Data and Research September 26, 2024

Goldman Sachs: Fostering ‘Financial Grit’ Is Key to Improving Retirement Savings

While working Americans reported improvements in their finances and retirement savings this year, many are still worried that competing priorities will delay their retirement.

Reported by

Because of easing inflation and improving economic conditions, working individuals who responded to questions for Goldman Sachs Asset Management’s “2024 Retirement Survey & Insights Report” reported that competing financial priorities had less of an impact on their ability to save for retirement during the past year than they reported in last year’s edition.

This is the first time Goldman Sachs observed a year-to-year decline in the impact of competing financial priorities on retirement savings since the onset of the pandemic.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

However, despite this improvement, 60% of individuals still reported they will need to delay their retirement due to what Goldman Sachs calls the “financial vortex,” which includes financial hardships, the cost of caring for family members, student debt, credit card debt and other expenses.

Goldman Sachs surveyed 4,874 individuals in July, including 3,280 working individuals across generations and 1,594 retired individuals ages 45 through 75 in its recent study. The research was released today.

While working participants expressed optimism about their finances, with 48% reporting an improvement, 29% of participants reported increased credit card debt, 33% reported less cash on hand for emergencies and 52% reported an increase in everyday expenses.

Christopher Ceder, a senior retirement strategist at Goldman Sachs Asset Management, said in a media roundtable on Tuesday that credit card balances and personal consumption expenditures are continuing to rise, as the average personal savings rate, now at 2.9%, continues to fall.

“While we see that retirement is moving in a good direction [and] markets are up, that doesn’t necessarily mean people are able to navigate their savings and … grow their retirement savings organically,” Ceder said.

‘Financial Grit’

The report argued that fostering “financial grit” is the key to success in planning for retirement. Ceder defined financial grit as a confluence of things—including the willingness to develop and manage a personalized plan, as well as the willingness to sacrifice near-term goals to achieve long-term goals and the utilization of a range of educational resources.

According to the study, competing priorities can significantly erode retirement savings, and without appropriate interventions, many individuals may find themselves unprepared for retirement. Goldman analyzed the total retirement savings of a typical saver who contributes consistently to their plan from age 25 through 65 and measured how different disruptive life events would impact their retirement savings.

For example, for someone with a starting salary of $50,000 and contributing 8% to their plan with a 5% employer match, leaving the workforce for eight years would reduce their retirement savings by 25%. A 10-year delay in starting to save for retirement would reduce retirement savings by 36%, according to the analysis.

Importance of Planning

Ceder emphasized that having a personalized plan for retirement is key to achieving higher savings levels. Workers with a personalized plan are more likely to be ahead of schedule with their savings, more confident in their ability to reach their retirement goals and less likely to delay retirement due to competing priorities, Goldman found.

Ceder added that, during the most recent inflationary environment, people with a plan tended to be more action-oriented when it came to making changes related to their investments, as well as seeking out advice. However, the report found that do-it-yourself investors, women and Generation X employees were the cohorts least likely to use advice services when offered through their 401(k).

“It’s not just people who have higher assets that need these planning resources; it’s the broad scale of retirement savers who need [them],” Ceder said. “We think the 401(k) plan is really the backbone of the industry .”

These services include access to financial wellness programs, digital investment advice or managed accounts, according to the report.

“The challenge is making these services broadly available, [such as] for 403(b) plans,” Ceder said. “A lot of times, when some of these services are offered, they’re offered in very narrow formats … and they are just not broadly marketed.”

Nancy DeRusso, head of financial planning and financial wellness at Goldman Sachs Ayco, said it would be effective if companies mandated that participants create financial plans, such as requiring an employee to talk to an adviser or planner before they make their benefits elections.

DeRusso emphasized the importance of plan sponsors offering access to education and advice, as well as offering benefits that meet the financial needs of different employees, such as those focused on paying down student debt. Effectively communicating about these benefits is also key, DeRusso said.

Investment Strategies

In terms of investing, Gregory Calnon, global co-head of public investing at Goldman Sachs, said defaulting participants into target-date funds early in their careers is an effective strategy for saving over the long-term.

“Having a financial plan coupled with the target-date funds, we think, is really important,” Calnon said. “There’s a period of time in your career, maybe it’s [age] 40, 45 or 50, where you transition away from being purely in target-date funds and … into something that’s more customized.”

Calnon also argued that incorporating alternative investments into defined contribution plans is needed in order to generate more return and narrow the retirement savings gap. However, he said, there is an educational hurdle to this, as participants would need to evaluate new asset classes that were not previously available to them, and there needs to be more product development to provide vehicles for investing in alternatives that offer enough liquidity to be part of a 401(k) plan.

