Social Security Education a Must-Have for Retirement Plan Participants

General education is helpful, but getting personal will help employees establish a plan for income in retirement.

Art by Jeffrey Decoster


According to the Social Security Administration’s website, Social Security will replace about 40% of an employee’s pre-retirement income after retirement.

It explains that this will be lower for people in the upper income brackets and higher for people with low incomes. “You’ll need to supplement your benefits with a pension, savings or investments,” the website says.

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However, even the Social Security Administration notes that most financial advisers say a person will need about 70% of pre-retirement earnings to comfortably maintain his pre-retirement standard of living. So, 40% is more than half of what the average person will need.

“Social Security is the largest retirement income asset for 99% of Americans,” says William Meyer, founder and managing principal of Social Security Solutions, who is based in Kansas City, Kansas.

Pre-retirees, those within 10 years of retiring, expect they will receive $1,805 a month in Social Security benefits, but retirees actually collect an average of $1,408, a 28% difference, according to the sixth annual survey by the Nationwide Retirement Institute. Twenty-six percent believe they can live comfortably on Social Security alone, and 44% say that it will be their main source of retirement income.

Seventy percent think they are eligible for full benefits before they actually are. On average, they incorrectly think they will be eligible for full benefits at age 63, and 26% think that even if they claim early and receive lower benefits, these benefits will rise once they reach full retirement age.

Clearly, Americans need Social Security education.

Plan sponsors and providers have stepped up to provide education. Many offer education seminars and calculators, and some have even brought in representatives from the Social Security Administration to help educate employees.

“We know of a lot of HR professionals that have taken it upon themselves to learn about Social Security and teach employees about the basics. Or, during benefits fairs, they bring in a Social Security expert,” says Brogan O’Connor, senior financial planner, Sentinel Benefits & Financial Group in New York City. “Employers also guide employees to the correct resources.”

Meyer notes that the Social Security Administration has a mandate that its employees can’t give advice, so staff brought in by retirement plan sponsors and providers can only provide general education.

O’Connor says his firm offers Social Security education sources to retirement plan sponsors. “We have a library of presentations we can tailor to each audience and sophistication level, depending on the industry of the plan sponsor,” he says.

In a general setting, Sentinel provides Social Security basics, such as when employees can take their benefits, rules about spousal benefits and the benefits of delaying taking Social Security. But, O’Connor says its financial planners also do one-on-one consultations. “We can explain more what each person’s Social Security benefit is, how much income they want in retirement and how much Social Security factors into that,” he says.

Going beyond education to actual planning

According to Meyer, that kind of personalization is what is needed. “The classic wellness programs and education done by plan sponsors, recordkeepers and advisers are good and have made progress. But, from my point of view, they are missing the mark, missing personalization,” he says.

He notes that when a group of people attend Social Security education, many still come out of it saying, “What does this mean for me?” Participants need to be given next steps, Meyer says.

“Much education focuses on how to maximize Social Security benefits, but employees need to know how to coordinate this with other savings,” Meyer adds. “People can claim Social Security as early as 62. If they decide to wait until at least age 70 to maximize their benefits, they will need other savings to do that.”

He notes that his firm found in a study that if an employee draws from his defined contribution (DC) plan savings in order to wait and maximize his Social Security benefit, he can make his income last two years longer in retirement, as well as reduce taxes and required minimum distributions (RMDs).

Social Security Solutions has a new wellness program that helps employees understand how to maximize Social Security benefits and coordinate this strategy with other savings.

The first step, according to Meyer, is to look at Social Security by itself and understand a maximizing strategy versus taking benefits early. He says most people take Social Security as early as possible. He attributes this in part to the fact that Social Security gives employees a report showing what their benefits will be on a monthly basis. “Employees are more likely to claim early if they only focus on the monthly benefit,” Meyer contends. “If they look at cumulative benefits, it could change behavior. A difference of a couple hundred dollars a month is no big deal, but adding that up over 20 or 30 years in retirement can be hundreds of thousands of dollars.”

The second step is coordination with other savings. “What we do in our financial wellness program is show two bars side by side—one of which shows the result of tapping into DC plans while waiting to maximize Social Security,” Meyer says.

He explains that if a single person starts Social Security as soon as he can, he will get approximately 72% less per month, and will have to take more out of his DC plan during and in later retirement years. If he delays taking Social Security until age 70, he will have to draw down from his DC plan without any Social Security until age 70. This will result in taking more out of his DC plan in the earlier years of retirement, but at age 70, he will get 32% more Social Security income on average and be able take less out of his DC plan in later retirement years.

Meyer adds that if a retirement plan participant claims Social Security at the maximum, the draw-down of DC plan assets until then reduces his balance, which will reduce RMDs at age 70 1/2, and the participant will save on taxes.

According to Meyer, historically, tools have not performed well with plan sponsors—employees have been given tools but haven’t used them. Social Security Solutions’ wellness tool provides a push report, an analysis individualized to every employee. “We get information from recordkeepers and plan sponsors and deliver via email or a plan sponsor Intranet on a page that has five different diagnostics—one for maximizing Social Security, one for coordinating Social Security and retirement plan accounts, estimates for how much money employees can spend, how much longer they can make their income last, and whether they are ready to retire,” he explains.

“We found that by presenting information in the right way, it changes behavior and makes participants feel more retirement ready and confident,” he says.

