Americans planning for retirement today face more individual responsibility and risk for their retirement benefits than prior generations experienced. One reason is the decline of private sector traditional defined benefit pension plans that pay guaranteed lifetime benefits. Many employers implemented 401(k) savings plans, at first to supplement and then later, to replace their defined benefit plans. In addition, a significant portion of working Americans do not have access to saving within an employer plan for their entire working career, which lessens the chance of having saved enough for a secure retirement. The most recent data from the Bureau of Labor Statistics show that only 55% of workers participate in a workplace retirement plan.
Worker Savings Amounts, by Plan vs. No Plan
In total, about how much money would you say you (and your spouse) currently have in savings and
investments, not including the value of your primary residence?
Have Retirement Plan defined as respondent or spouse having at least one of the following: IRA, DC plan, or DB plan.
Source: Employee Benefit Research Institute and Greenwald & Associates, 2019 Retirement Confidence Survey.
Figures and n -sizes presented exclude those who answered “Don’t know”, said they never worked, or refused to answer.
The main challenge for those whose primary source of financial security in retirement, in addition to their Social Security benefit, is their savings (either accumulated on their own or through an employer plan) is to have adequate savings. Workers are not saving nearly enough; 21% have saved nothing at all. Workers who have saved are then faced with determining how to convert those savings to a monthly income budget that will last for their lifetime. Part of this challenge involves longevity risk—the risk of living beyond life expectancy—that adds more complexity to retirement planning because there is a chance that people will outlive the income provided by their retirement savings. It is impossible for retirees to know how long they will live and therefore difficult for them to determine appropriate and sustainable spending strategies, especially considering unknown future variable investment returns and inflation. Many retirees often face financial shocks in retirement, such as long-term care expenses, that could disrupt their plans.
|Questions to consider:
Another challenge is to understand just how much retirement savings will be needed to provide an adequate income stream or whether additional savings will be needed for a secure retirement. While adding money on a periodic basis to a 401(k), 403(b) plan, or individual retirement account (IRA) during the working years might become routine for some, many workers and retirees often face hurdles in obtaining objective, easy-to-understand information about how to finance their retirement and where to find the right solutions to manage their lifetime incomes.
A multipronged approach could help a greater number of future retirees secure adequate lifetime income so that they won’t outlive their retirement assets. These approaches could include public policy changes, changes within employer-sponsored retirement plans, and broad-based education efforts in part to address behavioral biases.
Recently enacted legislation such as the SECURE Act, which is the most sweeping retirement reform in more than a decade, addresses some of these issues. Access to saving through payroll deduction will be increased through the establishment of Open Multiple Employer Plans (MEPs). The SECURE Act also aims to reduce certain barriers to the willingness of plan sponsors to provide a lifetime income option through an insured annuity in their 401(k) plans. However, other recent legislative proposals such as allowing tax-free no-penalty withdrawals from these plans to pay for long-term care insurance or to pay student loans and college expenses for workers and their dependents would adversely impact the accumulation of these funds for retirement. The SECURE Act allows for withdrawals from savings plans of up to $5,000 without penalty upon the birth or adoption of a child. While this could divert money otherwise intended for retirement, the hope is that this option will encourage younger workers to participate in plans and save where perhaps they otherwise would not.
An increasing number of employers have taken positive steps by expanding 401(k) distribution options to include structured fixed payment withdrawals and providing more education and planning tools to help employees understand and determine spend-down strategies. While very few employer-sponsored plans currently provide in-plan insured annuity options that address longevity risk, it is expected that this will change under SECURE.
Public policymakers and plan sponsors recognize the need for employees to have access to retirement plans as well as lifetime income solutions. Some actions that are included in SECURE and others that could be considered to accomplish these objectives are noted below.
Altering Federal Retirement Policies
- Implement a federal program on a national basis to provide worker access to savings through payroll deduction similar to the auto-IRA programs that have been recently initiated in some states for employers that do not currently sponsor plans. Some more far-reaching proposals call for mandated employer contributions to workers’ savings accounts.
- The SECURE Act does expand access for part-time employees who work a minimum of 500 hours a year for three consecutive years to the company-sponsored retirement plans that are provided to full-time (over 1,000 hours per year) workers. However, there is no requirement that these employees be provided any employer match as is provided to full-time employees.
- Address Social Security’s long-term funding issues to ensure confidence in the program’s stability and assure retirees that they can plan accordingly (see Social Security Election Guides).
- The SECURE Act modifies the age for required minimum distributions (RMD) in retirement plans from age 70½ years to age 72 to reflect increasing life expectancies. There are proposals that would raise this age even further to age 75.
Enhancing Employer-Sponsored Plans
- Find ways to encourage employers and reduce any barriers that might exist so they can offer lifetime income allocation choices during the accumulation phase for workers and annuitization at distribution for retirees.
- Add “rainy day savings accounts” to 401(k) plans to preserve assets set aside for retirement.
Emphasizing Financial Literacy and Education
- Improve information provided to workers both before and during retirement to raise their understanding about retirement planning and security issues.
- The SECURE Act increases the focus on the concept of lifetime income and helps to demonstrate adequacy by requiring employers to express account-based benefits in terms of monthly lifetime income in periodic retirement plan statements. Employees could benefit from enhanced education to understand this information and how to respond.
- Provide additional lifetime income education when people receive lump-sum distributions from a retirement plan or are faced with decisions about whether to cash out a defined benefit pension plan through a lump-sum distribution.
- Annuity options in savings plans provide more choice for workers but also more complexity. Disclosure of fees and how different types of annuities might work, done in an easy-to-understand manner, can help employees make better choices.
Securing income throughout retirement is important for all Americans as they plan and save for retirement, and ultimately manage their accumulated funds. It would be beneficial to take steps now to facilitate these efforts to achieve secure lifetime incomes for more retirees.
Additional Resources From the Academy