In TIAA-CREF's new Borrowing Against Your Future survey, I think the most interesting finding is that when it comes to plan loans, retirement plan participants are contradicting themselves. Paying off debt was cited by 46% of respondents as the primary reason for taking out a plan loan. Other significant reasons include: paying for an emergency expenditure (35%), home purchase/renovation (26%), paying bills due to job loss (24%), education costs for self or children (20%), and special events such as weddings or vacations (15%). Interestingly, only 26% thought that paying off debt was a good reason to borrow against one's retirement account. What's more, 44% of respondents say that they regret taking out a plan loan, and another 23% don't regret it, but wouldn't do so again. The report suggests that participants need to be reminded and helped in focusing on saving for retirement, as that is what their accounts are there for in the first place.
I would suggest an alternative solution. The data may reflect less of a contradiction and more of a dilemma. Participants are taking actions knowing that they are not in their long-term interests. I think that participants understand the importance of long-term savings, but near-term challenges are a major obstacle. What I think is needed are creative solutions to reflect that retirement savings do not occur in a vacuum. How can participants best be helped in meeting current financial stresses and future savings needs? The popularity of automatic features (auto-enrollment, auto-escalation, etc.) serves to get many participants on track in saving for the future. The tax code is designed to preserve what participants have saved through their retirement accounts. Penalties are imposed for early distributions of retirement assets, not to mention the regular taxes on these distributions. Plan loans that become due shortly after job loss might be added to the mix. What if we changed the mindset in how to approach savings, reflecting a more holistic view of the present and the future? Instead of penalizing people when their financial challenges are greatest, what if we instead came up with creative solutions that would meet immediate and future needs. I recently outlined one such idea, which in effect would allow tax-free access to retirement accounts for certified financial challenges. Participants would be encouraged to save more, knowing that they can access their money, but there would also be incentives to ensure that participants don't misuse this access. For example, job loss would be one identifiable category; a layoff notice could serve as proof of a financial challenge. 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. I have included with this post a simple chart outlining the opportunity. I would welcome any thoughts on this concept, whether you agree or disagree.
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6/18/2014 0 Comments Participants on Steady CourseVanguard for over a decade has been providing valuable data on retirement plan participant trends, based on its own client base. The latest edition, How America Saves 2014: A Report on Vanguard 2013 Defined Contribution Plan Data, for the most part shows steady progress. A few of the highlights:
What we see from the Vanguard data is a growing, strong preference by many participants for assistance in getting them to a better place in saving for retirement. Most participants recognize that they are not financial experts. The professionally managed and auto-enrollment data would appear to reconfirm that as well. Recent economic challenges are taking their toll on Baby Boomer and Generation X women, according to a report from the Insured Retirement Institute (IRI). Among the Gen X women who were surveyed, 35% find it more difficult to pay the mortgage or rent (21% for Boomers), 13% have taken early distributions from a 401(k) or IRA (9% for Boomers), 19% stopped contributing to their 401(k) or IRA (17% for Boomers), and 16% delayed plans to retire (25% for Boomers). For those not certain about when they will retire, current or anticipated savings shortfalls is the primary factor. Two-thirds (65%) of Boomer women have weak or no confidence in having enough money to live comfortably in retirement. It's even higher for Gen X (78%). The challenge becomes even greater when you factor in the longer life expectancy of women. The IRI suggests that use of a financial advisor produces better retirement savings outcomes, but 77% of Gen X and 55% of Baby Boomers have not sought out this financial support. For those who don't use a financial advisor, insufficient savings is the primary reason.
While the use of a financial advisor may very well produce positive results, I think we have a case of which comes first, the savings or the use of a financial advisor? For those who are struggling, I think most will say that the savings comes first, regardless of whether or not it should. To encourage improved retirement savings, I believe we need to take a page from Apple's "think different" approach. What if the Tax Code were amended to allow early distributions to be taken without penalty for financial hardship, but including incentives to encourage timely repayment. Knowing that the money would be available for financial emergencies would encourage more money to be put in the 401(k) or IRA in the first place. I outlined the concept in a recent blog post; here is a quick chart I put together describing the concept. The U.S. Census Bureau projects that the population will continue to reflect greater percentages of older individuals over the next 3 1/2 decades. The 2012 estimated population for those 65 and over is 43.1 million. In 2050, this figure is expected to be 83.7 million. By 2050, surviving Baby Boomers will be over age 85. Even as the Baby Boomer population declines, the older population is expected to continue to grow. The U.S. population as a whole is expected to grow from 314 million in 2012 to 420 million in 2060. This important trend will have significant impact on many areas, including healthcare, social programs, retirement planning, transportation services, and more.
According to a review of the top 100 defined benefit (DB) plans by Pensions & Investments Magazine, the funded status of those plans improved from 80.6% in 2012 to 93.5% in 2013, almost the same level as in 2005. In 2007, the funded status had reached as high as 108.6%, then plummeted the following year to 79.1% during the economic downturn. The combined funding deficit of the top 100 plans declined from $302 billion to $122 billion. The improvement was attributed primarily to gains in the equity market. An impressive 97 plans improved their funded status in 2013, with 24 plans having a funding surplus. Interestingly, despite the purported decline in DB plans, assets have grown from $2 trillion to $3 trillion in private DB plans since 2008, according to the Investment Company Institute (ICI).
