Data and Research November 13, 2018

Even the Most Reliable Data Suggests Households Will Fall Short of Retirement Income Goals

Looking at the various sources of households' estimated retirement income, the Center for Retirement Research at Boston College found that even the one it felt was most reliable shows roughly half of households are likely to fall short of a target replacement rate of 75%.

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The Center for Retirement Research (CRR) at Boston College, in a new brief, “How Much Income Do Retirees Actually Have?,” took a look at five surveys commonly used to measure the financial resources available to households in retirement.

CRR says one that is commonly used, the Census Bureau’s Current Population Survey (CPS), understates the resources available to retirees. Nonetheless, even using one of the more reliable datasets, its analysis shows that roughly half of households are likely to face a shortfall in the retirement income they will need, CRR says.

The reason why the CPS in prior studies understated retirement income is that it used to define income as money received on a regular basis—not taking into account money held in a 401(k) plan or an individual retirement account (IRA). In 2015, the Census Bureau redesigned the CPS so that it could take these factors into account.

Another dataset commonly used is the Survey of Consumer Finances (SCF). This captures both regular and irregular income and overstates high-wealth households, which are likely to own retirement savings accounts, CRR says. However, this survey is conducted only every three years and samples a small number of people.

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The Health and Retirement Study (HRS) surveys households in which the head is age 51 or older. It collects in-depth information on income, work histories, assets, pensions, health insurance, disability, physical health, cognitive function and health care expenditures. It also asks respondents about different sources of income.

The Survey of Income and Program Participation (SIPP)’s main objective is to evaluate the eligibility of households for federal, state and local government programs and their use of these programs. It is conducted annually.

The Panel Study of Income Dynamics (PSID) is a survey of households that has been conducted since 1968. CRR says it provides valuable information on the long-run dynamics of income, wealth, employment and family structure across generations. However, it does not ask respondents about regular and irregular income. It simply asks how much income was received in the calendar year.

CRR decided to analyze the HRS dataset and whether households would be able to replace 75% of their income in retirement—but CRR decided to define income four different ways. The first looked at final-year earnings. The second averaged the final five years of earnings, excluding any year in which no income was earned. The third looked at a person’s average earnings over the course of their career and indexed them to the Consumer Price Index. The fourth looked at the average wage-indexed career average earnings.

CRR found that in the first instance, 42% of households are at risk of facing a shortfall. In the second, it is 60%; the third, 52%; and the fourth, 57%. “Using the HRS, the replacement rate calculations, under various definitions of pre-retirement earnings, suggest that roughly half of households are likely to fall short of a target replacement rate of 75%. Researchers should feel comfortable using the SCF, HRS, PSID or SIPP to draw conclusions about retirement income. Concerns about the CPS are well-placed, but, fortunately, other measures of retirement income are available.”

CRR’s report can be downloaded from here.

Administration November 13, 2018

Study Finds Link Between Lower Participation and Fewer Choices in K-12 403(b) Plans

Research published by NTSA also finds a 203% increase in average contribution rates among plans providing access to 15 or more providers compared to plans with only one provider.

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A decrease in investment choice and reduced access to advisers leads to lower retirement plan participation by employees in public education 403(b) plans, according to research published by the National Tax-Deferred Savings Association (NTSA).

K-12 403(b) plans often have individual annuity contracts, thousands of investment options and hundreds of providers in which individual participants have directed their deferrals and savings into providers they picked, often after a representative visited the workplace. Some feel that this model—and having these advisers sit down with participants individually—is an advantage for participants. Still others believe K-12 school systems should pare down to one or a few providers to simplify plan administration and compliance with IRS regulations and to offer participants better, lower-cost investment options and less confusion.

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The research, based on data from nearly 4,500 school districts across the United States, found 25% greater participation in plans with 15 or more investment providers compared to plans with only one provider, and single provider arrangements have the lowest participation rate; 8% below the national average. In addition, according to the research, account balances are, on average, 73% higher among plans with 15 or more providers compared to single provider arrangements, and there is a 203% increase in average contribution rates among plans providing access to 15 or more providers compared to plans with only one provider.

“The research revealed that the number one factor driving participation and savings rates in school districts is participant choice,” says Jason J. Fichtner, Ph.D., a Senior Lecturer of International Economics at Johns Hopkins University’s Paul H. Nitze School of Advanced International Studies and author of “Improving Retirement Savings for America’s Public Educators,” a white paper detailing the research results.

Overall, the research finds that public employees who have access to retirement educational resources at the workplace and the assistance of financial professionals are saving earlier and contributing more to their 403(b) plans, and have greater confidence in being able to achieve their retirement goals.

“The range of participation rates in America’s public school districts is dramatic, suggesting that the choices that each school district makes available to employees and the resources that they provide to help employees understand the benefits of participation are key differences in driving participation rates,” says Brent Neese, executive director of NTSA.

There’s been a tug of war, of sorts, over the best design for K-12 school district 403(b) plans, but some say they should strike a balance between old and new.

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