How is income in retirement changing?

On April 24th, EBRI released its 28th annual Retirement Confidence Survey (RCS) produced in conjunction with Greenwald & Associates.

Among the findings, we learned that retirees’ confidence in their ability to afford certain retirement expenses declined. While 85 percent of retirees surveyed in 2017 expressed confidence in their ongoing ability to afford basic expenses, only 80 percent expressed such confidence this year. And, confidence in their ability to afford medical expenses is also down – 77 percent in 2017 vs. 70 percent this year.

While retiree confidence in these aspects of the affordability of retirement declined, the confidence workers have in living comfortably throughout retirement increased in 2018.

Even so, workers appear to be facing their own challenges, as they expect much more of their retirement income to be from sources that do not pay a guaranteed monthly income.

The RCS shows how workers’ expectations of the sources of income in retirement might differ from the sources of income for current retirees: 26 percent of retirees report receiving income from work, while 68 percent of workers expect working for pay to provide them income in retirement; 2-in-3 retirees report Social Security is a major source of income, while only about a third of workers believe Social Security will be a major source; and more than 4-in-10 retirees report income from a defined benefit (DB) or pension plan is a major source of income, while only 32% of workers expect a DB plan to be a major source for them in retirement.

Most current workers expect to rely on “income” sources that require both a savings strategy during their working years and a withdrawal strategy to create income in retirement. Workers see their workplace defined contribution (DC) retirement plans as a source of income in retirement far more than retirees report they have. Eight-in-ten workers say they believe their DC plan will be a major or minor source of income in retirement, compared to just 50 percent of retirees. Six-in-ten workers say they also expect income in retirement from an Individual Retirement Account (IRA).

As we transition to a generation of retirees that will be primary dependent on DC plans, how do workers plan to convert savings to income? In 2018, for the first time, DC plan participants were asked about their plans for the money accrued in their plan when they retired. Only half of workers are confident that they know how much income they will need each month in retirement or how to withdraw income from their savings and investments, with only 1 in 8 very confident.

In short, future retirees’ potential greater reliance on unpredictable sources of income combined with their lack of confidence in withdrawing income from their savings and investments is noteworthy—especially in light of its juxtaposition with their increased confidence in living comfortably throughout retirement.

The RCS is produced annually through the generous support of our funding members: AARP, Conduent HR Services, FINRA , J.P. Morgan, Lincoln Financial, Mercer, MetLife, Nationwide Financial, Principal Financial Group, T. Rowe Price, The Segal Group, U.S. Chamber, Vanguard, and Wells Fargo.

Impact of Plan Size on Workers’ Retirement Income Adequacy

Fee lawsuits and Department of Labor fee disclosure requirements have made defined contribution (DC) plan sponsors laser focused on plan fees. One apparent result has been that such fees have declined overall: according to analysis by BrightScope and the Investment Company Institute (ICI), between 2009 and 2015, total plan costs across all 401(k) plans declined by 14 basis points.1 This has translated into potentially improved retirement prospects for workers. According to the EBRI Retirement Security Projection Model (RSPM), workers ages 35-39 who enjoy 14 basis points fewer plan expenses can expect close to a 4 percent bump in net retirement savings surplus (NRSS)2 when they retire.

While a 4 percent increase in retirement income adequacy is good, participants can experience significantly greater increases by simply benefiting from the economies of scale of large versus small plans. According to the Brightscope/ICI report, fees of small plans (those with $1 million to $10 million in assets) are 1.17 percent This compares to fees of midsized plans ($100 million to $250 million in assets) of 0.52 percent and fees of mega plans (more than $1 billion in assets) of 0.30 percent.

These differences in fees translate into substantial variations in projected savings at retirement. According to RSPM, if the youngest cohort (ages 35-39) of participants in small plans enjoyed the economies of scale of midsized plans, they could expect an increase in NRSS of 19.6 percent–merely due to lower fees. If such participants enjoyed the economies of scale of mega plans, they could expect an increase in NRSS of 26.8 percent due to lower fees.

Costs associated with small plans are a driving force in coverage as well: According to the Bureau of Labor Statistics Compensation Survey, while 83 percent of those working for private sector employers with 500 employees or more have access to a defined contribution plan, only 60 percent of those working for private sector employers with 50-99 employees have such access.

