Nearing Retirement, and Worried the Money Will Run Out

Half of employees approaching retirement wish they had started saving sooner, a TIAA-CREF  survey finds.

The top concern for near-retirees?  Running out of money to cover monthly expenses, according to “Ready to Retire.” Regrets wash over many of the figures in TIAA-CREF’s report, with more than half (52%) of people ages 55 to 64, who are approaching retirement, saying they wish they had started saving for the future sooner.

Many survey respondents say they wish they had made smarter financial decisions earlier in their career, including saving more of their paycheck (47%) and investing their savings more aggressively (34%). These regrets underscore how important it is for employees, with support from their employers, to start thinking about retirement planning early and remain engaged in the process throughout their careers.

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Forty-five percent of respondents ages 55 to 64 say financial readiness is the most important factor in determining when they will retire. Yet these individuals haven’t always taken advantage of many common retirement planning and saving strategies that could help them feel financially prepared. Only 35% say they saved in an individual retirement account (IRA) or met with a financial adviser; 32% have calculated the income they would need for each year of their retirement; and 12% have saved in a health care savings account.

Not making the most of these options leaves many Americans feeling uncertain about their financial futures, with 68% of those approaching retirement saying they are unprepared for what lies ahead.

The research reinforces the idea that preparing for retirement should not be a sprint to the finish line, but a long-distance run that requires careful planning throughout an adult’s life, according to Teresa Hassara, executive vice president of TIAA-CREF’s institutional business.

“This will help prevent those nearing retirement from feeling like they have to play catch-up near the end of their careers,” Hassara says. “Developing and acting on a carefully constructed plan can help individuals at any age build a financially secure future.”

According to the survey, financial challenges make up three of the top four concerns for individuals closing in on retirement. Many worry about inadequate resources to cover monthly expenses (45%), while others are anxious about how health care costs (35%) or inflation (32%) could deplete their retirement savings. However, despite these concerns, only 10% of this age group has purchased an annuity, the only retirement product that guarantees an income stream for life, TIAA-CREF says.

The firm notes that according to the Social Security Administration, a 65-year-old male in 2010 could expect to live an average of another 17.57 years, while a woman of the same age could expect to live an average of another 20.20 years.

These challenges are leading some to reconsider what their retirement will look like. Forty-two percent of survey respondents ages 55 to 64 say they plan on working a part-time job during retirement, 39% say they'll be more conservative about how much they spend on entertainment and other luxuries, and 23% say they will downgrade their living quarters to something less costly. These realities may conflict with their desire for flexibility to do “what they want, when they want” during retirement, which 57% of this group says they are most looking forward to in their retirement years.

“If Americans find that their retirement savings aren’t adequate to meet their expectations about retirement life, it’s never too late to make adjustments,” Hassara says. “In fact, if a 55-year-old starts to max out his or her employer-sponsored retirement plan contribution next year and continues to do so for the next 10 years, those savings could grow to about $325,000. Employers and financial advisers can work with individuals to develop a robust retirement plan at any life stage so they can pursue the kind of retirement they envision.”

The Ready to Retire Survey was conducted by KRC Research online between May 19 and May 28 among a sample of 1,000 employed adults, ages 18 years and older, currently contributing to an employer-sponsored retirement plan. Data was weighted by key demographic variables to ensure the sample is representative of the employed population contributing to defined-contribution plans. Respondents for this survey were selected from among those who have volunteered to participate in online surveys and polls.

More information about the 2014 TIAA-CREF Ready to Retire Survey is available in the executive summary on TIAA-CREF’s website.

Emerging and Growing Trends in DC Plans

A survey from Towers Watson reveals some emerging and growing trends in defined contribution plan design, investments, fees and communications.

More employers are offering participants the opportunity to save on an after-tax basis, according to the Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey. Fifty-four percent of companies offer Roth features in their 401(k) or 403(b) plans, up from 46% in 2012. Additionally, 18% of respondents are planning or considering adding Roth features by 2016. Of those that currently offer Roth, 45% also allow other after-tax contributions.

