Data and Research May 16, 2022

Public-Sector Workers Delay DC Plan Decumulation

Data on decumulation patterns can be useful to public-sector DC plan sponsors who want to help employees with retirement planning.

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Almost half of public sector employees are taking no action to decumulate defined contribution plan retirement savings once retired, according to Mission Square Retirement research released this month. 

Josh Franzel, managing director at the Mission Square Research Institute, says the results of their research can help plan sponsors understand how public sector participants and retirees—most of whom also have a defined benefit plan—behave regarding their supplemental defined contribution savings.

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“It’s important to take a holistic view from a plan sponsor perspective in understanding how the different pieces fit together,” Franzel says.

The report, “Retirement Savings Participant Decumulation Behavior,” was written by Gerald Young, Mission Square Research Institute senior research analyst.

Mission Square studied participant disbursements, where money leaves the plan and the participant receives a direct payment, as well as transfers, where money leaves the plan and is sent to another financial institution or recordkeeper, and exchanges, where the money remains in the plan and the assets are moved from one or many funds and/or investments in the participant’s account to other funds and/or investments in the participant’s account.   

According to the research, 10 years from general employees’ last contributions, 48% of plan participants had not taken any partial disbursements, and 72% had not taken any full disbursements. In contrast, 27% of plan participants took their first partial disbursement within the same year of retirement, while 11% took a full disbursement that first year.

“[I]n those first two years, comparatively, there was a flurry of activity, still far below a majority, but then in years two through 10, almost nothing—and a large percentage in each case who would do nothing either in the way of a partial transaction or a full transaction,” Young explains. “If there was any type of a full transaction taking place, it was more likely to be in a transfer/exchange mode rather than a disbursement. But for those who did disburse funds, the dollar amount of those disbursements tended to be fairly limited.”

The research also shows that the biggest distinction in decumulation behavior among public sector employees is the age at which they retire, which correlates to whether they serve in a general role or in a public-safety role.

Franzel adds that “it’s important to take note that the average retirement age for general employees that we’re studying was around 62.5 years, and for public-safety employees was about 56.4 years.”

Other highlights from the research report include:

  • The average time of the financial transactions varies from one to four years after retirement;
  • About 30% of participants transfer funds and 12% exchange funds, with most of these transactions being for the full account balance;
  • Among disbursements, the majority are small, in the range of 0% to 2% of available funds;
  • About 17- 18% of participants take three or more partial disbursements after retiring, with 28% taking a full disbursement;
  • Workers who withdrew 100% of their balances tended to have less than $10,000 in their accounts;
  • After the first two years post-retirement, there is very little activity initiated, although some recurring disbursements may continue (e.g., required minimum distributions or periodic payments); and
  • More than 10 years after retirement, approximately half of all participants have still not taken a full disbursement and/or transfer from their retirement plans.

Franzel says that the research may, for plan sponsors, “paint a picture” of decumulation behaviors among public sector employees. This may improve their understanding of post-separation activity and be useful to employers trying to bolster support for employees planning for retirement. He says that many public-sector plan sponsors and other stakeholders within state and local retirement communities were interested in studying participants’ decumulation behavior, but that even within academic and practitioner literature, “not a lot has been done” on the topic.

The research used information on Mission Square Retirement participants, specifically those employed full-time and retired before age 75. That sample was then divided between public-safety workers and general government staff to tease out not only the department they served in but also the specific job function. The full dataset analyzed in the report includes 77,212 distinct account holders.

“Let’s say there is a police records clerk—that would be a person more likely to have a general retirement plan available to them as opposed to somebody who has sworn police or fire service,” Young says. “In terms of practical considerations that plan sponsor should be thinking about, given this is the role of financial wellness in general, how do you prepare your employees that are working up toward the retirement eligibility age?”

In the public sector, 86% of state and local employees have access to a DB plan and 64% have access to a supplemental retirement savings vehicle, such as a 457 DC plan, Franzel adds

“How does the fact that many of these folks have a defined benefit plan affect what they do with their supplemental defined contribution savings?” Franzel asks.

Young advises that exposing public sector DC participants to financial wellness resources, both earlier in their careers and two years before they retire, is one way to impact participants’ decumulation decisions.

“Financial wellness education programs that have been put in place by individual state and local government is one way to help those individuals to plan better for whichever of their retirement or other savings assets they might have,” Young says.

Data and Research May 16, 2022

Health Care in Retirement Will Cost an Average of $315,000

Fidelity champions health savings accounts paired with a high-deductible health plan as a means of meeting workers’ rising health care costs in retirement. 

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Fidelity Investment’s 2022 Retiree Health Care Cost Estimate increased 5% from 2021, and the figure has nearly doubled since the initial $160,000 estimate in 2002.

For 2021, Fidelity’s health care cost estimate was $300,000. Hope Manion, chief health and welfare actuary at Fidelity Investments Benefits Consulting, says that health care costs are likely to continue rising.

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“[T]he costs will continue to go up because of the nature of health-care consumption, where we have so much innovation and technology and improvements in care,” she explains. “We need to be bold and stand up to the reality and get prepared for it.”

For 2022, Fidelity estimates that a 65-year-old couple retiring this year can expect to spend an average of $315,000 on health care costs throughout retirement. The estimates for single retirees are $150,000 for men and $165,000 for women. For single retirees, the 2021 estimate was $157,000 for women and $143,000 for men.

“We did have a little bit of a leveling off, a bit of a break, in the last few years,” Manion adds. “What we’re seeing right now is a return to a as an acknowledgment that that trend is back in health care—there’s a lot of cost [and] inflation pressure that’s going to be happening short-term, [and] we need to be absorbing that into our estimate. Long-term, things should revert to a more normal health care cost trend, or annual increase.”

Fidelity’s estimate assumes that both members of the couple are enrolled in traditional Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits and services, physical therapy and lab tests, and in Medicare Part D, which covers prescription drugs.

The health care cost estimate release also finds that “Americans are generally out of sync with the expected total cost of health care in retirement.” Fidelity’s research shows that, on average, Americans estimate a couple retiring this year will spend just $41,000 on health care expenses in retirement, and 68% expect that associated costs will remain under $25,000.

The nature of for-profit health care in the U.S. is one reason costs have increased, Manion explains. “This number is going to just keep increasing until we get some fundamental change to the U.S. health care system,” she says. “It’s a for-profit system.”

Fidelity promotes health savings accounts as a solution for expected health care costs in retirement. Individuals with access to a high-deductible health plan paired with a health savings account can benefit from the triple-tax advantages of the investment vehicle to save for future medical expenses.  

“There continues to be an opportunity for additional education on the power of a health savings account, especially for younger people who likely have decades to save and invest before they retire,” adds Manion. “Furthermore, HSAs are also a great way to cover current qualified medical expenses.”

 

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