Data & Research June 27, 2013

The Elements of Retirement Readiness

Employees are less confident about retirement, and expect to work longer and retire later, a survey finds.
Reported by

The Transamerica Center for Retirement Studies (TCRS) released “Unlocking Secrets of Retirement Readiness: Meet the Everyday People Who Are ‘Power Planners,'” which shows the majority of employees (62%) said they are less confident about retirement since the start of the recession, and many Baby Boomers (43%) now expect to work longer and retire at a later age.

Catherine Collinson, TCRS president and author of the survey, told PLANSPONSOR, “The conversation on this began about two years ago, as we were finding that more people were thinking about the question of whether to work past the age of 70. We decided last year to think about that in terms of retirement readiness and what its definition is now. When we started to research the topic, we found that there are now a myriad of definitions for ‘retirement readiness.’ The old definition of building up a retirement nest egg, retiring at 65 and no longer have to set your alarm clock no longer applies. The survey allowed us to introduce our own definition of retirement readiness.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The survey defined retirement readiness as a state in which an individual is well-prepared for retirement, should it happen as planned or unexpectedly, and can continue generating adequate income to cover living expenses throughout their lifetime through retirement savings and investments, employer pension benefits, government benefits, and/or continuing to work in some manner while allowing for leisure time to enjoy life.

Five key elements of retirement readiness were identified:

  • A clear vision of retirement, including retirement dreams/expectations, expected retirement age, and any plans to continue working in retirement;
  • A retirement strategy that incorporates savings needs, potential risks, and a back-up plan if forced into retirement sooner than expected;
  • Retirement income, including savings and investments, pension benefits, and government benefits;
  • Knowledge to make informed decisions about retirement investments, government benefits, and health care; and
  • A family understanding, including an open dialogue about finances and agreement on any expectations of support.

According to the Los Angeles-based Collinson, the survey revealed a group of employees who are on the road to retirement readiness, deemed as Power Planners. These Power Planners then fell into five subcategories, which are connected with the aforementioned key behaviors, and include:

  • Future Early Retirees, whose clear vision of retirement is to retire sooner than age 65;
  • 10 Percenters, whose retirement income goals include saving 10% or more of their salary through their retirement plan;
  • Strategists, whose retirement strategy includes a written plan;
  • Knowledgeables, whose knowledge allows them to make informed retirement decisions; and
  • Conversationalists, whose family understanding allows them to frequently discuss retirement issues with family and friends.

"We found that the Future Early Retirees were usually more active in retirement planning. Those that had a written plan for retirement, Strategists, made up about 12% of employees. For the Knowledgeables, we found that 31% disagreed with the statement 'I do not know as much as I should about retirement investing.' And the Conversationalists, those who spoke openly with family members about retirement planning, made up 9% of employees," Collinson noted.

Regarding the findings of the survey, Collinson said, "The biggest surprise for us was the demographic breakdown of the Power Planners we documented in the survey. This group turned out to be all different ages and below $100,000 in annual income. Their common denominator was that they were all proactive people with exceptional saving habits."

She clarified that survey was meant to acknowledge what people are doing right in terms of retirement readiness and how they can build on that. "We found that while 59% of Power Planners were doing at least one of the five behaviors, there is still room for improvement. Doing one thing is tremendous but doing more furthers retirement readiness. We recommend that people start with one behavior and build on others over time."

In the survey, Collinson recommended a number of ways plan sponsors can encourage and foster the key behaviors for retirement readiness.

"Employers can offer a retirement plan to employees if they are not doing it already," she said. "One thing we found was that part-time employees have less access to retirement plans, so a suggestion to plan sponsors would be to cover part-time employees too." Collinson added that steps can be taken to encourage participation in the plan such as increasing employer matching contributions, as well as adding plan features like automatic enrollment and escalation.

She suggested plan sponsors make more employees aware of the Saver's Credit, also known as the Retirement Savings Contributions Credit. This tax credit is available to lower income individuals that contribute to qualified retirement plans such as 401(k)s. "The awareness of this program still isn't what it needs to be. We found that only 24% of workers even know about it."

Collinson also pointed out that employees seeking more education and advice about retirement from their employers, particularly those that are close to retiring. "We found that there is a gap in employers assisting those that are nearing retirement age. We would recommend that more planning services are offered to this group and to help them make that transition from the workforce to retirement."

Harris Interactive conducted the survey online on behalf of the TCRS between January 20 and February 21, 2013. More than 3,600 full- and part-time employees from around the country were surveyed.

The full survey results can be found here.

Data & Research June 27, 2013

Differing TDF Asset Allocations Yield Similar Outcomes

A new survey found that target-date funds (TDFs) with different asset allocations deliver similar retirement savings outcomes.
Reported by

“We found that target-date funds with significantly different asset allocations deliver similar retirement savings outcomes up to age 85. And as the target-date industry matures, we see an increase in diversification of the underlying investments in terms of both fund strategy and geographical location. Though the asset allocation or fund selection among target-date investments vary, target-date funds are relatively suitable investments for retirement savings. Investors realize that, too, and continue to put their money in these funds,” according to Josh Charlson, fund-of-funds strategist for Morningstar, Inc., and lead author of “Target-Date Series Research Paper: 2013 Industry Survey.”

Using the Monte Carlo analysis methods, simulating possible allocations a glide path could take, Morningstar tested the likelihood of investors being able to successfully retire. The test used common assumptions of salary, savings rate and expected retirement age. Morningstar compared glide paths that shifted their asset allocation “to retirement”–when a target-date fund discontinues asset allocation adjustments once the retirement date is reached–and those that continue to shift “through retirement”–when a target-date fund continues to shift its allocation more conservatively after the retirement date is reached. The research found target-date investors in different series have similar probabilities of accumulating sufficient savings, at least through age 85.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The findings of the survey also included:

  • Average industry glide paths--the outline of a target-date fund's changes in its stock and bond balance over time--should reasonably meet the typical worker's spending needs in retirement.
  • More target-date assets are shifting to passively managed investments, as both an underlying holding within a portfolio and as an overall investment approach. While 68% of target-date assets were in actively managed series as of December 31, 2012, inflows to passively managed series--those that invest 80% or more in passively managed investments--surpassed flows into actively managed series for the first time for the 2012 calendar year.
  • Managers of target-date series have significantly increased allocations to non-U.S. equities. Since 2005, international stocks have risen from 24% of the average 2040 fund's equity allocation to 36%, as of December 31, 2012. Emerging-markets bond funds appeared in nine target-date series in 2008, compared with 18 in 2012.
  • Target-date series have become established fixtures in defined contribution plans: assets are rising, fees are falling, and performance reflects strong broad market trends.
  • Assets in target-date series crossed the $500 billion mark in the first quarter of 2013. While the industry's organic growth rate has slowed, its growth is still competitive with other broad mutual fund asset classes.
  • Fees continue to fall, as the asset-weighted average expense ratio dropped to 0.91% in 2012 from 0.99% in 2011.
  • The industry's market leaders--Vanguard, Fidelity, and T. Rowe Price--still control about three-fourths of the industry's assets, despite impressive growth from some of the industry's smaller players. Four target-date series shuttered in 2012--American Independence, Columbia, Oppenheimer, and Goldman Sachs.

The full results of the "The 2013 Target-Date Series Industry Survey" can be found here. Highlights of the findings can be found here.

«