Client Service June 5, 2015

Social Security Claiming Is Advice Opportunity

Helping plan participants choose the right Social Security strategy can be a much-needed boon to retirement readiness.
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When it comes to retirement income, says Tom McGirr, senior vice president of participant products and tax-exempt markets at Fidelity Investments, most people think of just one source: their 401(k) assets.

Most pre-retirees do not factor in Social Security and Medicare,” McGirr tells PLANADVISER, which can result in a seeming shortfall in retirement assets. To address this, Fidelity is dialing up the conversation on how best to maximize Social Security benefits, which he says both retirement plan sponsors and plan advisers need to know in order to inform participants.

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“Most people don’t understand how the system works,” Jim Sampson, managing principal of Cornerstone Retirement Advisors, tells PLANADVISER. “They think that you turn 65, and a check starts showing up in the mail.” The high number of strategies around how and when to file, and the fact that you don’t get a do-over, make it critical for people to get the facts, he says.

“We’ve been hearing from our plan sponsors that they want to help ensure their employees are able to successfully transition to the next phase,” McGirr says. As well as personal savings, plan sponsors need to understand the importance of the totality of their participants’ assets. Beyond the 401(k), Social Security will play a substantial role in retirement income for many.

Three components—Social Security, Medicare and retirement income—are interconnected, and all play a part in a plan participant’s retirement readiness. Social Security has recently come in for increasing focus as a key building block, especially for low- and middle-income earners, because it plays such a critical part in helping these participants understand their income picture in retirement. “Social Security is going to provide a larger percentage of the income” for those at the lower spectrum of income, he observes.  

Next: The top mistake people make in claiming Social Security benefits.

Claiming too early is perhaps the No. 1 mistake people make, and it’s an irrevocable decision. Women can be especially vulnerable to this strategy. Specialized Social Security guidance can help participants understand the benefits of delaying. McGirr says that when people see the amounts they’d be able to claim at different ages—the difference between claiming at 62 or 65 or 70—they generally are very surprised.

“They understand the concept of delaying, but they don’t understand that it’s a significant difference,” he says, “upwards of 8% a year.” Over time, obviously, this can result in a substantial amount of money.

Guidance representatives work with Fidelity 401(k) participants or individual retirement account (IRA) holders in the firm’s retail channel to look at the individual’s complete situation. The goal is a comprehensive income plan that looks at a participant’s accumulated assets, and factors in information about the spouse, each person’s plans for retirement, how much income he or she is looking to replace, and what lifestyle is desired. “We work with them to identify sources of income in retirement,” McGirr says. “Some will come from accumulated assets and some from Social Security. There might be a pension from a previous job, or rental income. We bring that together and work with participants to do what-if scenarios.”

Cornerstone brought in a Social Security expert to do a group presentation to one of the firm’s larger clients. “It was a big hit,” Sampson says. “People walked away with a lot of info they didn’t have previously, and a great resource to get future questions answered.”

But one thing surprised Sampson: the audience. He figured it would be mostly older employees beginning to think seriously about how and when to claim, but there were many younger people in the room. “They were gathering information for their parents,” he says.

Data & Research June 5, 2015

PSNC 2015: What Participants Really Want

Looking for research-backed insights about retirement plan participant decisionmaking? We’ve got them.
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In a presentation closing the 10th annual PLANSPONSOR National Conference in Chicago, Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR, outlined key findings from this year’s PLANSPONSOR Participant Survey.  

Data from the survey was presented in the April 2015 issue of PLANSPONSOR, but the presentation at PSNC included new cuts of the data that show clearly what participants want and expect from their plan sponsors, advisers and service providers. The sample is comprised of workers age 23 and older—65% of whom actively participate in a workplace retirement plan. Eleven percent of the sample has access to a plan but does not currently contribute money, and one in three have more than 10 years of tenure at their current employer.

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Overall, the survey data shows a scant 35% of individuals are confident or very confident that they will achieve a secure retirement. The figure is a little better, at 41%, for active participants age 50 and older. Not surprisingly, only 25% of those lacking access to a plan at work are confident they’ll achieve a secure retirement.

The survey finds 76% of people who report being confident or very confident about retirement have $50,000 or more saved across all retirement accounts. This confidence is a good thing for the 22% in this group who have more than $500,000 saved—but overall the figure denotes dangerous overconfidence, as a single year’s health expenses in retirement average around $43,000 per year.

As Cooke Mintzer observed, “many of those people who report feeling confident are feeling confident at lower savings levels than we would like.”

She suggested one solution would be to frame savings as lifetime income, rather than a lump sum. “When they see $50,000 is only going to translate to a couple hundred bucks a month or less in retirement income, it could be a valuable reality check that shows they’re not really on track.”

NEXT: Employees cite stress across the board

In the face of savings hurdles, a strong majority of individuals in the survey (76%) reported at least mild financial stress, and 48% said their stress is moderate or severe. Nearly 32% are focused on paying off debt—including many in their 40s, 50s and even 60s.

This helps to explain the 51% of individuals who reported they want more guidance related to financial planning and financial wellness supplied by their employer. Thirty-eight percent want workplace training about investing basics and strategies, while 35% asked for help with saving and budgeting.

“People commonly reported that they want guidance about how much they should be saving—they want a specific number or percentage of income,” Cooke Mintzer noted. “As an industry, we’ve avoided that total number conversation. Only in the last two or three years has there been mass discussion of getting to a savings rate of 10% or total contribution with employer match near 12% or 15%. Many participants said they have no idea what goal they should be progressing towards.”

Drilling deeper into the desire for advice and guidance, 46% would prefer advice delivered through online tools or automated services. Importantly, only 26% said they would pay a premium for personalized and highly customized advice versus getting generic advice that is free.

NEXT: Plan sponsors play critical role in confidence

Highlighting the critical role plan sponsors play—especially in setting plan design—there were strong peaks in the occurrence of participant contribution rates around 3%, 5%, 6%, 10% and 15% of salary. As Cooke Mintzer explained, these are the numbers most commonly used by plan sponsors as the default auto-enrollment rate.

“The numbers clearly show plan sponsors have a lot of power in their hands to get people to save what they should be saving,” she said.

Asked how they arrived at their deferral rate, more than one-quarter of people in the survey said they did it to get the whole match. Nearly 20% are “trying to consistently hit a targeted savings level,” i.e., saving $100 per paycheck or $3,000 per year.

“Unfortunately, stretching the match is not always the answer here,” Cooke Mintzer said. “We do see a significant drop off in willingness to save to get the full match when you push it up to, say, 25% of the first 12% of salary deferred by the employee, rather than 50% of the first 6% of salary.”

One heartening statistic for plan sponsors: participants largely hold themselves accountable for failure to be better prepared for retirement. More than 75% of employees said their employer’s plan is excellent, very good, or good—and another 16% on top of that say their plan is fair, leaving just 2% giving their employer-sponsored retirement benefit a poor rating. Two percent said they were unsure.

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