Administration May 20, 2019

Individuals, Employers and Government All Play a Part in Retirement Readiness

A new research report and Catherine Collinson, with Transamerica Center for Retirement Studies, lay out steps all three can take to improve retirement confidence and readiness in America.

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The most frequently cited retirement concerns are declining physical health (50% global, 44% U.S.) and running out of money (40% global, 49% U.S.), according to research, “The New Social Contract: Empowering individuals in a transitioning world,” a collaboration among Aegon Center for Longevity and Retirement (ACLR) and nonprofits Transamerica Center for Retirement Studies (TCRS) and Instituto de Longevidade Mongeral Aegon.

Only 36% of workers in the U.S. are very/extremely confident that they will be able to retire comfortably. Just 31% of people in the U.S. are very/extremely confident that their health care will be affordable in retirement. Fifty one percent of Americans feel stressed about their long-term financial plans for retirement at least once per month.

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The best route to retirement readiness is starting to save as early as possible and becoming a “habitual saver,” the research report says. However, only 53% of workers in the U.S. say they are habitual savers. Only 28% have a written plan for retirement. These are two key tasks individuals can take to ensure their retirement readiness, according to the report.

The research also found that fewer than half of workers (48% global and U.S.) are currently factoring future health care expenses into their retirement savings needs. And in the U.S., only 41% of workers have a backup plan to provide an income in the event they are unable to work before they reach their planned retirement age. The report urges individuals to adopt healthy lifestyles and create a backup plan for early retirement.

In addition, the report says, people must commit themselves to continuing education to keep their job skills up to date and relevant and to learn how to make informed choices in their retirement planning. Financial literacy is an example of where improvement is needed. The survey found only 27% of U.S. respondents could correctly answer all of the “Big Three” financial literacy questions developed by Drs. Annamaria Lusardi and Olivia Mitchell that test knowledge of compounding interest, inflation and risk diversification.

Roles of the government and employers

Globally, the vast majority recognize that government retirement benefit programs are under strain. In the U.S., only 8% of people believe that Social Security will remain perfectly affordable and that the government should not take any action. “The message is clear that governments need to take action. Whatever the solutions maybe, the reforms must be fair and equitable,” the report says.

Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies in Los Angeles, tells PLANSPONSOR there are many things governments can do. One of the biggest topics currently is expanding coverage, so any reforms to make it easier for employers to offer retirement plans to employees, thereby improving coverage, can help tremendously, she says.

In addition, governments can make it easier for all employers to offer automatic enrollment in retirement plans, and there should be continued efforts to increase portability of retirement accounts when employees change jobs, if leaving assets in the plan is not option, according to Collinson.

Collinson also says, “As much as employers are doing to help employees save, they are doing little to help pre-retirees transition into retirement. Any fiduciary relief to make it easy for plan sponsors to help employers offer employees retirement income options will help.” She also says TCRS has worked on studies about helping employees extend their working lives. “People are living longer, and many will need to work longer. It is untenable to save for a 30 or 40 year retirement,” she says. “Most workers want to transition into retirement—shift from full-time to part time, work in a different capacity, phased into retirement—but most employers do not offer such programs. Thinking of how phased retirement programs will affect nondiscrimination laws and the qualification status of plans, and considering how to manage flexible work arrangements, any public policy reforms to make it easier for employers to offer phased retirement can benefit workers transitioning to retirement.”

Collinson says employers continue to have a profoundly influential role in helping employees save for retirement, but TCRS is seeing in its research an interest level among workers in additional benefits to protect their health and financial situation. Employers can offer physical as well as financial wellness programs.

Voluntary benefits and insurance protection can protect employees against catastrophic events. Employers can offer life insurance, disability insurance and other supplemental insurance.

She believes employers should also instill a sense of lifelong learning in employees. “A four-year degree serving a 30-year career, given the pace of change isn’t realistic,” she says. “Employees need to keep their job skills up to date and relevant, and employers can offer training and development as well as encourage continuing education.

“Especially in today’s world, where the unemployment rate is at historic lows and the labor market is as competitive as ever, employers can differentiate themselves by enhancing retirement benefits and other benefits and offering flexible work arrangements,” Collinson says.

Elements of a “social contract”

The report suggests that the idea of a “social contract” has been central to retirement systems in countries around the world. The traditional social contract is an arrangement involving three pillars: government, employers and individuals—each with a specific set of expectations and responsibilities.

According to the report, nine essential design features of the new social contract include:

  • Sustainable social security benefits – Preserve this fundamental source of guaranteed retirement income for today’s and tomorrow’s retirees.
  • Universal access to retirement savings arrangements – Ensure coverage for employed workers, the self-employed and those with parenting, caregiving, or other responsibilities.
  • Automatic savings and other applications of behavioral economics – Leverage automatic savings features and matching contributions to make it easier and more convenient for people to save and invest for retirement.
  • Guaranteed lifetime income solutions – Educate people on how to strategically manage their savings to avoid running out of money; raise awareness about ways to annuitize all or part of their savings.
  • Financial education and literacy – Improve people’s basic understanding of financial matters, starting in early childhood through adulthood, to help people make informed decisions.
  • Lifelong learning, longer working lives and flexible retirement – Provide tools and resources for reskilling and keeping their skills up to date and options for phased retirement so that people can remain economically active for longer and transition into retirement on their own terms.
  • Accessible and affordable health care – Reinforce healthy aging through quality health care. Provide access to healthy work environments and workplace wellness programs at the employer level.
  • A positive view of aging – Celebrate the value of older individuals and takes full advantage of the gift of longevity.
  • An age-friendly world – Enable people to “age in place” (in their own homes) and live in vibrant communities designed for people of all ages to promote vitality and economic growth.
The findings in the report are based on 14,400 workers and 1,600 retired people surveyed across 15 countries: Australia, Brazil, Canada, China, France, Germany, Hungary, India, Japan, the Netherlands, Poland, Spain, Turkey, the United Kingdom and the United States. The survey was conducted online between January 22 and February 14, 2019.
Reader Responses May 20, 2019

SURVEY SAYS: Voluntary Benefits and Financial Wellness

We have reported about how voluntary benefits can help employees with overall financial security.

