Moving the Needle on Retirement Confidence

EBRI’s latest survey data shows Americans are gaining confidence in some important areas related to retirement planning, but people realize they could do more to prepare.

The 25th Retirement Confidence Survey (RCS) from the Employee Benefit Research Institute (EBRI) finds Americans’ confidence in their ability to afford a comfortable retirement has continued to rebound from the record lows experienced between 2009 and 2013, but this increased level of confidence does not appear to be grounded on objectively improved retirement preparations.

According to the report, “The 2015 Retirement Confidence Survey: Having a Retirement Savings Plan a Key Factor in Americans’ Retirement Confidence,” 22% are now very confident (up from 13% in 2013 and 18% in 2014), while 36% are somewhat confident. Twenty-four percent are not at all confident (statistically unchanged from 28% in 2013 and 24% in 2014).

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The increased confidence since 2013 is strongly related to retirement plan participation, the report says. Among those with a plan, the percentage very confident increased from 14% in 2013 to 28% in 2015. In contrast, the percentage very confident remained statistically unchanged among those without a plan (10% in 2013, 9% in 2014, and 12% in 2015).

Retiree confidence in having a financially secure retirement, which historically tends to exceed worker confidence levels, has also increased, with 37% very confident (up from 18% in 2013 and 28% in 2014). The percentage not at all confident was 14% (statistically unchanged from 14% in 2013 and 17% in 2014).

Worker confidence in the affordability of various aspects of retirement also rebounded. In particular, the percentage of workers who are very confident in their ability to pay for basic expenses increased (37%, up from 25% in 2013 and 29% in 2014). The percentages of workers who are very confident in their ability to pay for medical expenses (18%, up from 12% in 2011) and long-term care expenses (14%, up from 9% in 2011) are slowly inching upward.

Sixty-seven percent of workers report they or their spouses have saved for retirement (statistically equivalent to 64% in 2014), although nearly eight in 10 (78%) full-time workers say that they or their spouses have done so. Still, a sizable percentage of workers report they have virtually no savings and investments. Among RCS workers providing this type of information, 28% say they have less than $1,000, though those who indicate they and their spouse do not have a retirement plan, such as an individual retirement account (IRA), defined contribution (DC) or defined benefit (DB) plan, are far more likely than those who have a plan to report this low level of savings (64% vs. 9%) and far less likely to report having saved at least $100,000 (3% vs. 35%).

Cost of living and day-to-day expenses head the list of reasons why workers do not save (or save more) for retirement, with 50% of workers citing these factors. Nevertheless, many workers say they could save a small amount more. Seven in 10 (69%) state they could save $25 a week more than they are currently saving for retirement.

Continuing the Upward Trend

Luke Vandermillen, vice president of retirement and investor services at The Principal, a co-sponsor of the survey, says this is an indicator that people know they could do a better job managing day-to-day expenses and know they should be saving more for retirement, and now it is up to plan sponsors and advisers to capitalize on that and help people make those decisions.

“There are a number of things plan sponsors can do to make saving easier for workers,” Vandermillen, based in Des Moines, Iowa, tells PLANADVISER. “The first is thoughtful plan design, making participation as stress-free and easy as possible.” He explains that this includes automatic enrollment, automatic deferral escalation at 1% per year, and setting an asset allocation product as the default investment.

Vandermillen warns that plan sponsors should not set the default deferral rate too low. “One, two or three percent is too low. We find, and the research backs up, that if you default at 6% to 8% and auto increase 1% each year, most participants do not opt out,” he says.

For the 2015 RCS, workers participating in a DC plan were asked what they would do if they changed jobs and their new employer automatically enrolled them into the workplace retirement plan, deferring 3% or 6% of their salary into the plan. At a 3% deferral rate, half of participants report they would raise their contribution. Another 39% would let the 3% deferral stand. Just 4% each would reduce the contribution or stop the contribution altogether. At a 6% deferral rate, three in 10 would raise the contribution and 44% would continue the contribution at 6%. Two in 10 would reduce the contribution, and 3% would stop it altogether.

If their employer were to implement auto-escalation, increasing the percentage of salary contributed to the plan by 1% each year, many plan participants indicate they would be likely to let their contribution continue to escalate to 10% or more. While 4% would stop the auto-escalation before it reached 5%, one-quarter (24%) would let it continue to between 5% and 9%. Others would allow their contribution to reach 10% to 14% (24%), 15% to 19% (11%), or 20% or more (11%).

Another way plan sponsors and advisers can help retirement plan participants maximize their savings is to show them what they will need, according to Vandermillen. The 2015 RCS found less than half (48%) of workers report they and/or their spouse have tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement. Vandermillen says tools such as The Principal’s Retirement Wellness Calculator helps people know if they are on the right track by showing them, on a scale from 1 to 100, their level of readiness.

According to the RCS report, while investment education and advice from an online provider could be a valuable and affordable tool for many, just 4% of workers report being very interested in obtaining investment education and advice online, and 22% say they are somewhat interested. The majority of workers are not too (26%) or not at all (48%) interested.

