Administration July 25, 2019

Preparing Employees for Retirement, a Global Comparison

Retirement plan sponsors and policymakers can gain ideas from countries with different methods for encouraging retirement security.
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Art by Ellen Surrey

In the United States, the average deferral rate is 8.6%.  American workers are saving for retirement, and they’re saving well, as reports show the mean 401(k) account balance has soared 466% in the last 10 years.

But how do these figures compare to other nations? Even as U.S. employees accumulate their savings mass, what takeaways can plan sponsors learn from studying savings politics in different parts of the world?

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The 2019 Aegon Retirement Readiness Survey, conducted with the Transamerica Center for Retirement Studies and Longevidade Mongeral Aegon, seeks to answer these questions. In the survey report, Aegon analysts rank employees’ reported levels of retirement readiness in markets around the world. Those who feel best prepared for retirement achieve higher numbers on a scale of 1 to 10.

While the United States ranked a medium index rate of 6.6, India earned the highest score out of the 15 countries studied, at 7.8. Brazil came in at 6.5, and China and the United Kingdom performed well at 6.2 each.

This type of confidence and savings approach in these countries isn’t solely caused by enhanced employer communications strategies or government impositions—it largely falls on each worker’s proactive approach towards their long-term savings.  

“Our research has shown that countries in which defined contribution [DC] plans are better established, for example India, the United States and the United Kingdom, tend to have a higher percentage of individuals who say that they always make sure they are saving for retirement,” says Dick Schiethart, external communications manager for Aegon.

Sixty-one percent of respondents in India are habitual savers, identified as those who have crafted a written retirement plan, are adding to their retirement savings, and are on track to meet their financial goals. Forty-six percent of respondents are habitual savers in the United Kingdom, 53% in the United States and 34% in Brazil.

“Habitual savers are better prepared for retirement across a range of measures compared to other groups of savers including: their awareness of the need to plan financially for retirement, having a written plan and feeling confident that they will have a comfortable retirement,” Schiethart adds.

Pensions and government savings

Aside from consistently adding to long-term financial savings, investors in these countries are generally required to participate in workplace savings plans by their respective governments, adding even more to their savings objectives.

While the United Kingdom obliges all employers to automatically enroll their workers into a retirement plan at a minimum contribution of 3%, India mandates pension plans for the country’s private sector of workers, separated into three channels: a life insurance plan, a defined benefit (DB) plan with employer and government contributions, and a DC plan with contributions from workers and plan sponsors, according to Aegon. Brazil, however, requires private-sector and self-funded employees to accrue savings via its social security system.

For India, the multifaceted retirement system results in an average income replacement ratio of 99%, according to a 2017 report by the Organization for Economic Co-operation and Development (OECD). Other countries with the highest income replacement ratios include Italy at 93% and Portugal at 95% of working wages, though it should be noted that these countries are experiencing far lower economic growth rates compared with India.

Key takeaways for employers

While Indian investors are greatly optimistic over their retirement savings and their relationship to advisers, Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, notes there are economic factors fueling this enthusiasm. In the Aegon report, she explains, most Indian workers are employed in urban areas of the country, where a booming economy currently exists.

“They are among the most optimistic when it comes to future generations, because they are enjoying so much economic growth,” she says. “That drives a lot of optimism, which is coupled with retirement savings habits.”

Even in already-developed nations, governments can learn and apply certain strategies implemented globally. Collinson previously told PLANADVISER, PLANSPONSOR’s sister publication, that the U.S. government can require employers to offer auto-enrollment in retirement plans, a move already established in the United Kingdom, and can continue efforts to implement retirement plan auto-portability.

Anne Lester, portfolio manager and head of retirement solutions at J.P. Morgan Asset Management, says countries can view how other nations provide help for retirement and emulate flavors from that. “Because the thing a plan sponsor cannot do is make an employee save, but they can provide a structure that encourages it,” she adds.

But even in developed, developing, and underdeveloped nations, all these countries face separate economic factors and hurdles. Collinson emphasizes the continuous growing need for retirement savings assistance around the world, especially for older workers as longevity rises and birth rates decline, which is turn adds a strain on social security systems.

“In each country we surveyed 100 retirees, and many are retiring sooner than planned either for health reasons or employment-related reasons,” she says. “It’s very concerning because around the world, countries are at a point where individuals are expected to self-fund a greater portion of their retirement income.”

Countries are seeing a rise in defined contribution (DC) plans, but plan sponsors throughout the globe must ask themselves if their workers can save enough over the course of their career with just one savings method, or if there is another tactic waiting to be applied.

