Data and Research November 4, 2019

Rethinking the Idea That There is a Retirement Crisis

A new report says Americans have greater access to workplace retirement plans and are saving more than in the past, and better protections are in place to guard their savings.

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With today’s retirement system, Americans today have greater access to workplace retirement plans than in the past, are saving proportionately more, will have more money in retirement, and have better protections in place to help guard their savings, the Empower Institute argues in a new report, “The Over-Stated Retirement Crisis.”

While some claim that employees were better off when defined benefit (DB) plans were the dominant retirement savings vehicle, the report notes that on a systemic level, DB plan coverage was not portable—and DB plans covered relatively few people. In 1950, 10 million Americans, or about 25% of private-sector workforces, had a DB plan. The percentage of workers with a DB plan increased, to about 50% in 1960, before dropping off again. In 1980, 38% of workers had DB plan coverage, and as of March 2018, 26% of civilian workers had access to a DB plan.

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The Empower Institute notes that between 72% and 90% of pension participants did not qualify for DB plans because of strict vesting schedules. It says individual plans’ challenges included discrimination toward rank-and-file workers and occasional misuse by corporations. DB plans had positive qualities—employees with access to a DB plan had a clear retirement day with a fixed payout, and the employer, rather than the employee, assumed the burden of funding the plan. But, the report says, many of the positive aspects of DB plans are being replicated through the modernization of the current retirement system.

According to the report, approximately $7.5 trillion are held in defined contribution (DC) plans, and access to workplace plans has increased over time. Access at the household level has expanded, as well. While 71% of civilian employees have access to either a DB or a DC plan, in 80% of marriages, at least one spouse has access to a retirement plan. The shift from DB plans to modern DC plans has played an important role in this increase, the Empower Institute claims.

Modern plans are also more available to employees of small businesses, the report says. In 1981, there were only about 4 million participants in pension plans at companies with fewer than 100 people. In 2015, by contrast, DB and DC plans covered nearly 11 million participants at businesses of that size. The report notes that 97% of 401(k) plans are sponsored by companies with 100 or fewer employees. “It’s likely these employees would never have had access to any workplace retirement plan in the 1970 s and 1980s,” the report says.

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. One factor sources say could lead to a crisis is a coverage gap. The Empower Institute agrees that moving forward, coverage could increase if legislation approving open multiple employer plans passes. This is one feature of the SECURE Act, which lawmakers and industry groups are anxious to get passed.

Employees are saving more

According to the Empower Institute report, thanks to modern plan design, including auto-features, employees in workplace retirement plans are saving more now than they ever have. Total employee and employer contributions have increased from an average of 9.9% of employee salaries in 1984 to 12.8% of employee salaries in 2017.

In addition, the amount of money saved in retirement savings accounts is at near-record levels. In 1975, total retirement savings were equal to 48% of total employee wages according to Federal Reserve Board data. In 2017, retirement assets topped 337% of employee wages.

The report points out that these savings numbers do not include potential savings outside of employer-sponsored plans. And, employees still have Social Security to make up what was once called the “three-legged stool” of retirement savings.

“Consider the fact that future retirees will be able to maintain the standard of living set by previous generations. Retirees born during the Great Depression had a median income equal to 109% of their average inflation-adjusted earnings. Gen Xers are on track to replace 110% of their earnings,” the report says.

However, while the report authors are adamant that the current retirement system is not broken, they say the industry can still work to improve it. Within individual plans, employers can choose options, such as automatic features, company-matching contributions, financial wellness plug-ins and advice solutions that can help their employees save more.

More protections

Retirement savings in DC plans are portable, allowing employees to take their retirement assets with them as they move from job to job, the report notes. However, when DB plans were the dominant retirement savings vehicle, it was difficult—if not impossible—for employees to seek a new job without affecting their retirement readiness.

The report authors add that regulation has been refined over years to offer employees more protection of their retirement assets. They offer as examples, the nondiscrimination testing rules and increased transparency of plan fees.

And, while admitting it is not a protection in the regulatory sense, the authors note the increased availability of investment and retirement planning advice has been proven to improve overall retirement readiness.

One type of protection not mentioned by the report is guaranteed income. However, the SECURE Act includes a safe harbor provision for in-plan annuities, which are the most cost-effective way to purchase them. Lawmakers, regulators and retirement plan providers are hopeful that the SECURE Act, or at least increasing discussion about annuities in DC plans, will lead to more product innovation and adoption by plan sponsors.

“Far from existing in a state of crisis, the retirement system as a whole positions Americans for a successful retirement. The retirement services industry has many players who compete in a marketplace of ideas, helping to ensure the system remains robust, competitive and flexible,” the Empower Institute report says.

Reader Responses November 4, 2019

SURVEY SAYS Views on Performance Appraisals

PLANSPONSOR NewsDash readers express their likes and dislikes about their firm’s performance review process.

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Last week, I asked NewsDash readers, “What do you think about your company’s performance appraisal process?

Nearly all responding readers (93.5%) reported their company uses a formal performance appraisal process. Only 6.7% indicated they are “very satisfied” with the process, while 23.3% are “somewhat satisfied,” and 16.7% are “neither dissatisfied nor satisfied.” Twenty percent said they are “somewhat dissatisfied” with their company’s performance appraisal process, and one-third are “very dissatisfied.”

