Asset Allocations of 401(k) Savers Changed Significantly Over Two Decades

Asset Allocations of 401(k) Savers Changed Significantly Over Two Decades

While most 401(k) retirement plan savers continue to invest heavily in equities, the asset allocations of plan participants in their twenties at the end of 2015 differed significantly from those of plan participants in their twenties in the mid-1990s, shifting away from equity funds and company stock and toward balanced funds, a study conducted by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found.

Published on August 3, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015,” is the latest update of a 1999 joint study that analyzed 1996 data from the EBRI/ICI database. At year-end 2015, the EBRI/ICI database included statistical information on 26.1 million 401(k) plan participants in 101,625 employer-sponsored 401(k) plans with $1.9 trillion in assets. In the new study, the authors were able to make a cross-generational comparison of 401(k) investors in their twenties in 1996 and 2015 by drawing on 20 years of data analyzed in the EBRI/ICI series of annual studies on 401(k) participants’ activities.

The research showed that throughout the study period, the share of assets younger 401(k) participants invested in equities was high: plan participants in their twenties held 80% of their aggregate assets in equities at year-end 2015, or only slightly more than the 77% of assets held in equities by their 1996 counterparts. But the analysis also found that the vehicles younger savers used to invest in equities changed between 1996 and 2015: whereas savers in their twenties allocated 55% of their aggregate assets to equity funds in 1996, this share had fallen to 28% by year-end 2015. Meanwhile, the share of assets that these younger 401(k) participants allocated to company stock decreased from 17% in 1996 to 5% at year-end 2015.

The findings further indicated that compared to their 1996 counterparts, younger 401(k) participants in 2015 were much more heavily invested in balanced funds, including target-date funds. According to the analysis, participants in their twenties in 1996 allocated only 8% of their 401(k) plan assets to balanced funds (target-date funds were not reported separately in the database before 2006); whereas their counterparts in 2015 invested 54% of their assets in balanced funds, with nearly half (47%) of these assets invested in target-date funds.

The authors emphasized that trends among investors in their twenties are mirrored across all age groups in the database: among all investors, allocations to equity funds declined from 53% in 1996 to 43% in 2015, and allocations to balanced funds increased from 7% of assets in 1996 to 25% in 2015.

The analysis also showed that target-date funds have been growing in popularity among 401(k) investors of all ages, and particularly among recently hired participants. The study found that among all participants, investments in target-date funds rose from 5% of assets at year-end 2006 to 20% of assets at year-end 2016, and that nearly half of the 401(k) participants tracked in the database held these funds. In addition, the study found that recently hired participants have become especially likely to hold target-date funds, and to have allocated a large portion of their balances to these funds: the findings showed that at year-end 2015, 60% of recently hired participants held target-date funds, and that these funds accounted for more than one-third of their assets.

The results of the analysis also revealed that among all of the 401(k) participants studied, investment in company stock remained at historically low levels in 2015: less than 7% of 401(k) assets were invested in company stock at year-end 2015, roughly the same share as in 2012, 2013, and 2014; but down sharply from 1999, when 63% of participants were invested in company stock, and company stock accounted for 19% of assets. The study also found that recently hired 401(k) participants have been investing in company stock at especially low rates: at year-end 2015, around one-quarter of recently hired 401(k) plan participants in plans offering company stock held company stock, compared with around 43% of all 401(k) participants.

From Benefit Trends Newsletter, Volume 60, Issue 10

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2017 Liberty Publishing, Inc. All rights reserved.

Optimal Retirement Plan Design Can Increase Savings

Optimal Retirement Plan Design Can Increase Savings

Adding automatic features to 401(k) and other defined contribution (DC) retirement plans can significantly boost the retirement savings of middle-income workers in particular, but older workers remain vulnerable to retirement shortfalls, according to a white paper published on July 25, 2017 by the Defined Contribution Institutional Investment Association (DCIIA).

The paper, “Design Matters: The Influence of DC Plan Design on Retirement Outcomes,” presents the first set of findings of an ongoing project that explores the current state of retirement readiness in a post-Pension Protection Act of 2006 (PPA) defined contribution environment. Based on data analytics and simulation analysis provided by the Employee Research Benefit Institute (EBRI), researchers looked at the positive effects of automatic plan features and the negative effects of asset “leakage” on the retirement income adequacy of DC plan participants, as well as at opportunities for improving DC plans without additional legislative regulatory action.

