You Could Live to 100: How to Plan for a Long Retirement
Originally posted July 1, 2014 by Casey David on www.foxbusiness.com.
They say there are only two certainties in life: death and taxes. But that doesn’t mean we have any control over the actual timing of our death, which makes retirement planning hard.
Projecting your life expectancy is a critical part of executing a retirement plan as it determines how much you need in your nest egg and your drawdown tactics.
According to the Social Security Administration, a 65-year-old male has an average life expectancy of 19 more birthdays to reach 84. Women can expect to live a little longer: A female turning age 65 today can expect to live, on average, until age 86. In fact, 1 out of 4 65-year-olds will live past age 90, and 1 out of 10 will live past age 95.
Living longer is good news, but it increases the risk of outliving your retirement savings if you don’t plan accordingly.
Retirement income certified professional and Director at the American College, David Littell, offers the following tips to help boomers plan for longevity risks in retirement:
Boomer: What are some solutions to longevity risks for baby boomers?
Littell: The most direct solution for longevity risk is to increase income sources that are payable for life. This can be accomplished in a number of ways. The best place to start is to defer Social Security benefits to increase lifetime payments. Social Security has an added advantage in that benefits increase for inflation each year as well. Another option is to choose a life annuity payout option—instead of a lump sum—from an employer- sponsored retirement plan.
In addition, there are a number of commercial annuity products that can provide lifetime income. A life annuity can create a stream of income over a single life or over the joint lives of a couple. Annuities can be purchased that provide an income stream starting immediately – or, with a deferred income annuity, income can be purchased prior to retirement. A deferred income annuity can be purchased to limit longevity risk in one’s later years. For example, buying an annuity at age 60 that begins at age 80 can be a cost effective way to limit longevity risk. Deferred annuities can also be used to create income for life as these can be annuitized at a later date, allowing the owner to lock in lifetime income. Deferred annuities can be purchased with riders that provide for a lifetime withdrawal at a rate specified in the contract. Be sure to read all the disclosure before investing in annuity to make sure you understand all the potential risks, fees and terms.
Boomer: How important is it to make a good estimate of life expectancy for planning for longevity risk, and how can we create our own estimate?
Littell: Unless all of a retiree’s income sources are payable for life, part of the plan will be taking withdrawals from an existing IRA and other accounts. Determining how much can be withdrawn each year depends in part on how long retirement will last. So making a reasonable estimate (and updating that estimate over the years) is an important part of retirement income planning.
This process begins by considering average life expectancy. According to the Social Security Commission, the average life expectancy at age 65 is almost 20 years, and there is a one in four chance of living to age 90. In addition, there are some interesting tools available on the web for making a more personal calculation. For example, the Living to 100 calculator provides an estimate based on answers to questions about personal and family medical history as well as questions about lifestyle habits.
Boomer: What is a contingency fund and what is in it?
Littell: One solution to address longevity risk, as well as other risks faced in retirement, is to maintain a separate source of funds that are reserved for these contingencies. A contingency fund can be a diversified investment portfolio. If the purpose is to have funds available if life is longer than expected, then it is appropriate to choose investments that emphasize long-term growth. A tax-efficient approach is to build this fund within a Roth IRA. With this approach, the value is not diminished by taxes and if the funds are not needed, the Roth IRA is a very tax efficient vehicle to leave to heirs.
A contingency fund does not always have to be an investment portfolio. It could also be the cash value of a life insurance policy, or a reverse mortgage with a line of credit payout option. Both of those options have limited tax consequences as well.
Boomer: How does longevity risk impact some of the other risks faced in retirement?
Littell: Some describe longevity risk as a risk multiplier. When a person lives longer in retirement, it means greater exposure to most of the other retirement risks such as inflation, increasing costs for health care and long-term care and more exposure to public policy changes that could put your savings at risk.
Boomer: How can boomers develop an income plan that evaluates all of the risks that retirees will face post retirement?
Littell: Building a retirement income plan requires strategies for creating consistent income to replace a paycheck and address other financial goals, such as leaving a legacy for heirs. But it also requires considering each of the major risks faced in retirement and having one or more strategies to address each risk.
