision for their retirement plan, such as how to achieve replacement income, and how to educate participants and help them effectively save for retirement.

This is an enormous population to serve, Ray says, citing population projections from the Pew Research Center that say some 10,000 Baby Boomers will retire every day for the next 18 years.

A substantial majority of participants (81%) trust the education they get from plan sponsors, the survey found. Ray calls education a real opportunity for plan sponsors and advisers to engage employees. Effective engagement would be one-on-one advice, since investments are complex, and participants are reluctant to raise their hands in group advice sessions to ask for information.

Other issues to address could be gender and age differences, and how people digest information.

“We have older workers and more females in the workplace,” Ray notes. “Are there ways to address that in a retirement policy statement with education, with seminars, and other methods of education?”

The retirement policy statement could address the importance of face-to-face advice, rather than Web-based advice at the employee’s convenience.

Regardless of what’s on the investment menu or how you do education, utilization has to be a plan’s key driver. The biggest variety of investment offerings counts for little if users can't use the Web-based advice or planning tools, Ray said.

The survey results were not particularly surprising, Ray feels, but plan sponsors and advisers should see it as an opportunity to help employees navigate their investment options.

The survey was conducted by an independent research firm and polled a random sample of more than 1,000 adults nationwide on their retirement plans. A summary of the findings can be downloaded here.

Data & Research February 27, 2014

Physicians Need a Financial Check-Up

Even with stronger earnings and savings rates than the general working population, an analysis from Fidelity Investments shows many physicians face the prospect of steeply reduced income in retirement.
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While physicians rank among the most highly compensated professionals, with an average annual salary of $299,000, many are not on track to support a financially secure lifestyle in retirement, according to a new report from Fidelity Investments. The report analyzes the retirement savings behaviors of some 5,100 physicians and 95,500 other health care professionals using proprietary Fidelity data, and finds the retirement outlook for doctors is surprisingly bleak in terms of traditional readiness measures, especially income replacement ratios.

The findings challenge the assumption that because physicians earn high average salaries, they should be financially prepared to retire in comfort. In reality, based on Fidelity’s analysis, physicians are on track to replace only 56% of their income in retirement, considerably lower than the income replacement rate of 71% Fidelity suggests for those earning more than $120,000 annually. The lower percentage, Fidelity explains, could force significant lifestyle changes for doctors late in life.

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Fidelity researchers say the 15% income replacement shortfall is attributable to a number of factors limiting physicians’ ability to save more for retirement, such as a shorter savings horizon, since doctors often don’t begin careers until their 30s. And many physicians carry substantial student loan debt from undergraduate and medical school, which interferes with early-career savings efforts, when dollars have the most time to grow before retirement.

When it comes to investing behaviors, the report finds younger physicians are demonstrating age-appropriate asset allocations in defined contribution (DC) retirement plans, while their older peers appear to be investing too aggressively and leaving critical savings exposed to market volatility.

Other findings suggest Internal Revenue Service-mandated contribution limits for tax-deferred retirement accounts are also holding back physicians from saving more. This implies a need for increased access for physicians to non-qualified (i.e., non-tax-deferred) retirement plans, Fidelity says.

The report does reveal some good news for doctors. Physicians’ average total savings rate, from both employer and employee contributions, is quite healthy, at 14.9% of annual salary. Not surprisingly, older physicians are saving more than their younger peers, with those age 60 to 64 saving 16.3% on average, compared to younger physicians, age 30 to 39, who are saving 13.1%.

Fidelity points out that, because of their high salaries, physicians are likely to receive lower Social Security benefits than other segments of the U.S. labor force, suggesting they should consider saving more than those who earn less.

Rick Mitchell, an executive vice president for tax-exempt retirement services, says Fidelity’s latest analysis reveals that physicians are not as financially prepared for retirement as one might think. He says the results are a clear indication that physicians need more financial guidance.

The analysis suggests physicians and other employees with higher salaries generally need to save at an even higher rate than other workers—15% or more in most cases—as Social Security benefits cover less of their income needs in retirement. In fact, according to the Fidelity report, Social Security benefits for physicians ages 60 to 67 are projected to account for a much smaller portion of retirement income (12%) than non-physician health care professionals covered in the analysis who are in the same age range and average $60,000 in annual salary (30%).

Fidelity says this means physicians need to consider ways to save more. To start, physicians should save up to the IRS limits, which allow employees to contribute up to $17,500 for those younger than 50 years old and $23,000 for those over 50 in their qualified workplace retirement plans. Surprisingly, Fidelity says many physicians are not maximizing this savings opportunity, with 60% of physicians under 50 years old and 30% of those age 50 and older not saving up to these limits last year.

And even for physicians saving up to the IRS cap, savings challenges remain given their salary levels, as these physicians cannot contribute 15% or more of their annual salaries without reaching the limit. To address this, Fidelity says plan sponsors and advisers should consider offering alternative saving plans, such as a non-qualified 457(b) plan, to help physicians increase retirement savings.

Best Practices to Help Improve Physicians' Retirement Readiness

To assist in improving retirement readiness, the report offers a list of best practices for sponsors and advisers working with physician participants to consider. Fidelity says physicians can improve their retirement outlook by doing the following:

  • Save up to the 402(g) limit of $17,500 (and $23,000 for those 50+) in 2014 in qualified retirement savings plans, and maximize Health Savings Accounts (HSAs) if the plan offers them;
  • Take advantage of other savings vehicles, such as non-qualified DC savings plans, IRAs, tax-deferred annuities and brokerage accounts; 
  • Target a total retirement savings rate of 15% or more annually; and
  • Seek professional guidance to develop savings rates goals, ensure asset allocation is age-appropriate and create a retirement income plan.

Best practices for employers to help physicians in the workplace include the following:

  • Use plan analytics to assess the retirement readiness of both physician and non-physician populations, and adjust the retirement program design accordingly; 
  • Provide additional retirement savings opportunities for physicians, such as a non-qualified 457(b) plan, which are widely used in the nonprofit health care sector; and
  • Provide physicians with one-on-one guidance outlining opportunities for increasing savings and allocating their assets. 

Fidelity also urges employers to define key metrics to measure progress, including percentage of physicians with total savings rate of 15% or more, percentage of physicians with age-based asset allocation, and income replacement rates for physicians and non-physicians.

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