Data & Research March 2, 2016

Housing Debt Is Invading Retirement

Research from LIMRA Secure Retirement Institute finds more Americans are entering and living in retirement with a mortgage representing their biggest source of debt.
Reported by

Home ownership remains widespread among retirees, according to the latest installment of the LIMRA Secure Retirement Institute Industry Trends series, and so does mortgage indebtedness.

Among retirees with $100,000 or more in assets, nine out of 10 own a primary residence, LIMRA finds, dropping to seven in 10 among retirees with fewer assets. “At one time, few people retired with mortgage debt,” LIMRA explains, “but that has changed in recent years.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

In 1989, just 11% of homeowners ages 65 to 74 were still paying the bank back for their home equity, averaging $29,000 of mortgage debt at retirement. By 2013, 43% of these households carried a mortgage, with the average debt rising significantly to $136,000.

Even retirees age 75 and older are carrying more debt burden, according to LIMRA Secure Retirement Institute. As of 2013, 2.7 million households, or 20% of the 75-plus group, had mortgage debt. Looking at the same population segment in 1989, only 5% still carried a mortgage.

“Institute research finds people carry debt into retirement for many reasons, such as using their home’s equity to fund health care, education, consolidating other loans and other expenses,” LIMRA explains. “Even with low interest rates, mortgage debt represents a cash outflow that can eat away at retirement income. In the best circumstances, a couple’s collective retirement income will allow them to stay on top of their living expenses and debts.”

Unfortunately, the research also shows “very few plan for the inevitability of meeting all these obligations when one of them dies. For this reason, an adviser’s best counsel is to encourage both spouses to be actively involved in their financial decisions as the surviving spouse typically lives for an extended period of time.”

The LIMRA Secure Retirement Institute Industry Trends Series is archived here.

Client Service March 2, 2016

Reenrollment Seen as the Next Step After Auto Enrollment

It gets participants' portfolios on track and presents an opportunity to select lower-cost funds.
Reported by

One of Vanguard’s largest plan sponsor recordkeeping clients, a company with nearly 18,000 participants and more than $1.2 billion in assets, did a reenrollment to get more of its employees invested in an age-appropriate target-date fund (TDF). A key change in the investment menu was the replacement of actively managed TDFs as the plan’s qualified default investment alternative (QDIA) with a passively managed, significantly lower-cost TDF suite.

Following the reenrollment, 94% of participants held an age-appropriate allocation in the TDFs, representing 74% of plan assets. That was a marked improvement from holdings prior to the reenrollment, when only 25% of participants held a TDF, representing 5% of plan assets. In addition, the percentage of participants holding an extreme equity allocation (i.e. more than 90% or less than 20%) decreased from 23% to 7%.

Six months after the reenrollment, only 16% of participants fully or partially opted out of the default TDF, and only 6% of participants opted out into a portfolio without any target-date holding. The opt-out rate for inactive participants was only 4%.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

As a result of the change in the QDIA to lower-cost funds, participants now pay only 10 basis points in investment fees, a 75% decrease from the 40 basis points they paid previously.

Vanguard notes that reenrollment is another tool at advisers’ and sponsors’ disposal to improve participant outcomes, and that it is particularly helpful for older investors who may not have been automatically enrolled into their plan following the Pension Protection Act of 2006.

“We’ve seen sponsors initiate vast improvements in retirement savings behaviors with widespread adoption of automatic features and the choice of target-date funds as the default option,” says Martha King, managing director of Vanguard’s institutional investor group. “Reenrollment is the next logical step on the path to improving Americans’ retirement readiness.”

«