One thing that becomes apparent when looking at all the risks is that the solutions to some risks require locking into income annuities and other low risk investments, while other risks require the flexibility of a diversified portfolio that can be adjusted based on changing circumstances over time. A critical guide for these choices is an informed advisor (such as someone who has earned the Retirement Income Certified Professional (RICP®) or Chartered Financial Consultant (ChFC®) designation from The American College) that can help you react (but not overreact) to changing circumstances.
One-Third of Workers Say ACA Will Delay Their Retirement
Originally posted May 27, 2014 on https://annuitynews.com. 
Although the Congressional Budget Office projects a smaller U.S. workforce in coming years as a result of the Affordable Care Act (ACA), the majority of American workers don't believe that the ACA will allow them to retire any sooner, according to a new survey from https://MoneyRates.com. On the contrary, the Op4G-conducted survey indicates that one-third of workers expect that the ACA – also known as Obamacare – will raise their health care costs and thereby force them to retire later than they previously anticipated.
One-quarter of respondents felt that Obamacare would have no impact on their retirement date, and another one-quarter weren't sure how it would impact their retirement. Those who felt Obamacare would allow them to retire earlier were the smallest segment of respondents at 17 percent.
Many of the workers who indicated that Obamacare would delay their retirement said that the delay would be lengthy. Seventy percent of those respondents said they expected the delay to be at least three years, including the 39 percent who said it would be at least five years. The respondents who said they expected an earlier retirement were more moderate in their projections, with 71 percent indicating it would hasten their retirement by three years or less.
Richard Barrington, CFA, senior financial analyst for https://MoneyRates.com and author of the study, says that the purpose of the survey wasn't to determine whether Obamacare would truly delay or hasten anyone's retirement, but rather to gauge the fear and uncertainty that surround the program today.
"It's too early to tell whether Obamacare will actually delay people's retirements," says Barrington. "But what's clear at this point is that the program has created a lot of concern about health care costs as a burden on workers and retirees."
Barrington adds that whether or not these concerns are warranted, there are steps workers can take to better manage their health care costs in retirement, including budgeting for health insurance within their retirement plans, shopping regularly for better deals on insurance and using a health savings account as a way of handling out-of-pocket medical expenses.
"The poll reflects a high degree of uncertainty over the impact of Obamacare on retirement," says Barrington. "One way to reduce the uncertainty is to take active steps to manage how health care will affect your retirement."
10 tips to help employees boost their retirement savings
Originally posted on https://ebn.benefitnews.com.
Even if they began saving late or have yet to begin, it's important for your plan participants to know they are not alone, and there are steps they can take to kick-start their retirement plan. Merrill Lynch has provided the following tips to help boost their savings - no matter what their stage of life - and pursue the retirement they envision.
1: Focus on starting today
Especially if you're just beginning to put money away for retirement, start saving and investing as much as you can now, and let compound interest have an opportunity to work in your favor.
2: Contribute to your 401(k)
If your employer offers a traditional 401(k) plan, it allows you to contribute pre-tax money, which can be a significant advantage; you can invest more of your income without feeling it as much in your monthly budget.
3. Meet your employer's match
If your employer offers to match your 401(k) plan, make sure you contribute at least enough to take full advantage of the match.
4: Open an IRA
Consider an individual retirement account to help build your nest egg.
5: Automate your savings
Make your savings automatic each month and you'll have the opportunity to potentially grow your nest egg without having to think about it.
6: Rein in spending
Examine your budget. You might negotiate a lower rate on your car insurance or save by bringing your lunch to work instead of buying it.
7: Set a goal
Knowing how much you'll need not only makes the process of investing easier but also makes it more rewarding. Set benchmarks along the way, and gain satisfaction as you pursue your retirement goal.
8: Stash extra funds
Extra money? Don't just spend it. Every time you receive a raise, increase your contribution percentage. Dedicate at least half of the new money to your retirement savings.
