Not ready yet
‘Retirement readiness’ is the catch phrase of 2014 in the US pension industry. With people living longer and savings affected by recession and a subdued recovery, there is a growing concern that workers will not have enough money to live comfortably in retirement. Only 13% of workers are very confident they will have sufficient income, according to the 2013 Retirement Confidence Survey by the Employee Benefits Research Institute (EBRI).
“The problem of retirement adequacy has not only a social impact but it also affects companies’ bottom line,” says Bill McClain, Mercer’s US intellectual capital leader for DC plans. “If older employees want to stay longer at work not because they like it but because they cannot afford to retire, that’s not good for productivity and health care costs. So employers are becoming more strategic in analysing whether a retirement plan works and they are moving beyond traditional ways to measure it.
“In the past, they would just look at the participation rate and the amount of savings. Now they want to know if employees are accumulating enough benefits for retirement, if they are taking too many loans from savings, and if they are making good investment decisions.”
Plan provider Transamerica Retirement Solutions came up with a name for the problem companies face when older workers stay on too long – ageing worker syndrome. In a study sponsored by the firm, experts estimate that 59% of plan sponsors will have received a plan-level retirement readiness report by 2017, 39% will have changed the design of their plan to enhance retirement readiness, 55% will have implemented automatic enrolment, and 45% of those will have adopted default deferral rates of 6% or higher.
Talking about automation, McClain points out that because employees rarely change their investments as they get older, plan sponsors are taking steps to change behaviour – for example, by informing those not invested in target-date funds (TDFs) that they will be moved to one unless they opt out.
“Helping people to be ready for retirement is indeed a priority while it’s evident that defined benefit plans will not be there to support people forever,” says Robyn Credico, Towers Watson senior consultant and defined contribution practice leader.
“The problem is how people can spend money in retirement knowing they live longer, and a new solution is TDFs that carry people through all retirement, until they are 80 or 90 and adjust the asset allocation accordingly. An alternative is offering an annuity inside a 401(k) as an investment option to prevent people running out of savings. Companies are also trying to make employees increase their salary deferral rate but, unfortunately, there is a lot of talk from the government about cutting the pre-tax income that could be saved for retirement”.
Allianz Global Investors (AGI) bases its ‘90-10-90’ retirement strategy on the findings from its Center for Behavioral Finance and the work of Shlomo Benartzi at UCLA Anderson School of Management.
“Annuities could be offered as retirement income products, but in the US they are a bad word and we may use behavioural finance to re-frame the problem and find the right balance between guarantee and non-guarantee solutions,” says Glenn Dial, head of retirement at AGI.
The idea is that every DC plan should seek to achieve a participation rate of 90% or more, every participant should defer 10% or more of salary, and 90% should be invested in a professionally managed strategy like a TDF.
AGI started training sessions for advisers in 2013 based on principles of behavioural finance, which will be rolled out across the country in 2014. “The implementation of this strategy is already moving the needle,” says Dial. “Our advisers in the past focused on the three Fs – fees, fiduciary and funds. Now they have totally adopted the 90-10-90 and we are seeing companies where participation rate has jumped from 73% to 90%”.