Protecting Retirement

New research suggests that many employees won't be able to afford even the basics during retirement. What can HR do to help them have a better shot at a comfortable life during their golden years?

Sunday, October 16, 2011
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The numbers are scary: Nearly half of baby boomers and members of Generation X are likely to be at-risk of not having enough retirement income to cover even their basic expenses and uninsured healthcare costs, according to the 2010 Retirement Security Projection Model from the Washington-based Employee Benefits Research Institute.

The same report finds that low-income households -- perhaps not surprisingly -- may be even worse off: 70 percent of the households in the lowest one-third (when ranked by pre-retirement income) were classified by the report as "at risk."

The EBRI estimates that the "retirement savings shortfall" (determined as a present value of retirement deficits at age 65) for boomers and Xers is $4.55 trillion, for an overall average of $47,732 per individual still assumed to be alive at age 65.

Automatically enrolling new hires in defined-contribution plans, made easier by reforms contained within the 2006 Pension Protection Act, has been touted as a cure for the ailment of employees with inadequate retirement savings. Indeed, the EBRI has noted that automatic enrollment has boosted the prospects of a comfortable retirement for millions of American workers.

However, research from San Francisco-based investment-services firm Callan Associates has found that many recent automatic enrollees appear to be staying at the default contribution rates, usually 3 percent -- far too little, experts say, to build up an adequate retirement nest egg during a career. In the meantime, the Social Security trust fund continues to lurch toward eventual insolvency, possibly by 2037, according to the most recent estimates, unless serious reforms are made to the system. 

What to do? In the absence of serious bipartisan efforts to fix Social Security, experts say there are a number of things HR leaders and their companies can do to encourage employees to put more aside for their retirement.

Steve Vernon spent 30 years helping large companies design and manage their retirement programs as vice president and consulting actuary at Watson Wyatt (prior to its recent merger with Towers Perrin). He is now president of Rest-of-Life Communications, where his clients have included AARP, Merrill Lynch and Royal Bank of Canada. He is also the author of Live Long & Prosper! Invest in Your Happiness, Health and Wealth for Retirement and Beyond and is an adviser to the Institutional Retirement Income Council.

He recently spoke with Andrew R. McIlvaine, senior editor at Human Resource Executive®, about what HR leaders should be doing and thinking about when it comes to helping employees plan for retirement.

Recent research from the Washington-based Employee Benefit Research Institute has found that even if baby boomers and Gen Xers delay their retirements past the age of 65 or even into their 70s, many would still be at risk of running out of money during their retirement years. Do you see this as a policy failure, an inevitable result of changing demographics or simply a result of the current bad economy?

There are many parents of this problem. It's all of the above, I'd say. In terms of whether it's a policy failure, well, you could argue [that] the government isn't doing enough but, frankly, we're probably not going to see much help from the federal government anytime soon, given its financial condition.

People aren't retiring, and that plugs up the promotion channels for the younger generation. It's not an immediate crisis we need to solve right now, but it's like Chinese water torture: Soon, we won't be able to attract the young people we'll need because they won't see any place for them to move up to.

So it's not one magic bullet that's going to solve this. I think part of the problem is employers just aren't encouraging their employees to save enough. You can attack this with educational campaigns or by changing your company's matching structure -- for example, if you're matching 100 percent on employees' first 4 percent of contributions to their 401(k) plan, why not match 50 percent on the first 8 percent?

Or, if you have automatic escalation, the auto escalate might stop at contributions equal to 6 percent of pay -- that might send the wrong message in terms of what they need to be contributing for retirement.

But, if the auto-escalation keeps going up to 10 or 12 percent, that's sending a better message, that that's the right amount to contribute for retirement.

Do you think the retirement-education programs most employers have in place right now are adequate?

A common deficiency with retirement education right now is that there's not much of it. Companies just aren't doing very much to tell their employees how to plan for retirement. Beyond that, most employees don't have a realistic idea of how much money they'll need to generate enough retirement income. It takes an awful lot of money to retire.

So telling employees how much money they'll need is one thing. But another thing is that some people will just give up upon hearing how much they'll need. They say, "I might as well not bother." So companies need to work at finding a way to help them free up more money in their daily budgets, and then it becomes more of a financial-planning exercise.

Some companies are trying all sorts of different ways to help their employees save money on typical expenditures, such as offering them discounts on group auto or home insurance and then encouraging them to put their savings toward retirement. It's going to take a multifaceted approach to solving this problem.

