Retirement security malaise persists
Brokers should address employers' misgivings about the
ultimate success of their plans
By Len Strazewski
Health care reform has employers and their employee benefit advisors thoroughly confused as they wait for final rules and a U.S. Supreme Court ruling later this year. But health care reform isn't the only benefits problem facing employers and their employees.
Retirement issues have taken a lower profile since the introduction of federal health reform, but they continue to pose troublesome questions for employers, employees and those who advise them. Before agents and brokers can respond with strategic advice, they need to understand the questions and the trends behind them.
Employees continue to ask, "Do I have enough money to retire?" Employers are asking, "Is my retirement plan working to build employee security?" They are pretty much the same question, but the answer keeps changing as the economy and financial markets fluctuate and as Congress rehashes legislation that controls retirement plans.
Retirement savings amassed before the recession may have seemed substantial, but even after some market rebound, the totals aren't what they were. And employee surveys paint a confusing picture of how prospective retirees and their employers feel about their future.
The Towers Watson Retirement Attitudes Survey, conducted most recently in June and July of 2011, polled 9,218 private sector employees about their level of retirement security. The poll indicates that employee confidence has rebounded from recessionary lows.
About 68% of respondents said they were confident they had enough resources to live comfortably for at least 15 years of retirement, up from 62% in 2010. Less than half (47%) of respondents, however, were confident their resources would last through 25 years of retirement.
Workers who still receive defined benefit pension plan benefits feel even more secure, according to the poll. Respondents with the older-style pension plans were more than twice as likely to feel confident their resources will last at least 15 years into retirement and two and a half times more confident they will last 25 years.
"As the economy shows periods of stable ground, employees are slowly beginning to be more optimistic about retirement," says Kevin Wagner, a senior retirement consultant at Towers Watson in New York. "However, the financial crisis was jolting to American workers. As a result, many employees are more financially conservative today and have a renewed interest in improving their financial decisions and planning and saving for retirement."
About 40% of respondents, however, said they planned to delay retirement; and of that group, 60% said they were likely to delay retirement by at least three years.
But a later survey of employers conducted by Aon Hewitt, the human resource consulting division of Aon Corporation, indicates that the companies that provide retirement benefits aren't so confident.
Early this year, Aon Hewitt surveyed more than 500 large U.S. employers representing more than 12 million employees. Of this group, only 4% are very confident that their employees will retire with adequate retirement assets, down from 30% in 2011.
Only 10% of these plan sponsors said they were very confident that their employees are taking responsibility for their own retirement success with effective planning, personal savings and maximum contributions to retirement plans. Only 18% think their employees will be able to manage their income during retirement.
"We've known for a while that workers weren't saving enough for retirement, but it seems that with continued tough economic times, employers are just realizing how dire the situation has become for much of their workforce," observes Pamela Hess, director of retirement research at Aon Hewitt.
In the survey report, Hess notes that employers are taking some steps to improve retirement plan features with automatic enrollment, professional investment advisors and more savings options.
Meanwhile, employers also have some concerns about federal retirement policy that helps maintain the quality and security of retirement benefits. Defined contribution retirement benefits, including 401(k) and 403(b), plans cover more than 67 million employees, according to the Department of Labor, but they fluctuate in value, depending on the performance of investment markets. And that can disrupt employers' retirement plan strategies.
Federal tax incentives that encourage employees to make their own contributions—even in down investment markets—have been in play in Congress as legislators struggle to balance the federal budget and reduce the federal deficit. House Resolution 101, introduced in February, affirmed bipartisan support for retirement plan tax incentives, but the issue comes up with every new tax plan.
Also, defined benefit pension plans, which for many years were the cornerstone of retirement strategy for large employers, have lost their luster. The old-style pension plans have been in decline since the 1970s, and the remaining plans are becoming progressively more expensive for plan sponsors.
In February, Josh Gotbaum, director of the federal Pension Benefit Guaranty Corporation (PBGC), the government agency that insures defined benefit pension plans, told a House subcommittee that the combination of plan participants living longer and the continuing recession was threatening pension plan security.
"Thanks to better health, better technology, and better lifestyles, today we're living longer, healthier lives," Gotbaum said during a hearing before the Health, Employment, Labor and Pensions Subcommittee of the House Committee on Education and the Workforce. "That's great news, but it also means that retirement costs more.
"Today, most people don't think they have enough money to retire—and they're right," Gotbaum said.
Gotbaum also identified a $26 billion gap between the PBGC's assets and what it owes to pay benefits for the pensions it insures. He called for increases in the premiums paid by employers for the federal insurance—which would raise the overall cost of maintaining pension plans.
"Think how hard it is to convince companies to keep their plans while you're asking them to pay for the losses of others," Gotbaum said.
"Without the tools to set its financial house in order and to encourage responsible companies to keep their plans, PBGC may face, for the first time, the need for taxpayer funds. That's a situation no one wants to face."
What can agents and brokers do to help their clients address these issues?
First, the surveys indicate that employers have continuing concerns about their retirement plan designs and the way they are received by employees.
Second, during the recession, many employers reduced or eliminated defined contribution plan matches, which reduced plan balances and depressed the value of retirement benefits. Those decisions are having a deep impact now as employees either face retirement with insufficient resources, or plan to work past retirement age to make up the difference.
It's a good time to suggest that your clients review their offerings, their level of retirement contributions and their benefits communications. If they stopped contributing to retirement plans, they may want to start again to stimulate employee savings.
If your clients aren't already providing independent investment advice and online retirement planning programs, consider recommending that they start immediately to move employees toward taking control of their personal retirement strategies.
Len Strazewski has been covering employee benefits issues for more than 30 years. He has an M.S. in Industrial Relations from Loyola University in Chicago.