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Y Not Saving?
Report finds Generation Y is most at risk for retirement
A report from Aon Hewitt suggests that Generation Y workers (ages 18 to 30) may be most at risk for not having enough savings in retirement, despite having the greatest amount of time to save.
Having many working years ahead of them might not be enough of a safety net, when rising health-care costs, increased life expectancy, and the steady decline in pension plan and retirement medical benefits are factored in, says Aon Hewitt. Improving their saving and investing behaviors could help Gen Y workers meet their financial needs in retirement, the analysis found.
After factoring in inflation and post-retirement medical costs, Aon Hewitt projects Gen Y workers will need to save 18.7 times their final pay in retirement resources—including Social Security, employer-provided defined benefit and defined contribution plans, and employee savings—to maintain their current standard of living in retirement (this assumes retiring at age 65; more will be needed to retire earlier). However, according to a press release, Aon Hewitt’s research shows that employees of this generation who work a full career are on track to accumulate just 12.4 times their final pay, leaving a shortfall of 6.3 times pay—a third of their total needs. The situation is even bleaker for workers without a pension plan, who have a shortfall of eight times.
Aon Hewitt’s analysis assumes no future leakage from withdrawals or cashouts, and that Social Security benefits are not reduced, rendering these scenarios optimistic at best, the announcement said.
The analysis shows that only half of Gen Y workers who are eligible to participate in a defined contribution plan currently are doing so. Among those who save, the average pretax contribution rate is only 5.3% of pay, with 41% of workers not saving enough to receive the entire employer-provided match.
Even if workers begin saving early, Aon Hewitt’s research shows that most cash out their savings well before retirement. Nearly 60% of Gen Y workers cash out their retirement savings when changing jobs, which means they are missing out on the opportunity for decades’ worth of tax-deferred growth on their investments.
“Automatically” Getting Them There
Automation in defined contribution plans is playing a strong role in helping employees save across all demographics, but especially with younger generations. The participation rate of Gen Y workers who were enrolled automatically was 85% in 2009 compared with just 42% under traditional enrollment.
Gen Y workers also are more likely to use contribution escalation features. For example, nearly a quarter of this demographic elected or were defaulted into contribution escalation when available in their employer’s defined contribution plan, compared to just 10% of younger Baby Boomers.
In addition, Aon Hewitt’s data show that Gen Y participants use simplified investment solutions more often and are more likely to use them correctly—primarily because of the growing popularity of premixed portfolios as the default investment under automatic enrollment. More than two-thirds (69%) of Gen Y investors used a premixed portfolio (mainly target-date funds) in 2009, compared with 54% for Gen X investors and 45% of Younger Boomers. Further, nearly 60% of Gen Y workers holding a premixed portfolio used it as a turnkey solution—meaning they invested 100% of their assets in the fund—compared with 40% of Gen X workers.
According to Aon Hewitt’s analysis, while Gen Y workers saw losses in their defined contribution plans similar to other generations during the 2008 market crash, their portfolios rebounded well when the markets recovered given better diversification and the embedded rebalancing. Gen Y workers experienced a -28% median rate of return in 2008 and a 29% median rate of return in 2009, compared with -28% and 23%, respectively, for Younger Boomers.
—Rebecca Moore
Held Accountable
Sponsors aware of responsibility to workers
A Deloitte survey underscores the extent to which sponsors increasingly are aware of their responsibilities to help participants save for retirement.
According to the study report, 62% of plan sponsors surveyed in 2010 feel that their responsibility includes taking an interest in whether employees are tracking toward a comfortable retirement. Deloitte asked respondents to rank the importance of “participant retirement readiness,” and it moved right to the top as the most important improvement plan.
Meanwhile, according to the Deloitte report, 15% of plan sponsors surveyed believe most employees will be prepared for retirement. However, sponsors appear unsure about which tools and offerings are most effective at helping participants manage this.
