 Holistic approach to retirement savings A recurring theme on these blog entries has been that one must consider saving for retirement as part of a holistic financial picture. Many people want to save for retirement but obstacles get in the way. The Tax Code outlines various provisions for distributions that are too early (pre-age 59 1/2), too late (post-age-70 1/2), too little (required minimum distributions), and too much. Undoubtedly, when these provisions were enacted, the intent was benevolent, to protect participants from using their 401(k) accounts frivolously as cash machines. The problem is that the penalty hurts those who are going through financial challenges at the worst possible time. In President Obama's most-recent budget proposal, he adds an exception to the 10% rule for those who are unemployed. (See page 176 of the document.) Under the President's proposal, individuals receiving unemployment compensation for more than 26 weeks would be allowed to withdraw up to $50,000 from their 401(k) or IRA without penalty. Distributions still would be taxed. As proposed, it would apply to distributions made after 2015. For those of us who have faced or are facing this challenge, the proposal might have minimal impact, but it is a good recognition of the problem and a step in the right direction.
What I would like to see is the concept taken out a step or two further. There is a general consensus that retirement savings are way behind where they should be, particularly as life expectancies lengthen. I think the key is finding ways to not only make it easier to save more for retirement, but also to make access less restrictive when there is a demonstrated need. The solution has to be one that recognizes financial challenges can occur at any stage of life. If a participant knew that he or she could access funds during a financial emergency, then more funds would be contributed in the first place. Instead of taxing the early distribution and then penalizing it as well, devise ways for participants to get back on their feet, while reducing financial and emotional stress. By building up 401(k) accounts to higher levels, this will benefit participants in the long run. They will have saved much more if they never face financial challenges, and the support will be there if they do have these challenges. One other key is that by encouraging greater contributions, this will help build up emergency funds as well, without increasing the need for public assistance and without imposing on other taxpayers. That alone should make this concept appealing to both Democrats and Republicans, to both Liberals and Conservatives. It would help those with a great need get back on their feet, make it easier to contribute to the economy sooner, and reduce an already highly stressful situation.
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 We cannot ignore the present when saving for the future. Likewise, we cannot ignore the future when dealing with the present. A recurring theme on this blog has been that people do want to do a good job in saving for retirement, but there are major obstacles into making this vision a reality. Two recent studies seem to concur with this hypothesis. The Investment Company Institute (ICI) reports that workers do in fact value their defined contribution/401(k) plans and the related tax-deferral advantages, even for those who are not contributing. HSBC points out that various life events play a significant role in interfering with the growth of retirement accounts. The ICI study, American Views on Defined Contribution Plan Saving. found that:
The HSBC report, The Future of Retirement - A Balancing Act - USA Report, meanwhile, points out a number of significant obstacles on the road to saving for retirement:
I think the remedy lies in finding the sweet spot of meeting the challenges of both today and tomorrow, rather than one to the exclusion of the other. Take a holistic approach to financial challenges, rather than observing them in a vacuum. Solutions also need to be politically acceptable to have any chance at success. I previously suggested one solution that I think might just work to address current financial challenges as well as long-term savings goals. The ICI report notes the importance of the tax incentive as it relates to retirement savings. What if we took this one step further and made the tax treatment even better. Various penalties under ERISA's tax provisions were well-intended, meant to help people save for retirement and to prevent them from wasting away their resources. So we have rules for too early (premature distributions), too late (age 70 1/2 rules), too little (minimum distributions), and too much (excess distributions). These were meant to protect individuals from themselves. In the case of the life events mentioned in the HSBC support, these penalties make a difficult situation even more challenging. My suggestion is simple - for verifiable financial distress, such as a layoff, allow access to retirement funds without penalty. The main benefit is that this will encourage greater retirement contributions in the first place as people will know that they will be able to access their funds when they need to. If the financial stress never occurs, then they will have saved even more for retirement. Here is a visual summary of my idea to make retirement saving less of a mirage and more of a rainbow: 
As we start 2015, Baby Boomers born in 1950 will be reaching their 65th birthdays. Among celebrities, this includes Stevie Wonder, Bill Murray, Julius Erving, Arianna Huffington, Richard Branson, Jay Leno, Martin Short, Natalie Cole, and Steve Wozniak, among others. For the rest of the population who are not so famous, it is a time when large numbers will be retiring. For the remaining fourteen years in the Baby Boomer era (1946-1964), it is a time to assess where things stand. The Transamerica Center for Retirement Studies has done just that.
