Retirement Market Update

Single Women Face Biggest Retirement Shortfall: EBRI

Widows and single women are more likely to face income shortfalls in retirement, according to a new study by the Employee Benefit Research Institute (EBRI). The study concluded that women are likelier to live longer than men, develop costly chronic medical conditions and spend time outside the workplace caring for children and other family members, Think Advisor reported. For married households where the woman dies first, the retirement saving shortfall for the widower was $18,476, compared with $22,783 for households where the man dies first, EBRI found. The gender disparity was starker for single men and women: $72,883 vs. $37,690.

Other Survey Findings:
  • Among households with a projected retirement-income shortfall, the average shortfall was $76,896 for widows and $82,937 for widowers.
  • Single women in the lowest pre-retirement wage quartile had an average savings deficit of $110,412, compared to women in the highest quartile of $28,951.
  • The median retirement savings deficit for single women was $19,900 and 10% face a deficit of atleast $222,592.
  • 48% of single women at the lowest income quartile had atleast a $100,000 deficit, 33% of single men and 42% of widows faced a similar situation.

“48% of single women at the lowest income quartile had at least a $100,000 deficit; 33% of single men and 42% of widows faced a similar situation.” (EBRI)

“Lack of eligibility for participation in a DC plans significantly increased savings shortfalls. For single women with no future eligibility in a DC plan, the average shortfall was $97,325, compared with an average $24,486 for those with 21 to 30 years of future eligibility.” (EBRI)

For single men in the lowest wage quartile, the shortfall was $29,736, compared to $12,465 for those in the highest quartile. (EBRI)

Participants Often Confused About Financial Terms: Survey

Many employees misunderstand terms commonly used by the financial planning industry, a study by the Empower Institute concluded. For example, 66% of respondents don’t understand what “rebalancing investments” means and the meaning of “asset allocation” eluded 69% of respondents, PlanSponsor reported. “Such multiple meanings can cause confusion and create barriers to confident decision-making,” the report said. Millennials in particular found financial terms difficult to understand. Even the term “defined contribution retirement plan” was unclear to 76% of respondents overall and 88% of Millennials. The survey also found participants perceive retirement plan communications as wordy and long, complex and confusing, generic, overwhelming and wasteful. They expressed a desire for communications that were concise, efficient, simple and easy to understand, relatable, personalized and engaging or attention-grabbing. When asked how they prefer to receive messages about their retirement plan, 51% favored personal email, followed by a website visit (44%). Least-preferred communication methods included post cards, social media-page visits, text messages – each of which were preferred by about 2% of respondents.

“63% of Millennial respondents found the term “plan participant” to be unclear, compared with 44% of total respondents.” (Empower Institute Survey)


Auto Drawdown Increasingly Popular 401(k) Option

Auto drawdown may soon become as popular a feature of many 401(k) plans as auto enrollment and auto escalation are today, Pensions & Investments recently reported. Of the 43% not offering automatic payments, 32% said they may offer the capability in 2019. Participants who do not need or want annuities still need mechanisms to withdraw funds other than in a lump sum or rollover to an individual retirement account, plan sponsors say. Mortgage Guaranty Insurance Corp. added installment payments as a distribution option to its $280 million 401(k) plan in 2015. Retirees can choose to receive payments either monthly or quarterly, according to Brenda Grabowski, total rewards manager in MGIC’s human resources department. In addition, in 2017 the company gave participants the ability to selectively decide from which investment funds the drawdowns should come and in which order, an arrangement that industry experts describe as cutting edge. Without drawdown options, participants are more likely to move their savings to an IRA, a choice that many experts say isn’t always in the best interest of participants.