Statistics like these have prompted bipartisan support of initiatives intended to increase availability of open Multiple Employer Plans (MEPs). The thinking goes that open MEPs allow small employers to band together and gain economies of scale to overcome inefficiencies currently preventing them from making cost-effective DC plans available to workers.

In 2016, the Commission on Retirement Security and Personal Savings of the Bipartisan Policy Center (BPC) advocated the creation of a new type of open MEP that would be covered by ERISA3 for businesses with fewer than 500 employers.4 More recently, a provision in the Retirement Enhancement and Savings Act of 2018 (RESA) seeks to facilitate the availability of open MEPs by modifying regulatory provisions such as the “one bad apple” rule that might otherwise hinder open MEP availability.

Critics of open MEPs point to the daunting challenges associated with supporting large numbers of low balance accounts and other administrative considerations, which suggest that economies of scale will be very difficult to achieve. They further point to the potential for abuses if implementation and oversight aren’t well thought out.

However, EBRI’s projection analysis shows that there are potentially gains to be made if open MEPs can achieve even some of the economies of scale of larger plans for small businesses.

1The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015. March 2018
2The net retirement savings surplus is equal to the present value (in 2018 dollars) at the end of each household’s simulated lifespan of the surplus wealth in retirement (for those who are not simulated to run short of money in retirement) less the savings shortfalls (for those who are simulated to run short of money in retirement). For additional information, see VanDerhei, Jack. “Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model.®” EBRI Issue Brief No. 410 (Employee Benefit Research Institute, February 2015) http://bit.ly/ebri-2015-february-ib-pdf
3Employee Retirement Income Security Act of 1974
4The BPC was chaired by Kent Conrad (former Senator of North Dakota) and James B. Lockhart III (former Executive Director of the Pension Benefit Guarantee Corporation (PBGC)). The name of the report is: Securing Our Financial Future. http://bipartisanpolicy.org/wp-content/uploads/2016/06/BPC-Retirement-Security-Report.pdf

Women’s History Month: A Time to Reflect on Women’s Retirement Challenges

As we observe Women’s History Month, themed, “Nevertheless, She Persisted,” there are things to celebrate when it comes to women’s potential retirement security. Women participate in DC plans at a higher rate than men at every income level, and their contribution rates are higher, too. Further, when controlling for income, women save more in DC plans and have higher balances.

Of course, because of differences in the wages of men and women, in the aggregate, men have retirement account balances that are more than 50% larger than women’s.¹ And women’s longevity can also present retirement savings challenges. The typical woman can expect to outlive her male counterpart by five years (age 76 versus 81).² This carries financial ramifications. As WISER (Women’s Institute for a Secure Retirement) points out in its Impact of Retirement Risk on Women report, because women live so long, they are:

  •  More likely to spend longer periods of time in a state of chronic disability
  •  Less likely to have a spouse-caretaker

In other words, not only are women likely to need to fund a longer retirement, they may also need to fund higher out-of-pocket health care costs in retirement as well.

An upcoming EBRI Issue Brief explores how much women are paying in out-of-pocket medical expenses in retirement compared to men, using actual reported medical expense of older individuals from the Health and Retirement Study (HRS).³

The data show that for those dying between ages 70 and 74, there is a less than 1 percentage point difference between men and women when it comes to their chances of entering a nursing home. However, the situation changes dramatically for the very long lived. Indeed, for those dying at the age of 95 or later, women are 13.5 percentage points more likely to enter a nursing home than men.

Once in a nursing home, expenses can be significantly higher for these older women than for their male counterparts. On average, the longest-lived women pay 44 percent more in cumulative out-of-pocket nursing home expenses than men ($75,310 vs. $52,365). At the extreme end of the distribution (the 95th percentile), that differential increases to 61 percent ($281,426 for women and $175,216 for men).

Again, the most likely explanation for this is that women live longer, are more likely to be single late in life, and often don’t benefit from spouses or partners as caregivers the way men may. This may hasten women’s entry into nursing homes as well as increase their length of stay once there. In fact, the evidence is that women are more likely to need more financial resources than men to meet their health care expenses during retirement, especially in cases where women outlive their caregiving spouse or partner.

So how does this translate into women’s confidence in being able to retire comfortably? In the 2017 Retirement Confidence Survey the Employee Benefit Research Institute finds only small differences between how women and men rate their confidence when it comes to various aspects of retirement income adequacy. For example,

  • Sixty-two percent of men are confident about having sufficient money to live comfortably throughout their retirement years, versus 59 percent of women.
  • Fifty-seven percent of men believe they will have enough money in retirement to take care of their medical expenses, versus 52 percent of women.
  • Forty-four percent of men think they have enough money in retirement to pay for long-term care expenses, versus 41 percent of women.

