Breaking Down Savings Barriers

Having an actual plan makes a big difference for achieving retirement goals, and having an actual adviser makes a big difference in having that plan, research indicates.

Nearly a quarter of Baby Boomers (22%) report having no savings for retirement, according to the “IRI Fact Book 2014,” from the Insured Retirement Institute (IRI).

Among those Boomers who have retirement savings, 40% have balances below $100,000. Citing a study by The Hartford, “Age of Opportunity: Americans Transitioning Into Retirement,” the book notes that 33% of retirees say if they could change just one aspect of their retirement, it would be to save more money and be better prepared financially.

While automatic enrollment and auto-escalation features in employer-sponsored retirement plans have indeed boosted retirement savings, the IRI contends that may still not be enough to ensure adequate reserves. Individuals need to be more engaged in retirement planning, the book argues, and seeking help from a financial adviser is one of the most effective ways for workplace savers to become more proactive.

A number of factors—e.g., the increased responsibility placed on individuals for structuring their own retirement income, coupled with the recent headwinds from the financial crisis, the subsequent recession and a slow economic recovery—have created a set of economic conditions that have negatively affected the retirement savings behaviors of Baby Boomers, the book says.

In a section titled “Barriers to Saving,” the IRI examines some inhibitors to saving for retirement and how potential changes to tax policy can exacerbate them.

IRI researchers also explore how working with an adviser can help achieve desired levels of savings, as well as how annuities can help as sustainable retirement income vehicles in the defined contribution (DC) plan context.

Key Findings

The fact book’s “Barriers to Savings” section reported the following regarding Boomers today:

• 20% have had difficulty paying their mortgage or rent in the
  past 12 months;
• 21% have stopped contributing to a retirement plan;
• 39% said they would be less likely to save if capital gains taxes increased; and
• 54% stated they would be less likely to save if federal income
  taxes increased.

There are ways to overcome the barriers, the book points out. Those who work with an adviser and set up a plan tend to fare better. Among Boomers who work with a financial adviser, 74% had determined a savings goal. The IRI found that having a plan for retirement increases confidence levels. Roughly half (49%) of the Baby Boomers with a plan prepared by an adviser said they were extremely or very confident they will have enough money to live comfortably throughout retirement.

Nearly 43% of Boomers who have consulted an adviser reported that they are very or extremely confident they will have enough money to live comfortably throughout retirement, compared with 33% who have not consulted a financial adviser. In sum, confidence levels rise when people have an adviser and soar even higher when the adviser designs a financial plan. The IRI found that 75% of the Boomers working with a financial adviser said that adviser prepared a retirement plan.

Middle-Incomers Need Advice: Vast majority have had no training on financial security in retirement

Eighty-three percent of middle-income Baby Boomers have not had any type of formal training or education about topics related to retirement financial security, a study finds.

According to a recent survey from the Bankers Life Center for a Secure Retirement, 59% of middle-income Boomers receive no professional financial guidance of any kind, whether formal or informal. At the same time, a majority (62%) somewhat doubt they will have enough savings to last throughout retirement.

The lack of education, services and confidence may be attributed to a disconnect between the Boomers and financial professionals, Bankers Life researchers suggest. The survey shows that approximately four in 10 Boomers with between $25,000 and $100,000 in annual income (39%) think they do not need advice because they prefer to make their own financial decisions.

The survey also finds that many middle-income Boomers could have inadequate retirement plans due to the tendency of the financial services industry to cater to wealthy Americans. Of Boomers without a financial professional, 85% have received no solicitations in the past year, Bankers Life says, and another 63% have never been contacted by one. Among Boomers having an active relationship with a financial professional, 25% sought out the relationships themselves, while a mere 6% say the relationship was initiated by the advice-provider.

Still, good relationships between middle-income Boomers and financial professionals can have positive results. Those who do turn to a professional generally have more saved for retirement. More than one-quarter (26%) who work with a financial adviser have investable assets of more than $500,000, compared with only 5% of those who do not work with one.

Middle-income Boomers should realize that not all of those working with a financial professional start with high levels of assets, according to Bankers Life. The study shows that while nearly half (43%) of individuals who have worked with a professional for less than two years have under $100,000 in investable assets, 75% of those who worked with one for 10 years or more have over $100,000 in investable assets. —PA

Adult Children Undermine Retirement

Six in 10 American parents support their adult children financially, according to a study from the LIMRA Secure Retirement Institute (SRI).