The authors stressed the importance of recognizing that today’s DC system is dramatically different from the system that existed prior to the PPA, as the PPA facilitated the introduction of many enhancements to DC plans, including automatic enrollment, automatic escalation, and qualified default investment alternatives (QDIAs). They cited research showing that currently, 60% of large DC plans have automatic enrollment, 80% of plans with automatic enrollment also have automatic escalation, and 85.5% of plans use target date funds as the default investment alternative for non-participant-directed monies.

The report pointed out that the difference in retirement savings for workers in plans with automatic features, and those whose plans do not have automatic features, is dramatic, as middle-income workers who spend their entire careers in plans with automatic enrollment and automatic escalation are projected to experience significantly better outcomes than middle-income workers in plans without automatic features.

Researchers recommended, however, that plan sponsors also take steps to limit asset “leakage” through early withdrawals or loans, especially given that the risk of default on such loans is high when an employee terminates employment with an unpaid loan outstanding. The authors therefore advised plan sponsors to limit plan loans, hardship withdrawals, and cash-outs, noting that doing so has been estimated to increase projected retirement assets and income by almost 10% for participants who otherwise take advantage of these features.

The study thus concluded that since the DC system is already equipped with many of the tools it needs to drive better retirement outcomes, the current system can be improved even without additional legislative or regulatory action. The authors observed that even among employers that already sponsor DC plans, wider and more consistent adoption of tools such as automatic features and adequate initial savings rates could make a significant difference in the retirement income adequacy of current participants.

However, the authors also counselled plan sponsors to keep in mind that younger workers are, on average, in better shape than older workers; particularly older workers who did not have access to a defined benefit plan, and were participants in a DC plan that did not include automatic features and other savings-boosting measures prior to the PPA. They, therefore, stressed that the recent implementation of an optimal DC plan design will not necessarily ensure that workers who did not enjoy the benefits associated with automatic features over their entire careers will have adequate retirement savings.

From Benefit Trends Newsletter, Volume 60, Issue 9

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2017 Liberty Publishing, Inc. All rights reserved.

Targeted Retirement Plan Communications Can Improve the Participant Experience

Targeted Retirement Plan Communications Can Improve the Participant Experience

As the workforce becomes more diverse and technologically savvy, retirement plan sponsors should focus on providing customized education, retirement readiness tools, situational guidance, and “next best step” trigger events to help employees prepare more effectively for retirement, a recent report by Broadridge Financial Solutions has recommended.

Released on June 7, the report, “Transforming the Participant Experience: Innovative Strategies for Improving Outcomes,” observed that converging trends—such as changing workplace demographics, technological innovations, evolving participant demands, increasing margin pressure, low savings rates, and added regulatory scrutiny—are creating challenges and opportunities for new solutions to improve participant experience. Pointing out that millennials are expected to make up more than 50% of the global workforce by 2020, researchers warned that plan providers should be prepared to cater to an increasingly diverse audience, many of whom are “digital natives.”

According to the report, growing numbers of plan sponsors are seeking to transform their participant engagement strategies by leveraging data analytics, participant preferences, and multimedia campaigns to create targeted communications. The authors noted that sponsors are increasingly moving away from legacy platforms that rely heavily on custom coding to modify campaigns and compliance communications, and are instead turning to cloud-based technologies that allow managers to streamline content and easily make changes across multiple communication channels, including digital, mobile, and print.

The report cited research showing, for example, that retirement plan participation can be raised 30% by effectively delivering personalized communication through multiple channels; and that an omni-channel approach of digital, print, and personalization strategies can save between 10% and 20% in annual communication costs.

In addition, the report recommended simplifying print materials to ensure that communications are focused on key points, and using online microsites and opt-out programs aimed at retirement plan participants to reduce the need for call center support.

Another important trend identified in the report is the increasing frequency of plan and regulatory changes, which put pressure on plan sponsors to respond quickly to new requirements and plan updates. The authors suggested that automated content solutions can help eliminate the need to constantly create and manage one-off changes, making it possible to issue targeted communications with speed and precision.

