July 18, 2017
Mid-sized Employer Meets Big 401(k) Goal
Thomas Automotive Family’s service department in Bedford, Pennsylvania.
When Peggy Zembower became the human resources director for Thomas Automotive Family about four years ago, she was dismayed that some long-time employees had never increased their retirement saving above the measly 1 percent of pay they’d started at.
One big issue was that the lowest-paid workers at the auto dealership – like low-wage workers everywhere – felt they couldn’t afford to save in the 401(k). A lack of knowledge about investing and a reluctance to give up control of their money seemed to frighten others out of saving, which meant forfeiting their employer’s matching contribution.
“It bothered me when I saw employees who’d been here five years and up and saw what small amounts they were investing,” she said. “Many lower-paid employees saved little or nothing.”
With her boss’ blessing, Zembower got to work.
Thomas Automotive is a mid-sized company with 280 full-time and part-time workers. Their earnings run the gamut, from employees in the service department earning $11 per hour (or about $23,000 per year) to car salespeople earning as much as $100,000, and Thomas Automotive’s owner, who has four dealerships in Pennsylvania and one in Maryland.
By doing the things retirement experts recommend, Zembower increased participation to 87 percent of employees, up from 53 percent. She did this by instituting automatic enrollment in the 401(k) at 4 percent of workers’ pay and auto-escalation, over time, of the amount saved. (Employees have the right to pull out or to maintain past contribution levels.) These techniques are far more common at large companies.
She goes further, re-enrolling all non-participating employees each April 1st, which requires them to revisit their decision before opting out of the retirement savings plan again. “We have a few employees who feel we don’t have the right to do this,” she said, “but we do.”
One gets the impression when interviewing Zembower that it is not what she’s done to make the 401(k) plan work better. It’s how she’s done it, with her gentle insistence that saving for retirement is best for the workers. Sometimes this means she’ll ask a worker to wipe off his greasy hands and look with her at the retirement calculator placed front and center on the employee page of the company website. …Learn More
July 6, 2017
IRAs Fall Short of Original Goal
Nearly 8 trillion dollars sits in Individual Retirement Accounts, or IRAs. This is nearly half of all the value held in the U.S. retirement system, which also includes employer pension funds and 401(k)s.
A big reason IRAs were created in 1974 under the Employer Retirement Income Security Act (ERISA) was to give individuals not covered by retirement plans at work an opportunity to save in their own tax-deferred accounts.
So, are IRAs helping these workers?
IRAs “have drifted very far from their original intent” of helping those who need them most, researchers for the Center for Retirement Research conclude in a new study.
Who is eligible to receive tax benefits for saving in an IRA has morphed over the years since ERISA’s passage, but the original description is still relevant to millions of Americans: about half of U.S. private-sector workers today do not have a tax-exempt retirement plan at work. Low-income workers are even less likely to have one.
To determine who benefits from IRAs today, the researchers first tracked down the source of the trillions of dollars held in IRAs. Only 13 percent of the money that flowed into IRAs in 2014 was from people putting new savings into these accounts. The rest was from rollovers of funds accumulated in employer 401(k)s, which usually occur when a worker retires or changes job. (ERISA did delineate rollovers as a second purpose of IRAs.) …Learn More
June 6, 2017
Slightly More Seniors Living With Family
In the 19th and early 20th centuries, it was not unusual for older Americans to live with their adult children and grandchildren. But more seniors could afford to live on their own after passage of Social Security and then Medicare.
By the 1990s, fewer than 10 percent of people over age 65 lived with relatives, usually offspring. This number has crept back up to around 12 percent in recent years, according to an analysis by the Center for Retirement Research.
Economic disadvantage is the common thread among older people living in these multigenerational households, a new study finds. This held true whether the seniors moved in with their adult children and grandchildren or the offspring moved into their parents’ homes.
“Experiencing economic distress increased the odds of a senior forming a multigenerational household,” concluded researchers from Arizona State University and George Mason University.
Here are their main findings, based on an analysis of U.S. Census data for more than 49,000 people who were 65 or older between 1996 and 2008: …Learn More
May 30, 2017
Young Workers’ Hopes Confront Reality
As the post-recession job market continues to improve, so has young adults’ optimism about their future opportunities, a Federal Reserve Board survey shows.
What’s poignant about this youthful optimism is that a changing labor market is making it increasingly difficult for young adults to get their careers off to the right start.
Surely, they sense this. Nearly two-thirds of adults between ages 18 and 30 told the Federal Reserve in a 2015 survey featured in a recent webinar that their schedules in “permanent” jobs were changing daily, weekly, or monthly. They strongly prefer future job stability over higher pay, despite the trendy flexibility of the “gig” economy, Uber driving, and freelancing.
“Permanent employment is not the same as stable employment,” Amy Blair, the Aspen Institute research director for the economic opportunities program, said during the webinar. “Without a stable floor, it’s difficult for a person to invest in himself or herself to build a career.”
The U.S. Bureau of Labor Statistics (BLS) has identified 30 jobs it predicts will have the fastest growth, generating 5 million jobs by 2024. Most of the top 10 are characterized by part-time, low-paying, or seasonal work that can make it difficult to put together a full-time schedule, Blair said. Many are the types of jobs that also lack health benefits, 401(k)s, and paid-time off.
The BLS’ top 10 are: …Learn More
May 9, 2017
Retirement Ball’s in Employers’ Court
If employers want to improve the poor retirement prognosis for a large chunk of American workers, there are some obvious things they could do.