However, things change when the sample is broken out by gender and marital status. Not surprisingly, married individuals register more confidence in being able to meet retirement expenses than single individuals. However, while the confidence of married men and women is virtually indistinguishable across the metrics, single men and women diverge materially in their confidence:

  • Two-thirds of both married men and women register confidence in having sufficient money to live comfortably throughout their retirement years; but only 47 percent of single women are confident, compared to 54 percent of single men.
  • Just over 60 percent of married men and women are confident in their ability to shoulder medical expenses in retirement; but only 37 percent of single women are confident compared to 48 percent of single men.
  • Roughly half of married men and women say they believe they will have enough money in retirement to pay for long-term care costs; that compares to 31 percent of single women being confident versus 36 percent of single men.

The results make several things clear: the majority of single women are worried about their ability to sustain themselves in retirement, and this appears to be driven in good part by the specter of potential health care costs. But equally importantly, married women may be underestimating their likelihood of facing some of their retirement years alone—as well as the potential financial consequences.

 

¹How America Saves – Women versus Men in DC Plans, October 2015
²Population Reference Bureau
³Cumulative Out-of-Pocket Health Care Expenses after the Age of 70

 

401(k) Plan Leakage and the Bipartisan Budget Act of 2018

The Bipartisan Budget Act of 2018 (H. R. 1892) contains several provisions that have potential implications when it comes to 401(k) plan leakage.

Certain provisions could increase plan leakage by making it easier to take hardship withdrawals. Namely, the Budget Act expands the categories of assets that are available for hardship withdrawals to include qualified nonelective contributions, and qualified matching contributions, as well as earnings. Previously, hardship distributions could only come from employees’ own contributions. Further, the Budget Act repeals the requirement to exhaust available plan loans prior to taking a hardship distribution, another provision that makes it easier to take money out of 401(k) plans.

The Budget Act also eliminates the 6-months prohibition against making plan contributions after taking a hardship withdrawal. This could have a mixed effect on leakage from 401(k) plans—potentially encouraging more hardship withdrawals, while at the same time reducing the amount of required forgone saving.

The Employee Benefit Research Institute (EBRI) addressed the topic of 401(k) plan leakage in testimony before the U.S. Department of Labor ERISA Advisory Council in a hearing on Lifetime Participation in Plans. EBRI’s analysis showed the impact of plan leakage over a full career for workers seeking to replace at least 80 percent of their inflation-adjusted income in retirement from a combination of Social Security and 401(k) balances (as well as IRA rollovers originating in 401(k) plans). It found that nearly 1-in-10 (8.8 percent) fewer low-income workers who are currently ages 25-29 are projected to reach retirement “success” (the 80 percent replacement threshold) when auto enrolled in 401(k) plans where leakage such as loan defaults, withdrawals, and cashouts is present. Put another way, 27.3 percent more full-career low-income participants would reach retirement success if plan leakage was eliminated. Between 18 percent and 23 percent more full-career middle-income workers would reach retirement success without such plan leakage.

The analysis further showed that in terms of impact, leakage from hardship withdrawals with a six-month suspension of contributions ranked well below the impact of leakage due to cashouts at job change, but ahead of the impact of leakage due to loan defaults. The projected percentage of low-wage workers achieving retirement success over a full career would increase by 4 percent if loan defaults were eliminated, by 8 percent if hardship withdrawals with a six-month suspension were eliminated, but by 20 percent if cashouts at job change were eliminated.

The testimony pointed out that research has shown that traditionally, participants in 401(k) plans with accessibility features such as loans have higher contribution rates than those without such access. Future research may wish to explore how the presence of automatic enrollment and automatic contribution escalation in 401(k) plans affects such trade-offs.

¹https://www.ebri.org/pdf/publications/testimony/T-180.pdf
²https://www.ebri.org/pdf/briefspdf/EBRI_IB_09-20074.pdf

White House Conference on Aging: July 13

logo-WHCOA2015The decennial White House Conference on Aging will be held in Washington Monday, July 13, and is being live-streamed over the Internet.