Noting that 45% of working American households have no retirement assets at all, and that the retirement savings gap in the U.S. is an estimated $7 trillion, the authors further advised plan sponsors to place greater emphasis on reducing the retirement savings gap. To address the challenges associated with employees who decline to participate in retirement plans and older employees who may be thinking of putting off retirement, researchers recommended developing programs that outline the options for and the drawdown phases of retirement.

From Benefit Trends Newsletter, Volume 60, Issue 8

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2017 Liberty Publishing, Inc. All rights reserved.

Americans Seek Freedom from Financial Worries in Retirement

Americans Seek Freedom from Financial Worries in Retirement

 

Older workers preparing to transition to retirement are focused on more than just the amount of their retirement savings—they want to achieve the freedom from financial concern that will allow them to spend time with loved ones and have experiences that provide meaning and purpose, a survey commissioned by financial services provider TIAA revealed.

The survey of 1,000 Americans ages 55-68 planning to retire in the next five years was conducted March 14-20, 2017. As well as investigating how near-retirees expect to finance their life in retirement, the survey looked at where these older Americans intend to live and travel in retirement, and how they expect to spend their time.

When asked what considerations are important to their definition of success in retirement, most of the near-retirees surveyed cited freedom from financial concern (95%); the flexibility to do what they want, when they want (96%); spending time with family and friends (93%); relaxing (92%); and having the time to travel (80%).

However, a majority of the older workers polled reported that they have changed their original retirement plans: while 37% of respondents said they expect to retire at the age they had planned 10 years ago, another 37% said they now anticipate retiring later, and 24% said they expect to retire earlier than originally planned.

The survey results also suggested that a large share of near-retirees have not fully prepared for retirement, with just 43% of respondents reporting that they have met with a financial advisor or that they have calculated how much money they will need annually in retirement. Of those respondents, 54% indicated that they feel extremely or very prepared for retirement, compared to 34% of those who said they have not met with an advisor.

Although some of the respondents expressed anxiety about their readiness for the future as they get closer to retirement, 43% said they feel extremely or very prepared for the transition to retirement, and another 46% indicated they feel somewhat prepared for retirement. Researchers pointed out that even though more than half (55%) of the near-retirees surveyed said they feel prepared to manage their income in retirement, only 21% said they anticipate their savings will last for their lifetime. The survey also showed that 65% of respondents who plan to rely on income from an annuity said they feel prepared to manage their income in retirement, compared to 54% of respondents who intend to draw down savings from a defined contribution retirement plan. However, just 17% of respondents reported having purchased an annuity as part of their retirement preparations.

The survey results further revealed that not all near-retirees plan to stop working after reaching retirement age: 31% of the men and 22% of the women polled said they have investigated part-time or consulting work, while 19% said they have considered volunteering.

In addition, the survey found that large shares of respondents plan to move in retirement. While roughly the same shares of male (40%) and female respondents (38%) said they expect to move out of their current home, they differed on where they would like to go: 61% of the men but only 49% of the women said they plan to downsize to a smaller home; and 24% of the women but just 10% of the men said they would like to move closer to family and friends.

From Benefit Trends Newsletter, Volume 60, Issue 6

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2017 Liberty Publishing, Inc. All rights reserved.

How Companies Can Assist Employees in Transitioning To Retirement

How Companies Can Assist Employees in Transitioning To Retirement

As older workers are preparing for retirement, employers can help them make this sometimes challenging transition smoother by encouraging these employees to think about the steps they can take to create value and improve their well-being before and during retirement, according to an article that appeared in the April 2017 issue of Workspan, a magazine published by HR association WorldatWork.

The article, “How to Help Employees Ease into Retirement,” was written by Lori Block and Alan Vorchheimer of Conduent HR Services. The authors observed that given the extended lifespan of the average retiree, people who are preparing to leave the workforce have to consider the possibility that their retirement could last 20-30 years. Thus, they pointed out, prospective retirees will have to adjust to a number of new realities in order to live “well” during this final, and often extended phase of life.

