Data & Research May 4, 2016

Former GAO Leader Calls for a Retirement Rethink

David Walker, former head of the Government Accountability Office, called on the retirement industry to work alongside government and community leaders to build a better financial future for Americans.
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Speaking at the Plan Sponsor Council of America’s 69th Annual Conference, The Honorable David M. Walker, currently senior strategic adviser in PwC’s Global Public Sector Practice, former Comptroller General of the U.S., and former head of the Government Accountability Office, said participants need to be educated about the need to plan and save for retirement, to invest well, preserve assets and to appropriately draw down assets in retirement.

Walker noted that Social Security should now be looked at as a foundation for retirement income, but not the whole house. “The Federal Government has grown too big, promised too much, and needs to restructure,” he told attendees.

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Walker noted that in 1912, federal government expenditures approached 3% of the annual gross domestic product (GDP); in 2015, it was closer to 20%. In 1912, Congress controlled 97% of the federal budget; now it controls 32%, he said. In addition, the U.S. debt to gross domestic product (GDP) ratio is about 75%; when Social Security and Medicare is added in, the debt to GDP is 105%.

“Future generations are getting a huge burden,” Walker said.

NEXT: What needs to be done

The government focuses more on consumption than investing, according to Walker. He suggested that with the looming insolvency of Social Security, the government needs to restructure and use the power of compounding. If nothing is done about Social Security, it will have to cut benefits, and plan sponsors and participants will be affected by this downdraft of unfunded retirement obligations and escalating health costs. “Soon, there will be only two workers for every retiree,” Walker pointed out. “The U.S. is not exempt from the laws of prudent finances.”

Changes Walker suggests for Social Security include increasing the base defined benefit, gradually increasing the normal retirement age (with exceptions for certain occupations), using a more accurate measure for inflation, and adding a supplemental automatic savings account.

For health care, Walker said it should be universal for all with options for additional coverage paid for by employers or employees.

Walker noted that employee benefit plans represent the largest pool of capital in the world, and many pensions, including public plans, are severely underfunded.

“It is increasingly important to supplement Social Security,” he concluded, adding that “It’s not too late to create a better future for employees, but we need to start now.”

Data & Research May 3, 2016

Workers Need Help Understanding Their Retirement Plans

A survey found that employees are confused about benefits including group retirement plans, but retirement is their most important financial goal and they would like help from a professional to achieve it.
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Among workplace benefits, employees find group retirement plans such as 401(k) and 403(b) the most difficult to understand, according to the Four Seasons Financial Education 2016 Employee Financial Wellness Survey. Thirty-nine percent of workers said their retirement plan is the hardest to comprehend, while 35% said they fully understand all their employer benefits. The second most difficult benefit to understand is the group health insurance plan, cited by 26% of employees. Health savings account and flexible spending accounts tied for third most difficult (20%), and life insurance was reported to be the least complicated benefit to understand (13%).

When asked how well they understand their employers’ 401(k) plan investment options, 14% of employees who have no financial wellness programs at work said “extremely well.” That number increased to 22% for employees who have a wellness program.

“This data tells us even more work and innovation are needed to help employees understand their employer retirement plans,” says Travis Freeman, president of FSFE. “It likely requires a team effort between the employer, plan adviser and financial wellness program.”

Despite retirement plans being the most difficult benefit to understand, overall workers said retirement is their most important financial goal (35%), followed by budgeting and managing debt (33%) and financial planning (22%). Tax planning was the least important goal (1%). When broken down into age groups, however, the survey found that only 7.6% of employees ages 18 to 29 consider retirement their top financial goal. This group is most focused on budgeting and paying down debt. Women were also more likely than men to name budgeting and debt as their primary financial goal (36.5% compared with 28.2%, respectively).

Employees said access to one-on-one guidance with a professional would be most helpful in achieving their retirement goals (48%), followed by more retirement education (38%), a customized retirement plan (37%), and calculators and tools (23%). The survey also found that many workers would be open to the possibility of sharing the cost of a workplace financial wellness program that could help them achieve their goals (49%). Thirty-three percent said it’s unlikely, and 18% said it’s likely.

The survey results are available here.

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