Data and Research October 20, 2020

Retirement Readiness Gaps Have Widened in 2020

New data published by Wells Fargo suggests the COVID-19 pandemic has driven some workers even further behind their retirement savings milestones, while others continue to voice confidence in their goals.

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Wells Fargo has published its 2020 “Wells Fargo Retirement Study,” based on a survey of roughly 4,600 people conducted in August by The Harris Poll.

The annual research report examines the attitudes and savings behaviors of working adults and retirees, with this year’s edition coming amid the heart of a pandemic and the worst recession in generations. Naturally, the researchers included many pointed questions about the COVID-19 crisis, but they also focused on the important and evolving topic of defined contribution (DC) plan decumulation.

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Speaking during a conference call introducing the new research, Nate Miles, head of DC business at Wells Fargo Asset Management, said there is no doubt that COVID-19 has driven some workers even further behind in their retirement goals. Notably, working men report median retirement savings of $120,000, while working women report $60,000.

“Yet for those impacted directly by COVID-19, by a job loss or in other ways, men report median retirement savings of $60,000, which compares to $21,000 for women,” Miles said. “With individual investors now largely responsible for saving and funding their own retirement, disruptive events and economic downturns can have an outsized impact on workers who are already more vulnerable to financial challenges.”

As the Wells Fargo survey has shown year in and year out, working Americans, and even the most disciplined savers, are not saving enough for retirement.

“The good news is that for many of today’s workers, there is still time to save and prepare,” Miles said.

The Pandemic’s Uneven Impact

The study finds that different demographic groups are, on average, experiencing very different financial impacts from the pandemic. The data makes it clear that women and younger generations are falling behind their savings goals more often than older men.

“Women are less sure if they will be able to save enough for retirement, and they appear to be in a more precarious financial situation than men,” Miles warned. “Barely half of working women say they are saving enough for retirement, or that they are confident they will have enough savings to live comfortably in retirement.”

The data suggests women directly impacted by COVID-19 have saved less than half the amount for retirement that men have and are much more pessimistic about their financial lives. In addition, women impacted by COVID-19 are less likely to have access to an employer-sponsored retirement savings plan and are less likely to participate if they do have access.

Though Generation Z workers started saving at an earlier age and are participating in employer-based savings programs at a greater rate than other generations, they are nonetheless also worried about their future. Fifty-two percent of Generation Z workers say they don’t know if they’ll be able to save enough to retire because of COVID-19, 50% say they are much more afraid of life in retirement due to COVID-19, and 52% say the pandemic took the joy out of looking forward to retirement.

At the same time, the study shows that despite a challenging environment, many American workers and retirees remain optimistic about their current life, their finances and their overall future. A majority of workers say they are very or somewhat satisfied with their current life (79%), in control of their financial life (79%), are able to pay for monthly expenses (95%), and feel confident they are able to manage their finances (86%).

The Decumulation Challenge

Despite an increasing shift to a self-funded retirement, nearly all workers and retirees say that Social Security and Medicare play or will play a significant role in their retirement—a reality underscored by the pandemic.

According to the study, 71% of workers, 81% of those negatively impacted by COVID-19, and 85% of retirees say that COVID-19 reinforced how important Social Security and Medicare will be or are for their retirement. Overall, workers expect that Social Security will make up approximately one-third of their monthly budget (30% median) in retirement. And even among wealthy workers, Social Security and Medicare factor significantly into their planning.

Of course, the dependence by many on the programs also drives anxiety, especially at a time of substantial political division in the U.S. The vast majority of the study’s respondents harbor concerns that the programs will not be available when they need them and they worry that the government won’t protect them.

A Spending Paradox

Lori Lucas, president and CEO of the Employee Benefit Research Institute (EBRI), also participated in the research call. She highlighted a finding in the data that suggests people are reluctant to actually spend down their DC plan assets.

“This is puzzling because of what we know about the lack of retirement assets and confidence reported by workers and retirees,” Lucas said.

The data shows that retired households with less than $200,000 at retirement tend to spend down only about a quarter of their assets in the first two decades of retirement. The group with the greatest amount of assets, on average, spends down just 11% of DC plan assets during this time frame.

“This is a dynamic that we are going to be studying further and that I expect to evolve in coming years, as more people enter retirement without pensions and significant amounts of assets outside of their DC plans,” Lucas said. “Not only do we need to help people save enough. We should also figure out ways to help these people who get to retirement with a nice nest egg, but who don’t know how to spend it down. In fact, we don’t really know yet with confidence why they are not spending these assets.” 

Lucas said that, anecdotally, it is common to hear retirees say they want to maintain their balance, either because they’re motivated to leave behind their assets for loved ones, or because they want to avoid losses. Many retirees also simply say they do not need to spend a lot of money to be happy in their lifestyle, and that they get a sense of satisfaction and security by maintaining their wealth even as they age.

“We very commonly see serious loss aversion among retirees,” Lucas said. “Beyond investment losses, many people actually see spending as a loss in retirement. Seeing their accumulated assets wind down is just too painful for some people. For this reason, I think the majority of people will tell you their goal is to maintain their assets during retirement.”

Lucas said this is in some ways a laudable goal, but there is certainly more room for the retirement plan industry to create innovative spending solutions to help people meet all their retirement goals.

