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Turning Point

Retirement expert cautions that action must be taken now, before it's too late, to ensure employees will have "a retirement income that lasts as long as they do."

Monday, December 9, 2013
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Melissa Kahn, principal at MJ Kahn Associates and former vice president at MetLife, believes this country is at a turning point. Americans simply aren't saving enough for retirement. She points to the 2013 Retirement Confidence Survey conducted by the Employee Benefits Research Institute, which revealed that 28 percent of Americans are "not at all confident" they have saved enough money to live comfortably throughout retirement.

While people with defined-benefit plans are in good shape, it's a different story for those with 401(k) plans.

"The former chairman, president and CEO at MetLife -- Robert Henrikson -- used to say that 401(k) plans are popular but they haven't been proven successful yet, if we measure success by the ability to ensure that someone is going to have a retirement income that lasts as long as they do," she says. "We won't know if 401(k)s are successful for at least another 10 to 15 years."

Until then, she says, this issue is really everyone's problem -- workers, employers and members of Congress. But action must be taken now, she says, so the United States can avoid serious financial issues in the years ahead.

While at MetLife, Kahn addressed federal legislators and regulators on Social Security, long-term care and other retirement-income-security concerns. Her consulting firm, based in Washington, is involved in employee-benefits advocacy and strategy.

Kahn will be moderating a panel of retirement experts addressing this issue at the Human Resource Executive® Health & Benefits Leadership Conference in March (www.benefitsconf.com). HRE Contributing Writer Carol Patton asked Kahn in a recent Q&A to share her thoughts and concerns about the retirement picture today.

Despite employers' continuous educational efforts, why are employees still in the dark about how much they need, and don't have, for their retirement? Are they being unrealistic, even irresponsible?

There was research recently done by academics from the University of Colorado, University of Virginia and Catholic University. They did a broad study, looking at 168 papers and 201 studies [on] the impact of financial education. Their assessment was that financial education and training has a 0.1 percent effect on behavior. There was little correlation between financial education and how people actually act with that knowledge.

Years ago, I was at a conference. [A presenter's] quote really stuck with me: "People are not economically rational beings. We don't do necessarily what's in our best interest." [Consider] the catch-up contribution that was implemented back in 2001, through which people over the age of 50 could contribute an extra $5,000 a year to their 401(k) plans. Vanguard has statistics on that. No matter how you cut it, only 15 percent of people eligible for catch-up contributions [earning less than $100,000] took advantage of that. For those who made more than $100,000, the number spikes to more than 40 percent [which is improved, but still woefully low]. You have to wonder what basically drives people.

People can't translate a lump sum into an income. When you give them a sum of $100,000 in their 401(k) plan, most have never seen that kind of money before. So they think, "I'm wealthy." They can't translate that into the fact that, if they were to buy a $100,000 annuity in today's low-interest-rate environment, that would be less than $5,000 a year.

What are the long-term ramifications for individuals, government and the private sector?

If we continue on this path, people are going to definitely have to work longer. They're not going to have enough in savings to retire and have any kind of quality of life. That also has implications for employers that conditionally have wanted to move older workers out ... who need more healthcare. That will be a larger financial burden for employers. The government will also have to deal with these individuals who are going to [need] assistance.

But shouldn't people be responsible for their own retirement planning?

Employers, employees and the government all have a role, [but] it's clearly the individual's responsibility.

There have been bills introduced in the United Kingdom and the United States -- a savings plan through which the government would put $1,000 into an account for every child born. By the time the child was 65 or 70, the amount in that account would be very valuable to them. That's definitely one way to go. I think it exists in the United Kingdom, but it never took off in the United States. It would have cost the government too much money.

So what are some effective, realistic solutions?

We should be teaching financial education as a requirement in high school. If parents would start teaching their children about saving and investing ... young children would understand the concept of compound interest.

There needs to be some sort of soft paternalism going on. Obviously, auto enrolling, auto-escalating and re-enrolling everybody every year [helps]. People who are auto-enrolled almost always stay in the plan.

I still am an advocate of an in-plan-accumulation option. Put into a target-date plan an income component such that, when [employees] put their money into this target-date plan, part of that allocation would go into an annuity. So they'd buy pieces of income over their life ... and get the benefit of dollar-cost averaging. People complain now that it's very expensive to buy annuities because interest rates are so low. But when you're doing it every year, interest rates go up and down. You get the benefit of that [fluctuation] over time.

