Data and Research September 10, 2020

Early Retirement Increasingly the Goal for Younger Generations

This may be wishful thinking for some, but there are ways to help them achieve their target retirement age.
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The divide between generations’ retirement goals seems to be increasing.

According to a recent Vanguard study, although most American workers plan to retire around age 65, a growing number of those younger than 40 years old are hoping to retire earlier. The study found that most members of Generation Z (67%) and most Millennials (61%) plan to retire before age 65, and nearly one-third of Gen Z (31%) and nearly one-quarter of Millennials (22%) plan to retire before age 60. Yet, research shows, those in the Generation X and Baby Boomer workforce believe an early retirement is far from the picture. In fact, these two age groups are likelier to retire later, or choose to never retire.

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Dean Edwards, principal and head of advice and digital for Vanguard’s Institutional Business, says he believes that because those in younger age groups are far from retirement, retiring earlier may seem more realistic than for those in older age groups who only have several years left before they hit standard retirement age. “When thinking about retirement, your proximity to it certainly influences your feelings about it,” he says. “Younger generations are decades away from reaching retirement age, so the prospect of retiring early may feel more attainable given the amount of time they still have to save and prepare.”

Only 39% of young Boomers (those born between 1956 to 1964) and 54% of Gen Xers plan to retire before age 65, while just 7% of young Boomers and 22% of Gen Xers plan on retiring before 60, according to the Vanguard study. Recent research from Willis Towers Watson paints a similar picture when it comes to younger workers—nearly half of Gen Z employees expect to retire before age 65.

Steve Nyce, a senior economist at Willis Towers Watson, says these goals tend to be aspirational for many in their early-working years, only to be corrected later in life when mortgages, family, caretaking and other costs come into play. For example, many people underestimate the cost of health care during their careers and what that will do to their ability to save for retirement and find coverage if they retire before age 65, he says. “This leads many to revise their expectation and, for many, that means a longer working career,” he says. “This looks more like wishful thinking that’s not grounded in the economic realities that many will face.”

Steve Vernon, a research scholar at the Stanford Center on Retirement, says younger generations will need to take Social Security into consideration as well. Currently, workers cannot file for Social Security until age 62 at the earliest. “If you’re retiring at age 50 or 55, you have to have a different plan for saving money,” he says.

He also says more individuals, especially younger workers, are monetizing hobbies and activities and choosing that avenue as work. In the future, these individuals may choose to continue this work into retirement. “Some people are changing up what retirement means to them. It can mean doing the work that you love doing, and so there’s also an evolving view of retirement at play here,” he adds.

Access to affordable and personal financial advice can drive better outcomes for investors and help them achieve their goals, says Edwards. “As our survey findings demonstrate, financial and retirement goals differ by generation, so it’s important to ensure that advice offerings can be tailored to an individual’s needs, preferences and desired value for the cost,” he says.

Those in younger generations, most of whom are well-versed in technology, may prefer an online portal to access their retirement account and future financial goals, while older generations may be more comfortable working with a financial adviser, Edwards says.

However, Millennials and Gen Zers can still benefit from working with a financial adviser. Retirement experts can help younger workers visualize what their future could look like, says Scott Butler, a financial planner at Klauenberg Retirement Solutions. “Do not go by rules of thumb. Visualize what you want retirement to look like and put a price tag on it,” he says. “Then you can start working backward to figure out how much you need to save up to by your retirement date and then how much you need to save to get there. This is one of the places a financial adviser can really help, especially when determining what rates of return to try to achieve before and after retirement and when to use the different tax-favored investment vehicles.”

Additionally, Nyce says, the use of “informal learning” such as talking with colleagues, friends and family about their thoughts and experiences, can go a long way to support employees. “Employers should take steps to facilitate those discussions through employee resource groups and encourage those practices generally,” he says.

He says employers can help their workers achieve an early retirement by leveraging tax-advantaged spending/savings tools such as health savings accounts (HSAs) and flexible spending accounts (FSAs). “HSAs in particular can help employees accumulate savings to pay for health care costs in a much more efficient way and, if [the employee is] healthy, they can accumulate a valuable nest egg to draw on during retirement,” he adds.