Parents with Millennial children most often help to pay for cell phones and mobile service, college expenses and loans, rent or mortgage payments, and even entertainment costs, such as movies or sporting events. The majority (57%) of Americans with adult children have at least one of them living at home, the study found, and nearly three-quarters of parents whose children are 18 to 22 years old have at least one living with them.

“While Millennials are the most educated generation in history, nearly four in 10 are unemployed, and many more are underemployed,” says Deb Dupont, associate managing director, LIMRA Secure Retirement Institute.

“Parents of Millennials, even those over the age of 22, are providing considerable support to their children at a time in their lives when saving for retirement should be a priority,” she adds. Nearly half (45%) of parents who have supported their adult children financially in the past year report that this has negatively affected their retirement saving.

The study findings are based on a nationally representative survey, fielded last July, of 1,009 Americans. —PA

Retirement and Health Care: The American Benefits Council advocates a long-term outlook on both

A new strategy outline issued by the American Benefits Council (ABC) suggests that the advocacy group will work to achieve public policy reform that more closely unifies health care and retirement concerns.

According to its new strategy manifesto, the ABC expects recent trends in personal health and financial well-being to gain steam in the medium and long term. Over that time, it anticipates individuals and employers will embrace a broader view of lifetime income protection, which includes not only health coverage and retirement savings but also life insurance, disability and long-term care coverage in a much more integrated way.

The main driver behind focusing attention on the need to protect lifetime income through a total financial wellness approach, the ABC says, is that people’s lives are getting longer, while the U.S. pension system is covering a dwindling number of people. Indeed, according to data the council pulled from a recent U.S. Centers for Disease Control and Prevention (CDC) report, the average time spent in retirement has lengthened from 9.6 years in 1970 to 17.6 years today for men, and from 14 years to 20.6 years for women over that same time period. Meanwhile, individuals retiring today can expect the cost of health care to grow 7% annually through the end of their lifetime.

In developing a new strategic plan, the ABC concludes that, in the future, the three main stakeholders in the benefits system will continue to be individuals, employers and the government, although the roles of each will evolve. Additionally, the council says, the principle objective of employee benefits policy will remain helping individuals achieve “personal financial security,” although that concept is perhaps now more accurately described as “personal health and financial well-being.”

The council’s new strategy outline also takes into account the growing importance of “global competitiveness” in retirement and health coverage offerings. The spreading global footprint of the largest employers, and the increasing globalization of markets and economies, means global competition will dictate much of the design and perceived successes of employee benefit programs by the end of the next decade, the ABC says.

Another major consideration for the council’s strategic vision is that technological advances should be expected to keep accelerating. Technologies available today make possible what was unimaginable just 10 years ago when the ABC’s last strategic vision document was issued, the group says. —John Manganaro

Need to Address Health Care: Pre-retirees lack an action plan

The third annual Nationwide Retirement Institute survey found that the majority of respondents (72%) with at least $150,000 in household assets say one of their top fears in retirement is of health care costs going out of control. More than half (55%) believe the Patient Protection and Affordable Care Act (ACA) will increase those costs.

Fear is doing little to inspire these pre-retirees to take action, however. More than two in five (45%) say they would delay their retirement if they had to buy their own health insurance. Roughly one-quarter of employed affluent Baby Boomers (26%) say they believe they will never retire.

Just two years ago, most affluent Boomers surveyed expressed little concern over health care costs in retirement. Last year, that number rose 30%, and it jumped a bit higher this year, with 44% saying they believe it will be the biggest expense throughout retirement.

Still, these worries can lead to a positive outcome, says John Carter, president of Nationwide’s retirement plans business, in Columbus, Ohio. They increase the conversations around paying for health care in retirement and can be a great starting point for advisers to help retirement plan participants assess and plan for those costs.

“We believe there is a lack of clear understanding around the Affordable Care Act,” Carter says, noting that four in 10 consumers report believing the ACA will increase their retirement health care costs. People are unaware of how much they will need for meeting expenses in retirement, he feels, and do not fully understand the entire benefits landscape—a picture that includes Medicare, Social Security benefits and long-term care.