A mere 25% of plan sponsors surveyed offer managed accounts. However, more than half (51%) make individual financial counseling/investment advice available to all participants, the study found. An additional 16% are considering adding this feature in the next two years. For those that do not offer this service, potential fiduciary responsibility continues to be listed as the top reason for not offering it (60%), Deloitte said.
Further, according to the study, less than 5% of plans currently offer retirement-income products. Only 12% of plan sponsors surveyed indicate they are considering adding in-plan or at-retirement income options.
“Our workforce is maturing and changing, and our 401(k) plans are struggling to keep pace,” Deloitte said in the report. “The Baby Boomers have begun their transition into retirement and the debate regarding the success of 401(k) plans in the U.S. is a hot one. Participant readiness is in the spotlight in the media, on Capitol Hill, and in our homes.”
In other results, sponsors reported the most common actions taken by participants over the past 12 months were:
* Increased loan activity (49%)
* Decreased deferral rates (41%)
* Increased withdrawals—hardship, in-service (40%)
* No changes (23%)
* Rebalancing portfolios to be less aggressive (21%)
In 2010, Deloitte said there was an increase in plan sponsors offering employer matching contributions (66%) from 2009 (59%). Among those that previously suspended matching contributions, 55% reported that they plan to reinstate matching contributions within the next 24 months.
From a plan design perspective, the average number of investment options available to participants has risen from fewer than 10 in 2000 to more than 20 in 2010. Eligibility restrictions also have been altered dramatically, as 86% of respondents now allow participant eligibility in the first three months. Similarly, vesting schedules have been reduced; in 2000, 42% offered a four- to six-year graded schedule and, in 2010, 42% now offer immediate vesting of employer contributions. —PA
Great Expectations
Generations differ about life in retirement
A recent Wells Fargo survey showed that many respondents did not have a realistic understanding of how much money they will need in retirement.
However, the good news is that 79% want their employers to offer more advice to help manage their retirement plans. People of all five generations surveyed voiced strong support for changes in 401(k) plan design and regulation to make it easier for employers to provide guidance and advice. Some 65% believe they should be saving more, and could be if they got more guidance or advice.
Sixty-five percent said that those without access to a 401(k) or similar plan should have an equivalent system. Of those with a 401(k) and company matching contribution, 85% said they contributed as much as their company will match. Eighty-two percent said employees should be offered a lifetime income option in their retirement accounts.
A Wells Fargo news release said 56% of the 50-somethings surveyed are “confident or very confident” they’ll have the money to support the retirement lifestyle they want. Unfortunately, according to Wells Fargo, their retirement account balances don’t back that up; while the median retirement savings of respondents age 50 to 59 is $29,000, stretched out for a 20-year retirement, the savings would amount to about $190 a month (assuming a 5% rate of return). The survey found that only 33% have a detailed written retirement plan.
Thirty-seven percent do not know how much they will need and/or cannot estimate how long they will be able to live on what they have saved. Almost two-thirds (62%) say they have not changed their retirement savings rates in the two years since the recession began, and only 16% have increased it.
“Too many Americans have their heads in the sand in the face of obvious savings deficits,” said Laurie Nordquist, Director of Wells Fargo Institutional Retirement and Trust, in the news release. “People are not even close to where they need to be in total savings. Barring a miracle, a winning lottery ticket, or a big inheritance, they’re going to be forced to dramatically cut back their lifestyles after retirement.”
Middle-class Americans, especially those younger than 50, increasingly know that retirement is a do-it-yourself endeavor. Only two in five (40%) of those surveyed said they think Social Security will be available throughout their retirement—including only 20% of 20-somethings and 22% of 30-somethings.
According to Wells Fargo, compared with Americans who are married or partnered, single Americans:
• are more likely to be “very confident” of having enough to retire on comfortably (25% among unmarrieds versus 17% among marrieds);
• are more likely to believe Social Security will be available to them during their entire retirement (47% versus 37%);
• expect to spend less on health care after retirement ($24,000 versus $36,000);
• are contributing more to their 401(k) or similar plans (9.7% of annual income for unmarrieds versus 8.0% for marrieds);
• are less likely to be contributing to an IRA (23% versus 30%) or to say they can depend on their brokerage accounts as a source for retirement income (47% versus 55%), but are more likely to have or expect a pension (55% versus 41%).