In their article, Block and Vorchheimer referred to research done by the Gallup organization that identified “five pillars,” or elements of well-being that are essential to most people: namely, career, social, financial, physical, and community well-being. Increasingly, they said, HR professionals are recognizing that the workplace can be the foundation these pillars are built upon, providing people with the tools they need to perform well and feel good throughout their lives.

The authors advised companies looking to boost the professional well-being of their workers nearing retirement to offer these employees access to options like phased retirement, which can help both the employer and the employee gradually adjust to the individual’s departure. They also recommended that employers promote social well-being in the workplace through initiatives like multi-generational “reverse mentoring,” in which younger employees help their co-workers who are closer to retirement understand new technology and industry trends.

In addition, Block and Vorchheimer noted, employers can improve the financial well-being of older employees by offering them access to third-party vendors, voluntary benefits, and other programs they can carry into retirement. Finally, the authors advised employers to promote community well-being by, for example, giving mid-career employees and retirees assistance in transitioning from their current job to a position in a nonprofit organization that would benefit from their skills and experience.

Block and Vorchheimer stressed that applying this five-pillar approach to helping employees transition to retirement can enable employers to live up to their values and honor their commitments to their workers, while also resolving some practical issues. “On a practical level,” they argued, “it enables better workforce management and movement, breaking up possible career bottlenecks for newer employees while retaining and transferring critical knowledge from outgoing senior and experienced people.”

From Benefit Trends Newsletter, Volume 60, Issue 6

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

Workers Who Feel Stressed About Retirement Are Failing to Take Action

Workers Who Feel Stressed About Retirement Are Failing to Take Action

Many American workers who report feeling stressed about retirement admit they are not taking the steps necessary to prepare for their financial future, the results of an annual survey conducted by the Employee Benefit Research Institute (EBRI) and Greenwald & Associates indicated.

The 2017 Retirement Confidence Survey (RCS) was conducted January 6-13 with 1,671 U.S. residents (1,082 workers and 589 retirees) aged 25 and older. The results showed that 31% of workers feel mentally or emotionally stressed about preparing for retirement, and that 30% worry about their personal finances while at work. Of these respondents, half said they think they would be more productive at work if they did not spend time worrying.

When asked whether they believe that having access to programs at work that help them plan for their financial future would be helpful in increasing their productivity, around half of all of the workers surveyed said they believe they would benefit from participating in retirement planning (52%), financial planning (49%), or health care planning (47%) programs.

The results also showed, however, that many workers are not yet taking critical retirement planning steps. While 61% of the workers surveyed said they have saved for retirement, just 41% indicated that they have tried to figure out how much money they will need in retirement, 38% said they have estimated how much income they would need each month in retirement, another 38% reported that they have estimated the amount of their Social Security benefit, and 34% indicated that they have estimated their expenses in retirement. In addition, just 23% of the workers surveyed said they have spoken with a professional advisor about retirement planning, and only 11% reported that they have prepared a formal plan for retirement.

In line with earlier waves of the survey, the 2017 wave indicated that far more retirees than workers feel confident that they will be able to afford a comfortable retirement. Almost 80% of the retirees surveyed said they feel confident about having enough money to live comfortably throughout their retirement years, including 32% who said they feel very confident.

The results also showed that workers who believe their debt is a major problem have notably lower levels of retirement confidence: 32% of these workers said they are confident about retirement, compared with 78% of workers who indicated that debt is not a problem for them. Moreover, the workers who said they have a retirement plan appear to have markedly higher confidence than those who did not: 33% of those who lack a retirement plan said they are confident about retirement, compared with 71% of those who have a plan.

Of the workers who reported that they are not currently saving for retirement, 73% said they would be at least somewhat likely to save for retirement if their contributions were matched by their employer, and approximately two-thirds said they would be likely to save for retirement if automatic paycheck deductions of either 3% or 6% of salary were used by their employer.

The findings further indicated that workers are far less confident than retirees about being able to afford health care in retirement: 54% of workers said they are confident about being able to afford medical expenses in retirement, compared to 77% of retirees.

From Benefit Trends Newsletter, Volume 60, Issue 4

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2017 Liberty Publishing, Inc. All rights reserved.