Data and Research October 23, 2015

Early 20s Is Go Time for Retirement Saving

ADP marks National Save for Retirement Week by highlighting the power of stocking money away at your first job—and all your jobs after that.
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Only about four in 10 (41%) U.S. employees ages 20 to 24 are currently saving for retirement, according to a new analysis from the ADP Research Institute.

“It’s no mystery that as employees age, they take retirement planning more seriously,” explains Joe DeSilva, senior vice president and general manager for ADP Retirement Services. However, the research shows people tend to overestimate their ability to “play catch-up” and stick around in the workforce after age 60. Further, DeSilva says, playing catch-up “takes away employees’ ability to capitalize on the power of compounding earnings to help their retirement savings grow.”

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The study shows a more favorable 65.5% of employees ages 55 and older are contributing to a retirement plan or are otherwise regularly saving for the years after work, with varying degrees of success. ADP says this pattern of older workers saving more for retirement than younger workers continues to hold true from earlier research, and highlights the need for employers to refine their financial education strategies to ensure they are addressing the distinct priorities, needs and desires of each demographic within their workforce to encourage retirement planning.

ADP finds deferral rates also increased with age, with employees ages 20 to 24 years deferring on average only 4.6% of salary, while employees ages 55 and older deferring on average 8.5% of salary. “Additionally,” the analysis explains, “even as employees race to catch up and save more, average savings levels never approach the optimal double-digit savings rates that are recommended by financial experts.”

“We believe that providing plan participants with access to financial education throughout all stages of their career can help to reinforce the importance of retirement planning and increase their financial security,” De Silva adds.

NEXT: Tips for the generations

The ADP analysis shares specific tips for each generation currently in the workforce or retirement, as well as tips plan sponsors can use with today's multi-generational workforce.

For Baby Boomers, defined as those born between 1946 and 1964, ADP says there is absolutely no way to get around the need to save a significant portion of current income should one want a financially secure retirement. One specific tip: “Try living on your retirement income now. By putting away more of your pay for retirement savings, you can add to your nest egg while adjusting to your new income level in retirement … If you are age 50 or older, take advantage of catch-up contributions and review your asset allocation in your retirement plan account. Ensure your investments are appropriate for your age and risk tolerance.”

For Generation X, those born between 1965 and 1980, ADP says don't wait to reach the catch-up contribution age of 50 before saving up to the Internal Revenue Service (IRS) limits—which largely remain unchanged heading into 2016. “Save more now to take advantage of compounding earnings,” the analysis urges, and “maximize your savings during your prime earning years by choosing to automatically increase your retirement plan contribution every year.”

Another important piece of advice for Gen X: “Save for retirement first. You can borrow for your child's college education, and you can purchase long-term care insurance for elderly parents, but you cannot borrow for your retirement.”

For Millennials born after 1981, “don't wait to save until all your college loans are paid off,” ADP says. “Save now to take advantage of compound earnings. Establish good money management habits; focus on saving, smart budgeting and planning for emergencies.”

The full study is available here: “How Employers Can Extend Coverage andSimplify the Retirement Readiness Process.”

Data and Research October 23, 2015

Nearly Half of DB Sponsors Preparing for Risk Transfer

The top catalyst for a pension risk transfer to an insurance company is PBGC premium increases.
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Nearly half of large defined benefit (DB) plan sponsors (45%) have taken proactive steps to prepare for an eventual pension risk transfer, according to MetLife’s 2015 Pension Risk Transfer Poll.

Among those plan sponsors who are very or somewhat likely to engage in pension risk transfer, the percentage who have taken preparatory steps rises to 72%. Wayne Daniel, senior vice president and head of U.S. Pensions at MetLife, tells PLANSPONSOR the total accumulated value of DB plans in the U.S. is more than $3 trillion and only a small portion of that has been de-risked. “We certainly expect [risk transfer] to be a growing and continuing trend. We see interest in derisking across DB plans of all sizes,” he says.

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When asked what type of de-risking activity they would consider, nearly half of DB plan sponsors (46%) would most likely transfer risk with an annuity buyout, including 37% who would consider a buyout in combination with a lump sum offer. Of those planning to use a pension buyout, more than half (57%) are considering a pension risk transfer option to an insurance company for their DB plan in the next two years. This percentage increases to 63% for plans with DB plan assets of $250 million to $499 million and 77% for plans with DB assets of $500 million to $1 billion.

The top catalysts for a pension risk transfer to an insurance company are additional Pension Benefit Guaranty Corporation (PBGC) premium increases (51%), the impact of the new mortality tables issued by the Society of Actuaries in 2014 (45%) and the funded status of their plans reaching a predetermined level (34%).

NEXT: Preparing for pension risk transfer

A critical step in preparing for a pension risk transfer transaction is obtaining agreement among decision-makers about how to approach derisking. According to the survey, plan sponsors identify key stakeholders as members of their company's C-suite, including the CEO, CFO, among others (87%), plan actuaries (72%), attorneys/legal counsel (68%), ERISA/plan governance committee members (62%), and outside consultants/advisers (45%).

When it comes to executing a successful pension risk transfer transaction, plan sponsors are focused on communication. Thirty-one percent of plan sponsors indicated that communication is the most important factor for ensuring success, followed by the price/cost of the transaction (26%), among other factors.

“Successful communication includes communicating with both plan participants and the insurance company to which liabilities are being transferred,” says Daniel. “Communications play an important role in helping participants feel confident that their benefit will be there when they need it. The poll found nearly half of plan sponsors (49%) plan to communicate with plan participants about how their benefits will be paid once a buyout has been finalized with a specific insurer, while 36% will communicate with plan participants once they make the decision to transfer the liabilities to an insurer.”

According to Daniel, once a DB plan approaches the insurance market, a transaction can usually be done in three to six months, assuming the plan is well prepared, and has good participant data. “Often where we see delays occurring, these delays can be attributed to incomplete or inaccurate data,” he says.

Taking steps such as evaluating costs and benefits, identifying an acceptable cost level, securing the necessary agreements and monitoring the environment and funded status will put the plan sponsor in the best position to act when they believe the time is right for their company and their plan, Daniel says. “We believe that these steps are necessary so that the plan sponsor can react and execute promptly when the opportunity arises.”

The MetLife 2015 Pension Risk Transfer Poll was fielded between August 24 and September 8 among 229 defined benefit (DB) plan sponsors from Fortune 1000 companies, as well as the next largest 2,000 companies by DB plan asset size. Three in four respondents (72%) reported DB plan assets of $250 million or more, with 35% having assets greater than $1 billion.

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