I'm a big proponent of phased retirement, whereby there are different patterns of work. I was also at an academic forum ... [where] John Shoven at Stanford [Institute for Economic Policy Research, housed at Stanford University] said that we need to get people more in the mind of working 50 years to finance a retirement of 20 years. He said we encourage people to take Social Security earlier than they should. If we could get them to delay, it would save the government money and ... people would have secure retirement when they really need the money.

What about technology? What new tools can employers offer to help employees build their retirement accounts?

There is a proliferation of tools and every service provider has them. Somebody did a study when these tools came out ... . People went through the entire tool but wouldn't pull the switch. They want investment advice or guidance from a person as opposed to a computer model.

The government has looked at doing its own tool. For many people, the government is a more trusted source than financial-service providers because people feel like financial-service providers want them to invest in their products. It would be really helpful if the government could create some sort of tool that employers could use without having fiduciary liability hanging over them.

In the meantime, what can HR do?

[Start] by benchmarking what other companies are doing. If you don't already have auto-enrollment and auto-escalation in your plan, having senior-management buy-in is absolutely critical.

At MetLife, Rob Henrikson came out with what we called our life-insurance challenge. Everybody looked at their own life-insurance coverage to see if it was adequate ... . Many people realized they were underinsured and ended up increasing their coverage ... . HR can have something similar for retirement plans where there is this annual teaching moment when you can re-enroll and look at what you're invested in and how much you're investing.

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What's the retirement-legislation landscape looking like in Washington these days?

The Lifetime Income Disclosure Act and a regulation from the Department of Labor would require employers to show on 401(k) annual or quarterly employee statements the income equivalence of that balance translated into an annuity. We hope that will be the "a-ha" moment for employees, where they actually say, "I would only get $5,000 a year. I need to save more." It would get them more into an income mode as opposed to the lump-sum mode.

There's also a bill that was in the president's budget for the last two years called auto IRAs. For employers with 10 or more employees that do not sponsor a plan -- only about 50 percent of the workforce is covered by an employer-sponsored plan -- it would require them to auto-enroll individuals in an IRA. Employees could opt out.

There's also in Congress a proposal called multiple-employer plans. This would be focused on small employers and let them band together so their purchasing power is greater and [so they can] offer a plan for all their employees. There are certain rules today that restrict their ability to do that.

The financial industry has also been working with the Treasury Department to [take another look] at safe-harbor regulations and increase those percentage limits. [The regulations] said to employers, "If you auto-enroll someone at 3 percent and go all the way up to 6 percent, you can't be held liable for that. You're safe. But many of us in the financial industry say those numbers are way too low. Most experts say that, at a minimum, people need to save 10 percent, more like 15 percent.

Do you envision any of these bills becoming law?

For the disclosure bill, the Department of Labor put out an advanced notice of proposed rule-making in the winter. They have gotten a lot of comments. They're working on putting out proposed regulations. The regulatory process will overtake the legislative process. In terms of the others, it's so unclear these days what, if anything, is going to pass.

What actions are being taken at the state level?

The National Association of Insurance Commissioners is working with the Department of Labor on an annuity safe-harbor regulation. A lot of employers today with their defined-contribution plans are not offering annuities as a distribution option. Part of the reason is they're concerned about fiduciary liability. The DOL is trying to recraft its guidance in this area so it would make it easier for employers to offer annuities. They're working with the states on this. 

One of the things that has driven this auto-IRA legislation is that a lot of states have introduced legislation to open up their state-level 401(k) plans to small, private employers.

You paint a fairly bleak picture. Can Americans still be optimistic about retirement?

It's not too late, but we can't wait. I go back to [Henrikson's] quote. It haunts me because so many people who are invested in the 401(k) system always tout the benefits of it. I'm not convinced. I'm a DB lover. I'm sad that those plans are going away. Most people don't know how to invest [or] how much to put into their plan. To the extent we can do it for them and help them, everybody is going to be much better off and sleep a lot better at night.

The second annual Human Resource Executive® Health & Benefits Leadership Conference will be held March 17 through 19 at Caesar's Palace in Las Vegas. To learn more about the conference, including sessions and exhibitors, visit www.benefitsconf.com.

 

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