June 2016

Which direction to go?

401(k) Investment Options: Less is More

There’s plenty of evidence of the unfortunate consequences for employees overwhelmed by too many investment options in their 401(k) plans. Studies find that confused employees might not join the plan at all, select investment funds that are not well diversified, or throw up their hands and put an equal amount in each fund offered by their employer. And as employers add more options, the new funds often carry higher fees and produce lower returns.

A new study took the opposite tack, examining how employees reacted when one large U.S. employer reduced the number of investment options. The results were lower fees and less turnover, saving employees an average of $9,400 over a 20-year period. Further, their new portfolios were less risky.

The employer, a non-profit organization, cut the number of investment options roughly in half, from the 90 different funds initially in the plan.  The employer also simplified the plan by sorting employees’ choices into four groups:

  • 13 Target Date Funds (TDFs) with low fees and investments determined by an employee’s age;
  • 4 index funds invested in a money market, diversified U.S. stocks, diversified U.S. bonds, and diversified international stocks;
  • 32 mutual funds organized by risk level, from small-cap growth funds and REITs to balanced funds and Treasury bond funds;
  • A brokerage account with wide latitude to invest.

The researchers – Donald Keim and Olivia Mitchell at The Wharton School – analyzed the responses among those affected by the change, which was anyone who held at least one mutual fund eliminated during the plan streamlining.  Those affected who did not choose replacement funds were defaulted into a TDF appropriate for their age. …Learn More

Not All Baby Boomers Can Work to 70

There’s one problem with expecting all baby boomers to delay retirement beyond their 60s: it might not be fair.

FigureThat’s because people with lower incomes and less education die younger than the well-to-do with more education. Think about what would happen if everyone retired at, say, 70. Those with less education and a lower socioeconomic status (SES) would enjoy fewer years in retirement than people with higher SES.

This gap in retirement duration has also widened in recent decades. That’s because the lowest SES group has seen much smaller improvements in their life expectancy, according to economists at the Center for Retirement Research, which supports this blog.

Their study tracked adults surveyed by the U.S. Census Bureau over time and assigned each one to an SES group by sorting them into four education quartiles. Education levels correlate with income and are widely used to measure SES.

The researchers, by using separate data that match the adults to their death certificates, found that while mortality improved for all SES groups, the gap between the top and bottom SES has increased over the past three decades.

Converting mortality data into average life expectancies, they found that 65-year-old men in the highest SES back in 1979 lived nearly to age 79 – 1½ years longer than men in the lowest SES.  But today, older men in the top SES are living to 85 – about 3½ years longer than the lowest SES group.

Given these uneven longevity gains, the researchers asked this question: how much longer could men work today if the goal were to maintain the same retirement-to-work ratios they enjoyed in the late 1970s? …Learn More

Thumbs up

Our Readers’ Favorite Blogs

It’s the time of year when we highlight blogs that attracted the most page views over the previous six months, according to Google analytics.

Today, we’re listing a “baker’s dozen” – 13 blogs – popular with our readers, instead of the usual top 10.  This allows us to highlight some interesting themes that were apparently on readers’ minds:

Many retirees weighed in with their comments on two blogs about how and why they’re taxed:

  • How Federal Taxation Drops for Retirees
  • Why Most Elderly Pay No Federal Tax

A new feature called “Boomers: Rewriting Retirement” that profiles people who are either approaching retirement or recently retired made the list:

  • A Familiar Dilemma: to Work or Retire

Squared Away tried something else new – two quizzes on financial topics – and many readers took them: …Learn More

Too Much Health Plan Choice is Costly

Technology, coffee, investments, beer – most consumers value choice in some aspect of their lives.  But what if having too many choices leads to bad decisions and costly mistakes?

Pie of optionsCarnegie Mellon University economists Saurabh Bhargava and George Loewenstein, and Justin Sydnor from the University of Wisconsin School of Business, found this to be the case at one company that required employees to select from a menu of options and build their personal health plans from the ground up. The researchers found that the employees typically designed health plans that would cost them more than other plans with similar coverage.