That’s the big takeaway in Morningstar Inc.’s new report on employers that offer 401(k) plans to their employees but don’t do what’s required to encourage them to save enough.
During the early 2000s, automatic enrollment to increase participation in employer 401(k)s became all the rage, and the strategy has proved itself. Today, nearly 90 percent of automatically enrolled employees stay where they are put, while only about half of workers sign up to save when 401(k) enrollment is strictly voluntary.
But the auto enrollment trend has stalled, and the crazy-quilt private-sector retirement system still has a lot of holes in it. Even when companies automatically enroll their workers, the plans are often designed in ways that discourage them from saving enough, Morningstar’s David Blanchett, head of retirement research, concludes in his report.
“Too often the focus among plan sponsors is improving [401(k)] participation,” he writes. The plans themselves have left us “with low and inadequate savings rates that threaten the retirement security of many Americans.”
At least there’s something to be improved upon: many private-sector employers don’t even offer retirement plans, particularly in industries when people earn low-incomes or work for small companies.
Blanchett’s critique of plans already in place rightly leans on groundbreaking academic research a decade ago that tested 401(k) plan design to determine what drives employee participation in the plans and drives how much they’ll agree to save.
Take plans with auto-enrollment. His analysis of T. Rowe Price and Vanguard client data found that 3 percent of salary remains the most popular savings rate that employers default their workers into during automatic enrollment in the plan – but 3 percent is widely viewed as inadequate if a worker wants to have enough money to retire on.
Why so low, Blanchett asks, when people might accept more? …Learn More
May 4, 2017
Our Stubborn State of Financial Illiteracy
The U.S. retirement system is built on people having a working knowledge of finance. Yet financial literacy among a big chunk of Americans ranges from unimpressive to abysmal.
This revelation was again confirmed in a survey that recently debuted by financial literacy guru Annamaria Lusardi, head of the Global Financial Literacy Excellence Center at George Washington University. In a 2011 survey, Lusardi had found that too many Americans were unable to answer three very simple financial questions.
This new survey is more ambitious, though the results are no more promising. It asks 28 questions in eight areas: earning money, budgeting, saving, investing, borrowing, insuring, understanding risk, and information sources. In the nationally representative survey, about one in four people got no more than seven answers (25%) correct.
One telling finding is that the highest scores were for knowledge about borrowing, with nearly two out of three answering these questions correctly. I suspect this knowledge has been gained from experience – experience with high-interest credit card bills and onerous student loan payments, as well as mortgages.
In every other financial topic surveyed, about half or less answered the questions correctly. Questions about risk, which is at the heart of many financial decisions, fared worst – only 39 percent answered these correctly.
An important connection is made in the report regarding 18- to 44-year olds, who answered only 41 percent of the questions correctly (versus 55 percent for people over 45). Younger adults also answered “I do not know” most often.
When it comes to retirement, those who would gain more from financial knowledge are the least knowledgeable. Saving that starts in early adulthood can go a long way toward achieving retirement security, thanks to compound investment returns over the many years remaining prior to leaving the work force. It’s unfortunate that those who could benefit from compounding often don’t comprehend its effect. …Learn More
February 28, 2017
In the Dark about Retirement?
There’s new evidence to remind us that nothing much changes: we are still baffled by our DIY retirement system.
And no wonder!
First, saving must start at a young age, when retirement is an abstraction. Saving is further stymied by two big questions: how much to save and how to invest it? It’s also smart to anticipate how one’s compensation arc might affect Social Security – taking into account, for example, that women withdraw temporarily from the labor force to have children and that earnings can decline when workers hit their 50s. As we fly past middle age and retirement appears on the horizon, it’s a little late to figure this retirement thing out. And there’s no plan for long-term care when we’re very old.
The evidence: Start with Merrill Lynch’s new survey in which 81 percent of Americans do not know how much money they’ll need in retirement. This makes it very difficult to know how much to deduct from one’s paycheck for retirement savings. Employers, frankly, could do more to help us figure this out. (Some answers appear at the end of this blog.)
Being in the dark now about how much to save is a cousin of being afraid of running out of money later, in retirement. More than 70 percent of accountants say this fear of running out is their clients’ top concern – followed by whether they can maintain their current lifestyle and afford medical care in retirement – according to the American Institute of Certified Public Accountants.
Our inclination to avoid difficult issues does not go away with age. Yes, we’ve gotten wiser, but advanced old age means death, and who wants to think about that?
The upshot: seven in 10 adults have not planned for their own long-term care needs in the future, Northwestern Mutual reports. Even among a smaller group who anticipate having to take care of an elderly parent, one in three of them “have taken no steps to plan” for their own care.
“You would think that would prompt them to action,” said Kamilah Williams-Kemp, Northwestern’s vice president of long-term care. And while the constant barrage of news and statistics is making Americans more aware of their rising longevity, Williams-Kemp said, caregivers are often more interested in talking about their emotional and physical challenges and the rewards of caregiving than about its substantial financial toll.
There is a “disconnect between general awareness and prompting people to take action,” she said.
The potential for dementia or diminished capacity late in life isn’t on our radar either, the survey of CPAs found: the vast majority of people either choose to ignore the issue, wait and react to it, or are confused.
Squared Away exists in part to educate people about retirement essentials, based on facts and high-quality research. The following blogs might help you:
How Much for the 401(k)? Depends. …Learn More