Data & Research February 16, 2016

Does Happiness at Work Help or Harm Retirement Readiness?

A new report from the Center for Retirement Research at Boston College finds employee engagement and workplace happiness have a serious—and sometimes counter-intuitive—influence over retirement planning.
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“How Do Non-Financial Factors Affect Retirement Decisions,” the latest Issue Brief from the Center for Retirement Research at Boston College (CRR), finds that a positive workplace experience is a critical component in the decision of workers ages 65 and over to remain in the labor force.

The CRR based its analysis on a long series of studies conducted by the Social Security Administration’s Retirement Research Consortium. These reports, CRR explains, “examine how two types of non-financial factors affect retirement decisions: the worker’s on-the-job experience and the allure of retirement activities.”

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According to the issue brief, specific job characteristics that either incline workers to retire or to remain on the job have a real influence on a given individual’s retirement readiness picture. Retirement industry practitioners are probably already aware of this tendency, CRR notes, in that workers in traditionally blue-collar industries are generally expected to retire earlier (and save more aggressively). But even industry pros may not be aware of just how much subtle on-the-job factors, such as workplace culture, inter-employee relationships and the potential for an enjoyable life post-work, can skew one’s retirement readiness outlook and decisions.

In fact, CRR argues there is no shortage of evidence that so-called “non-financial” factors have a formative influence on one’s retirement outlook—even more than basic dollars-and-cents projections.

“If financial considerations drive retirement decisions, workers financially prepared for retirement would exit the labor force immediately and those not prepared would work longer,” the report explains. Looking at the data, this is clearly not what happens. “A study by Steven Haider and David Loughran, for example, shows that this is not the case for those who remain in the labor force past age 65.”

Using data from the Census Bureau’s Current Population Survey (CPS), the Haider-Loughran study finds that the individuals most likely to be working at these older ages are, in fact, those with the strongest finances—those with the most education, greatest wealth, and highest lifetime incomes.

“Such workers have higher labor force participation at all ages, as they have fewer health impairments and better employment opportunities,” CRR explains.

NEXT: Why the gaps exist 

Another interesting trend measured by CRR is that the objective quality of work offered to those over age 70 is not that great, especially when it comes to pay and other financial factors.

The CRR researchers point to data from the “AHEAD cohort from the Health and Retirement Study (HRS),” a biennial survey of a panel of older individuals. That study finds those still working past age 70 “earn significantly lower hourly wages than they had earlier in their careers.” This is yet more evidence, CRR argues, that non-financial factors such as workplace engagement and having a sense of purpose outside of work directly control one’s decision to retire.

Of course, no amount of workplace happiness can keep one working forever. In this sense it is also important to consider one’s career/industry in asking whether qualitative factors such as happiness will drive the retirement date. In other words, many who want to work later because they enjoy it simply will not be able to. (See "Retirement Planning Takes a Life Vision.")

The CRR brief goes on to assess the effect of a wide range of workplace characteristics on labor force transitions (based on worker statement data from the HRS), “from physical demands and stress levels to age discrimination and the enjoyment of work.” The HRS assessment was initially collected by asking respondents the extent to which they agree with statements such as “I really enjoy going to work” on a scale from 1 to 4, with 1 meaning “strongly disagree” and 4 meaning “strongly agree.”

According to the CRR there is clearly a “statistically significant relationships between a 1-unit increment on the response scale and the likelihood that a full-time worker remains in full-time employment, shifts to part-time employment, or retires over the two-year period between HRS interviews. As expected, jobs that require physical effort or good eyesight increase the likelihood of retirement.”

The CRR brief concludes that “non-financial benefits seem far more important than non-financial costs,” both in keeping some workers in the labor force and drawing others into retirement. The full findings are available for download here.

Data & Research February 12, 2016

Overhauling a DC Plan to Move the Needle

Plan advisers should encourage their plan sponsors to revisit the purpose of the DC plan.
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Investment provider SEI takes a look at the coming retirement crisis in its new report, “Do DC Plans Need to Be Redesigned?” The 2016 Defined Contribution Outlook especially scrutinizes what plan sponsors expect out of their plans.