The research from EBRI notes that low-income workers, in particular, are at risk of not having enough money to meet their retirement needs. Are there specific things employers can or should be doing to help this particular group?

I would like to see more done to help this group. Some employers will say, or think, "This is not my problem -- we pay them and that should be enough." But, I have seen a couple employers offer their workers a higher 401(k) match -- say, 100 percent on the first 2 percent, then 50 percent on the next 4 percent, and so on.

The problem is that lower-income employees just tend not to have enough money to contribute to their plans, period. I have to admit that this is a group that just gets ignored and that's a shame. The best way to help them is to offer a traditional defined-benefit pension, but those are becoming increasingly rare.

Should members of Generations X and Y assume, in their retirement- planning scenarios, that Social Security either will not exist when they retire or exist but in a drastically altered form? Should employers be addressing this possibility in their retirement-education materials?

I worry about Social Security constantly. I do think it will be there -- it's being way too pessimistic to say that it won't be. However, if assuming Social Security might not be there when you retire motivates you to save more, then great. What I see too often is people being pessimistic about Social Security but not doing anything other than moaning about it. What I say constantly to members of Generations X and Y is, "Don't be like your baby boomer parents, who haven't saved enough." Look at them as bad examples.

I don't think employers should be addressing the question of "whither Social Security" in their educational materials -- it's way too politically sensitive and, with regard to older employees, it's just not a responsible thing to do, because you'll be scaring them for no reason.

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Just about every proposal to reform Social Security that's been put out there exempts people in their 50s, 60s and older from any changes. I think the better thing to do is address the fact that Social Security was never intended to provide you with a secure retirement -- it was designed to provide you with a base, to be supplemented with your own savings or pension. That's the message to focus on.

I also think employers could be doing more to educate employees about how they claim Social Security when they retire. Half of Americans today retire at age 62, which means their payments are less than if they put off retirement for a few more years.

Companies should be educating their employees about this -- I think the inevitable conclusion, for most people, would be that they need to work a little longer. Companies could then offer more flexible-work arrangements.

What should be done, from a legislative standpoint, to provide greater retirement security for Americans?

I'm actually a little pessimistic about the ability to get some legislative relief at this point. I think what we're dealing with today, in terms of retirement savings, is more of a behavioral and cultural problem. I just don't think legislation can get at that. I look at the success of the anti-smoking campaigns over the years -- those took decades for the message to sink in, and now we're seeing similar messages about unhealthy eating and obesity. We need to focus on changing behavior, and that's going to take awhile to sink in. Eventually, it will.

What sort of shortcomings do many so-called Guaranteed Lifetime Income Option (GLIO) products have today, and how can these be addressed?

Well, they do address the important issue of retirement-income security, but they're complicated, and people tend to be confused by them. I'm a fan of old-fashioned annuity products. When you look at employee surveys, employees say they want guaranteed lifetime income -- essentially, they're describing a traditional pension plan.

Traditional pension plans worked pretty well. And you can also buy annuities with escalators, automatic 3-percent increases, which work pretty well. These products have been around for a while, and I favor them over the more-complicated products because, again, employees tend to get confused by them and just tend not to use them.

But annuities aren't widely offered by companies today.

No, they're not widely offered and to me, that is a problem. What I've been advocating is that companies put a retirement-income menu into their plan, just like an investment menu, in which employees have four or five choices to select from to generate retirement income. Just having a menu such as this sends a message to employees that they need to pay attention to this issue.

What would the menu include?

You might include a lump-sum payout or a rollover for employees who don't want to use the menu. It might also include an option for managed payouts, in which employees would invest their retirement money and draw down the principal and investment income carefully, so employees would have a low chance of outliving their financial resources.

It would also include educational tools on the pros and cons of the various methods for generating retirement income, and modeling tools to show how much retirement income could be generated by each method.

What sorts of concerns do employers bring up when you approach them about this?

It's a pretty new idea, but when I talk to employers, they say they like it. But the most common objection I hear is they're concerned about fiduciary liability. My response to that is that the Employee Retirement Income Security Act already provides specific guidelines they can follow when devising an investment menu that also apply to this.

Those guidelines focus on the process: You need to show that you've relied on a diligent and thoughtful process; they're not requiring that you have terrific outcomes. I do think these retirement-income menus will be standard at many companies within the next five years.

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