Compliance October 20, 2020

Advisers Can Spearhead Retirement Plan Committee Setup and Training

Plan sponsors can trust advisers to help with committee decisions and training and expect input from ERISA attorneys.

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When it comes to fiduciary training for retirement plan committees, experts generally say a plan adviser can take the lead and use the occasional help of an ERISA [Employee Retirement Income Security Act] attorney.

“The first step in setting up a highly efficient committee is to work with a retirement plan adviser specialist or consultant,” says Brendan McCarthy, national sales director of defined contribution investment only (DCIO) at Nuveen. “They can help guide the plan sponsor through the entire process, including the critical fiduciary training.”

Before addressing the training of the committee, the adviser should determine whether the plan should have both an administrative committee and an investment committee or just a single retirement plan committee that covers everything, McCarthy says. In general, only the largest companies that have in-house finance capabilities form two committees, McCarthy says.

The second big determination is deciding how large the committee should be. “They typically range from three to seven, with five being the ideal number,” McCarthy says. “It is very important to have an odd number, so that in the event of a vote, you don’t have a tie.”

The third major area to determine at the outset of forming a committee is “to look at the demographics of the workforce and ensure they are represented on the committee,” he says. “Perhaps the company has a high percentage of Millennials. If so, there should be at least one Millennial on the committee. They can help with ideas on plan design and communication to appeal more to their like demographics. Studies have shown that diverse committees achieve better decisions. A Callan study, for instance, found that committees that invoke diversity have stronger governance practices and have a better understanding of their audiences—thus increasing employee engagement and improving outcomes.”

Dannae Delano, a partner with The Wagner Law Group, agrees that paying attention to the diversity of a plan’s workforce can improve the effectiveness of the committee and the experience of participants. “Age-old statistics show that understanding the retirement plan and how it works is difficult for participants but it increases exponentially when there is someone of their demographic group represented on the committee, because they can convey information to people in a way they understand,” Delano says.

There are staple positions many committees turn to when they recruit members, McCarthy says. Most committees first draw from in-house legal or finance, human resources (HR) and benefits departments.

Timothy Irvin, director and corporate markets practice leader at Cammack Retirement Group, agrees that diversification is important but says committees should not avoid hiring capable people. “First and foremost, the retirement plan committee is an expert group, and it is not worth sacrificing knowledge,” Irvin says. “Members of the committee are charged with making prudent and loyal decisions on behalf of plan participants and their beneficiaries, so, first and foremost, they need to be capable.”

In addition to the positions McCarthy suggests as being a good fit for the retirement plan committee, Irvin says having someone from payroll who is familiar with the workforce data can be very helpful.

Once the committee is established, it is important to draft “a plan committee charter, a governing document that outlines fiduciary responsibilities and roles, as well as the goals and objectives of the committee,” McCarthy says. In line with that, another best practice is to have each member of the committee sign a fiduciary acknowledgement outlining their duties, including the risks of serving on the committee, he says.

The last step is to appoint one member of the committee to act as secretary, responsible for documenting the meetings and retaining all documentation. “For instance, they should thoroughly document not just the selection of investments but all of the thoughts, logic and due diligence that went into making that decision,” McCarthy says.

As to how long committee members should serve, Irvin says, “We tend to see them serving two to three terms lasting two to three years apiece. What you don’t want is for someone to serve a single term, because then you will lack continuity of institutional knowledge. If at all possible, stagger the terms. Then, you continually get new ideas from fresh blood.”

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Basics of Fiduciary Training

Once the committee and its responsibilities are established, it is critical to train the members on their fiduciary responsibilities, advisers say. The first step can be explaining how the plan works at a high level, Irvin says—“its provision, match, eligibility and plan economics, like revenue sharing, fee leveling or other ways services in the plan get paid for. They should also understand not only their own role and responsibilities, but also those of the vendors and the consultant.”

Delano says she believes the most important concept retirement plan committee members need to understand, as outlined in ERISA, is the standard of prudence and loyalty they must uphold. “If they lack the capacity to make a decision, they have a duty to find an expert to help educate them on the matter,” she says.

Irvin suggests that the next item of business should be reviewing plan documents, including the investment policy statement (IPS), with new committee members. He says committees should do that as a refresher every year for existing members.

At Cammack, the consultant assigned to the plan handles all this training, sometimes bringing in an ERISA attorney, Irvin says. Furthermore, Cammack often has ERISA attorneys attend retirement plan committee meetings to add their insights, he says.

Delano says she steadfastly believes it is important for advisers to bring in ERISA attorneys. “At some point, an ERISA attorney needs to get involved because of the integral role they play in managing a plan,” Delano says. “That is why they can be helpful, especially with ongoing training. Laws and governing documents for the plan change all of the time. These are fluid things they have to be on top of and thoroughly understand. Even case law regarding fiduciary obligations, accounting, plan expenses and conflicts of interest—all of these matters change with court decisions that are constantly being handed down.”

As to what type of insurance committee members should have, Delano says ERISA requires them to be bonded, and it is a best practice to provide them with errors and omissions (E&O), indemnification and/or directors and officer (D&O) liability insurance. Smaller plans that don’t want to take on the expense of this specialized insurance can put an indemnification provision in their plan document, she says.

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