Opinions September 25, 2024

PRT: Myths and Reality

Pension risk transfers benefit plan sponsors and plan participants. 

Reported by

Sean Brennan

Some have argued that employers’ transition from defined benefit to defined contribution retirement plans has been a decades long failed experiment. Setting aside enough of one’s hard-earned money to last through retirement is difficult and has proven to be a struggle for many Americans. In fact, the National Institute on Retirement Security has estimated the retirement savings deficit at between $6.8 trillion and $14 trillion, and 45% of working households have no retirement savings at all.

That being said, DB plans have not been without their own issues historically and have experienced significant volatility in funded status due to mismatched asset and liability cash flows. In addition, most corporations do not have sufficient expertise and infrastructure to manage the associated investment, longevity and operational risks. And the Pension Benefit Guaranty Corp. backstop comes from a non-government-backed agency that has limited tools to safeguard its solvency – one of which has been to cut benefits in many cases. These realities make pension risk transfer an attractive and pragmatic solution for plan sponsors that serves to enhance security for plan participants.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

The PRT Solution

The life insurance industry offers a compelling way for DB plan sponsors to secure their legacy obligations through PRT transactions, a trend that has been embraced over the past decade. According to global insurance broker Aon, “$315 billion of [U.S.] pension obligations have transferred from plan sponsors to insurance companies” since 2012. 

PRT enables plan sponsors to increase participant security and reduce their plan sizes relative to their balance sheets, and allows companies to focus on their core businesses. PRT transactions also have several layers of protection that give DB plan sponsors and participants peace of mind. Under the purview of the National Association of Insurance Commissioners, PRT insurers invest more conservatively than pension plans (within protected separate accounts in most cases), closely match asset and liability cash flows, and hold strong capital buffers well in excess of the minimum required by regulators.

Alongside the NAIC, a dedicated PRT fiduciary oversight process is enforced at the federal level by the Department of Labor. The DOL set forth a principles-based framework for prudent insurer selection in its Interpretive Bulletin 95-1, where plan fiduciaries consider “a number of factors relating to a potential annuity provider’s claims-paying ability and creditworthiness,” with the ultimate goal of selecting the “safest annuity available.”

As a result of these layers of protection, the differences in financial strength among the most secure PRT insurers are minor. DOL fiduciary guidance acknowledges this by indicating that there is more than one “safest available” insurer.

Questions Raised

Increasing PRT volumes have encouraged detractors, often with their own agendas at odds with participant security, to question the safety of PRT transactions. One focus is whether a PRT group annuity is as secure as a pension plan regulated by the Employee Retirement Income Security Act and insured by the PBGC. Other questions relate to evolving insurer investment and capital sourcing practices, including the use of offshore reinsurance.

Reality Check

The positive impact of PRT transactions on retirement security is irrefutable. A clear track record shows that the insurance regulatory framework protects consumers far better than the ERISA system and the PBGC.

Plan participants whose benefits have been guaranteed by a PRT insurer have enhanced security from layers of regulatory capital and other protections put in place by insurers, which are not required of corporate DB plans. Because of these strong protections, not one PRT retiree or beneficiary has had their benefits cut since the issuance of DOL 95-1 nearly 30 years ago.

Under the ERISA regulatory framework there have been more than 2,500 distress plan terminations involving more than two million plan participants in the same timeframe. An outcomes report from the PBGC itself shows that an estimated 16% of those participants had their benefits cut, by an average of 24%.

The principles-based approach underlying the DOL’s fiduciary guidance is one driver of the insurance system’s resiliency. The DOL recently reaffirmed this approach following a thorough review of 95-1. The department’s approach is intended to account for market trends and evolving business structures.

As an example, the use of reinsurance backed by Bermuda-based reinsurers is considered by fiduciaries under the DOL 95-1 framework, as they review capital support and transaction guarantees as set forth in the guidance. Fiduciaries are generally comfortable with this structure because annuity writers based in the U.S. must adhere to statutory accounting principles and stringent capital standards. Athene, for example, operates its Bermuda subsidiaries to substantially the same capital and risk standards as its U.S. affiliates.

Independent fiduciaries and their expert advisers are best qualified to provide an expert review to ensure an appropriate comparison of insurers.

Bottom Line – Do the Work

If a pension system were designed from scratch with retiree security as the number one priority, it would look like the insurance system. It has been independently verified time and time again that the PRT system maintains and enhances retirement security. Cursory review should not replace the sound rigorous analysis that underpins the PRT system, and any honest evaluation of its merits.

Sean C. Brennan is executive vice president of pension group annuity and flow reinsurance, Athene Holding Ltd., and partner, Apollo Global Management.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.

«

Please turn off ad blocker to view.