When most Baby Boomers started working, defined benefit plans were very popular, if not the norm. It wasn't until the early 1980's that 401(k) plans came into existence, although other types of defined contributions plans (such as profit-sharing plans) had been around for a long time. Those coming into the workforce afterwards have had more time to build their account balances. Transamerica reconfirmed that there is a retirement savings shortfall, and many Boomers are inadequately prepared for a long retirement. Equally as important, the study found that there is a disconnect between the expectations and the reality about working during retirement. According to Transamerica, roughly two-thirds of Baby Boomers plan to continue working past age 65, primarily for income or to retain health benefits. Some will continue working because they enjoy doing so. Most Boomers seek some sort of phased retirement, perhaps working reduced hours or in a different capacity. Nearly half of employers strongly agree that they are supportive of employees working past age 65. By contrast, only 1/4 of employees strongly agree that their employers are supportive. There is a similar disconnect in employees believing that employers will allow reduced roles. The study recommends that Boomers remain employable, but this may be easier said than done. Many employers have policies in place to ensure that they are an age-friendly workplace, but there is significant skepticism on the part of employees that these policy statements are actually supported. As with the Baby Boomer and Gen X, the two generations that preceded it, the Millennials (ages 20-39) are not taking full advantage of employer 401(k) matching contributions, according to data released by Aon Hewitt. Although three out of four eligible employees are participating in a defined contribution plan, 40% of those in their 20's and 31% of those in their 30's are contributing less than the company match threshold. As with the Boomers and Gen X, inertia seems to keep Millennial participants at or near the default rates. In Aon Hewitt's example, it shows that individuals who delay saving at the threshold from age 25 to age 30, can be costing themselves over $200,000 in retirement assets assuming retirement at age 65.
What strikes this writer in the example is that even the less optimal saver still would have over $700,000 in his or her retirement account. EBRI, by contrast, reports that the average account balance as of year-end 2012 was around $64,000. For "consistent" participants, defined as those with accounts at the end of all the years from 2007 through 2012, the average account balance was $107,000. If we take the lower-end estimate from the Aon Hewitt study, it would seem that there would not be any retirement savings crisis to talk about. With the reality undoubtedly closer to the EBRI figures, we need to consider why Millennial participants are not saving enough. Inertia most likely does play a significant role, but perhaps it is the daily challenges as well that get in the way. The cost of college and graduate school has left many in debt. Millennials also may be getting married, buying their first homes, and starting a family. Saving for retirement may be seen as important, but so are these other events. To quote John Lennon, whom we lost 34 years ago today, "Life is what happens while you're busy making other plans." If you help individuals and families focus on both the long- and short-term needs, rather than looking at either in isolation, then you will be on the road toward helping them gain a more solid financial footing. The IRS has announced its annual update with cost-of-living adjustments (COLA's) for various retirement plans. The annual deferral limit under Tax Code Section 402(g) raises the maximum from $17,500 to $18,000. For catch-up contributions for those over age 50, the maximum increased from $5,500 to $6,000. Undoubtedly, this will help some participants boost their retirement savings a little. Will it resolve the widespread retirement savings shortfall? That is less likely, even if it does help somewhat. This writer believes that most participants do in fact want to save for retirement and do a good job at it. The unfortunate reality for many, including yours truly, however, is that other financial challenges do get in the way. Whether an individual or family faces unexpected medical expenses, job loss, declining property values, natural disaster, or some other struggle, saving for retirement does not occur in a vacuum. Under ERISA, rules have been designed to be in the best interest of the participant. I once heard a simple explanation of some of the penalty provisions under the Tax Code - undoubtedly intended to be benevolent in nature, they provide penalties for distributions that are too early (pre-age-59 1/2), too late (post-age-70 1/2), too little (minimum distributions), or too much (excess distributions). Unfortunately, these benevolent remedies can make the challenges even harder. A possible solution. What if instead of focusing on taxing early distributions, participants were enabled to both save more for retirement and have greater access to their money when financial challenges become front-and-center? Let's say you are annually deferring 6% of a $50,000 salary, or $3,000 (not including matching employer contributions nor investment results). You would like to contribute more, but economic uncertainty and other financial challenges are concerns. There is a lot of consolidation in your industry. If you knew that you could access your funds without penalty when a certifiable financial challenge occurs, this would encourage most people to contribute more to the 401(k) in the first place. Maybe instead of $3,000 a year, this same participant now contributes $6,000 or more. If the financial challenge never occurs, the participant will have given a tremendous boost to his or her account balance. If the financial emergency does occur, this will provide a resource for individuals without imposing on other taxpayers. Here is a snapshot of this concept: 
10/1/2014 0 Comments Retirement Assets Top $24 TrillionAccording to the Investment Company Institute (ICI), retirement assets inched up to a record $24 trillion in the 2nd quarter of 2014. This represents asset growth over the prior quarter across all categories. IRA assets are up from $6.9 trillion to $7.2 trillion. DC plans grew from $6.4 trillion to $6.6 trillion. Even the oft-maligned DB plan grew, from $3.1 to $3.2 trillion in the private sector, and from $5.0 to $5.1 trillion among governmental plans. Since 2000, retirement assets have more than doubled, from $11.6 trillion to $24.0 trillion.