Changes to health savings account (HSA) and defined contribution (DC) plan contribution levels are an emerging trend, Towers Watson says. Twenty-three percent of employers that offer DC and HSA plans intend to increase their total contributions toward these plans over the next two to three years.

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However, there is room for improvement in integrating HSA and DC contributions, which offers employees tax efficiency, according to the firm. Nearly every company (99%) sets DC and HSA contributions independently. Of those that offer HSAs, only one in five (19%) specifically educate their workers about the wealth accumulation benefits of saving in both plans.

The survey results show the evolution of investment offerings has come full circle since the inception of DC plans. The first plans generally offered a few diversified choices, but over time, many organizations offered an overwhelming number of options. Today, employers are streamlining the number of investment options they offer to employees.

More than two in five (43%) companies have streamlined their investment offerings in the last five years with a strong bias toward continuing to decrease options in the next 12 months. Three-quarters (74%) of plans currently maintain fewer than 20 options, with the majority offering between 10 and 19 investment choices.

The vast majority of companies (79%) offer a combination of active and passive options throughout their portfolios. Approximately one in 10 offer either active-only or passive-only choices. Towers Watson says the understanding that active management efficiency is better achieved through multi-manager structures is growing. Participant use of single, stand-alone options has been inefficient, and 40% of companies recognize that combining investment strategies is more effective.

One emerging trend for investment lineups is custom target-date funds (TDFs). Unbundling the key decision points enables employers to align the glide path, portfolio construction and fund implementation to their plan objectives and participant demographics. Half of companies (49%) say they see the value of a custom TDF series and either have implemented one or may explore the option.

The survey finds outsourcing of investment services is gaining traction. One-third of respondents are either already in an outsourced DC solution or have expressed interest in delegating all or a portion of their plan oversight, with smaller plans more interested in outsourcing than their larger counterparts.

Regarding fees, 40% of survey respondents calculate and charge an asset-based fee based on the performance of the investment funds, while 32% charge a fixed dollar amount per member. Fifteen percent have a mix, where some recordkeeping fees are calculated as a fixed dollar amount per member and the remainder is charged as an asset-based fee netted from the performance of funds.

Towers Watson finds that since 2009, the percentage of companies requiring employees to pay direct recordkeeping fees has risen from 33% in 2009 to nearly 60% passing the full cost on to participants today. Only 23% of employers absorb the cost themselves.

The firm notes that increased use of technology opens the door for new ways to build participant engagement and increase the likelihood they will take action. However, using technology without a strategy for implementation, measuring results and refining the process does not guarantee it will result in participant engagement and behavior change. To increase the likelihood of effectiveness, Towers Watson suggests plan sponsors’ communication strategies should be based on data that provide a thorough understanding of all participants and what motivates their behavior.

One approach the firm says employers are using to gain knowledge of their participants and design communication campaigns is micro-segmentation, which leverages data to identify communication preferences, buying habits and other behavioral tendencies. Data can also be used to deliver content that is timelier and more relevant, reaching employees when they are most likely to act, such as after a life event or transition to a different life stage.

Armed with this knowledge, employers are able to use the right technology in more targeted ways to reach participants more effectively, such as through gamification, online contests and questionnaires, mobile apps and electronic bulletin boards. According to Towers Watson, when used strategically, the increased accessibility and low cost of mobile apps, gamification methods and other technology solutions offer plan sponsors new ways to reach employees and more alternatives for helping them make better, more informed financial decisions.

The 2014 Towers Watson North American Defined Contribution Plan Sponsor Survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a DC plan. These companies sponsor 401(k) plans or 403(b) plans, represent a range of industry sectors, and have more than 1,000 employees and $10 million or more in assets.

The survey report may be downloaded from here.

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