‘Working Until I Die,’ the New American Way?
Research shows that not every U.S. worker is saving for retirement, but experts disagree on who’s to blame.
Ginger Hathaway just landed her first job with an employer that offers a 401(k). She is 58 years old and has been working since she was a teenager.
Most of her jobs have been at restaurants where a 401(k) or other kind of retirement savings plan wasn’t offered, Hathaway said. She hasn’t saved anything for her later years, mostly because she has been a single mother for more than a decade and is focused on paying two college tuitions.
‘The people have failed, not the industry.’
—Chad Parks, president and CEO of The Online 401(k)
Even though her new employer will contribute to her 401(k), Hathaway said she can’t afford to put dollars in it right now. She may be able to contribute in a few months if she gets promoted.
“I’ll be working until I die,” said Hathaway, who lives in Wisconsin. “I don’t really blame anyone or anything. It’s just the cards I’ve been dealt.”
Her story has a familiar tone for many Americans, statistics show. Less than half of working Americans have access to today’s No. 1 retirement vehicle: a 401(k) plan. Many who have a 401(k) at work opt not to participate, and many who do contribute often don’t save enough.
“We have less of a culture of thrift than we used to,” said Mathew Greenwald, president and CEO of research firm Greenwald & Associates.
According to the Employee Benefit Research Institute’s 24th annual Retirement Confidence Survey, only 45 percent of all workers say they have a 401(k) plan at their workplace. And while for the first time the survey showed an increase in respondents who are confident they will have enough money to last throughout their retirement (18 percent), only 11 percent have $250,000 or more. A whopping 36 percent have less than $1,000 saved, an 8 percentage point increase from last year.
It’s clear not every American is saving for retirement, but does that mean the retirement industry has failed everyone? After all, when access to plans at work and adequate savings are at issue, the big picture doesn’t look that great.
“The people have failed, not the industry,” said Chad Parks, president and CEO of The Online 401(k), a retirement plan provider serving primarily midsize to small employers. With individual retirement accounts available, “There’s not a lack of tools or access,” he said. “It’s a lack of people saving. People have taken their eyes off their personal responsibility of saving.”
But Steven Sass, a research economist at the Center for Retirement Research at Boston College, said he wouldn’t give the industry a passing grade. Sass said for those who have access to plans, the information participants and plan sponsors receive is still too technical and overwhelming for many. Because many workers are ill-equipped to make investment decisions, it may be the reason people who aren’t automatically enrolled into plans don’t participate.
Developing a Habit
The focus, Sass said, should be on developing a habit of saving over a long period of time and investing in target-date funds, which are funds where investments become more conservative as the participant ages.
“Very few people know how much they will need in retirement,” Sass said. “What’s more important is how long and how much you save. The industry is still focusing more on investments and picking mutual funds.”
New Documentary Cracks a Few Nest Eggs
Data show that too many Americans aren’t saving enough for retirement. The nest egg that they are supposed to create over time is cracked and broken for many.
That’s the resounding theme of “Broken Eggs Film: The Looming Retirement Crisis in America,” a documentary by Chad Parks, president and CEO of The Online 401(k), a retirement plan provider that mostly serves a mid- to small-employer base.
For six weeks, Parks and his crew crisscrossed America,interviewing industry experts and everyday people on their retirement situation.
The 79-minute film lays the groundwork for what is the reality: Social Security will be broke by 2033 if nothing is done, many Americans no longer have defined benefit plans, and people stay on their current course. Because of this, many U.S. citizens will have ugly decisions to make in what should be their golden years just to survive.
“We wanted to strike an emotional chord,” said Parks, 42, a certified financial planner-turned-entrepreneur when he created The Online 401(k) in the late 1990s. “A lot of people know they need to save; they know they need education and feel hopeless in terms of where to start.”
Parks said he wants the film, which was privately funded, to be a conversation-starter. People can go to the website, brokeneggsfilm.com, to tell their own story, to host screening sessions, and to become advocates to protect retirement’s future.
“The ultimate goal is to get people to watch this film and to modify their savings behavior,” Parks said.
But many industry experts say there is a lot that is working.
Retirement plans overall held $23 trillion in assets at the end of 2013, a 15.6 percent increase from December 2012, according to the latest figures from the Investment Company Institute, a Washington-based association that represents U.S. investment companies. A good bit of that precipitous climb has come from employers adopting automatic features and using target-date funds.
Bank of America Merrill Lynch’s 401(k) Wellness Scorecard showed nearly half of plan sponsors eligible to use auto enrollment do so, increasing their numbers by 16 percent in 2013; increasing contributions automatically went up 25 percent compared with the previous year. In addition, when combined with offering advice, employees were more likely to have better participation and saving rates, the March study found.