More than half of plan sponsors agree that the original purpose and current use of DC plans do not match up. The findings clearly show that although companies continue to shift away from defined benefit (DB) plans to DC plans as the dominant retirement savings vehicle for participants, plan sponsors sometimes seem reluctant to tinker with plan design.  

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Plan sponsors seem to be waking up to the fact that the DC plans may be inadequate to support employees in retirement, or even allow them to retire at all. According to SEI’s report, more than half of plan sponsors (57%) said the original intent of the DC plan was a supplementary savings vehicle for employees with access to a DB plan. And even more plan sponsors—nearly two-thirds (62%)—said they believe their employees’ primary source of retirement income will be the company DC plan, a rise from 57% of plan sponsors in a 2014 SEI report.

According to Frank Wilkinson, director of market research for SEI, the numbers show plan sponsors beginning to accept a changing landscape. “Nearly 84% of plan sponsors are not confident that their employees will have enough to retire at retirement age,” he tells PLANADVISER, “and 88% feel their business will be impacted in a negative way if people can’t retire.”

Wilkinson notes that in the wake of this recognition, plan sponsors can display either action or inertia. “We’ve seen bits and pieces [of action],” he says. “There’s some unbundling from the recordkeeper, some use of single-manager and multi-manager funds instead of recordkeeping funds.” SEI’s report shows nearly two-thirds of those surveyed (62%) believe it is a good idea to separate asset management services from recordkeeping.

Wilkinson says some plan sponsors fall into a category of more forward-thinking organizations trying to build the DC plan into a competitive differentiator that would allow people to retire at the right age with adequate assets. These plans share several characteristics: they tend to be larger plans with a paternalistic approach. “They want their employees to retire because they care,” he says.

NEXT: What the outlier organizations are doing to move the needle. 

Wilkinson describes these plans as outliers, and says they tend to be organizations with both DB and DC plans that now are looking to carry some of the aspects of the DB plan to the DC plan, making it a more sophisticated vehicle. It’s not a new trend: For some years, the industry and lawmakers have been attempting the “DB-ization” of DC plans. According to Wilkinson, these plans are scrutinizing the funds and aiming to position their employees to meet retirement goals.   

The first step for plan sponsors is to recognize the DC plan as the primary retirement vehicle, says Joel Lieb, director of defined contribution advice for the institutional group at SEI. The next is to set company-specific goals for the plan. Ojectives will vary by company and industry, Lieb says, but they tend to center on retirement. A construction company, for instance, might have an employee base that generally retires by age 55 instead of 65. Lieb says the goal would then be to structure the plan to reflect this earlier retirement age.  

The company will need to look at where they are invested today, assess employee deferral rates and perform a liability study, not unlike the way a DB plan looks to match assets and future liabilities. “Look at what the contributions are, so that you can ‘present-value’ those future payments,” Lieb says.

Another goal could be achieving income replacement, Lieb says, so a plan could be built around getting employees as close as possible to an 80% replacement ratio. Plans should capture their baseline in order to determine the gaps that might stand in the way of achieving plan goals. “Are low contribution rates causing a gap?” Lieb asks. “Are employees too conservative at one end of the spectrum or too aggressive at the other? Those things will come out in the analysis.” It’s time-consuming to accumulate all the data, but it tells an important story, he says.

After the analysis shows a plan its current status, Lieb says it’s easier to determine the path. Wilkinson says the process can help the plan sponsor sharpen the focus. Investments might need rethinking; perhaps the plan needs to make sure participants are using the target-date funds (TDFs) more appropriately.

While some plans still have a mindset where plan sponsors think of the DC plan as supplemental, Wilkinson says, more plans realize it’s the primary retirement vehicle, and they will need to put more resources into it: “The days of plan sponsor inactivity are over.”

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