The White House conference has been held each decade since the 1960s to identify and advance actions to improve the quality of life of older Americans. The 2015 White House Conference on Aging is an opportunity to look ahead to the issues that will help shape the landscape for older Americans for the next decade.

A series of regional conferences have been held around the country in recent months to generate input and feedback from Americans about how to shape the aging policy landscape, leading up the White House event next week. The July 13, 2015 White House Conference on Aging marks the 50th anniversary of Medicare, Medicaid, and the Older Americans Act, as well as the 80th anniversary of Social Security.

For more information, and the link to the live-stream Internet access, see http://www.whitehouseconferenceonaging.gov/

GAO Report on Retirement Savings: Overall Gaps Identified, but the Focus of Retirement Security Reform Should be on the Uncovered Population

VanDerhei

VanDerhei

By Jack VanDerhei, EBRI

The Government Accountability Office’s new retirement analysis reviewed nine studies conducted between 2006 and 2015 by a variety of organizations and concluded that generally one-third to two-thirds of workers are at risk of falling short of their retirement savings targets.

However, many of these studies use a “replacement rate” standard: Most commonly, this analysis concludes that you need to replace 70–80 percent of your preretirement income to be assured of a successful retirement. This is a convenient metric to use to convey retirement targets to individuals—and no doubt provides useful information to many workers who are attempting to determine whether they are “on-track” with respect to their retirement savings and/or what their future savings rates should be. However, replacement rates are NOT appropriate in large-scale policy models for determining whether an individual will run short of money in retirement. Why?

Because simply setting a target replacement rate at retirement age and suggesting that anyone above that threshold will have a “successful” retirement completely ignores:

  1. Longevity risk.
  2. Post-retirement investment risk.
  3. Long-term care risk.

In fact, looking at just the first two risks above, if you use a replacement rate threshold based on average longevity and average rate of return, you will, in essence, have a savings target that will prove to be insufficient about 50 percent of the time. Of course, this would not be a problem if retirees annuitized all or a large percentage of their defined contribution and IRA balances at retirement age; but the data suggest that only a small percentage of retirees do this.

In contrast, EBRI has been working for the last 14 years to develop a far more inclusive, sophisticated, realistic—and, yes, complex—model that deals with all these risks. It’s our Retirement Security Projection Model® (RSPM), and produces a Retirement Readiness Rating (basically, the probability that a household will NOT run short of money in retirement).

Blog.JV.GAO-rpt.June15.Fig1Our most recent Retirement Readiness Ratings by age are shown in Figure 1 (left). Our baseline results do include long term care costs (the red bars), but we also run the numbers assuming that these costs are NEVER paid by the retirees (the green bars). This latter assumption is not likely to be realistic for many retirees, but we include it to show how important it is to include these costs (unlike many other models).

Even more important is Fig. 2 (right), which shows Retirement Readiness Ratings as a function of preretirement income AND the number of future years of eligibility for a defined contribution plan for Gen Xers.

Blog.JV.GAO-rpt.June15.Fig2Even controlling for the impact of income on the probability of a successful retirement, the number of future years that a Gen Xer works for an employer that sponsors a defined contribution plan will make a tremendous difference in their Retirement Readiness Ratings (even with long-term care costs included).

The evidence from EBRI’s simulation modeling certainly agrees with the GAO that a significant percentage of households will likely run short of money in retirement if coverage is not increased. However this is because we model all the major risks in retirement and do not simply assume some ad-hoc replacement rate threshold.

Moreover, using an aggregate number to portray the percentage of workers at risk for inadequate retirement income is really missing the bigger picture. The retirement security landscape for today’s workers can be bifurcated into those fortunate enough to work for employers that sponsor retirement plans for a majority of their careers vs. those who do not. In general, those who have an employer-sponsored retirement plan for most of their working careers appear to be well on their way to a secure retirement.

Perhaps the focus of any retirement security reform going forward needs to be on those who do not work for employers offering retirement plans and those in the lowest-income quartile.

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Jack VanDerhei is research director at the Employee Benefit Research Institute.

Employers Unaware of Full Implications of King vs. Burwell

by Paul Fronstin, EBRI

paul-fronstin-webThe outcome of the King vs. Burwell case before the Supreme Court of the United States has major implications for employers, workers, and employment-based health benefits.

See Paul Fronstin’s latest post on the topic online here, which kicks off a new series on Mercer/Signal: US Health Care Reform.