“Employers play such an important role through the offering of benefits that make it easy to save,” adds Collinson. “This is a global challenge, and the extent that we can offer best practices across countries and find new ideas and innovation can really only help the situation.”
Administration July 19, 2019

Stopping a Retirement Crisis

Currently, America has a retirement plan coverage gap, a retirement savings gap and a guaranteed income gap, which plan sponsors and lawmakers need to address to avoid a retirement crisis.
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Art by Lars Leetaru

Headlines say there is a retirement crisis in this country, but in reality it is an impending retirement crisis that sources say policymakers and retirement plan sponsors can take measures to avoid.

“We have a retirement challenge that is very serious, and if we don’t act, it will migrate from a challenge to a crisis,” says Roger Ferguson, chief executive officer of TIAA in New York. There are three components to this challenge, he says: a coverage gap, a savings gap and a guaranteed income gap.

Coverage gap

Among those workers who are offered a retirement savings plan, the system works pretty well, says Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association (DCIIA) in West Palm Beach, Florida. “But we have to continue to close the retirement savings coverage gap,” Minsky says. “We need to broaden the pool of people who have access to workplace retirement savings plans.”

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Only half of Americans are offered a workplace retirement savings plan, Ferguson says, which means those who are not offered one are going to be totally dependent on Social Security, which he contends will not be enough. This means that employers that currently do not offer a workplace retirement savings plan need to seriously consider doing so, he says.

And once they begin offering one, it should automatically enroll participants into the plan at a meaningful deferral rate, 6% or higher, and include automatic escalation, says Jeff Winn, managing partner at International Assets Advisory in Orlando. It is incumbent on sponsors to encourage and enable people to save as much as they can, Winn says.

Eventually, predicts Mike Swann, client portfolio manager, defined contribution team at SEI Investments in Oaks, Pennsylvania, the government will require employers to offer retirement plans and mandate that workers participate in them.

Provisions in the SECURE Act, passed by the House and stalled in Congress, which would expand retirement plan eligibility to part-time workers and allow for multiple employer plans (MEPs) to be joined by employers without a common nexus, could help narrow the coverage gap.

Savings gap

“Sponsors are really the ones that should be doing the education on the importance of saving for one’s retirement,” Winn says. “They have stepped up to the plate with low-cost investments, primarily due to fee compression, but if there is any area where they are falling down, it is educating people about the critical need to save adequately for retirement.”

To put this in perspective, the Federal Reserve and the Government Accountability Office (GAO) have estimated the retirement savings shortfall in the U.S. to be between $4 trillion and $7 trillion, Ferguson says. “A recent GAO report says that 30% of households where the head is between the ages of 55 and 64 have no retirement savings or a defined benefit plan, and among those who do have savings, the median savings is $104,000, which translates into $310 a month in income. That tells you the degree to which the savings shortfall is” serious.

“Companies need to help their employees understand the critical need to save, and encourage them to start early,” Winn says.

Guaranteed income gap

Retirement plan sponsors also need to think about offering in-plan annuities that guarantee lifetime income, Ferguson says. “People are living longer, which means they need to be provided guaranteed income that they cannot outlive,” he says. “More than half of 65-year-old men will live to age 85, and one-third will reach age 90. Two-thirds of 65-year-old women will live to age 85 and half to age 90.”

Ferguson says he is encouraged that the SECURE Act includes a safe harbor provision for in-plan annuities, which are the most cost-effective way to purchase them.

“For most Americans, being able to guarantee a level of lifetime income is of nearly paramount importance,” says John Lowell, a partner with October Three in Atlanta. While in-plan annuities are rare, he is hopeful that the increasing discussion about the need for steady, reliable retirement income will lead to designs that facilitate in-plan annuities.

Plan sponsors can also help encourage lawmakers to shore up Social Security, says Ric Edelman, executive chairman of Edelman Financial Engines in Fairfax, Virginia. For those Americans who make $40,000 or less, Social Security will provide a substantial amount of their money in retirement, he says.

“The typical American retiree gets the bulk of their income from Social Security, and if Congress does not act, in 2035, the benefits will be cut by 23%, meaning that $1,400 a month will become $1,000,” Edelman says. “Should that occur, millions of American retirees would lose their homes and be unable to buy adequate medicine or food. We would face an economic crisis the likes of which we have not seen since the Great Depression.”

This is why Edelman has launched the Funding Our Futures coalition, which sponsors can join, he says. The coalition, which currently has more than 40 members, is working to educate Americans about how the Social Security trust fund is in danger of being depleted so that they will turn to their Congressional representatives to ask them to take action. “Nobody gets elected cutting Social Security benefits or raising Social Security taxes,” he notes. “We need to create the political will to solve the problem.”

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