“Their underestimation of what health care costs in retirement can lead to these fears,” Carter says, and in the wake of such fear and confusion, many participants fail to plan. According to the survey, just 23% of Baby Boomers have discussed health care costs with a financial adviser. “It’s not just about the assets you accumulate,” Carter says.

As the ACA has gotten more ink over the last year, Nationwide’s survey found that the percentage of pre-retirees who feel confident to very confident that they know their personal benefits and who grasp the consequences of the ACA has increased from 24% to 32%. However, confusion still abounds. Over three in five affluent pre-retirees (61%) say they wish they had a better understanding of Medicare coverage. Nearly two-thirds of affluent pre-retirees enrolled in Medicare did not know that the program does not cover long-term care costs. “There is room for us to educate more,” Carter says.

The survey results yielded few surprises, he says, but it did highlight that insufficient knowledge around planning for health care expenses in retirement continues to challenge pre-retirees. “The good news is that the ACA has pulled health care into the dialogue,” he says. “Advisers need to be ready to have this conversation and be proactive.”

He recommends using all available expense planning tools and calculators—such as Nationwide’s Personal Health Care Assessment. Further, he stresses that advisers need to gain a thorough understanding of Medicare, Social Security and the ACA, and know the benefits. —Jill Cornfield

Advisers Rely On Numerous Enrollment Strategies

The Financial Wellness Cachet: Incorporating holistic financial planning is a competitive advantage

Financial wellness programs can be a value-add for advisers, especially when they help drive retirement readiness and address the roots of participant inactivity.

Financial stress is widespread, says Matt Iverson, founder of Retiremap in San Francisco, citing a recent survey by New York Life Retirement Plan Services that indicates three-quarters of the population describe themselves as stressed or extremely stressed. The cause? More than half (60%) point to possible financial difficulties, and 47% worry about potentially unaffordable medical expenses.

“We all say everyone should save more, but if you can’t afford to save more because of credit card debt, so you can’t retire at 65, these things have an effect on the employee as well as the employer,” Iverson says.

In the face of this significant stress, which does not seem to be going away, Iverson notes, the adviser is the main point of contact to address the problem with retirement plan participants, either with phone support or by working with the plan sponsor to implement a program to help them identify and set goals.

Contributing to the problem of financial stress, Iverson says, is that we live in an age of relentless marketing. People are constantly exposed to commercial messaging. “It’s hard to extract yourself from the things that provide short-term gratification,” he says, adding that part of the adviser’s job is to frame things so people can make the right decisions.

A financial wellness program can help create that environment and raise awareness around getting people to meet their goals, Iverson says. While plan-design features definitely play a part in preparing participants to retire, advisers can bring maximum benefit to the plan by offering programs that help participants recognize the financial behaviors that make them stand in their own way, so to speak. “We can advocate for the participants to help get them where they need to be,” he says.

Some of people’s top concerns are skyrocketing medical expenses—probably the No. 1 expense, Iverson says—and, among other macroeconomic trends, stagnant wages. “People have to do more with less,” he observes, and within a retirement plan, an adviser might have to broaden the scope of topics to cover more than just investment options.

Moving from financial planning to workplace financial wellness programs is not a huge leap, and the impetus is partly being driven by the employer. It is increasingly common for human resources (HR) and benefits people to see the impact on work performance of their employees’ financial stress, Iverson says. They would like aging retirees to retire, but sometimes they cannot afford to, and many participants continue to work at a time when their benefits and salary are more expensive—on average, an additional $7,000 to $10,000 a year for people who cannot retire.

Education must be relevant to employees’ goals. Advisers should use the communication strategies that will resonate with specific, targeted populations. Much of the communication should help them see if they are on track to meet financial goals broadly, Iverson argues, not just for retirement, which is generally more of a concern for people close to that milestone. —Jill Cornfield

Overlooked Factors: Retirement planners may be missing several key dynamics

There is a pretty long list of variables people commonly forget to consider in their retirement savings effort, says David Blanchett, head of retirement research for Morningstar in Chicago.

“First, I think a serious misunderstanding of life expectancy still exists today—especially how life expectancy will change in the next 20 or 30 years, as that will impact even the older generations of people in the 401(k) system right now,” he says.