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Last week, I asked NewsDash readers, “What voluntary benefits do you offer employees, and do you consider these benefits a way to help employees with financial wellness?”

 

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The majority of respondents (84.6%) work in a plan sponsor role, 7.7% are advisers/consultants, 5.1% are TPAs/recordkeepers/investment managers and 2.6% are CPAs.

 

Nearly all responding readers’ companies (94.9%) offer life insurance, and a large majority offer AD&D insurance (89.7%) and short- and/or long-term disability benefits (84.6%). Less common benefits offered are long-term care insurance (23.1%), pet insurance (20.5%), legal assistance (30.8%), a discount shopping program (25.6%) and auto insurance (17.9%).

 

Other voluntary benefits respondents reported their company offers include dental and vision plans, critical illness and hospital indemnity insurance, identity theft protection, employer assistance programs (EAPs) and flexible spending accounts (FSAs).

 

Seven in 10 responding readers (71.8%) consider voluntary benefits a way to help employees with financial wellness, while 28.2% do not.

 

In comments left by readers, there was a split between those who thought voluntary benefits were a good thing and those who thought they were not. Respondents pointed out considerations for offering voluntary benefits that plan sponsors may not think about. A couple said employees would be better off building an emergency savings fund. Editor’s Choice goes to the reader who said: “Offering voluntary benefits is important but providing employees the tools to change their behavior and improve their financial well-being can be more impactful.”

 

A big thank you to everyone who participated in the survey!

 

Verbatim

The voluntary benefits we offer (Life Insurance and AD&D insurance) are 100% paid for by our company.

We are considering Legal Assistance and Identity Theft protection.

Voluntary benefits have their place, but they must be approached with caution. Often, the premiums seem very low, which can be a red flag indicating scant benefits. The benefits are marketed as a good value when, in fact, employees may be better off putting money in an emergency or rainy-day fund. Some brokers have pushed voluntary benefits hard, without clearly disclosing that they may qualify for volume discounts if they can hit certain sales targets. Finally, some employers offer “voluntary” benefits, thinking they qualify for the ERISA safe harbor, but they also want employees to give them credit for providing a benefit. So, the employer ends up endorsing the voluntary benefit, inadvertently taking them outside the safe harbor. Bottom line: voluntary benefits have their place but need to be approached with caution.

The higher paid the employee, the better these programs tend to work. For lower paid it is much more difficult.

Most people over-insure. Their financial fitness would be enhanced if they diverted money from these high commission products to an emergency fund and long-term savings.

We view our voluntary benefit plans as added flexibility and options for our employees to make their own choices for their own needs. They add support to the core benefits and financial needs of the employee. We view them as a part of our financial wellness package in the sense that they help to fulfill some financial gaps or concerns employees may have for their current and future needs.

Most Americans need basic financial education to ensure their own financial wellness. Disability and retirement plans are key — but employers really can’t force a person to have a savings account.

I think they are a waste of money, but employees seem to like them.

If structured properly, employee benefit packages can not only increase the financial wellness, but provide crucial health benefits as well (like EAP and on call nurse)

It’s an added bonus to our employees. We are a very small company and this type of benefits helps us to offer something more.

Voluntary Benefits are a hassle and a waste of time. Most of these products are available on the open market. Even if employers do not pay premiums, we spend a lot of time reconciling billing statements, sending payments, etc. – and that all costs money. Where is it written that employers have to offer every program under the sun?

Depending on the policy chosen they can allow an employee to choose one of our health care options that costs them a lot less.

I wish everyone would take more of an interest in their financial wellness.

It is a balancing act between offering benefits that can truly help employees and offering benefits that employees sign up for whether they need them or not. We find that the lowest paid employees tend to sign up for any benefits offered even if they cannot afford to pay for them.

The benefits are awesome but it’s getting employees to understand the value – that’s the challenge.

Most are a waste of time and money but are being marketed in ways that employees are asking for them and they need to be offered for benefit packages to be considered competitive.

By offering such benefits as short term disability insurance, employees can purchase coverage to protect their income if they get sick or hurt. Voluntary benefits do help employees with financial wellness. But, we also promote Financial Well-Being by Dave Ramsey which teaches skills and techniques that address budgeting, cash flow management, and debt reduction, as well as investment, savings and retirement strategies. Offering voluntary benefits is important but providing employees the tools to change their behavior and improve their financial well-being can be more impactful.

Offering Long term care and critical illness can help protect other assets (like 401(k) plans) from being used before retirement. We’re also considering offering a financial wellness benefit with financial planners offering advice to employees on budgeting, saving, paying down debt, etc.

Providing employees the opportunity to purchase long-term and short-term disability plans allows them to keep their homes and pay their bills if they are hurt while off the job. Life insurance helps with their peace of mind in case something happens to them – especially if they are the main source of income to their family. Legal insurance allows them to have access to legal advice and discounted in services, which can save them money – especially in frivolous lawsuits. Auto insurance is a savings to the employee – helping them keep more money in their pocket.

Most employees would not otherwise purchase life insurance or short term disability on their own.

 

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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