Early retirement hopefuls can take full advantage of matching dollars available through employer-sponsored plans or use Roth accounts and other tax-free investments, Butler suggests. He also recommends taking an aggressive approach to investment options but being wary of going overboard. For example, employees can invest a larger percentage of their savings into a diversified allocation of small cap stocks using mutual funds or exchange-traded funds (ETFs) rather than investing in individual stocks or Bitcoin. “The right allocation will be different for everyone based on their risk tolerance, goals, options available and investment timeframe,” he says.

Once participants get closer to retirement, they can work with an adviser to put their plan together for how investments will generate retirement income over time, Butler notes. He says participants should have a plan that sections off assets they will use for income throughout their retirement. “That way, you can invest each segment according to its timeframe and purpose without affecting the level of risk and return of the other segments,” Butler says.

Administration September 8, 2020

The PEP Opportunity

Pooled employer plans (PEPs) are coming, and potential adopting employers need to know what to look for and what they are getting into.
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Art by Yogee Chandrasekaran

Coming to market January 1 are pooled employer plans (PEPs), which were created by provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed late last year.

Several entities have announced that they’re working to create PEPs, and the Department of Labor (DOL) has issued a Notice of Proposed Rulemaking (NPRM) to implement the registration requirements for pooled plan providers (PPPs), as well as a request for information (RFI) on prohibited transactions involving PEPs.

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Rich Rausser, senior vice president, client services, at Pentegra, says he’s glad the DOL is taking more action on PEPs; however, he adds, he finds it interesting that people are looking for more guidance when the PEP provisions in the SECURE Act already provide a lot of information. “The DOL states concerns about how PEPs will work, but entities can create one based on the guidance we have to date,” he says.

Rausser notes that, in general, the goal of PEPs is to broaden retirement plan coverage and make it simpler and more cost effective for small employers to sponsor plans. “It is about bringing large plan economies of scale and best practices to small employers.”

Bruce Ashton, partner at Faegre Drinker Biddle & Reath, says he is skeptical about the extent to which the scale of PEPs will reduce costs. “It certainly will on the investment side, and plan investments are the most expensive items in plan,” he says. “Costs may be somewhat more for smaller employers that would not have to have an audit of a single plan. Once in a PEP, the PEP will be audited. The cost may be trivial but, nonetheless, it’s an added cost.”

Ashton adds, “I’ve been talking with recordkeepers and they say recordkeeping for PEPs isn’t going to be any less expensive. It’s like recordkeeping a bunch of individual plans.”

A simple plan design can eliminate some costs. “I can see some offering a simple plan design, a simple definition of compensation, even a safe harbor plan design, although that creates employer contribution expenses,” he continues. “But I can also see PEPs offered at more than one level and price point for basics on up.”

If an employer joins a multiple employer plan (MEP) of any kind, it is not in control of the plan, says Pete Swisher, president of Waypoint Fiduciary LLC. While that’s the point of PEPs for most plan sponsors, some like to maintain control of decisions such as the investment lineup, for example. Swisher says that, in his opinion, PEPs should have a simple plan design so they are easier to administer and have a lower chance for errors, but it’s possible there will be plans that offer customizable benefits.

While cost is a critical factor in offering a retirement plan for a small business, Rausser says the decision is also about time and complexity. “These folks are not retirement plan experts. They want to run their business and want to provide a retirement plan. Even those that are offering a plan are already outsourcing some duties,” he says. “Employers need to question whether the cost of a PEP is reasonable considering if they had to do administration on their own, it would be taking time from their business. And they need to question whether it will help them attract and retain employees.”

Rausser says he thinks there will be different models of PEPs based on who is sponsoring them. “I can see all kinds of models. Some PPPs may assume all duties and include recordkeeping,” he says. “We are looking at being a PPP and most likely are not going to be the recordkeeper.”

“It seems to me there will be three fundamental types of PEPs,” Ashton says. “One completely unbundled and unconflicted. For example, the PPP is a TPA [third-party administrator] with no service provider affiliates and no proprietary investments.” The second type, Ashton says, would be a partially bundled solution where the PPP selects either affiliates as service providers or proprietary products. The third is fully bunded, with the PPP using affiliates and proprietary products.