As Blanchett observes, most people are aware that modern medicine continues to improve the average length of peoples’ lives, but few understand how truly significant this is from a financial planning perspective. For a 65-year-old, even a five-year boost in life expectancy dramatically increases his lifetime income needs.

“It’s really important for people to ask themselves not just, ‘Will I be able to retire?’ but also, ‘Can my nest egg last 30 years?’” Blanchett says.

“It’s not an exact statistic, but the other thing is that people who have saved in a 401(k) plan successfully are not ‘average’ Americans,” he says. “When you look at the data, consistent retirement plan participants tend to be somewhat healthier and wealthier than people on average, which has a positive impact on longevity.”

Further complicating the problem, Blanchett says, many people back-load their savings effort and plan to make up for lost ground late in their career, when they expect to earn their highest wages. “But what happens to this outlook if you learn at 55 that you can’t work anymore?” he says, “or that you have to shift to a part-time position?”

Another piece of the retirement planning picture that often gets overlooked is the “sequence of return” risk associated with retirement portfolios. Put simply, the sequence of return risk arises from the fact that an individual has to leave the work force at some specific point and begin drawing on accumulated assets. This can be a major problem if the anticipated retirement date comes during a deep market trough, as it did for many during the Great Recession, when they saw more than 20% or 30% of their portfolios evaporate over a short time.

“Some people think converting to a cash portfolio might be the answer here, but cash isn’t exactly safe either,” he says. “An all-cash portfolio right now is essentially posting a negative rate of return after you factor in inflation. And if you’re earning a negative rate of return after inflation for the first 10 years of retirement, you’re never going to make it over the 30-year retirements we’ve been talking about. You’re inevitably going to have to take on some amount of risk.”

Blanchett adds that there is also a tendency to overlook the fact that bond holdings are subject to sequence risk as well, and these may not always be a safe investment. The point, he says, is that getting too focused on one piece of the retirement picture—be it health care or housing—may be problematic. —John Manganaro

Next-Level Readiness: Sponsors need to enhance auto-enrollment features

More than three-quarters of large and midsize U.S. employers that sponsor 401(k) and 403(b) defined contribution (DC) plans say retirement readiness has become a major issue for their employees.

A survey by Towers Watson shows that a vast majority of plan sponsors have taken steps to boost employee retirement readiness through improved plan design and communications. However, not all plan sponsors are optimizing these strategies. For example, more than two-thirds of companies (68%) offer automatic enrollment to at least some of their workers, but far fewer (26%) automatically re-enroll noncontributors or participants deferring less than the default amount. Towers Watson claims employers have the opportunity to engage both slow and stagnant savers by using re-enrollment.

Similarly, 54% of companies provide automatic escalation, but only 28% mandate it. Among sponsors that automatically enroll some or all workers, approximately two-thirds offer automatic escalation of contributions, with 35% making it truly automatic.

Aside from auto-enrollment and -escalation, the appeal of an employer match continues to be one of the single largest influencers of the amount and level of employee savings, according to Towers Watson. The company’s 2014 North American Defined Contribution Plan Sponsor Survey found 95% of plan sponsors offer a matching contribution to some or all of their workers. One-third of employees save at the match threshold, and another third save more. Knowing that many employees tend to save at the match level provides the opportunity for employers to reshape the match to encourage increased participant savings and improved retirement readiness, Towers Watson states.

Fifty-four percent of companies offer Roth features in their plans, up from 46% in 2012, the survey found. Additionally, 18% of respondents are considering or planning to add Roth features by 2016. Of those that currently have a Roth provision, 45% also allow other after-tax contribution options. While post-tax offerings have increased, utilization of the strategy still remains low, with only 8% of highly compensated employees and 11% of non-highly compensated employees using Roth accounts to save. Towers Watson suggests that organizations wanting to be proactive about driving up the use of their Roth provisions should target messages to employees not currently making such contributions.

The 2014 Towers Watson North American Defined Contribution Plan Sponsor Survey was conducted in June and July of last year among 457 large and midsize U.S. companies that sponsor a defined contribution plan. These companies sponsor 401(k) plans or 403(b) plans, represent a range of industry sectors, and have more than 1,000 employees and $10 million or more in assets. —Rebecca Moore

Pre-Retirees’ Regrets/Worries

Retirement Setbacks for Women