Data & Research June 25, 2024

55-Year-Olds Twice as Likely to Rely on 401(k) Compared to Predecessors

The reliance on 401(k)s means retirement industry must turn attention to this group about 10 years from the traditional retirement age. 

Reported by

Fifty-five-year-olds are almost twice as likely as 65- and 75-year-olds to rely on “do-it-yourself” employer-sponsored plans like 401(k)s to fund their retirement amid the broader decline of defined benefit pension plans that supported previous generations, according to Prudential Financial Inc.’s “2024 Pulse of the American Retiree Survey.” 

“It’s very important to budget both today to see how much you can afford to contribute to 401(k)s and other retirement accounts,” says Brandon Goldstein, a financial planner at Prudential Advisors. “And consider what expenses you might need in your ideal retirement scenario. Make sure to budget for inflation in the future.” 

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Without a traditional pension plan, people will have to “self-fund” and create their own income streams, Goldstein adds. The demise of traditional pension plans has led to more income-based annuity products and dividend-paying stocks and bonds strategies to supplement social security.  

“My advice is to sit down with a planner, go through your budget, and come up with an income goal in retirement and roadmap to get you there,” he says. 

Prudential found that the median retirement savings of individuals aged 55 were less than $50,000, considerably less than the eight times annual income goal that is advised for this age group. According to the findings, 59% of 65-year-olds and 52% of 75-year-olds are worried about outliving their funds, which is certainly an issue, but still lower than the 67% of 55-year-olds, according to the insurer. 

The current market environment is further exacerbating savers’ concerns. Due to inflation and rising living expenses, 43% of 65-year-olds and one-third of 55-year-olds have put off retirement. In addition, 19% of 65-year-olds, 15% of 75-year-olds and more than one-third (35%) of 55-year-olds said they would find it difficult to save $400 in a month to pay an emergency bill. 

On a 10-point scale, people who were 55 years old were the least satisfied with their lives overall, not just financially, scoring only 6.2. 65-year-olds (7.0) and 75-year-olds (7.4) reported higher levels of life satisfaction. Individuals aged 55 who did not have financial stability were notably more likely to have mental health difficulties (53%) in contrast to those who were financially secure (33%). 

“America’s 55-year-olds have the opportunity to reimagine and protect retirement outcomes with a new set of tools that can help them safely grow their retirement nest egg while also ensuring a reliable stream of lifetime income,” said Dylan Tyson, president of retirement strategies at Prudential, in a statement. “With the retirement model evolving beyond traditional pensions, lump sums and Social Security, it is critical that we work together to prepare for better and longer lives throughout retirement.” 

Only 6% of 55-year-olds plan to use annuities in retirement, compared to 11% of 65-year-olds and 20% of 75-year-olds, amid the industry’s growing push for lifelong income solutions to retirement security.  

Nonetheless, 71% of people over 55 say they are considering annuities, offering the industry “significant opportunity” to improve retirement security through secured income options, Prudential stated. 

Brunswick Group conducted the survey from April 26 to May 2, polling a national sample of 905 Americans who were 55, 65, and 75 years old.  

Compliance June 24, 2024

DOL’s IB 95-1 Report Calls for Further Review of DB Pension De-Risking

The report from the DOL’s EBSA summarized the concerns of some stakeholders, but makes no recommendations of its own.

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The Department of Labor on Monday published its long-awaited report on Interpretative Bulletin 95-1, which outlines the process defined benefit plan fiduciaries must use when selecting an annuity provider to which the plan will transfer pension obligations. The report summarized meetings and discussions with stakeholders, but concluded that the DOL is “not prepared at this time to propose amendments to the Interpretive Bulletin.”

The report does indicate that the department could consider changes to the bulletin in the future. 

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“[Employee Benefits Security Administration] has not concluded that changes to the Interpretive Bulletin are unwarranted,” the DOL wrote in the findings section of the 29-page report.

“Today’s report is the result of an extensive and thorough review, including more than 40 stakeholder meetings on this topic and input received through our consultation with the ERISA Advisory Council,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “We look forward to further exploration of the issues and concerns raised during the process, so that we can consider what next steps may be necessary to guide fiduciaries considering a pension risk transfer for their defined benefit pension plans, so that the fiduciaries can meet their obligations to participants and beneficiaries.”

IB 95-1 is a guidance document issued in 1995 by DOL that describes what fiduciaries operating under the Employee Retirement Income Security Act must consider when selecting an insurer as a pension risk transfer provider to be sure that the provider is safe one. The six criteria include:

  1. The insurer’s investment portfolio
  2. Size of the insurer relative to the size of the PRT contract
  3. Level of insurer’s capital and surplus
  4. Other lines of business of the insurer
  5. Structure and guarantees of the contract
  6. Additional protection offered by state-level guaranty associations

The report, required by Section 321 of the SECURE 2.0 Act of 2022, summarizes potential shortcomings of IB 95-1 that were identified by stakeholders in more than 40 meetings with the DOL in consultations with the ERISA Advisory Council last July, without making any recommendations itself.

Some of the key issues highlighted by stakeholders, DOL wrote, included private equity ownership of PRT providers, offshore reinsurance agreements, and administrative capacity. Pension risk transfer activity has been increasing in recent years as the funding levels of corporate pension funds as risen due to interest rates and investment performance.

The report read: “stakeholders had a global concern that private equity-owned insurers may not intend to be in the insurance business for the long term and, by definition, annuities are long-term commitments. These stakeholders questioned whether private equity firms would have policyholders’ interests at the forefront.”

Mark Unhoch, pension risk transfer practice leader at consulting firm October Three, says that the administrative capacity “should be part of IB 95-1.” Elements such as “customer service, checks coming on time, making changes online or elsewhere,” become critical services for an insurance company to offer when they take over a pension, and IB 95-1 as currently written is silent on whether a pension fiduciary should even consider it.

Congress in SECURE 2.0 required the report to be finished by December 29, 2023, 178 days ago. All the same, the report concludes: “Further exploration into developments in both the life insurance industry and in pension risk transfer practices is necessary to determine whether some of the Interpretive Bulletin’s factors need revision or supplementation and whether additional guidance should be developed.”

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