Helping Employees Address Longevity in Retirement

Americans are living longer, but many do not have adequate savings to provide for a 20- to 30-year retirement.

A study from the Indexed Annuity Leadership Council (IALC) found one in four Baby Boomers has less than $5,000 saved for retirement and nearly one in four (24%) of all respondents had nothing saved for retirement.

Jim Poolman, executive director for the IALC, who is based in Bismarck, North Dakota, says the study also found that 60% of Baby Boomers think they will need less than $1 million for retirement, yet, he notes, estimates show they could spend up to one-quarter million on health care costs alone.

“People aren’t thinking about the extra costs needed due to living longer,” he says. Poolman suggests that is the number one thing retirement plan sponsors and advisers can do to help employees prepare for longevity— educate them about how much money they will need. “Part of the reason people are not saving enough is they are not educated about what they’ll need,” he contends. “They need to know they will spend one-quarter million dollars on health care.”

Fredrik Axsater, global head of Defined Contribution at State Street Global Advisors (SSGA), who is based in San Francisco, says plan design features such as automatic enrollment at a reasonable default savings rate (he suggests 6%) plus an employer matching contribution have been good at helping people save and save more. But, he also thinks education is key.

“Providers should show how participant account balances translate into monthly income on retirement plan statements,” Axsater says. “The account balance tells them nothing. It’s not fancy, but it’s a basic indication of how they are doing.”

Axsater adds that SSGA sees in its research more retirement uncertainty for Generation X. “They need to do something now because they still have more time for retirement savings,” he says. 

Poolman suggests plan sponsors and advisers provide participants with proper retirement calculators to educate them. He also suggests yearly checkups—a one on one with a representative of the plan sponsor or with an adviser to see how the participant is doing, motivate him or her to save and provide education about how much they’ll need.

In addition, Poolman says, “As employees get older, investment goals change, risk tolerance changes, and employees are not getting that education on a frequent enough basis. It is incumbent upon employers to do that. They don’t want employees leaving and having bad feelings that the company did not provide for them.”

Axsater believes keys to addressing longevity in retirement have been spelled out by the Stanford Center on Longevity. Aside from financial security, it has identified social engagement and health as important.

“Trying to make sure that as participants age they continue with social engagement is helpful for the wellness of employees,” he explains. “This could mean holding workshops where pre-retirees talk about their goals and concerns. One idea Stanford has, and is working on with one plan, is a default unless employees opt out, that when they approach retirement, they get involved in some nonprofit. So there’s not a total cutoff on social engagement from work.”

Healthy living is important, Axsater says. Employers should showcase their health wellness programs as a way to stay healthy and possibly reduce health care costs down the road.

Since defined contribution (DC) plans have been slow to adopt retirement income products, Poolman says his advice to employees is to save enough in their plans to get the full match, but then, if they can, to save in other products that can provide them a steady stream of income for which to better plan for retirement.

However, not everyone can afford to do that, he concedes, so participants turn to working longer. “General stats would show employees have to work longer in order to provide for a longer retirement,” Poolman says. “That’s not all that bad because when we live longer, we tend to want to stay engaged longer.”

Although DC plans have been hesitant to adopt annuities, Poolman sees some plans are changing and using annuities, since defined benefit (DB) plans are less available.

Axsater adds that very few plan sponsors have adopted retirement income strategies, but SSGA is seeing momentum with its clients. “What the Department of Labor (DOL) and Treasury have done over the last few years has been helpful guidance for employers,” he says. He cites as examples the relaxing of requirement minimum distribution rules (RMDs), so participants can purchase qualified longevity annuity contracts (QLACs) and guidance for including annuities in target-date funds (TDFs).

Making retirement savings last for life is a complex problem left to participants, Axsater says. “We need to provide cleaner income for life. That’s why lifetime income strategies are so important.”

He notes that RMDs have been the best guidance given to date about drawing down account balances, but employees need better rules of thumb so they don’t run out of money.

“Our research shows participants think they can safely draw 8% or 9% of their savings annually, but that creates a 70% chance of running out of money before they die,” Axsater says. “We need a replacement for the RMD that provides better guidance for participants, coupled with retirement income products. And they need help determining when they can retire.”

Poolman thinks there have been those out there that have been beat up on annuities unfairly. For example, he says the mutual fund industry doesn’t like competition, so it has helped perpetuate DC plan sponsors' aversion to annuities. “Part of the problem is a lack of education about annuities. The more plan sponsors and participants learn about the benefits of annuities, and understand them better, the aversion becomes diminished,” Poolman says. 

Axsater concludes, “Right now, because of participant demographics, it is more important than ever to offer lifetime income strategies. Sixty percent of DC assets are held by participants age 50 and older.”