On behalf of Wells Fargo, Harris Interactive Inc. conducted 1,756 telephone interviews of middle-income Americans in their 20s, 30s, 40s, 50s, and 60s. —Fred Schneyer
Getting Together
IRS allows for commingling of assets in group trusts
The Internal Revenue Service has issued Revenue Ruling 2011-01, modifying the rules for group trusts.
Beginning on January 10, 2011, the assets of qualified plans under statutes 401(a) and 457(b) may be pooled in a group trust. This revenue ruling, with the assets of custodial accounts under § 403(b)(7), retirement income accounts under §403(b)(9), and § 401(a)(24) governmental plans, will not affect the tax status of the group trust or the tax status of each of the separate group trust retiree benefit plans.
The IRS said a custodial account under § 403(b)(7) will fail to satisfy § 1.403(b)-8(d)(2)(i) if the assets of the account are invested other than in the stock of a regulated investment company, and any group trust in which the assets of a § 403(b)(7) custodial account is invested must comply with this restriction. Accordingly, as a result of this investment restriction, the assets of a custodial account under § 403(b)(7) generally will be combined in a group trust that solely contains the assets of other § 403(b)(7) custodial accounts.
The ruling lists the requirements for the tax status of the group trust to be derived from the tax status of the participating entities to the extent of their equitable interests in the group trust. —PA
A Leg Up
Investors say advisers help them save more
People who spend time with a financial professional report saving two to three times more than their peers who do not, according to a study from the ING Retirement Research Institute.
The research found that investors who work with an adviser feel more knowledgeable about investments and more confident in their ability to enjoy retirement, and they save more.
ING Retirement Research Institute analyzed data from more than 14,000 users who used INGCompareMe.com—
a Web site on which users can enter their personal information to see where they stand in relation to others on saving, spending, investing, debt, and personal finance matters.
According to the data, those who spent “some time” with an adviser (31%) reported saving, on average, more than twice as much for retirement as those who spent “no time.” The number jumped even higher—more than three times as much—for those who spent “a lot of time” getting such help.
Spending time with a financial professional had an impact on how an individual invested with respect to asset allocation. According to the data, a majority (60%) of those who spent some time or a lot of time with an adviser considered themselves to be moderate investors. The number who characterized themselves as moderate dropped to less than half (48%) when they spent very little or no time, and thus tended to be more conservative.
Confidence about future financial success also varied greatly between those who spent “a lot of time” versus “no time” with a financial professional. More than six in 10 (62%) of those who spent a lot of time with one said they were highly confident about enjoying their retirement. For those who spent no time, only about one-third (34%) reported the same level of confidence.
—Nicole Bliman
Many Americans Lack Rainy Day Fund
Fifty-four percent of respondents to a survey from the EARN Research Institute said they could not meet basic financial needs if they lost their income for 90 days or more. Sixty-four percent of low-income families (annual household income of $35,000) gave the same response. Asked where they might obtain the funds necessary to meet basic household financial needs in the event of circumstances such as job loss or catastrophic illness, 65% of those polled reported they would dip into their savings accounts. Forty-three percent of those polled suggested they would make early withdrawals from 401(k) or other retirement accounts, while 35% of the youngest adults of those surveyed (ages 18 to 34) suggested they would rely on credit cards. —Fred Schneyer
Team Players?
There’s no “we” in investing, just “I”
Investors do not want to jump to a rational conversation about facts and figures right away; financial advisers need to understand them on an emotional level first.
This was a finding in a report published by the Insured Retirement Institute (IRI) and Maslansky, Luntz + Partners examining retirees’ and pre-retirees’ attitudes about investing and the role of financial advisers.