Participants and plan sponsors might not be humming the Pharrell Williams tune "Happy", but they could listen to the song that has reached #1 in two dozen countries and check out their retirement plan on their mobile devices. The growing importance of accessing retirement plans via iPhones, iPads, Androids, and other mobile devices is made clear in a report by Deloitte. According to the Annual Defined Contribution Benchmarking Survey (2013-2014 Edition), nearly two-thirds (64%) of plan sponsors are either satisfied or very satisfied with interacting with their recordkeeper via mobile apps. What's more, in just two years, from 2011 to 2013, participant interaction with the recordkeeper has increased from roughly one in ten (11%) to nearly one in three (31%). Plan sponsors project that six in ten (61%) participants are satisfied or very satisfied with mobile access to the recordkeeper. The impact of social media and instant chat tools are less certain, with plan sponsors for the most part saying that participants are neither satisfied nor dissatisfied (37% for social media, 29% for instant chat); an additional 51% are classified as "not available" for both social media and chat. When it comes to transaction processing via mobile devices, the glass is only half-full and somewhat behind other segments of financial services. Only 53% of plan sponsors currently support this, but additional growth is expected (16% of plan sponsors in the next two years), so nearly seven in ten (69%) will provide this mobile support.
Smartphones and tablets are relatively lightweight compared to laptops and desktop computers. People love having access to the information they want when they want it. Mobile devices enable this to happen. It helps explain their phenomenal success in less than a decade. While mobile devices can be a distraction with all of the apps that are available, they are amazing for the scope of what they can do. That is why plan sponsors and participants as well are clamoring for even greater mobile access. The Spectrem Group's Millionaire's Corner has released highlights of a study that looks at how retirement plan participants access their accounts. I think the main takeaway is that participants will use the method that is most convenient. If they are working in front of a PC or Mac, that will be a primary tool -- at or near 80% across all demographic groups. Most, of course, are always near their iPhone or other smartphone, so that is used by a vast majority as well. Tablets (including e-readers) have become very popular, but they are not quite as universal as smartphones, so while the usage numbers are strong, they are not as high as for smartphones or PC's/Mac's. By the numbers, here are Spectrem's highlights:
The last decade has been nothing short of phenomenal in how mobile technology has transformed how we access information. It wasn't so long ago that a participant had to call a customer service center and listen to a menu of voice prompts to get account information. The incredible popularity of smartphones and other mobile technology has enabled participants to easily access account information 24/7. An ongoing theme of this blog has been that retirement savings does not occur in a vacuum. To quote John Lennon, "Life is what happens to you while you're busy making other plans." Most people would readily agree that saving for retirement is a very important goal, but for most people, it is not the only goal. Sometimes challenging circumstances get in the way and difficult choices are made - a family member faces health challenges, a natural disaster results in extraordinary expenses, a return to employment after a layoff takes longer than expected, the value of housing plummets precipitously, and more. Saving for retirement takes a back seat to the more immediate financial challenge. Perhaps a participant takes out a 401(k) loan. Or a distribution is taken early to address current challenges. The tax code arguably is designed to keep participants on track for a more secure retirement, but its early withdrawal penalties may make it more difficult for individuals and families just when they need help the most. In an earlier blog post, I modestly suggested that legislation that would add certified financial challenges to the list of exceptions to the 10% early distribution penalty, while simultaneously encouraging repayment of borrowed funds as soon as the hardship is over, would go a long way to getting or keeping families on a better financial path for themselves and for the economy as a whole. If participants are contributing more because they know that they will still have access to their accounts, then if they are never laid off, their existing accounts will have grown very substantially, probably significantly more than is now the case for most.
This brings us to an important finding from a study prepared by New York Life, along with Greenwald & Associates. It recognizes that saving for retirement is part of the holistic view of personal finance. In essence, savings do not occur in a vacuum. The study posits that retirement providers need to understand this premise if they are to effectively help participants: "Simply focusing on retirement planning in our participant education and engagement strategies ignores the complexities of an individual's financial life - and rings hollow and incomplete." The report takes it a step further with this call to action: "To successfully empower individuals to save for retirement, it is imperative that we need tools and advice to support the broad spectrum of their financial lives." Why does this matter so much? According to the report:
New York Life recommends a holistic approach that helps individuals navigate the various financial challenges. I would take it a step further and have it change according to the needs of the individual. For example, if there is a job loss or unexpected expense, what are the best options for moving forward? How do you face current hurdles alongside future goals? When it comes to retirement savings, public employees are generally more optimistic than the population as a whole, according to a report released by the Pew Charitable Trust. Nonetheless, awareness of the features of their retirement plans tends to be on the low side. Many people perceive the employee benefits received by public workers as being better than the private sector. Because tax dollars are the source for the benefits and salaries of public workers, this element sometimes makes them contentious as well. Where states are facing fiscal challenges, some turn to the public sector retirement plans as part of the solution. Key findings from Preparing for Retirement: Top Findings from a Survey of Public Workers, include:
When you think about it, anything that increases certainty is highly valued by employees. Job security clearly fits in this category, but so does the preference for not changing the plan's design. Even the willingness to take a lower salary in exchange for higher retirement benefits is an indication that certainty is a key element. |
Blog Author - Ken FelsherWith over 25 years of writing, editing, and research experience. I enjoy sharing with my readers my love of working with content on a variety of subjects. 
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March 2015
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