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Asked what they like about their company’s performance appraisal process, 30% chose “nothing.” More than two in 10 said they like getting a raise afterward, 16.7% like being able to let their boss know about the work they’ve done, and 26.7% like getting input from their boss about their work. Only 6.7% indicated they like being able to set goals for their career, and only 3.3% like doing peer reviews. More than one-third (36.7%) said it is an affirmation of their skills, 26.7% like self-assessing their achievements, and 13.3% like being able to measure their progress on previous goals.

As for what they dislike about their company’s performance appraisal process, 17.9% chose “everything,” 46.4% said it has no relation to raises, and 39.3% said it takes too much time. Nearly three in 10 (28.6%) indicated they dislike self-assessments, 10.7% dislike peer reviews, and 32.1% said there is no action taken on anything. Slightly more than 7% said it leads to negative feelings about themselves, 21.4% dislike trying to set goals, and 28.6% said the questions/categories on the appraisal do not relate or relate well with their job function.

Most of the readers who left comments seemed to be in the “dislike” camp. Many mentioned that raises are not actually tied to performance. Some complained about the time it takes, and several indicated it serves no purpose. Many readers said feedback on performance should be done between employees and managers throughout the year. Editor’s Choice goes to the reader who said: “I would prefer a monthly ‘touch base’ session with my supervisor.”

Thanks to everyone who participated in our survey!

Verbatim

I have to conduct the performance appraisals and I find them a waste of time. The worksheet that we need to fill out is not really geared to professionals. I wish that we had something else to use as a framework to conduct the appraisals. With that being said, I check in with my staff regularly about their performance so nothing in the formal appraisal is ever a surprise.

We are supposed to set goals, but they end up being boilerplate. My manager knows what I am doing and checks in throughout the year. This annual process is only used to file a paper to justify a raise—which is always paltry, no matter how stellar our reviews are—because we are in a “competitive environment.” The entire process is a waste of time and effort.

They are by nature subjective. There’s a given pot of money dedicated to pay increases. Regardless of performance, the annual increase is tethered to that amount. By working in an HR function with access to the entire company’s pay information, it’s easy to see how this contributes to income inequality. Since increases are in percentages rather than flat dollar amounts, those in higher pay levels inexorably “win” and the gap gets wider. The lower paid jobs are crucial, so telling the incumbents to increase their education and skill levels doesn’t solve the issue. Somebody has to do the work. Disproportionately rewarding those subjectively deemed to be high performers necessarily negatively impacts others.

In my opinion, it doesn’t seem to matter what you indicate as the ratings are already pre-planned and so is the increase amount. Why go through the whole performance appraisal process? However, it does remind me all that has been accomplished over the past year, so I guess that is the good part!

Making people think the review process is linked to annual raises is a scam. The annual budget for raises is established well before the reviews are written but most employees think the process is the other way around.

Who reviews the reviewer?

I view performance reviews in the same category as I do overly complicated expense reporting: they’re part of any job and few companies get them right.

I would prefer a monthly “touch base” session with my supervisor.

Performance appraisals are much like donating to charities at Christmas—they assuage management’s guilt but don’t provide meaningful change or feedback. They’re done to “appease the masses,” not to facilitate a meaningful dialogue about the employee’s AND company’s performances over the last year. They are a necessary evil so management can justify a minimal raise to employees.

Ours is a website that I understand is used by a lot of companies. It is not user-friendly & difficult to navigate.

I have worked for 3 large insurance companies, and it’s the same at all three. The evaluation year is essentially just 11 months long, because self-appraisals must be completed by Thanksgiving—so you never get credit for anything that gets completed in December! Meanwhile, Management has secretly ranked all staff and decided on preliminary raise amounts. Pay is not tied to performance and performing the formal reviews is a huge waste of time for both employees, and managers who also tend to be worker-bees themselves.

Management is selective regarding who gets reviewed and who gets raises.

I have to do my own performance appraisal which I complete in less than 5 minutes. I just copy the one from the year before, change the date, change some figures which no one checks, sign it, and that’s it. My boss then writes one sentence. If you think this is fair, then you are the fool.

The need to improve the connection between performance and rewards continues to be the area for needed improvement identified from the annual all-employee survey at our firm.

The company touts pay for performance, but you can have a stellar year and the cap out for raises is 2%. Doesn’t feel like pay for performance.

Raises and bonuses are determined before appraisals are written. This results in appraisals being written to justify the raise, or lack thereof.

I don’t really know anyone that ‘likes’ giving or receiving appraisals. They are very time consuming and if open communication exists between manager and employee, the feedback is happening all year. That being said, I have a great boss who is very good at providing feedback, so it is nice to see it formalized in an appraisal. To get my current job, I used a prior appraisal as a ‘reference’ because I didn’t want to ask my then current supervisor. It worked very well!

I hate doing them. I feel like I am doing my bosses job—without the pay. All companies do them, so I guess you just have to suck it up and play the game. Can’t wait to retire.

What performance appraisal process???? Employers actually have that process in place????

I have found that, over the years, I wind up doing all the work on the appraisal so that my boss can check the box that it’s been done. Career development? Hey, it’s not like she has a clue… bitter? Nah.

No matter what “system” you choose to use, performance reviews are a necessary evil. The conversations should be happening on a regular basis, but frequently do not. You have to have something in the file for legal reasons…especially, if you need to let someone go.

 

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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