9: Take advantage of catch-up contributions
One of the reasons it's important to start early if you can is that yearly contributions to IRAs and 401(k) plans are limited. The good news? Once you reach age 50, these limits rise, allowing you to try to catch up on your retirement savings. Currently, the 401(k) contribution limit is $17,500 for 2013. If you are age 50 or older the limit increases by $5,500.
10: Consider delaying Social Security as you get closer to retirement
For every year you can delay receiving a Social Security payment before you reach age 70, you can increase the amount you receive in the future." The delayed retirement credits range from 3% to 8% annually, depending on the year you were born. Pushing your retirement back even one year could significantly boost your Social Security income during retirement.
American Workers More Physically than Financially Fit
Originally posted April 22, 2014 by Lisa Barron on https://www.benefitspro.com
American employees see themselves as more physically fit (57 percent) than financially fit (28 percent), according to new research from the Principal Financial Well-Being Index: American workers.
The vast majority (84 percent), however, also believe that maintaining physical fitness is an investment in their financial future.
Still, nearly half of workers (46 percent) are stressed about their current financial situation. Fifty-one percent of Gen Y workers are stressed about finances compared to 35 percent of baby boomers. And those working with a financial advisor were less likely (33 percent) to be stressed about their financial future.
"American workers recognize the long-term financial benefits of staying healthy, but financial stress is often a constant pressure that can have a significant impact on their physical health," said Luke Vandermillen, vice president at the Principal Financial Group.
"With spring in full swing, now is a good time for Americans to apply their good fitness habits to their financial lives as well. Mark some time on the calendar for financial spring cleaning."
More than half (52 percent) say they have monitored their spending levels in the past year. Thirty-nine percent created a budget to keep finances in check, up from 28 percent two years ago.
Fifty-seven percent have an emergency fund in place, with those working with a financial profession about 1.5 times more likely to have one.
"It's encouraging to see American workers planning for unforeseen hurdles by giving themselves a financial checkup and setting aside money in an emergency fund," said Vandermillen.
"Despite a few missteps, like using the fund on monthly bills, these positive behaviors show individuals are making strides and taking personal responsibility to improve their short and long-term financial well-being."
The Principal Financial Well-Being Index: American Workers was conducted online among 1,123 employees at small and mid-sized businesses from Feb. 4-12.
Follow this Record Retention Checklist
Originally posted April 23, 2014 by Paula Aven Gladych on https://www.benefitspro.com
Qualified retirement plans are required to report and disclose certain obligations as part of the Employee Retirement Income Security Act of 1974, but what isn’t well known is that ERISA also spells out how long a plan sponsor must retain plan documents and records that support those obligations, according to Kravitz.
Kravitz, which represents Kravitz, Inc. and Kravitz Investment Services, Inc., points out that all records that support the plan’s annual reporting and disclosure requirements should be retained. All plan-related materials and records must be kept for at least six years after the date of filing an ERISA-related return or report. Records should be preserved in a manner and format that permits ready retrieval, the company said.
It is the plan administrator’s responsibility to retain these records, even if they’ve contracted with an outside service provider to produce their Form 5500 filing, Kravitz said.
The Department of Labor also requires employers to retain records that show how much benefits have been accrued by each plan participant. Here’s it’s list:
1. Plan documents: ERISA requires that plan administrators retain the original signed and dated plan document and all original signed and dated plan amendments; a copy of the plan’s most recent IRS approval letter; and copies of Form 5500. Plan documents should be retained until the plan is terminated, Kravitz said.
2. Supporting documents: Reports that support the plan documents also should be kept, according to Kravitz, including financial reports, Trustees’ reports, journals, ledgers, certified audits, investment analyses, balance sheets, income and expense statements, corporate/partnership income-tax returns, documentation supporting the trust’s ownership of the plan’s assets, evidence of the plan’s fidelity bond, and copies of nondiscrimination and coverage test results.
3. Census and other data: Payroll records that determine participant eligibility and contributions should be retained, according to Kravitz. Records that establish hours of service data also must be kept to demonstrate the determination of allocations and vesting.