On a note to employees who do not think Social Security will be there for them when they retire, Meyer offers some historical perspective. “At other times, the Social Security system has been in a similar situation as it is today, and in short order, lawmakers were able to fix the system and get it funded. There are approximately 30 different proposals currently to shore up the system, and it will be hard politically with all the Baby Boomers retiring to cut things. We have a precedent and history in shoring up the system, and I believe we will do the same again. Those approaching retirement will get benefits based on current rules, while those younger need to keep an eye out for reform,” he says.

Presenting a total picture to employees

According to O’Connor, retirement plan sponsors need to realize that having general education about their DC plan and just general investment education is helpful, but there are so many factors people going into retirement don’t understand and should. He says having more pinpoint-type education helps employees feel more comfortable with their entire retirement picture. Education should not only include Social Security, but also Medicare, insurance coverage that will be needed, and getting estates in order.

“From our perspective, we want to make sure people are looking at all aspects of financial planning. We run into a lot of situations in which people tend to look at things in a silo, such as just looking at what their DC plan will provide. So, we try to promote education about all aspects to help them feel confident,” O’Connor says.

Natural Disasters Damage Retirement Accounts, Too

What options do participants have when a natural disaster affects them, and are there steps plan sponsors can take to reduce the impact on retirement savings?

Natural disasters are known to damage communities and properties. Less understood, however, is the harm they can cause to participant retirement accounts.

When a participant’s home or property is destroyed, dipping into his defined contribution (DC) plan account may be one of the first actions he takes. This leads to early distribution taxes and penalties and cuts savings accumulated. And, because participants will take a period of interrupted employment to work on their homes and communities, this makes a dent into their retirement account as well since retirement contributions are disturbed too, says Steve Friedman, a shareholder who advises employers on employee benefits law at Littler Mendelson.

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“If somebody has a home that is damaged, it certainly opens up the prospect of that person needing some money to get themselves financially through,” he says. “That gets into the question of what rules govern their access to 401(k) or 403(b) assets.”

Earlier this year, the Department of Labor (DOL) provided guidance to employee benefit plans, plan sponsors and workers affected by severe storms in Nebraska, Iowa and Alabama, and in June, Congress added a special tax relief to the newly-signed Disaster Relief Bill. This relief granted access to the retirement funds of those affected by federally declared disasters in 2016 and 2017, and allowed these participants to repay distributions within three years, avoid additional early distribution taxes, borrow supplementary funds as a plan loan, and more.

More recently, the IRS has amended hardship withdrawal rules modifying the safe harbor list of expenses in the Internal Revenue Code for which distributions are deemed to be made on account of an immediate and heavy financial need by adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters. The IRS says this is “intended to eliminate any delay or uncertainty concerning access to plan funds following a disaster that occurs in an area designated by the Federal Emergency Management Agency (FEMA) for individual assistance.”

However, it’s important to note that while afflicted participants may take hardship withdrawals, that is only the case if the plan allows for hardship withdrawals. Employers are not required to offer hardship withdrawals in their plan.

“Any type of hardship withdrawal has to be pursuant to the retirement plan,” says Wesley Stockard, co-chair of the Employee Retirement Income Security Act (ERISA) and Benefit Plan Litigation team at Littler Mendelson. “These are not a benefit that must be provided, an employer has to have them as a provision that employees can take advantage of.”

“Employees need to keep in mind that though there has been a terrible circumstance, there is still a process that needs to be gone through,” he adds. “Doing this process correctly protects the employer and employee from any accusations.”

Friedman and Stockard recommend employees consult the summary plan description (SPD) should they have any questions regarding plan benefits. An SPD acts as a basic ERISA disclosure document for employees to understand. Following these steps ensures compliance for both employers and participants, especially in times of natural disasters where there is increased urgency.

IRS hardship withdrawal rules were amended in a way that could help reduce the impact on retirement savings from having to take a hardship withdrawal. Six-month bans placed on 401(k) or 403(b) contributions of participants taking a hardship distribution no longer not apply. Employees do not have to take a loan first, although plan sponsors may still require that, and the IRS has made it easy for participants to provide proof of their financial need.

A guide published by Fidelity examines the topic of retirement plan hardship withdrawals, with the objective of improving the long-term financial health of those who take them. Fidelity reminds plan sponsors that they still have discretion over limiting the amount of hardship withdrawals, and it recommends helping participants establish emergency savings to avoid having to take a distribution.

If participants choose to take a plan loan instead, they need to understand the differences from taking a hardship withdrawal. While plan loans are not subject to penalties since employees are borrowing the money, if a participant leaves his employer before paying off the loan, he is still required to pay the residual balance.

An analysis from Deloitte finds that more than $2 trillion in potential future account balances will be lost due to loan defaults from 401(k) accounts over the next 10 years. This figure includes the cumulative effect of loan defaults upon retirement, including taxes, early withdrawal penalties, lost earnings, and any early cashout of defaulting participants’ full plan balances. For a typical defaulting borrower, this represents approximately $300,000 in lost retirement savings over a career.

It recommends plan sponsors establish and enforce robust education and loan risk awareness programs designed and curated for fiduciary responsibility, prior to lending approval. Plan sponsors may also reduce the permissible loan amounts and number of loans outstanding per participant, and increase flexibility in payback timelines, as well as enforce waiting periods for plans that are currently designed to allow participants to take multiple loans.

Deloitte points out that the DOL states that loan programs should not diminish a borrower’s retirement income or cause loss to the plan, and views loans as investments, requiring the same fiduciary oversight as any other plan investment option.

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