Vandermillen notes the survey does not get into the reasons for little interest in online education and advice, but he wonders if it is because plan sponsors and advisers may not be focusing on the right types of education and advice. Online resources are most effective when they meet people where they are in the retirement readiness spectrum, not necessarily using complex calculators, but simplifying the message, he says, and he suggests reinforcing the message with education meetings, mailers, and on company or provider websites. Vandermillen adds that online education and advice should be made readily available to participants and should be usable on mobile devices.

“The finding that retirement confidence has moved up is encouraging, but there’s more work to be done,” Vandermillen says.

The 2015 RCS report is available at www.ebri.org.

Retirement Planning Should Consider the Unexpected

There are some informative discrepancies between current workers' expectations for retirement and the circumstances actually experienced by people leaving the U.S. workforce, EBRI says.

Sixteen percent of workers in the 2015 Retirement Confidence Survey (RCS) from the Employee Benefit Research Institute (EBRI) say the age at which they expect to retire has changed in the past year, and of those, the large majority (81%) report their expected retirement age has increased.

Just 9% of workers say they plan to retire before age 60, compared with 36% of retirees who report they retired that early. Sixteen percent of workers plan to retire between the ages of 60 and 64, although 29% of retirees retired in that age range. More than one-quarter (26%) of workers plan to wait (compared with 6% of retirees who actually waited) at least until age 70 to retire, and 10% of workers indicate they will never retire.

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Luke Vandermillen, vice president of retirement and investor services at The Principal, a co-sponsor of the survey, notes that workers and retirees responding to the survey say they spend little time doing retirement planning—less than they spend planning for the holidays. “This leads to misconceptions,” he tells PLANADVISER. “Workers think if they don’t have enough money to retire, they will just work longer or work in retirement, but sometimes people can’t retire on their own terms because of health issues or company downsizing.”

The RCS has consistently found that a large percentage of retirees leave the work force earlier than planned (50% in 2015). Many retirees who retired earlier than planned cite hardships for leaving the work force when they did, including health problems or disability (60%), changes at their company, such as downsizing or closure (27%), and having to care for a spouse or another family member (22%).

In another expectations gap, the RCS has consistently found that workers are far more likely to expect to work for pay in retirement than retirees are to have actually worked. The percentage of workers planning to work for pay in retirement now stands at 67%, compared with just 23% of retirees who report they work for pay in retirement.

Vandermillen says plan sponsors and advisers can help employees mitigate dashed retirement expectations by focusing more on retirement outcomes. This includes thoughtful plan design and tools to track retirement readiness (see “Moving the Needle on Retirement Confidence”).

According to the RCS, many workers continue to be unaware of how much they need to save for retirement. Less than half (48%) of workers report they and/or their spouse have ever tried to calculate how much money they will need to have saved so that they can live comfortably in retirement.

While the majority of retirees (90%) report that Social Security provides a source of income for them and their spouse (63% say it is a major source of income), workers and their spouses continue to expect to draw their retirement income from a wide variety of sources. Eighty percent of current workers expect Social Security to be a major or minor source of income in retirement, but they believe that personal savings will also play a large role.

At least two-thirds each say they anticipate receiving retirement income from an employer-sponsored retirement savings plan (74%), an IRA (69%), and other personal savings and investments (66%). Seventy-three percent expect employment to provide them with a source of income in retirement, and 55% expect to receive income from an employer-sponsored traditional pension or cash balance plan. The RCS report notes that only 32% report that they and/or their spouse currently have an employer-sponsored traditional pension or cash balance plan with a current or previous employer.

The reason workers may be less likely to expect than retirees are to receive income from Social Security is confidence in Social Security’s ability to maintain the current value of benefits paid to retirees is low. Just 9% of workers are very confident that the Social Security system will continue to provide benefits of at least equal value to the benefits received by retirees today, and 26% are somewhat confident.

All in all, more than half (56%) of workers expect to be able to manage in retirement with no more than 70% of their preretirement income. Another 23% expect to be able to manage with 70% to 85% of preretirement income. Fifty-seven percent of retirees say their income in retirement is no more than 70% of their preretirement income, and 12% say it is 70% to 85%.

Compared with what they expected when they first retired, retirees are more likely to say their expenses in retirement are higher than expected (37%) rather than lower (24%). Thirty-five percent report their expenses are about the same as expected.

“Being able to control all variables is something people need to think about—spend a few more minutes planning and it will produce better outcomes,” Vandermillen says.

According to the RCS, workers express a moderate level of interest in purchasing an insurance product when they retire that begins providing guaranteed monthly income at some point in the future, such as age 80 or 85. Eight percent of workers indicate they are very interested, and 30% report they are somewhat interested.

Vandermillen thinks the reason more workers are not interested in guaranteed income products is mostly an education issue. He says first, the efforts The Principal and other providers have made to show retirement plan participants how their account balances translate to income in retirement needs to continue. In addition, workers may have heard about guaranteed income products, but don’t understand them. “They need to not only know how much they need in retirement, but how they can receive it,” he states.

The 2015 RCS report is available at www.ebri.org.

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