Retirement Savers Advised To Plan for Medical Expenses

Retirement Savers Advised To Plan for Medical Expenses

Since Medicare and private insurance plans seldom fully cover the costs of medical care for retirees, individuals and couples planning for retirement should factor in the costs of medical care in determining the amount they need to save, a study on health expenses in retirement published by the Employee Benefit Research Institute (EBRI) recommended.

The study, “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $370,000, Up from $350,000 in 2016,” was published in the December 20, 2017, issue of EBRI Notes. The article examined the amount of savings Medicare beneficiaries are projected to need to cover program premiums, deductibles, and certain other health expenses in retirement. Specifically, the study looked at the projected costs associated with premiums for Medicare Parts B and D, premiums for Medigap Plan F, and out-of-pocket spending for outpatient prescription drugs.

The data used in the analysis came from a variety of sources, including the 2017 Medicare trustees report. The data were entered into a Monte Carlo simulation model that simulated 100,000 observations, allowing for the uncertainty related to individual mortality and rates of return on assets in retirement.

The results showed that in 2017, a 65-year-old man needs $73,000 in savings and a 65-year-old woman needs $95,000 in savings if the goal is to have a 50% chance of having enough savings to cover premiums and median prescription drug expenses in retirement. If, however, the goal is to have a 90% chance of having enough savings to cover these costs, the man needs to save $131,000 and the woman needs to save $147,000.

The findings further indicated that in 2017, a 65-year-old couple with median prescription drug expenses need $169,000 in savings to meet the goal of having a 50% chance of having enough savings to cover health care expenses in retirement. If, however, the couple aim to have a 90% chance of having enough savings to cover these expenses, they need savings of $273,000. In addition, the study found that a 65-year-old couple with drug expenses at the 90th percentile throughout retirement, and who want to have a 90% chance of having enough money for health care expenses, need to have $368,000 in savings.

The study also looked at shifts in savings targets in recent years. The findings indicated that projected savings targets increased between 1% and 6% from 2016 to 2017, after decreasing from 2011 to 2014 and then increasing from 2014 to 2016. The authors pointed out that despite the increase in savings targets since 2014, the 2017 savings targets were lower than the savings targets in 2012 almost across the board.

In addition, the authors emphasized that many workers should be saving more for health expenses than the amounts cited in this report, as the analysis did not factor in the total savings needed to cover long-term care expenses and other health expenses not covered by Medicare, or the fact that many individuals retire before becoming eligible for Medicare. The researchers also observed, however, that workers may need to save less than the estimated amounts if they choose to work past age 65 and continue to receive health benefits as active workers, thereby postponing enrollment in Medicare Parts B and D.

From Benefit Trends Newsletter, Volume 61, Issue 1

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.

Raising Default Rates without Lowering Participation

Raising Default Rates without Lowering Participation

Although many employers have increased the default contribution rates in their retirement plans with the aim of generating higher employee savings, plan sponsors may not realize that they could increase their suggested saving rate without causing significant numbers of employees to decline to participate in the plan, according to research recently published by Voya Behavioral Finance Institute for Innovation.

The working paper, “How Do Consumers Respond When Default Options Push the Envelope?” was published on October 7, 2017, and was released in conjunction with the study’s authors, who include behavioral scientists at UCLA, Harvard, and the University of Pennsylvania. The study looked at the effect on retirement plan enrollment and savings behavior when individuals were shown savings rates above traditionally displayed levels.

According to the study’s authors, this question is especially relevant with the spread of automatic enrollment, which has been found to be an effective plan design tool for overcoming behavioral barriers to saving. Researchers noted that while many retirement plans now offer this feature, the default contribution rates are set relatively low, with most plans suggesting a 3% rate to their participants, and very few recommending a rate higher than 6%.

The subjects of the study were individuals who visited their employer’s plan enrollment website between November 2016 and July 2017. As part of the enrollment process, the subjects were randomly assigned to see a suggested contribution rate ranging from 1% up to 11%, in 1% increments. The results of the analysis showed that being prompted to select a rate between 7% and 10% did not result in lower enrollment than a 6% control rate; and that the highest rate suggested, of 11%, resulted in only a slight decline in enrollment. The study also found that while the main boost in average saving levels occurred when the suggested rate was increased from 6% to 7%, all of the higher suggested rates produced better average saving levels than the 6% rate.