“Nearly three in five plan sponsors (57%) offer employees the opportunity to draw down their funds in installments, up from 37% in 2013, according to a report by Alight Solutions.” (Alight Solutions Report)

401(k) Average Savings Rate Hits 12.2% In 2017: PSCA

The average 401(k) savings rate was 12.2% in 2017, an increase from the average of 9.7% in 2010, according to the Plan Sponsor Council of America’s (PSCA) 61st Annual Survey of Profit Sharing and 401(k) Plans. Workers deferred an average of 7.1% of their pay to their 401(k) plans in 2017, up from 6.2% in 2010, reported. Meanwhile, the average employer contribution grew from 3.5% to 5.1% during the same period. The increase in average savings rates is likely attributable to higher default contribution rates set by employers who automatically enroll their employees, the report states. Further, many plan sponsors have reduced the eligibility requirements for employee participation, helping to increase the percentage of workers with 401(k) accounts. “The increases in retirement contributions from both plan participants and plan sponsors confirm the positive impact of company-sponsored retirement savings plans,” PSCA executive director Jack Towarnicky said. Among plans that automatically enroll employees in 401(k)s, 60% had a default contribution rate that was higher than 3% in 2017. Only 30% had rates that high in 2007, according to PSCA. The survey includes responses from 345 401(k) plans, seven profit-sharing plans and 253 employers that sponsor both types of plans.

“Workers deferred an average of 7.1% of their pay to their 401(k) plans in 2017, up from 6.2% in 2010.” (PSCA Survey)

Most DC Plan Sponsors Shunning Annuities

Half of defined contribution (DC) plans offered some sort of retirement income solution to employees last year, according to Callan’s 2019 Defined Contribution Trends Survey. The survey of 106 plan sponsors also found that the most common solutions were providing access to a defined benefit (DB) plan (27.4%) or offering a managed account service (14.2%), PlanSponsor reported. Despite a 2014 Treasury Department ruling making it easier to do so, only 1.9% of respondents reported offering qualified longevity annuity contracts (QLACs) or longevity insurance. Asked why they do not offer an annuity-type product in their DC plans, plan sponsors reported being uncomfortable or unclear about fiduciary implications. Plan sponsors also report that an annuity-type product is unnecessary or not a priority and that there is a lack of participant need or demand – notwithstanding that studies show that participants would prefer retirement-income certainty. Other reasons for not offering an annuity-type product cited by respondents include difficulties in communicating to participants and concern over insurer risk.

“12.3% of DC plans indicated they provide an annuity as a form of distribution. 3.8% said they use an annuity placement service, and 3.8% offer an in-plan guaranteed income for life product.” (Callan Survey)

“Regular due diligence remained the most common reason for conducting an investment structure evaluation. The next two most common reasons were to identify overlaps and gaps in the fund lineup (44.2%) and to add additional diversification opportunities (18.2%).” (Callan Survey) 


Largest Retirement Funds Top $11 Trillion: P&I

Total assets of the 1,000 largest U.S. retirement plans reached $11 trillion as of Sept. 30, a 6.4% increase from a year earlier, and a 31.8% increase from five years prior, Pensions & Investments’ (P&I) annual survey found. Defined benefit (DB) plans within the P&I 1,000 universe represented $6.91 trillion in assets, while defined contribution (DC) plans accounted for nearly $4.1 trillion in assets as of Sept. 30. Among the 200 largest retirement systems, asset growth among DC plans, which oversaw $2.47 trillion in assets, once again outpaced that of DB plans, with $5.46 trillion in assets, the survey found. Of note, assets of DB plans in the top 200 grew 4.4% compared to the previous year and 22.4% compared to five years earlier. Assets in the top 200 DC plans grew 10.7% from a year earlier and 53.5% from five years earlier. The asset growth differences can be attributed to a number of factors, including DC plans “benefiting from market gains and new contributions,” said Jay Love, an Atlanta-based partner and U.S. director of strategic research at investment consultant Mercer. “(Among) the top 1,000 DB plans, I would imagine that half of them are probably frozen and another 20% to 30% are closed,” he said.

“DC plans among the 200 largest, passive indexed equity assets increased by 14.5% in the 12 months ended Sept. 30, to $538.8B, while passive indexed bond assets remained unchanged over the year, at $50.2B….DC plan clients in particular have recognized "that you don't want to be so dogmatic (when considering) active vs. passive" approaches in your portfolio, said Josh Cohen, Chicago-based head of institutional defined contribution at PGIM Inc. ‘We think there is a case for active and passive,’ depending on the asset class.” (P&I Survey). 


