Posts Tagged "retirement"

401k in typewriter font

Index Fund Rise Coincides with 401k Suits

Employee lawsuits against their 401(k) retirement plans are grinding through the legal system, with mixed success. Many employers are beating them back, but there have also been some big-money settlements.

This year, health insurer Anthem settled a complaint filed by its employees for $24 million, Franklin Templeton Investments settled for $14 million, and Brown University for $3.5 million.

More 401(k) lawsuits were filed in 2016 and 2017 than during the 2008 financial crisis, and the steady drumbeat of litigation could be affecting how workers save and invest. For one thing, the suits have coincided with a dramatic increase in equity index funds, according to a report by the Center for Retirement Research. Last year, nearly one out of three U.S. stock funds were index funds, double the share 10 years ago.

Line chart showing stock index funds on the riseSome see this change as positive. Many retirement experts believe that the best investment option for an inexperienced 401(k) investor is an index fund, which automatically tracks a specific stock market index, such as the S&P500. Federal law requires employers to invest 401(k)s for the “sole benefit” of their workers, and index funds usually charge lower fees and carry less risk of underperforming the market than actively managed funds – two issues at the heart of the lawsuits.

To avoid litigation – and to comply with recent regulatory changes – employers are also becoming more transparent about the fees their workers pay to the 401(k) plan record keeper and to the investment manager. This transparency may have had a beneficial effect: lower mutual fund fees, which translate to more money in workers’ accounts when they retire. The average fund fee is about one-half of 1 percent, down from three-fourths of 1 percent in 2009, according to Morningstar.

In short, these lawsuits appear to be changing how people invest and how much they pay in fees for their 401(k)s. …Learn More

Vignettes Improve Social Security Savvy

Screenshots of Social Security videosThere’s an informal rule in journalism: put too many numbers in an article, and readers will drop like flies. A similar phenomenon might also be at work when someone looks at a Social Security statement filled with numbers.

The statement, which is intended to help workers plan for retirement, shows the size of the monthly benefit check increasing incrementally as the claiming age increases. Yet many people still choose to claim their benefits soon after becoming eligible at 62, which means smaller Social Security checks, possibly for decades.

In a recent experiment, a friendlier approach proved effective in helping people process this information: tell a story.  Researchers at the Center for Economic and Social Research at the University of Southern California created a fictional 3-minute video of a 62-year-old man talking with a financial adviser about retirement. The researchers showed it to workers between 50 and 60 years old.

Here’s one exchange in the video:

Adviser: [Social Security has] a tradeoff: you can decide to claim earlier. In that case, you would have a lower monthly benefit, but you’d get to enjoy these benefits for a longer period.

Worker: So if I claim sooner, I get less money per month?Learn More

Logos of various gig companies

Self-employed Lose Some Social Security

Self-employed and gig workers who fail to report all of their earnings to the federal government will pay a price: a smaller monthly Social Security check when they retire.

Gauging the magnitude of this problem is tricky since the IRS doesn’t know how much is not being reported by a group of workers not easily identified in the available data. As a first step, new research derived estimates of the unpaid self-employment taxes that result from the under-reporting, using a combination of U.S. Census data on the workers’ incomes and past studies on the prevalence of the problem.

Specifically, the researchers found that more than 3 million self-employed people – construction contractors, small business owners, and other independent contractors – did not disclose some or all of their earnings to the IRS in 2014. This under-reporting translated to unpaid self-employment taxes of $3.9 billion to Social Security and another $900 million to Medicare.

An additional 2.3 million Americans sell goods and services on platforms like Airbnb, Lyft, and Etsy every month. A large share of these gig workers are not reporting all of their income either. Their under-reporting resulted in an estimated non-payment of $2 billion to Social Security and $500 million to Medicare in 2014.

In fact, the estimates are conservative, and the true level of the missing payroll taxes is probably larger, said the study’s authors, a tax expert at American University and a private policy consultant.

Independent contractors are most likely to be baby boomers over 55, while Generation Xers are more common on the online platforms. Self-employed people fail to disclose earnings for a couple of reasons: they are confused about the tax law or they want to increase their disposable income. But responsibility also falls on the platform companies that process payments for their workers and sellers, the researchers said, because the companies are not required to file 1099 earnings forms with the IRS for a majority of their workers.

Whatever the reasons for the underreporting, self-employed workers will one day get less from Social Security. This study raises an obvious question for future research: how much less? …Learn More

Cars Separate U.S. Retirees from Germans

Florida

Florida

Retired Germans spend more days outdoors than retirees in this country. But when older Americans leave the house, they stay out longer.

What makes the difference? The car. Americans love their automobiles and overwhelmingly rely on them, according to a new study by MIT’s AgeLab. If they’re going grocery shopping, they might as well run their other errands.

Only about half of Germans, on the other hand, say driving is their favorite way to get around. And they venture out more frequently, because they can walk – or bike – to the market, which tends to be closer to home.

