Benefits January 3, 2024

Employers Have An Opportunity to Press Demographic Trend: Hiring Older Workers

The growing pool of workers 65 and older is affecting how plan sponsors should look at workplaces and benefits in the future.

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Plan sponsors have the opportunity to gain an advantage over their competitors by supporting flexible workplace hours and benefits for part-time workers, hiring larger numbers of older individuals from the growing pool of workers 65 and older.

Data from a Pew Charitable Trusts report shows that, currently 62% of workers 65 and older are working full-time, compared to 47% in 1987.

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Employers can bolster workplace flexibility to mitigate older workers’ longevity risks of running out of money in retirement or living longer than workers have financially planned for, says Joe Coughlin, founder and director of the MIT AgeLab, a multidisciplinary research program that studies the behavior of individuals who are 50-years of age and older.

“Some of the implications for employers—and some are starting to get it now, is that older workers are not a cost—they are a resource, they are educated, they want to work,” Coughlin says. “Rather than looking at older workers, as a cost or something to move off books, [plan sponsors] may want to start thinking about ‘how do we re-slot them into different positions that may pay less but how do we train them to be continually productive?’”

Plan sponsors must prepare for these older workers who will keep working after retirement age, says Coughlin, whose work relates demographic trends to business strategy around aging. Numbering near 11 million, the older workforce has nearly quadrupled in size since the mid-1980s, according to the Pew research.  

Plan sponsors “probably need to start demanding from their product manufacturers new content [for] thinking about longevity [planning] not simply retirement planning, not simply financial security,” Coughlin adds.  

Older workers rely on the support of employers and government programs to retire, according to a 2023 panel of speakers, at the Economic Policy Institute. A 2021 study from the Boston Center for Retirement Research found that 26% of retired individuals were able to cover server care needs for at least five years using income and their financial assets.

The “classic” longevity risk is individuals will run out of money in retirement; and the second, that retired workers are likely to live longer than in the past. For plan sponsors, addressing both risks are key to successfully taking advantage of the workplace demographic trend, adds Coughlin. 

Mitigating “classic” longevity risk by “looking at the challenge of making sure that our wealth span keeps up with our lifespan,” is but one of the risks plan sponsors should help employees with Coughlin explains.

Employers that want to recruit and retain older workers, many of whom may want to work less than full-time or may be willing to accept lower compensation, may need to consider offering more benefits to part-time employees, providing flexible work hours and appealing to older workers by trading off slightly lower compensation for enhanced benefits, Coughlin says.

“For instance, the older worker might be looking less for cash income and maybe more for benefits,” he says. “[Plan sponsors may] make a trade off saying, ‘hey, we got you covered for dental or we got you covered for additional medical but that’s going to be a little less cash in your pocket’ and [older workers] may be good with that because they’ve just retired [from full-time employment], perhaps with a full 401(k) or pension plan.”

Coughlin expects that employers will bolster benefits to take advantage of this workplace demographics trend.

For plan sponsors to increase their efforts to hire older workers, “the great hope might be found in the SECURE [2.0] Act [of 2022], which is now requiring employers that if [part-time employees] have 500 hours per year for [two] consecutive years to offer them benefits,” he adds.

This legislative provision does not take effect until end of 2024.

Although self-employed workers and independent contractors were left out of the retirement legislation, the SECURE 2.0 Act prepared crucial groundwork to facilitate employers to employ greater numbers of older workers, Coughlin says, as retired workers are more likely to work part-time than their nonretired counterparts, according to Pew Research Center data. 

The December 2023 Pew Research Center report, “Older Workers Are Growing in Number and Earning Higher Wages,” was published by Pew Charitable Trusts. Data were sourced from the Federal Reserve 2022 Survey of Household Economics and Decision-making.

Compliance January 3, 2024

Fiduciary Proposal Comment Period Closes, Receives Both Praise and Criticism

Morningstar argued that the DOL proposal would lower fees for smaller plans, while ACLI argued it would reduce access to annuity products for lower income savers.

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Tuesday, the comment period for the Department of Labor’s retirement security proposal, sometimes referred to as the fiduciary rule proposal, expired.

The proposal would apply fiduciary status under the Employee Retirement Income Security Act to certain one-time sales interactions, such as rollovers from retirement plans to individual retirement accounts, annuity sales, and plan investment menu design. The DOL proposal has received a wide range of feedback from firms such as Morningstar and industry lobbying groups including the ERISA Industry Committee and the American Council of Life Insurers, among others.

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The ERISA Industry Committee did not take a clear stance on the proposal but did offer some recommendations the group said could improve it. ERIC’s recommendations primarily revolved around clarifying to whom the proposal would apply. Specifically, ERIC asked DOL to exclude “hire me” conversations, educational materials, and human resources employees from being included as fiduciaries under the proposal.

Morningstar’s comment letter was supportive of the proposal and argued that, as proposed, it would help retirement savers in smaller plans significantly by lowering their management fees. Morningstar estimates that $55 billion would be saved over ten years by retirement savers as a consequence of access to better advice and lower fees, especially advice rendered to a plan about investment options. About $47 billion of the savings would come from plans that have $25 million in assets or less.

Speaking of management fees paid by smaller plans, the letter says, “Some of these investment fees look outlandish compared to the investment universe.”

Other commenters, including Brian Graff, the CEO of the American Retirement Association, noted at a hearing hosted by DOL in December, the potential gains for underserved, smaller retirement plans that could come from the proposal.

Lia Mitchell, a senior analyst for government affairs at Morningstar, cautions that Morningstar’s savings estimates are in “completely undiscounted dollars.” This means that they do not account for changes in behavior that could occur because if the proposal if finalized, such as an increase in advisory fees. Recordkeeping and administrative fees “are held constant,” Mitchell explains.

Morningstar also recommended that the DOL require advisers to consider a saver’s potential Social Security income when determining whether a recommendation, such as a rollover or annuity purchase, is in that person’s best interest. Mitchell explains that the age at which someone claims Social Security can have “a higher impact than private solutions” such as an annuity purchase.

The American Council of Life Insurers urged the DOL to completely withdraw the proposal. The council’s letter argues that ERISA is a “sole interest” standard and this is “incompatible with the very nature of sales and marketing activities.”

Further, the proposal would hurt lower-income savers by reducing their access to insurance products and rollovers by increasing their cost, ACLI argued.

The group also said the proposal should not apply to annuity products, because the complexity and labor intensity of the sales process for those products is better accounted for with a commission-based compensation model for insurance agents.

 

 

 

 

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