According to the Investment Company Institute (ICI), assets in retirement plans plans edged up to a record $23 trillion, with defined contribution (DC) plans comprising about $5.9 trillion. IRAs continue to show growth as well, reaching $6.5 trillion as of 12-31-13. Plan activity remained relatively quiet, with only 3.5% of plan participants taking a withdrawal. Only 2.7% stopped contributing. to their DC plan. Asset allocation changes to account balances and contributions were minimal. About 18% of participants had a plan loan, consistent with recent years, although higher than five years ago. Defined benefit (DB) plans even had a modest increase, from $2.7 trillion at year-end 2012 to $3.0 trillion at year-end 2013.
![]() The TIAA-CREF Institute has released an interesting look into the financial attitudes and activities of the Millennial population, also known as Gen Y. According to College-Educated Millennials: An Overview of Their Personal Finances, for the most part, Gen Y tends to be both optimistic and worried at the same time. Most Gen-Yers have a checking or savings account, and more than half have a self-directed retirement account, while just about half own their own home. So although this might suggest that Gen Y is financially knowledgeable, many still are challenged with high debt levels from student loans, mortgages, and car loans. Even for those covered by a retirement plan, 50% acknowledged that they have too much debt. Three in ten (30%) indicated that they would have difficulty coming up with $2,000 if they had a financial emergency within a month. While Gen Y seemingly is doing well in terms of asset ownership, the authors report that this population segment also tends to be lacking in financial education. They urge the following solution: "Policies aimed at improving financial literacy could help Gen Y minimize the costs incurred in managing debt, improve personal financial safety nets, and fortify both short-term and long-term financial stability and security." I think the recognition of the need to focus on both short-term and long-term financial stability is very valuable in the discussion of how to resolve the shortfalls in retirement savings. In too many cases, it seems that the focus has been more of an "either/or" choice. In other words, telling people that they need to save more for retirement is all well and good, but there has to be recognition that this effort does not occur in a vacuum. There are many short-term challenges as well. I recently posted a blog entry that would retool this provision to instead both encourage retirement savings and be available for short-term financial challenges. One thought that I keep coming back to is what if there were a way to contribute more to a 401(k) plan and have better access to the funds to meet those short-term financial challenges. As it now stands, the 10% early distribution penalty punishes individuals just at the time of financial difficulty, rather than encouraging them to get back on their feet. When it was enacted, it was most likely well-intended as a way to ensure that money intended for retirement is in fact available for retirement. The problem is that for many people, financial challenges might not await retirement - the "rainy day" is more immediate. The gist of the idea is that if participants who potentially will have financial stress know that if they contribute more to their 401(k), but will also have access to the funds in a financial emergency without penalty, while also being encouraged to "pay it forward" as they return to a better financial state, then this will increase retirement readiness and give peace of mind to those who are addressing both short-term and long-term needs. 4/4/2014 0 Comments Recent Blog HighlightsAs we move further into Spring and the opening of the baseball season, I thought this would be a good opportunity to highlight links to some of the blog posts since the beginning of the year:
One of the more interesting findings in EBRI's annual Retirement Confidence Survey (RCS) is that there is a disconnect between when individuals expect to retire and when they actually retire. EBRI has been tracking this for over two decades. Back in 1991, only 11% of workers thought that they would retire after age 65.Today, one in three (33%) expect to retire after age 65 and 10% don't expect to retire at all. Those expecting to retire before age 65 declined from 50% in 1991 to 27% in 2014. Despite this expectation, the actual median retirement age has stayed relatively stable at 65 throughout the 1991-2014 period. The primary reasons cited for the changing expectations are the poor economy, inability to afford retirement, and a change in employment status. Many retirees left the workforce earlier than expected due to negative reasons such as health problems or disability, as well as for financial reasons.
The major implication of these findings is that individuals will need ways to overcome shortfalls that result from longer life expectancies measured up against fewer savings years. Although people think that they will work longer, that doesn't appear to be the reality. The headlines:
The 10% early withdrawal penalty was designed to discourage access to retirement funds before what one usually thinks are the retirement years. If it were too easy, then retirement savings would not be there during those retirement years. For many of those who are accessing retirement funds, however, it is more a matter of necessity than of choice. The attached visual piece is an attempt to outline the problem and suggest a solution. It is meant as a starting point, open to fine tuning along the way. If we think of retirement as part of the overall financial picture, and not simply an isolated moment, then I think we can finally generate a more realistic solution. Telling people they need a million dollars for a secure retirement is counterproductive. Helping people solve their own financial riddles will produce positive results.
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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. CategoriesAll 401(k) 402(g) Boomers Catch-up DB Dc Deferral Limit Defined Benefit Defined Contribution ERISA Healthcare Participation Pension Professionally Managed RCS Retirement Retirement Confidence Tax Code Vanguard Women Working Archives
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