In addition, the results indicated that suggesting higher rates is likely to lead to meaningful improvements in the financial security of plan participants: the authors calculated that for an employee with an annual salary of $70,000, the incremental benefits could produce additional retirement savings of $57,000 (assuming 40 years of saving with a 6% rate of return), or more than 8% of additional retirement savings over the employee’s working career.

The authors noted that the suggested rate was presented in an opt-in environment, but added that while suggested rates in an opt-in environment are a “soft” default, it may be assumed that these results also apply to “harder” defaults in auto-enrollment plans, whereby participants are automatically assigned the default rate unless they actively opt out.

From Benefit Trends Newsletter, Volume 60, Issue 12

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.

Challenges Facing the U.S. Retirement System

Challenges Facing the U.S. Retirement System

As traditional pensions are declining and individuals are increasingly responsible for planning and managing their own retirement savings accounts, the Federal government should introduce and strengthen policies aimed at ensuring that Americans have adequate retirement incomes, a special report to Congress released by the Government Accountability Office (GAO) recommended.

The report, “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Retirement Security,” was published in October 2017. Its findings were drawn from prior work and the research of others, as well as insights from a panel of retirement experts on how to better ensure a secure and adequate retirement for all Americans.

The authors noted that over the past 40 years, changes have occurred to the nation’s current retirement system, which is made up of three main pillars: Social Security, employer-sponsored pensions or retirement savings plans, and individual savings. They warned that many of these changes have made it harder for individuals to plan for and effectively manage retirement.

The authors pointed out that Social Security’s retirement program is projected to be unable to pay full retirement benefits beginning in 2035, which could cause future benefits to be reduced or delayed. They described this situation as highly problematic given that many Americans have come to rely almost exclusively on these benefits in retirement: in 2015, 34% of households aged 65 or older received 90% or more of their income from Social Security.

Meanwhile, researchers observed, outside of employer-sponsored plans, individuals’ retirement savings are often low or nonexistent. According to the report, the personal savings rate in the United States trended steeply downward between 1975 and 2005, from 13.9% to 2.2% of disposable income; and has since recovered somewhat, but has not yet reached its pre-1975 level.

Turning to private employer-sponsored plans, the authors noted that there has been a marked shift away from employers offering traditional defined benefit (DB) pension plans to defined contribution (DC) plans, such as 401(k)s, as the primary type of retirement plan, and that this shift has increased the risks and responsibilities for individuals in planning and managing their retirement. They also cautioned that many DB plans are at risk because the Pension Benefit Guaranty Corporation (PBGC), which insures most DB plans, has substantial liabilities, especially in its multiemployer program.

In addition, researchers pointed out that many individuals still lack access to an employer-sponsored plan, or are not saving enough in these plans to provide an adequate retirement. They observed that while around 66% of private-sector workers were offered coverage in an employer-sponsored plan in 2016, participation in such plans varies greatly by sector and by income. For example, they noted, in 2016, 89% of workers in information services had access to an employer-sponsored plan, compared with 32% of workers in the leisure and hospitality industry. They also cited an analysis of 2012 data showing that 84% of workers in the highest, but only 40% of workers in the lowest income quartile had access to an employer-sponsored plan.

The researchers emphasized that DC plan participants face other barriers to saving, such as high retirement plan fees; difficulties navigating complex financial decisions to plan for and manage their accounts; and a substantial risk of losing all or a portion of their savings when other needs arise or their life circumstances change, such as when leaving an employer mid-career.

Drawing on the input of the expert panel and previous research, the authors identified five policy goals for a reformed U.S. retirement system: promoting universal access to a retirement savings vehicle, ensuring greater retirement income adequacy, improving options for the spend-down phase of retirement, reducing complexity and risk for both participants and employers, and stabilizing fiscal exposure to the Federal government.

From Benefit Trends Newsletter, Volume 60, Issue 11

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.

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.