This article originally ran on January 16, 2015.
By Michael A. Webb
As a recent Profit Sharing Council of America Survey
indicates, the issue of retirement readiness has become one of increasing concern among 403(b) plan sponsors. In fact, the study indicates that nearly 90% of respondents now measure participant outcomes in achieving retirement readiness. In this article, we will examine the issue of retirement readiness and how advisors and plan vendors can provide valuable assistance with this issue.
Retirement readiness actually is not a new concept; those of you who have worked with retirement plans for many years may know the concept by its former not-so-sexy name, gap analysis. To determine a participant’s retirement readiness, first a calculation is performed to determine the participant’s income needs in the retirement. Then, a calculation of a participant’s anticipated retirement income stream (including pension/Social Security/403(b) and other defined contribution retirement plans) is performed. The difference between the two figures is the retirement “gap,” or the degree to which a participant is or is not ready for retirement.
For some participants, their retirement income stream actually will exceed their retirement income need and there will be no “gap”— their degree of retirement readiness will be high. This can be true of participants with generous pension benefits and/or those who have worked with advisors and other plan professionals to save and invest in a fashion that would ensure retirement readiness. Most participants, however, have some sort of “gap,” ranging from small to cavernous.
Many plan recordkeepers, and an increasing number of advisors, provide automated calculation tools so it can be determined the degree to which each participant in a 403(b) plan is ready for retirement can be determined. However, as is the case with most tools regarding calculations, the “garbage in, garbage out” rule applies; the tools are only as effective as the data inputs. In addition, calculation assumptions can often vary widely as to what is the precise level of retirement income needed for a particular participant. Thus, whether the actual calculations for each participant will prove to be correct at retirement is questionable. However, regardless of accuracy, the retirement readiness calculator is viewed as a possible motivator of positive participant behavior, since most participants will have “gaps” that can only be filled by behavioral changes.
Practice Pointer: Advisors should make certain that their 403(b) plan participants can calculate their retirement readiness with as little effort as possible.
Why has retirement readiness become an increasing concern for 403(b) plan sponsors? While gap analysis has been performed for many years, the transition from a traditional pension system to a defined contribution model among private tax-exempt organizations resulted in more and more individuals accumulating insufficient retirement savings, especially as the baby boomer generation reached retirement age. Such individuals thus had to work past their normal retirement date, in some cases for several years, in order to secure sufficient retirement income. This, in turn, blocked other individuals within the organization from advancing into such positions, thus affecting employee retention.
At organizations where traditional pensions exist, such as public K-14, the effect has been less pronounced. However, as traditional pensions are reduced, or even eliminated for new hires, retirement readiness will decrease for such employees as well. Moreover, the impact on a school district can be more pronounced than at a private tax-exempt, since the impact of individuals working years beyond their scheduled retirement is a direct budgetary one, because the replacement for the retiree would, in most cases be hired at a lower pay scale. And, due to the time value of money, the time to take action for such individuals is not at retirement age, but early on in their working careers.
Retirement Readiness — the Solution and the Role of the Advisor/Plan Vendor
Well, if the plan sponsor could wave a magic wand and fill the income gap of their retirees they would clearly do so. But there is, of course, no “magic bullet”; the methods of increasing retirement readiness involve changing participant behavior in an area where participant inertia is the norm. Automatic enrollment and other automated strategies, such as auto-deferral increase and qualified default investment alternatives, can assist with retirement readiness, but are no panacea. Furthermore, as Ellie Lowder pointed out in a recent article
, auto-enrollment can be difficult to implement at public K-14 institutions and other plan sponsors whose plans are not subject to ERISA.
When inertia is a powerful motivator, it can be difficult to affect the participant behavioral changes that can impact retirement readiness. However, some advisors and vendors have commenced the process by using available data to identify those who have retirement income gaps and isolating the cause of such gaps as well as solutions. At that point the advisors and vendors then work with participants to implement the solutions. For some participants, the solution may be as simple as the reversal of making inappropriate investment decisions with their account (such as buying high and selling low), but for many, tougher choices are required, such as foregoing additional income to increase savings for retirement.
Although retirement readiness itself is not a new concept, measuring the effect of initiatives to improve retirement readiness is not yet a well-mined area, though there are some case studies in which successful initiatives have been implemented. However, one would think that advisors who work directly with participants may be well-equipped to change the behaviors of the participant with whom they work, due to their one-on-one interaction. And, for advisors for whom the plan sponsor is the client, the active involvement of the advisor, plan vendor(s) and sponsor in a coordinated, customized education campaign to improve participant retirement outcomes may be worth the effort, given the impacts stated above regarding employees who should be retiring remaining in the workforce.
Practice Pointer: In an increasingly price-sensitive environment, it is quite possible that advisors who have demonstrated achieving retirement readiness for their plan participants can command a fee premium over those who are not successful.
The problem of retirement readiness is a significant one and there are no simple solutions. However, it would appear that the ability to “move the needle” and positively affect participant retirement readiness is yet another area in which the retirement plan professional can add value to the client relationship, whether it is at the participant or sponsor level.
Michael A. Webb is the NTSA Communication Committee Co-Chair and a Vice President at Cammack Retirement.
Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment, Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.
Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.