“Automatic features have really pushed the needle by capturing upon participants’ inertia,” said Kathleen Kelly, managing partner at Compass Financial Partners in Greensboro, North Carolina. “We are also seeing a much greater interest from plan sponsors to help put building blocks together to enable participants to make the right decisions.”
EBRI data are also showing positive signs that 401(k) plans work well for people who use these accounts for the long haul. About 86 percent of low-income workers would get at least 60 percent of their pay in retirement at age 64 if they stay in a 401(k) plan for at least 30 years and if Social Security payouts remain the same, EBRI data show. Higher wage earners would see similar benefits under the same circumstances.
“For those people eligible for a 401(k) plan over a substantial number of years, we are finding large account balances,” said Jack VanDerhei, EBRI’s research director.
Sass said the industry is trying to make today’s defined contribution plans act like their predecessor, defined benefit plans — both of which he thinks are outdated. The defined benefit plan, often a pension, is a retirement benefit that promises a monthly payment in retirement that is typically pulled from a formula based on an employee’s age, years of service and final salary. In general, the strategy behind offering a defined benefit plan was to keep workers at their jobs for long periods of time to avoid retraining new workers, then to get them to retire in a timely fashion. But these plans are rare in today’s workforce.
The Bank of America Merrill Lynch study shows that more 401(k) plans use automatic features that help these accounts act like defined benefit plans. Like those plans, little is expected from participants in 401(k) plans that use auto features; they are signed up automatically and if they are put into a target-date fund, they don’t have to think about an investment lineup. Unlike many defined benefit plans, participants must contribute, but there’s an automatic feature for that, too.
It’s a great setup, but Sass said there are two problems: workers don’t stay at their jobs for years like they used to and not enough companies are offering 401(k) plans to cover every worker. Plus, because many Americans haven’t saved enough, workers remain on the job longer. Unlike the defined benefit plan where certain triggers — such as number of years worked — have been met, 401(k)s offer no real incentive to retire.
It’s an outdated system, where many small employers offer plans only when it serves a purpose for themselves, Sass said, and he added that the U.S. system should be autonomous so every low- and high-income worker receives the same savings opportunity and benefit.
“Some of this doesn’t make sense anymore,” Sass said. “We need a system where everyone gets a tax benefit. That way we won’t have to bribe doctors and lawyers to give their secretaries a retirement plan.”
Sass isn’t the only one thinking that employers should stop offering this as a voluntary benefit. To get everyone to save something for retirement, several states including California, Connecticut and Maryland have offered ideas promoting state-run retirement systems for private workers.
President Barack Obama has offered his myRA plan, a starter retirement savings bond account that is set up through the workplace. The president, who unveiled myRA in his 2014 State of the Union Address, said these accounts would be offered through employers, but managed by the U.S. Treasury Department. Because accounts would be invested in U.S.-backed savings bonds, savers would be guaranteed a decent return.
And earlier this year, Sen. Tom Harkin, D-Iowa, introduced the Universal, Secure, Adaptable (USA) Retirement Funds Act, a mandatory retirement savings vehicle for employers that don’t have a retirement plan with an annuity option. Through the USA Retirement Fund, participants would automatically contribute 6 percent of pay at the start, and employers could contribute up to $5,000 per account annually. At retirement, participants would get an annuity, like a traditional defined benefit plan. The proposal has been referred to the Committee on Health, Education, Labor and Pensions of which Harkin is chairman.
Most industry experts are in favor of voluntary plans that reach people who currently don’t have access at work, but not at the expense of the system that already benefits millions of Americans.
“The idea behind myRA is positive because the bottom line is that we need to get more people covered,” Compass Financial’s Kelly said. “But there’s a lot already working in retirement, and there’s a positive momentum in terms of what plan sponsors have elected to do.”
Parks added that even though it may be harder for midsize and small businesses to offer a 401(k) plan, there’s no good excuse anymore. Because of technology advances and new regulations, costs have dropped considerably. Employers may not understand that they don’t have to match employee contributions. Plus, employers can qualify for tax credits — sometimes up to 50 percent of startup costs — when introducing a retirement plan at work.
“When you run a small business, you have a lot you need to take care of, and there is an order of importance for all of it,” Parks said. “Unfortunately retirement plans always seem to be the last thing they think about.”
To get employers to think more positively about establishing retirement plans, current incentives need to stay in place. During the past year, the Obama administration has offered several proposals targeting the tax-preferred status of 401(k) plans that would help shore up the nation’s debt. Limiting how much can be saved in a tax-sheltered retirement plan discourages businesses from starting them, which would limit worker access to these accounts, experts say.
“The desire to find revenue causes policymakers to look at the retirement sector, not as it should be, but more as an eye toward how much money can we take from the tax-preferred status of retirement plans,” said Bradford Campbell, counsel at law firm Drinker Biddle & Reath, during a company webinar in March. “How you address tax incentives at the small business level could really impact how many plans there are, how available they are and the rules we operate under.”