As people age and recognize the inevitability of their limitations, they begin to think more carefully about whether they will be able to remain in their homes. To gain insight into this issue, the AgeLab surveyed older Germans and Americans to compare their retirement experiences and satisfaction with their lifestyles – the AgeLab calls it “residential mastery.”

This goal is achievable for seniors everywhere, if they can find a way to continue to live healthily in a particular cultural and social environment. “Americans may reach residential mastery by having access to a car, ride-sharing or taxi services, while Germans may reach residential mastery by having shops and amenities in walking distance,” concluded an article in the Journal of Environmental Psychology.

In the survey, retirees in each country were asked what they need and what their neighborhoods provide. Both Germans and Americans put the most value on living close to healthcare facilities and their family and friends, who can provide the day-to-day support they need. They agreed on 12 of 17 aspects of their lifestyles – affordability, places to sit and rest, cultural institutions, green spaces, etc. – as being critical to them. …Learn More

Social, Economic Inequities Grow with Age

Retirement, as portrayed in TV commercials, is the time to indulge a passion, whether tennis, enjoying more time with a spouse, frequent socializing, or civic engagement.

Boston University sociologist Deborah Carr isn’t buying this idealized picture of aging.

Golden Years book jacket“This gilded existence is not within the grasp of all older adults,” she argues in “Golden Years? Social Inequality in Later Life.” “For those on the lower rungs of the ladder,” she writes, retirement is “marked by daily struggle, physical health challenges and economic scarcity.”

Her book, which mines multidisciplinary research on aging, reaches the distressing conclusion that economic inequality not only exists but that it becomes more pronounced as people age and become vulnerable. And this problem will grow and affect more people as the population gets older.

Poverty has actually declined among retirees since the 1960s. But by every measure – health, money, social and family relationships, mental well-being – seniors who have a lower socioeconomic status are at a big disadvantage. They have more financial problems, which creates stress, and they are more isolated and die younger.

Throughout the book, Carr documents the myriad ways the disparities, which begin at birth, reinforce each other as people grow up and grow old.

“Advantage begets further advantage, and disadvantage begets further disadvantage,” Carr concludes. For the less fortunate, “old age can be the worst of times,” she said. …Learn More

Portland's neon sign

20,000 Savers So Far in New Oregon IRA

About a third of retired households end up relying almost exclusively on Social Security, because they didn’t save for retirement. Social Security is not likely to be enough.

OregonSaves logoTo get Oregon workers better prepared, the state took the initiative in 2017 and started rolling out a program of individual IRA accounts for workers without a 401(k) on the job. The program, OregonSaves, was designed to ensure that employees, mainly at small businesses, can save and invest safely.

Employers are required to enroll all their employees and deduct 5 percent from their paychecks to send to their state-sponsored IRAs –1 million people are potentially eligible for OregonSaves. But the onus to save ultimately falls on the individual who, once enrolled, is allowed to opt out of the program.

More than 60 percent of the workers so far are sticking with the program. As of last November, about 20,000 of them had accumulated more than $10 million in their IRAs. And the vast majority also stayed with the 5 percent initial contribution, even though they could reduce the rate. This year, the early participants’ contributions will start to increase automatically by 1 percent annually.

The employees who have decided against saving cited three reasons: they can’t afford it; they prefer not to save with their current employer; or they or their spouses already have a personal IRA or a 401(k) from a previous employer. Indeed, baby boomers are the most likely to have other retirement plans, and they participate in Oregon’s auto-IRA at a lower rate than younger workers.

Despite workers’ progress, the road to retirement security will be rocky. Two-thirds of the roughly 1,800 employers that have registered for OregonSaves are still getting their systems in place and haven’t taken the next step: sending payroll deductions to the IRA accounts.

The next question for the program will be: What impact will saving in the IRA have on workers’ long-term finances? …Learn More

ROMEOs: Retired Old Men Eating Out

Every Thursday morning, five, six, seven of them meet for a hearty breakfast and freewheeling conversation at the Sunrise Bistro in Summerville, South Carolina.

The retirees’ talk careens from Tammany Hall and texting while driving to their military experiences and the aches and pains of old age. Several of the men had technical careers, so they recently dived deep into analyzing why a Coast Guard cutter carrying Zulu royalty crashed into a New Orleans dock.

Paul Brustowicz quote“We talk about man things,” said Bob Orenstein, an 83-year-old Korean War veteran who is retired from a Wall Street computer firm. “Men are mainly loners frankly, but everybody has found something to identify with in the group.”

The truth is that the ROMEOs – retired old men eating out – get much more than that from their weekly assemblies. “I think it’s just the friendship, the camaraderie,” said Paul Brustowicz, 74, a former jack-of-all-trades for an insurance company.

Friendship is the best antidote to isolation, which is dangerous for older Americans because it can lead to depression, poor health habits, and other problems. Most of the men in the breakfast club are South Carolina transplants, and their meetings have led to socializing and phone calls outside the group. Two of the men go deep-sea fishing together for redfish, and others share memories of growing up in New York or the tricks of the trade for constructing sailboat and railroad models. …Learn More