Who’s Responsible for What?

“There is a movement in the U.S. to more group retirement programs,” Swisher says. “They all do similar things and have fairly similar benefits. Both MEPs  and PEPs have the advantage that they take plan sponsors further out of the middle of things. They are a way to outsource chores and duties. You can’t outsource being a plan sponsor unless you join a group program.”

Plan sponsors that join a PEP retain two primary responsibilities, says Ashton. They are responsible for selecting and monitoring the PPP and any other named fiduciary of the plan. He says the SECURE Act says plan sponsors are also responsible for the investments offered in the plan, but the act goes on to say that’s not the case if the PPP delegates investment responsibility to a 3(38) investment manager.

“Probably, in most PEPs, the only retained responsibility will be to select and monitor the PPP,” Ashton says. “But, this means finding a PEP based on the services offered, how much responsibility is assumed by the PPP and service providers and what it costs, and whether the service providers appear to be competent.”

He adds that plan sponsors are not responsible for monitoring recordkeepers. That is the responsibility of the PPP. “The PPP is the responsible fiduciary for administration of the plan and for selecting and monitoring service providers,” he says.

The PPP will remind participating employers of their oversight duties. Rausser says the DOL’s registration process for PPPs goes into a bit of detail for providing PPP and legal contact information. “Part of the purpose is to give employers and employees access to the PPP if any concerns arise,” he says. “Also, it is inherent in the relationship between the PPP and participating employer for the PPP to remind them of their fiduciary responsibilities.”

Ashton adds that if a plan sponsor decides through prudent monitoring that it doesn’t like the PPP, it seems the only realistic thing the sponsor can do is drop out of the PEP. “It’s not like when a plan sponsor offers its own plan and can replace service providers; it can’t replace the PPP,” he explains. “It can maybe move to a different PEP or sponsor its own plan.

“There are conflict issues that the PPP and service providers have to be aware of, but, for plan sponsors, their obligations shouldn’t be much different, with one exception,” Ashton says. “That is, as PEPs become more of a bundled solution, plan sponsors may notice that the PPP wants to adjust compensation for the recordkeeper or 3(38) investment manager. The PPP will want plan sponsors to agree to the change or not, and if they don’t say anything, that will be like agreeing. Plan sponsors will then need to assess the proposed change and make a decision. It’s a fiduciary decision put back on the participating employer.”

This will happen unless the DOL adopts a prohibited transaction exemption (PTE) saying a PPP can change the compensation of an affiliate. But Ashton says he doesn’t expect the DOL to do that.

“There’s no question that if an entity has affiliates that offer four different types of services and it uses those rather than looking at outside firms, it didn’t search to find the best. But, a bundled arrangement is a service sell,” Swisher says.

Nonetheless, he warns that when an employer joins a larger pool of employers, it may become a larger target for plaintiffs’ lawyers. “If an employer joins a $2 billion plan even though it’s a $2 million plan sponsor, it will get more attention,” he says. “But the idea behind a PEP is to limit participating employers’ exposure, and the type of insurance available to employers in these plans that I’ve seen beats the insurance they could get on their own.”

Ashton says an interesting situation will be how a plan sponsor with an existing plan can get into a PEP. “Can an existing plan be merged in? And, if so, how will the PEP handle the protected benefits of existing plans?” he queries. “It’s a plan sponsor issue to the extent the sponsor has to understand whether the PPP can handle the merger and protect benefits.”

Rausser says he’s seen a lot of excitement about PEPs. “Almost everyone I speak with has a huge level of interest. In some discussions we’re having [about our own PEP], we’re looking at a goal of 1,000 participating employers by the end of year one and 2,000 to 5,000 over a two- to four-year period,” he says.

The DOL has offered some statistics on how many applications it expects it will receive for PPPs, Rausser says. “It expects half of recordkeepers and third-party administrators will be pooled plan providers, about 5% of chambers of commerce, a smaller percentage of broker/dealers [B/Ds] and a few investment advisers,” he says.

While it remains to be seen how many PEPs are offered and what models they will adopt, Swisher says, “One thing is clear: This is happening. Many firms are going to roll out PEPs in 2021 and this will move the needle for plan adoption.”

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