Gen Xers Less Confident About Retirement Than Boomers

Three-quarters of Baby Boomers think they will have enough money to live comfortably during retirement, but only 35% of Gen Xers are equally optimistic, according to a new survey from Retirement Living. The report, “Retirement Preparedness Study 2019: Baby Boomers vs. Generation X,” found that while Boomers rely primarily on pensions and 401(k) plans, Gen Xers are more likely to rely on 401(k)s and IRAs, Plan Advisor reported. Both generations rely or expect to rely on Social Security. Seventy-three percent of Boomers rely on Social Security for 25% to 100% of their monthly income; 85% of Gen X’ers expect to do the same.
Other Survey Findings:

  • 50% of Boomers and Gen Xers have saved or are on track to save $700,000 or less. Boomers think that is adequate, while Gen Xers do not.
  • Asked what they would have done differently with regards to savings, Boomers responded: Investing differently or playing the stock market better, reducing spending and living on a budget, and investing more in a Roth IRA rather than a traditional IRA.
  • Of the 14% of pre-retirees not saving wfor retirement, reasons cited for not saving included stagnant wages, student loan debt and the cost of living. 

“65% of Boomers saving for retirement are male and 35% are female. Among Gen X, this is evenly split.” (Retirement Living Study) 


Retirement Reform Bill (RESA) Reintroduced In House

The Retirement Enhancement and Savings Act (RESA) has been reintroduced in the House by Reps. Ron Kind, D-Wis., and Mike Kelly, R-Pa., Pensions & Investments reported. Kind and Kelly initially introduced the 2018 version of RESA, which, despite garnering bipartisan support, was not passed. Among other provisions, the bill would make it easier for smaller employers to join open multiple employer plans, ease non-discrimination rules for frozen defined benefit plans and add a safe harbor for selecting lifetime income providers in defined contribution plans. “As a nation, we have a problem when it comes to retirement savings,” Kind said. “We need to take commonsense steps to ensure our businesses are offering their employees flexible retirement plans that set our workers up for success in their golden years.” Wayne Chopus, president and CEO of the Insured Retirement Institute, said that RESA contains several measures to help Americans by expanding opportunities to save for retirement. “RI is thankful to Reps. Kind and Kelly for their leadership and commitment in pursuing legislation that will help more Americans achieve a financially secure retirement,” Chopus said. “We believe the enactment of RESA will provide Americans with commonsense measures to help them address the challenges and overcome the obstacles they face as they plan and save for their retirement.”

“RESA would make it easier for smaller employers to join open multiple employer plans.” (Pension & Investment Reported) 

States Advance Fiduciary Rules As SEC Mulls National Standard

New York, Nevada, Maryland and New Jersey are among states moving toward a fiduciary standard for advisers of all stripes, Investment News reported. While state activity ramps up, the Securities and Exchange Commission is considering its own reform proposal. Industry opponents of state-level fiduciary laws assert say the SEC should set policy. “We always have preferred a national level of standard of conduct for predictability and uniformity,” said Andrew Remo, director of legislative affairs at the American Retirement Association. Various state laws “would make the situation for companies that operate in different states complex and costly.” “The vast majority of states will probably wait” to see the SEC’s final rule before taking substantial action, said George Michael Gerstein, counsel at Stradley Ronon Stevens & Young. Many observers expected the SEC to release a final rule by this summer, but that timeline may be delayed thanks to the partial government shutdown that halted most SEC activity. The longer it takes, states could grow impatient.

“Expect the majority of states will delay any action until the SEC’s final rule is released.” (George Michael Gerstein, Stradley Ronon, Stevens & Young)

Actions recently taken by states include:

  • Nevada introduced draft regulations requiring brokers to meet a fiduciary standard of care at all times if they manage a client’s assets or create periodic financial plans.

  • A New York legislator reintroduced his Investment Transparency Act, which requires brokers and other non-fiduciary financial advisers to tell clients that they can recommend high-fee products even if they’re not in the clients’ best interests.
  • Maryland’s Financial Consumer Protection Commission released a report urging state lawmakers to raise investment-advice standards.

The trend toward longer, healthier lives benefits higher-income individuals disproportionately. Higher-income workers are more likely to be in occupations in which physical decline is less of an impediment to working into one’s late 60s or 70s. Those in the bottom three income quintiles face a 64% chance of suffering an age-related decline in ability to work, for example, while those in the top quintile of income face only a 25% chance. As a result, the highly educated tend to work longer.

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