What Participants Need

PLANADVISER: What can employers and the advisers who advise them do to address this new scenario we’re in where people are getting back to normal, not saving as much as they were, maybe, during the pandemic, but also dealing with higher expenses and volatility?

Kim Cochran: I just read an article that said credit card debt was at an all-time high—that it had increased $61 billion, which is shocking. A year and a half ago, I was saying that everybody was flush with cash because they weren’t going to the office, they weren’t paying for parking or getting coffee at Starbucks. How things have changed!

When we talk about retirement savings, sometimes we have to back up and say, if someone has a lot of expenses and things are really costly, should they be putting more money into the retirement plan?

Advisers and the retirement industry always said, “You can’t afford not to save for your retirement.” But now I’m a contrarian with that. I think, right now, if you have personal financial challenges, you need to get those straight. What employers can do to really help here comes down to education, whether there’s a financial wellness coach or software or an adviser—someone who could talk to them about proper budgeting, what not to put on a credit card, etc.

How do they pay down that debt? I think that’s the biggest issue we’re running into with interest rates going up. If someone has a tremendous amount of debt, it doesn’t matter how much they save for their retirement; they still have that debt to pay back. I’m really concerned about debt management now.

PA: As Kim said, it’s usually “Save—always save.” What is your sense of things now?

Catherine Collinson: For context, Transamerica Center for Retirement Studies does an annual retirement survey of workers, appraising where they stand with their retirement savings, their attitudes, beliefs, how well they’re doing. In almost 23 years of looking at retirement, what we’ve found is it’s a much bigger story—it’s a holistic financial picture.

As Kim said, one thing the industry can do right now is to offer education. Consistently we see that workers want more information and guidance from their employer on how to achieve their retirement goals, [they want help understanding] their financial big picture. Every provider already has this education. It’s a matter of getting it to the audience.

PA: We hear a lot from retirement plan advisers and plan sponsors about that: participants’ holistic wealth picture and how that translates into when they can retire. How can advisers and plan sponsors help guide people?

Bridget Bearden: Besides increasing awareness of educational opportunities, as Kim and Catherine have mentioned, they can by just increasing awareness overall of what it means to be financially secure and how retirement savings can contribute to that.

In regard to retirement age, our Spending and Retirement Survey was fielded among retirees ages 62 to 75. More than half said they retired earlier than expected. The most common reasons were being able to financially, but also due to a health condition or a disability. It’s very important for advisers and employers to be talking to the employees, not just about what they’ve saved so far but about how their bodies are handling their current workload.

Can they continue in a full-time capacity? And are any family members disabled or in need of caregiving assistance, because to help a family member or a loved one could also be the reason an employee retires early. We also find that some retirees move in and out of retirement, especially those with physical conditions that limit their ability to work full time consistently. So as health improves, they might go back to work for a short while and then go back into retirement. And it could be the health of themselves or, again, a loved one.

Cochran: When we’re talking with organizations, we realize that, typically, the 60- to 65-year-old workers are at the top of their game financially, careerwise, knowledgewise. So, many times they’ll retire because they think they should and they want to have some fun. They spend a couple of years, and then they come back for another career. It’s difficult to replicate them with new employees coming in. So we’re seeing many of them going back into the workforce but more in a consulting role.

Collinson: In our research, we see the trends that Bridget and Kim are talking about. We also see that today’s workers have expectations of working beyond traditional retirement age. They envision it as a flexible transition, not full-blast, full-time one day, never again the next. They have a real desire for a phased retirement and something that’s flexible and reflective of their lives and aspirations.

They’re just as likely to cite one or more healthy-aging-related reasons as financial reasons. Many want to stay active, involved, keep their brain alert, enjoy what they do and the sense of purpose that comes with working, and this strikes me as a whole new frontier for plan advisers and plan sponsors. Because, in our research and anecdotally, talking to as many people as I can about this, many plan sponsors are just not yet thinking in these terms and about how they could potentially tailor their benefits offerings to complement this desire for a flexible retirement.

PA: Let’s talk about the people who don’t have enough saved, or who are afraid they’ll draw down what they do have saved, then have nothing left. Catherine, you’ve written about the saver’s tax credit, which is one of several resources the industry may really want to tap into, particularly as we now have state mandates in some cases or incentives for businesses to offer retirement plans. Do you think there will be more of these tax credits and potentially more ability to use them?

Collinson: I love this question because we have, societally, so many opportunities to save for retirement on a tax- advantaged basis. And we’ll start with the saver’s credit. Transamerica Center for Retirement has been focused on raising awareness of the saver’s credit pretty much since it was enacted in 2001 as part of EGTRRA [Economic Growth and Tax Relief Reconciliation Act] and then made permanent in 2006 as part of the Pension Protection Act.

What we found is that awareness really helps, and the landscape has changed over the years. Once upon a time, [through 2018,] the IRS had the 1040EZ form, and people eligible for the saver’s credit were more likely to use that form, which didn’t include the saver’s credit. Since then, the IRS has addressed that through instructions—and now its Free File program.

The saver’s credit is a tax credit for eligible savers who save for retirement in a qualified retirement plan or individual retirement account. The income eligibility limits are designed to be equitable so to help people who have less income available to save, to give them a little boost.

We’ve learned a lot both through our research and the broader economic research that’s gone on with the saver’s credit.

