Wells Fargo Institutional Retirement and Trust has published its ninth annual Retirement Study, finding once again that employees are being asked to shoulder more responsibility for directing their own retirement savings effort.
Lori Lucas, president and CEO of the Employee Benefit Research Institute, helped Wells Fargo leaders Joe Ready, head of Wells Fargo Institutional Retirement and Trust; and Fredrik Axsater, executive vice president and head of strategic business segments for Wells Fargo Asset Management, contextualize the findings. She added insight from EBRI’s own independent research, which harmonizes with many of the finding established by Wells Fargo’s analysis.
According to Ready and Axsater, probably the most important overall finding in this year’s analysis is the strong positive impact on participant outcomes associated with having “a planning mindset.” This is to say that Wells Fargo uncovered four specific participant characteristics that correlate with a significantly better financial life—including lower levels of reported financial stress and greater reported financial outcomes. These characteristics include having set a specific money-related goal in the preceding six months; having previously set a specific long-term financial goal, such as a retirement age or savings level; feeling good about planning financial matters in general over the next one or two years; and preferring to save for retirement now rather than waiting until later.
“Employees just starting out in the workforce today face a retirement savings and spending journey of 60 to 70 years, and they are being made responsible for managing more of this effort on an individual basis,” Ready said. “Those closer to retirement still have a savings and investing horizon that is 25 or 30 years, or longer. Regardless of income, establishing a financial plan today and maintaining a focused set of financial goals can deliver many benefits.”
Ready and Axsater observed how the planning mindset cuts across household income levels, with some evidence to suggest those with higher incomes are somewhat likelier to have a planning mindset. In particular, Wells Fargo finds 33% of workers with a planning mindset have household incomes below $75,000.
Across all workers surveyed, 84% of those with a planning mindset say they regularly contribute to retirement savings, versus 66% who do not report having this mindset. At the same time, fewer people with the planning mindset envision living to age 85 or longer as being likely to cause financial hardship.
Spending down of DC assets remains a big challenge
Ready and Axsater pointed to various findings showing employees are eager to receive more guidance and support when it comes to spending down DC plan assets.
Lucas here offered insight from EBRI’s research efforts, including a recent Issue Brief, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?”
As Lucas explained, the data shows retirees are actually not spending down their accumulated assets to fund their retirement needs—even when assets are plentiful or when there is guaranteed income available to ensure that retirees will not run out of money. EBRI’s analysis found that regardless of pre-retirement asset size, rates of decumulation are low. Over an 18-year period following retirement, median assets declined only 24% for the low asset group of retirees—from $31,740 immediately after retirement to $24,000 eighteen years later. Lucas said this is was surprising to learn, but also somewhat intuitive.
“It is not ‘irrational’ for lower-asset households to hold on to their assets as long as possible,” she said.
EBRI found similar patterns when assets are greater. For the moderate asset group, median non-housing assets declined 27% (from $333,940 immediately after retirement to $243,070 18 years later). For those with the most substantial assets—starting with a median of $857,450 immediately after retirement, the decumulation rate was less than 11% (to $763,900 18 years later).
Lucas pointed out how having guaranteed income for life, such as a pension, didn’t make retirees more likely to spend down their assets. The study found that of all the subgroups studied, pensioners had the lowest asset spend-down rates.
“This suggests that if the goal is to avoid spending down assets, pensioners are best suited to achieve it. In other words, if retirees seek to limit their spending to their regular flow of income, such as pension, Social Security income, or other annuity income, then pensioners are indeed best suited to avoid asset decumulation, as they have more regular income than others,” EBRI found.
Asked for her personal take on this situation, Lucas said it also shows that retirees, unlike on the accumulation side of things, lack a framework for guiding their retirement spending decisions. And so, many of them revert to cautious attitudes, “and there is the fact that saving and frugality are generally considered to be virtuous behavior.”
“I would also point out that most individuals say they are happy in retirement and do not need to spend a lot to be happy,” Lucas said. “They say that having their nest egg intact, as a form of independence and security, makes them happier than anything material or discretionary they may be able to buy with the money.”
Ready and Axsater observed that users of 401(k)s do not see them as strictly a means for accumulating lump-sum savings. Eighty-six percent of workers agree that it would be valuable if their plan provided a statement on how much they could spend each month in retirement, based on their current and projected savings.
According to the survey, younger workers would like to see their employer provide more help with their long-term retirement planning choices. Seventy-three percent of Millennial workers and 63% of Generation X workers say they would like more help from employers, compared with 50% of Baby Boomers.
In closing the presentation, the trio of speakers voiced optimism about the prospects for continued progress on solving retirement issues here in the U.S.—both from a public policy and private industry perspective. Ready said providers and plan sponsors can be proud of the fact that employees generally perceive their retirement plan offerings as being high quality and as having a strong positive impact on their financial lives. As the survey shows, 92% of workers say they feel more secure about retirement because they have contributed to a 401(k), and 82% of those with access to a 401(k) say they would not have saved as much for retirement at this stage if not for the 401(k).