Data & Research November 19, 2014

Nearing Retirement, and Worried the Money Will Run Out

Half of employees approaching retirement wish they had started saving sooner, a TIAA-CREF  survey finds.
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Many survey respondents say they wish they had made smarter financial decisions earlier in their career, including saving more of their paycheck (47%) and investing their savings more aggressively (34%). These regrets underscore how important it is for employees, with support from their employers, to start thinking about retirement planning early and remain engaged in the process throughout their careers.

Forty-five percent of respondents ages 55 to 64 say financial readiness is the most important factor in determining when they will retire. Yet these individuals haven’t always taken advantage of many common retirement planning and saving strategies that could help them feel financially prepared. Only 35% say they saved in an individual retirement account (IRA) or met with a financial adviser; 32% have calculated the income they would need for each year of their retirement; and 12% have saved in a health care savings account.

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Not making the most of these options leaves many Americans feeling uncertain about their financial futures, with 68% of those approaching retirement saying they are unprepared for what lies ahead.

Plan sponsors need to understand who employees are, how to reach them, and what they need to know to take action, says Ben Lewis, managing director of TIAA-CREF. “Examining the retirement behavior of different demographic groups can help you understand your employees’ needs,” he tells PLANADVISER.

For example, Lewis says, survey results from earlier this year show that Generation Y employees are significantly more likely to have changed how their money is invested in the past year (59%) than those 35 years or older (42%). “As a result, sponsors may want to reiterate the importance of rebalancing with workers 35 years or older while working with Gen Yers to ensure that the choices they are making are the right ones for their life stage,” he says.

Targeted Messaging

Plan sponsors can look to different demographics to determine how best to tailor their messaging. According to Lewis, a survey of younger Americans ages 18 to 34 found most of them (79%) said it would be helpful to have advice that is personalized for their particular life stage. This generation is more likely to value online tools and calculators (74% vs. 57% of the general population), seminars (68% vs. 53%) or webinars (67% vs. 54%) as channels for financial information and advice, TIAA-CREF found in its research.

Lewis points to TIAA-CREF research that shows going online is just the start to reaching Generation Y savers, and it can be helpful to include the following engagement methods to get younger participants on the road to saving:

  • Peer learning and interaction;
  • Offer customizable tools and resources, such as calculator;
  • Keep the tone entertaining and fun;
  • Utilize online, social and mobile platform; and
  • Address Gen Y-specific challenges, such as the issues that aging Baby Boomers issues they face.

Communications should focus on encouraging employees to take three actions, Lewis says. “Enroll in the plan, increase contributions every year, and check asset allocations every year to rebalance if necessary,” he says. “Communications programs will benefit from the “4 Cs”: continuous dialogue; segmented, needs-based content; channel of choice; and a consultative approach.”

TIAA-CREF’s research on older workers reinforces the idea that preparing for retirement should not be a sprint to the finish line, but a long-distance run that requires careful planning throughout an adult’s life, according to Teresa Hassara, executive vice president of TIAA-CREF’s institutional business.

“This will help prevent those nearing retirement from feeling like they have to play catch-up near the end of their careers,” Hassara says. “Developing and acting on a carefully constructed plan can help individuals at any age build a financially secure future.”

Worries Abound

According to the survey, financial challenges make up three of the top four concerns for individuals closing in on retirement. Many worry about inadequate resources to cover monthly expenses (45%), while others are anxious about how health care costs (35%) or inflation (32%) could deplete their retirement savings. However, despite these concerns, only 10% of this age group has purchased an annuity, the only retirement product that guarantees an income stream for life, TIAA-CREF says.

The firm notes that according to the Social Security Administration, a 65-year-old male in 2010 could expect to live an average of another 17.57 years, while a woman of the same age could expect to live an average of another 20.20 years.

These challenges are leading some to reconsider what their retirement will look like. Forty-two percent of survey respondents ages 55 to 64 say they plan on working a part-time job during retirement, 39% say they'll be more conservative about how much they spend on entertainment and other luxuries, and 23% say they will downgrade their living quarters to something less costly. These realities may conflict with their desire for flexibility to do “what they want, when they want” during retirement, which 57% of this group says they are most looking forward to in their retirement years.

“If Americans find that their retirement savings aren’t adequate to meet their expectations about retirement life, it’s never too late to make adjustments,” Hassara says. “In fact, if a 55-year-old starts to max out his or her employer-sponsored retirement plan contribution next year and continues to do so for the next 10 years, those savings could grow to about $325,000. Employers and financial advisers can work with individuals to develop a robust retirement plan at any life stage so they can pursue the kind of retirement they envision.”