At IRI’s 2010 Annual Meeting, a panel of 24 retirees and pre-retirees between the ages of 50 and 74 was shown a series of video messages about retirement, investing, and the role of financial advisers. Participants used instant-response, hand-held devices to communicate their reactions to these messages, which Maslansky, Luntz + Partners gathered and published.
When the same type of exercise was conducted at IRI’s annual meeting in 2009, Maslansky concluded that investors were in a “post-trust” mindset; they were skeptical about everything. In 2010, the “post-trust” attitude is still strong, but a “recovery” attitude is making some headway.
The report suggests that investors do not care about the big picture as much as they care about their personal stake in it. Also, most advisers believe they do a very thorough job of educating their clients, yet clients still feel uneducated. The report recommends “closing the gap” between going through the motions of investor education, and really making sure clients are getting it. Advisers need to understand that investors these days are highly skeptical of anyone claiming to have a “sure thing,” and that the only certainty in markets is uncertainty.
To help advisers get a deeper appreciation and give them the ability to succeed, IRI and Maslansky made several suggestions: Listen to your clients and give them the most personalized investment strategy possible; when it comes to discussing “retirement income” or “annuities,” advisers should focus on the philosophy behind why those products may work, and not the products themselves; protect the bulk of their investments, but find one sliver of the pie to invest with aggressively—one place in which they may be more aggressive is with “new” money. —Nicole Bliman
Match Rates
Employer match is a powerful deferral incentive
The Principal Financial Group found that the design of the employer match can be a powerful motivator for participants, even when the employer’s total contribution does not change.
The Principal analyzed 6,560 contracts involving its plans that include a match formula. In each of three scenarios studied with the same match, the participant contribution increases as the matching formula targets higher contributions.
“The data tell us that, while the employer contribution stays at 2%, the higher target deferral in the match formula is spurring participants to save more,” said Barrie Christman, Vice President of Individual Investor Services at The Principal, in a news release. “This is significant because it shows that employers can incent better savings behavior without having to increase their costs.”
In addition, the analysis shows that stretching the matching contribution to a higher level does not have a negative impact on participation rates.
Further analysis of a sample group of participants making a contribution and having an employer match shows that 43% of those participants fall within the 6% to 10% contribution range, and 26% are contributing 11% to 15%. Of that sample group, 75% are deferring up to their employer’s matching contribution. —PA
To Cut 401(k) Costs, Look at Investment Expenses
Smaller plans do not necessarily have cheaper costs; a new survey actually proves otherwise. The 11th edition of the 401k Averages Book illustrates that the average total plan cost for a small retirement plan (100 participants) is 1.33%, while the average total plan cost for a large retirement plan (1,000 participants) is 1.11%. The study shows the small plan average investment expense is 1.26%, while the large plan average investment expense is 1.09%. According to a press release, investment expenses account for 95% of the small plan’s total expenses and 98% of the large plan’s. The range between the high and low total plan costs on a 100-participant plan with a $50,000 average account balance is .57% to 1.76%. —Rebecca Moore
401(k) Participant Wins FINRA Arbitration
A 401(k) participant claimed Morgan Stanley caused significant losses to his account after his request to move money out of the stock market was not acted upon. The Financial Industry Regulatory Authority (FINRA) awarded Robert Bryant $80,504, as well as $1,500 in costs and $26,566 in lawyers’ fees. The awards were levied against Morgan Stanley, which managed the 401(k) plan for Bryant’s employer; broker James Miller was not named in the claim. According to the FINRA document, Bryant accused Miller of rebuffing his “concerns” that the stock market was too risky for his 401(k) assets and that the best move was to transfer assets into cash holdings. Miller argued that Bryant should stay in the stock market. Morgan Stanley was liable for not supervising Miller effectively, Bryant charged. Among other things, Morgan Stanley argued that Bryant’s losses were his own fault and that the company was not negligent in its dealings with Bryant. —Fred Schneyer