There was one major issue that prevented it from really addressing its audience, and that was that it’s not refundable. You had to have a tax liability to be able to claim it. And, especially as income levels have changed over the years and tax laws have changed, there are many more tax filers now who don’t have a tax liability because of their income bracket. They fall in at the lower end of the spectrum; therefore, they’re not fully benefiting. We have to wait till 2027 when the saver’s match begins, which will be available to everyone who contributes to a retirement plan or IRA and meets the income eligibility requirements—regardless of whether they have a tax liability or not. So this is something that’s really exciting to talk about for advisers, for plan sponsors; there’s much goodwill to be generated from it. And still fewer than half of workers are aware that it exists.

Another benefit people need to hear about is the catch-up contribution. Those have been around for over 20 years. As people grow older and become eligible for things, there’ll always be a new audience and something to talk about and to help people take advantage of these opportunities they might otherwise not be aware of.

PA: Yes, and to your point about the saver’s credit, there’s a way for the industry to generate goodwill with it, to talk about it. But also, as we talk about really addressing the retirement gap and expanding the pool of people who are able to save, there’s money on the table [that people could know about].

Cochran: Catherine, you hit the nail on the head. The saver’s tax credit was what I’d call a nothing burger because it never really applied. You never really had a scenario where employees said, “Hey, I can afford to save $1,000, and I’m gonna get the credit because there are no other credits invalidating it.” So, now we’re moving forward. We need to really put it in place when it’s available.

PA: There’s a movement now toward holistic retirement planning. How should advisers work with plan sponsors on financial wellness solutions, and when should they move into product areas such as managed accounts, annuities for guaranteed income or just general wealth management?

Cochran: There are great tools out there. There have always been great calculators at the best recordkeepers, but the numbers show that less than 8% of employees utilize those tools. We have a very complicated industry, and many of the terms we use don’t mean much to people. What’s an annuity? What’s a managed account? We’ve found that financial wellness is another ‘buzzword.’ At the core, they’re extremely valuable, but it’s the human interaction that helps draw an employee to those tools. For instance, financial wellness can be available on a website, but if nobody goes there, it doesn’t help.

You really want to ask each employee how they want to get their information. It might be a one-on-one session, with us, as advisers, reaching out to the individual, or getting on a Teams or Zoom call and walking them through the tools available on their retirement website.

It might also be a financial wellness platform, like Hub’s FinnPath. That’s a great way to talk about individual life actions, whether it’s debt reduction, life insurance or even the retirement plan. But we need to be able to connect with an employee, [whether] in person—believe it or not, those meetings are coming back—or over a Zoom technology … or in written form.

We need to have all those choices for employees and then take them through that “one thing they can do today.” If that one thing is reducing their credit card debt, let’s focus on that. That will get them financially strong.

If they’ve already gotten to that point and need to increase their contributions, great. That’s the one thing. But we need to ‘baby-step’ them. And it has to be more than just using all the wonderful bells and whistles out there, and be truly customized to what that individual needs.

PA: Absolutely. Catherine and Bridget, from the research side, what do you see in this movement toward financial wellness?

Bearden: Employee Benefit Research Institute has been around since 1978, and our core research focuses on retirement and wealth benefits offered through the employer, as well as health benefits. We see that health-care costs and financial well-being are intrinsically linked from both the employee and employer perspectives. When we ask employers what top issues their employees face that their financial wellness initiatives are designed to address, the highest-ranked is retirement preparedness, at 35%. This is among employers that have at least 500 employees and are interested in or currently offering financial well-being programs. The second, at 31%, is health-care costs.

We focus on the interrelationship between [all of these issues] in our study “Retirement Security Projection Model.” It simulates the percentage of U.S. population at risk of falling short of the retirement income needed to cover average expenses and uninsured health-care costs [including long-term-care costs] in retirement. If you look at some of the projected savings needed to cover health expenses, they range widely, based on the cost of prescriptions. For couples, it could go well over $300,000 to have a 90% chance to cover medical expenditures. This is a holistic conversation. But I totally agree with Kim. The delivery and messaging conveyed to employees is very important too.

Collinson: Emergency savings is also important here. How can plan sponsors help their employees boost their emergency savings, and offer other voluntary-benefit types of insurance protections, which could help mitigate the impact of a shock? Of course, in life, we know those will happen; we just don’t know when and what the cost. What worries me is the absence of emergency savings; our research is finding a high percentage of plan participants who are taking a loan and/or hardship withdrawal or early withdrawal from their retirement account. Around 30% have done one or the other. And even though saving for retirement is good, it could be counterproductive if they withdraw those funds and pay income taxes on them to cover the cost of an emergency.

We ask why they’re taking the money. Of course, with hardship withdrawals, we know there are statutory reasons, ranging from medical expenses to avoiding eviction from their primary residence. And with loans, it’s things like paying off debt, credit card debt, some other financial situation that arose and it was their only alternative. So as we help participants enhance their financial wellness, having savings available to cover short-term emergencies is also vital to their ability to build long-term retirement savings.

PA: Any final remarks or things you’d like to add about participants and retirement savings?

Collinson: Our industry continues to evolve. There is tremendous innovation; there’s technology; there’s wisdom regarding how investments work, behavioral finance and behavioral economics.

There will always be new opportunities for the industry to offer guidance, for plan advisers to give their clients advice. It’s a journey as much as a destination, and it’s really exciting. Now the opportunities are even greater, because of what we’ve learned through the pandemic, and we have people’s attention.