The Ready to Retire Survey was conducted by KRC Research online between May 19 and May 28 among a sample of 1,000 employed adults, ages 18 years and older, currently contributing to an employer-sponsored retirement plan. Data was weighted by key demographic variables to ensure the sample is representative of the employed population contributing to defined-contribution plans. Respondents for this survey were selected from among those who have volunteered to participate in online surveys and polls.

More information about the 2014 TIAA-CREF Ready to Retire Survey is available in the executive summary on TIAA-CREF’s website.

Data & Research November 19, 2014

Plan Sponsors Should Optimize Retirement Readiness Efforts

More than three-quarters of large and midsize U.S. employers that sponsor 401(k) and 403(b) defined contribution (DC) plans say retirement readiness has become a major issue for their employees.
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A survey by Towers Watson shows a vast majority of plan sponsors have taken steps to boost employee retirement readiness through improved plan designs and communications. However, not all plan sponsors are optimizing these strategies. For example, more than two-thirds of companies (68%) offer automatic enrollment to at least some of their workers, but far fewer (26%) automatically re-enroll non-contributors or those deferring less than the default amount. Towers Watson says employers have the opportunity to engage slow or stagnant savers by using re-enrollment.

Similarly, 54% of companies provide automatic escalation, but only 28% mandate it. Among sponsors that automatically enroll some or all workers, approximately two-thirds offer automatic escalation of contributions, with 35% making it truly automatic.

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Aside from automatic enrollment and automatic escalation, the appeal of an employer match continues to be one of the single largest influencers of the amount and level of employee savings, according to Towers Watson. The Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey found 95% of plan sponsors offer a matching contribution to some or all of their workers. One-third of employees save at the match threshold and another one-third save more than the threshold. Knowing that many employees tend to save at the match threshold provides the opportunity for employers to reshape the match to encourage increased levels of savings and improved retirement readiness, Towers Watson says.

Fifty-four percent of companies offer Roth features in their plans, up from 46% in 2012, according to the survey. Additionally, 18% of respondents are planning or considering adding Roth features by 2016. Of those that currently offer Roth, 45% also allow other after-tax contributions. While this option has increased, utilization still remains very low, with only 8% of highly compensated employees and 11% of non-highly compensated employees using Roth options for savings. Towers Watson suggests that organizations that want to be proactive about driving up the use of their Roth provisions should target messages to employees not currently making Roth contributions.

Similarly, the survey shows a majority (59%) of companies offer a health savings account (HSA) as part of their account-based health plans, but only one-third (32%) of eligible employees are taking advantage of this option, with higher enrollment rates reported by companies with larger assets. Making the effort to increase employee awareness and understanding of available HSA accounts can be worthwhile if employers want to ease concerns about affording health care in retirement, advance the mark on retirement readiness and offer tax advantages. Also, incentives, such as an employer HSA contribution, can drive employee savings.

Towers Watson notes that fees affect employees’ ability to be ready for retirement. When employees are required to pay fees, they are taken directly from participant account balances, so the higher the fees, the less employees have in the market. Over time, the impact can be sizable. The firm says adoption of a fee policy is a good practice and can be one component of optimal plan management. According to the survey, most employers have conducted a high-value fee benchmarking study in the last three years, leading nearly half (48%) to reduce administrative fees and 34% to reduce investment expenses.

Survey results show employers rely heavily on traditional, passive communication methods (e.g., account statements, newsletters, group meetings, online education, webcasts) and that those methods of communicating with and educating employees are not working. Only 12% of respondents say employees know how much to save, and only 20% say employees feel comfortable making investment decisions. Less than 10% of survey respondents use mobile apps extensively or have tried “gamification,” which uses game design to motivate employees to achieve savings goals.

However, employers are showing signs that they are ready to make a more substantial investment in communications, with 84% reporting that they expect to increase efforts to educate employees on saving and investing over the next two or three years. More importantly, 78% say they will increase their use of technology to deliver information to employees over that same time period.

Towers Watson says plan sponsors should take steps to analyze their DC plan provisions with results in mind. This will broaden their considerations to include related health care factors and help them make decisions based on what is appropriate for their plans, given the unique needs of their employee demographics. Plan sponsors should also regularly measure the effectiveness of their DC plans based on how well the plan is helping employees meet their saving goals. This involves looking beyond participation, deferral rates and asset allocations, the firm says.

The 2014 Towers Watson North American Defined Contribution Plan Sponsor Survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a DC plan. These companies sponsor 401(k) plans or 403(b) plans, represent a range of industry sectors, and have more than 1,000 employees and $10 million or more in assets.

The survey report may be downloaded from here. 

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