4. Communications: Employers should keep copies of all communications that are provided to participants and beneficiaries
5. Participation forms and tax reporting: Companies need to keep documents that show they have followed plan documents with participant transactions, for plan audit purposes.
6. Duration of storage: Records should be kept for at least six years after a government filing. Kravitz recommends that employers keep these records for the life of their retirement plan. The DOL does allow electronic copies of these documents as long as they meet certain specifications.
Target Date Fund Investors More Confident About Reaching Retirement Goals
Originally posted April 15, 2014 on www.ifebp.org
Individuals investing in a target date fund within their workplace defined contribution (DC) retirement plan feel more confident about investing and meeting their retirement goals than those that don't use target date funds, according to recently updated survey results from Voya Financial's Investment Management business.
The survey was conducted by ING U.S. Investment Management, which plans to rebrand as Voya Investment Management in May 2014. ING U.S. Investment Management is part of Voya Financial, Inc., which recently rebranded from ING U.S., Inc.
In the survey, "Participant Preferences in Target Date Funds: An Update," more than half (56%) of target date fund (TDF) investors felt confident they would meet their retirement goals. In comparison, just over four-in-ten (41%) of non-TDF investors felt confident about their retirement savings. Further reinforcing this confidence among TDF investors is the survey's finding that nearly two-thirds (64%) felt they could turn their plan savings into an income stream at retirement, compared with just 43% of non-TDF investors. These findings compare similarly to results of a similar study conducted in 2011.
Overall, more than two-thirds (68%) of plan participants using TDFs reported that the investments alleviated the stress of retirement planning, increased their confidence that they were making good investment decisions, and helped them feel more assured they could meet their retirement income goals.
Target Date Fund Investors Contribute More
The survey also found that TDF investors contribute more to their retirement plans. Forty-two percent of TDF investors contribute more than 11% of their income to their workplace plan. In comparison, just 23% of those who do not invest in TDFs were contributing more than 11% of their income.
"These findings about how target date funds are influencing plan participants' feelings and savings habits provide some powerful insights that both consultants and plan sponsors can act upon," said Bas NieuweWeme, managing director and head of institutional distribution. "Considering the significant increase in the equity markets in 2013, it is noteworthy that the confidence of those that don't invest in target date funds is no stronger than it was in 2011. On the contrary, those that invest in target date funds continue to be more confident than non-target date fund investors, or demonstrating greater levels of retirement readiness."
Plan Participants Seek Glide Paths Offering Protection and Diversification
In addition to higher confidence and savings levels among TDF investors, the survey found that the vast majority of both TDF investors and non-TDF investors have a strong preference for protection against loss in the years leading up to retirement (92%) and broad diversification among both investments (92%) and investment providers (85%).
"Participants clearly want their investment providers to exhibit great care in the all-important years leading up to retirement," said Paul Zemsky, chief investment officer of multi-asset strategies and solutions. "This knowledge can help consultants and plan sponsors factor in the investment preferences of their participants when customizing glide paths for their plan demographics. Our focus and objective as investment managers is to ensure we apply those risk-return preferences in a thoughtful and disciplined way."
In addition to the updated research on plan participants use of TDFs, ING U.S. Investment Management has published"Rethinking Glide Path Design - A Holistic Approach,"a detailed analysis of how to align investment portfolio risk with the retirement objectives of participants at every stage in the plan life cycle. Understanding participant demographics and knowing their preferences allows us to create custom glide paths which are designed specifically for individual plans.
"A glide path design needs to take into account the risks of the investment portfolio relative to the overall retirement goals of plan participants over the course of a full life cycle," says Frank Van Etten, deputy chief investment officer, multi-asset strategies and solutions. "This helps maximize the probability of successful retirement - namely, allowing participants to maintain their lifestyles in retirement while not outliving their assets. To accomplish this, the investment decision at every stage of the life cycle must incorporate a holistic perspective in which in-retirement objectives are driving the process."
