Benefits January 22, 2015

Cost of Retirement Income Jumped in 2014

A quarterly analysis from BlackRock finds the cost of purchasing lifetime income units increased significantly in the last 12 months, putting pressure on pre-retirees planning for life after work.
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A sharp rise in lifetime income costs means many workers in their 50s and early 60s are less financially prepared for retirement than they were 12 months ago, despite 11% gains in equity markets over the same time period. Even a strong 14% return for the average 55-year-old retirement investor examined by BlackRock couldn’t keep pace with the relative increase in lifetime income costs.

Chip Castille, BlackRock’s chief retirement strategist, says markets in 2014 were mostly friendly to investors at the retirement horizon, despite some volatility. Portfolios held by 64-year-olds grew an average 19% in 2014 and outpaced the cost of future lifetime income, which rose a more modest 11%. BlackRock explains that, with just over $282,000 in median lump sum savings, this group of late-career workers has the equivalent of slightly more than $12,000 in estimated annual retirement income.

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Castille says the CoRI Retirement Indexes demonstrate ongoing shifts in annuity and income product markets, as well as the impact of wider market moves on retirement-specific portfolios. “Projected income gives a much clearer picture of retirement savings and a new way to manage portfolio performance,” he adds.

The indexes offer investors ages 55 to 64 a daily estimate of the “price” today of a dollar of annual retirement income starting at age 65. The CoRI Indexes, composed largely of U.S. government and investment-grade bonds, use current interest rates, annuity prices, inflation expectations, life expectancy and other factors to set the daily price estimates.

The final quarterly CoRI analysis for 2014 shows that, for workers around age 55, a dollar of estimated annual retirement income would have cost $12.47 a year ago. Twelve months later the cost is $16.62. As a result, workers’ median nest egg value of $280,000 could only generate estimated retirement income of $16,849 a year starting at age 65, the analysis shows. 

“What’s interesting (and counterintuitive) about that result,” BlackRock says, “even though the savings portfolio grew in value, it would be on track to generate almost $3,000 less in annual retirement income than the smaller nest egg 12 months ago.”

BlackRock says the main factor behind the increase in lifetime income costs was the continued slump in interest rates. The last year saw yields on 10-year U.S. Treasury notes fall “a staggering 28.62%,” the analysis explains. Jeffrey Rosenberg, BlackRock’s chief investment strategist for fixed income, adds that predictions of rising rates from many investment experts in 2014 did not play out. 

The firm notes that the BlackRock 2015 Outlook predicts that “long-term interest rates may inch up this year,” but BlackRock expects rates to be low for some time to come.

BlackRock offers a summary of the fourth-quarter 2014 CoRI results here. The index findings are powered by BlackRock’s CoRI Retirement Indexes, together with U.S. retirement savings data from the Employee Benefit Research Institute (EBRI). 

Data and Research January 21, 2015

Regulations, Work Force Changes Challenge Plan Sponsors

Retirement plan sponsors surveyed repeatedly expressed frustration with regulatory complexity and concern about greater worker mobility.
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Plan sponsors surveyed by Buck Consultants identified the creation of 401(k) plans as having the most significant effect on employers who sponsor defined contribution plans.

Survey respondents identified the Pension Protection Act of 2006 as having the most impact over the last 40 years on defined benefit plan sponsors. The two runners up were volatility exposed by increased accounting transparency, and demographic changes in the workforce—such as fewer long-term workers.

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Apart from the statutory changes to the Employee Retirement Income Security Act (ERISA), respondents to the survey—fielded for the last in a series of articles from Buck commemorating the 40th anniversary of ERISA—noted other changes in the 40 years since ERISA was enacted that directly and indirectly impact employee retirement benefits. These include such trends as increased employee turnover and the decline of “career” employees, as well as a graying work force that might not be able to retire because they have not saved enough.

Several plan sponsors expressed particular concern with increased employee turnover and the increasing prevalence of defined contribution retirement plans. In particular, they worried that workers are far too tempted to cash out retirement savings each time they leave an employer. Some also lamented the decline of defined benefit retirement plans and expressed concern that some participants still are not prepared to successfully navigate defined contribution plans—particularly in terms of investment selection and monitoring.

The top challenges faced by plan sponsors in the survey were administrative complexity, designing effective employee communications, and balancing the needs of large, diverse work forces. Frustration with regulatory complexity was expressed repeatedly by survey participants. One participant even suggested that tax preferences for employee benefits be eliminated—observing that without the tax preferences, there wouldn’t be “so many rules to get in the way!”

However, asked what would happen if the favorable tax rules for employer provided retirement and health coverage were repealed, survey respondents overall predicted that employers would drop both types of benefits, and, for those employers that retained plans, that fewer employees would participate. Some expressed concern that employers would drop plans without a corresponding increase in cash wages—leading to decreased retirement savings.

Asked what one thing they would change about retirement plans or regulations, respondents cited nondiscrimination requirements and better education, advice and modeling tools that would enable participants to understand the long-term implications of savings decisions.

Some plan sponsors wished for a reinvigorated defined benefit pension system, and some wished for an end to lump-sum distributions from retirement plans, as well as retirement and health coverage offerings designed and sponsored by the federal government—as opposed to our employer-based system that exists today.

Also on the wish list for improvements to defined contribution plans was the ability to buy chunks of an annuity as an investment choice.

Plan sponsors expressed concern about retirement readiness and its impact on managing a workforce, with one survey respondent saying, “Folks who do not save enough and cannot afford to retire [make it] hard to manage employee attrition. ERISA needs to be better in getting people to transition into retirement.”

Buck Consultants fielded the survey in August and September 2014, among approximately 40 plan sponsors.

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