The cost of these choices was large for the average employee – about one-quarter of their annual premium payments in the coming year. An extreme example is the group that chose a plan with a $350 deductible. They paid about $1,100 more in premiums to save, at most, $650 in out-of-pocket spending throughout the next year.

There might be reasons that someone would choose a low-deductible plan – not having enough cash on hand in case of a medical emergency, for example. But in this particular setting, Bhargava explained in an email, “none of these explanations could reasonably account for people paying $2 to $4 in extra premiums to reduce $1 in expected out-of-pocket expenses.”

Further, lower-paid employees earning under $40,000 per year were much more likely to make these mistakes.

Bhargava said that the paradox of too many choices confronts the millions of Americans who sign up online for health insurance under the Affordable Care Act (ACA) – including his mother. In a recent presentation, he said she is “like a lot of consumers” and has “a strong aversion to a high deductible.” …
Learn More

Silhouette of Washington DC skyline

Retirement Researchers Meet in August

Reverse mortgages, health insurance, marital histories, social networks, and even student debt – any or all of these can play a role in the financial security and well-being of America’s retirees.

These are among the topics that will be explored during the 18th annual meeting of the Retirement Research Consortium, which features researchers from top universities around the country whose work is supported by the U.S. Social Security Administration.

The meeting will be held on Thursday, Aug. 4, and Friday, Aug. 5 in Washington, DC.

To learn more about the research papers being presented, click here to read the agenda.Learn More

Job satisfaction illustration

More Retirees Get Less Satisfaction

Figure: More Retirees Get Less SatisfactionIn the late 1990s, six out of ten retirees found retirement “very satisfying.” Today, not even half do, according to a recent analysis of a long-term survey of older Americans.

The news isn’t all bad, since the “moderately satisfied” share rose – and moderately satisfied is probably a more realistic goal for most people anyway.

But the question of why so few people are very satisfied with their retirement state of mind is difficult to pin down. The survey analysis by the Employee Benefit Research Institute (EBRI) and past academic research provide some clues.

Health.  It’s well-established that health and satisfaction are inextricably linked: healthier retirees are happier retirees, according to a 2005 study by the Center for Retirement Research, which supports this blog.  One reason health is important is that retirees who are healthy can remain active – bridge, golf, travel, volunteering, whatever – which brings satisfaction. …Learn More

Family holding hands

Medicare vs Medicaid in Nursing Homes

When a spouse or parent requires long-term care, quality is the top priority. But a report last year by the US Government Accountability Office (GAO) cited concerns about the quality of the federal data essential for monitoring the quality of care.  For example, three key indicators point to improvements: better nursing staff levels and clinical quality and fewer deficiencies in care that harm residents. Yet consumer complaints jumped 21 percent between 2005 and 2014, even though the number of nursing home beds has remained roughly flat in recent years.

Anthony Chicotel, an attorney with the San Francisco non-profit California Advocates for Nursing Home Reform, said care quality is intertwined with affordability, payment sources, and dramatic changes under way in nursing home economics.  For his views on this important topic, Squared Away interviewed Chicotel, who is also part of a national coalition of attorneys advocating for patient rights.

Question: Recent Boston Globe articles have highlighted substandard care at nursing home companies that allegedly sacrificed resident care quality for profits.  Are these a few bad actors or is this a larger problem?  

Problems exist in the traditional buyer-seller marketplace for nursing homes and long-term care services. Providers all get paid pretty much the same rate regardless of whether the care they provide is good or bad. It’s usually the government who’s paying, and they’ve got an imperfect monitoring system to make sure the rules are followed.

The bottom line is that dollars can be extracted from a for-profit facility that don’t go into patient care. What you sometimes see is a nursing home affiliated with a number of other companies that provide services to the nursing home at above-market rates. The same web of companies running the nursing home might be in charge of the linen supplies, medical equipment, therapy, and the above-market rents for the facilities. If they’re paying, say, $12,000 a month for linens instead of sending it to a non-affiliated company, and it costs only $7,000 per month to supply the linens, they’re making a $5,000 profit. I don’t think the government’s going to catch that or account for that money.

Q: Long-term care is so expensive – more than $6,000 per month, on average.  What are the top three financial issues that face nursing home patients and families? … Learn More

12