Survey Methodology
ING U.S. Investment Management, in collaboration with the ING Retirement Research Institute, conducted an online survey of 1,017 employer-sponsored retirement plan participants between September 16, 2013 and September 20, 2013. At 90% confidence, the margin of error in the study was +/- 3.5%. Of the respondents, 500 invested in a TDF within their plan, while 517 did not. All respondents to the survey were currently contributing to an employer-sponsored defined contribution plan, were age 25 or older, and were the primary/joint financial decision maker for their account. The survey included plans of all employer sizes. The data was weighted by household income, age and gender, among other variables, to more closely represent the demographics of the general retirement plan population. To prevent bias, ING U.S. Investment Management was not identified as the sponsor of the research.
There is no guarantee that any investment option will achieve its stated objective. Principal value fluctuates and there is no guarantee of value at any time, including the target date. The "target date" is the approximate date when you plan to start withdrawing your money. When your target date is reached, you may have more or less than the original amount invested. For each target date Portfolio, until the day prior to its Target Date, the Portfolio will seek to provide total returns consistent with an asset allocation targeted for an investor who is retiring in approximately each Portfolio's designation Target Year. Prior to choosing a Target Date Portfolio, investors are strongly encouraged to review and understand the Portfolio's objectives and its composition of stocks and bonds, and how the asset allocation will change over time as the target date nears. No two investors are alike and one should not assume that just because they intend to retire in the year corresponding to the Target Date that that specific Portfolio is appropriate and suitable to their risk tolerance. It is recommended that an investor consider carefully the possibility of capital loss in each of the target date Portfolios, the likelihood and magnitude of which will be dependent upon the Portfolio's asset allocation.
Stocks are more volatile than bonds, and portfolios with a higher concentration of stocks are more likely to experience greater fluctuations in value than portfolios with a higher concentration in bonds. Foreign stocks and small and mid-cap stocks may be more volatile than large-cap stocks. Investing in bonds also entails credit risk and interest rate risk. Generally, investors with longer timeframes can consider assuming more risk in their investment portfolio.
Biggest boomer retirement regrets
Originally posted by Lisa Barron on https://www.benefitspro.com
The last of the baby boomer generation will be turning 50 this year, and it's time for them to get a fix on how they are going to prepare for retirement.
Fortunately, there are valuable lessons, financial and otherwise, to be learned from those who have already reached their later years.
On the financial front, there is of course room for many regrets. "Generally, the failure to have a plan is number one," Pete Lang, president of Lang Capital in Hilton Head and Charlotte, N.C., told BenefitsPro.
"I find people five years into retirement with no plan whatsoever."
Lang said that includes a tax plan, an income plan and an investment plan. Otherwise, he cautioned, "All your money is slipping through your fingers."
He left out an estate plan, Lang said, because while it may be needed for a financial blueprint it is not needed to retire, as are the other three.
On taxes, according to Lang, the biggest regret is the failure to use a tax-forward plan, such as deferring Social Security. "If you don't take it at 65 or 66, you can defer it and that will minimize taxes."
Other tax regrets include withdrawing money from tax-deferred IRAs too early, and not spreading Roth IRA conversions over a period of time.
As for income, Lang goes back to Social Security deferrals. "Everybody thinks the government will go out of business. That's not the case. The checks will always continue," he said.
"If the government gets into trouble with inflation, that's another issue. But the checks will be there, and deferral is a great way to guarantee enhanced income stream."
Finally, turning to investment, Lang said the big regret is the failure to hedge against inflation. "The inflation rate over the last 15 years has averaged 2.5 percent. And when you look at portfolios, they are also taxable. You have to use a tax co-efficient. I use 3.4 percent. So, if you're not growing at that rate you are not hedging money against inflation. If that's the case, you're losing buying power," he explained.
Given the risk inherent in equities and the current low yields on Treasuries, Lang said, "Use the standard rule to diversify a portfolio to create an income stream from safer allocations short term and in the long term from a more aggressive plan."
Clarence Kehoe, executive partner in accounting firm Anchin, Block & Anchin, told BenefitsPro he sees regrets over some very basic mistakes made during the peak earning years.
"From my experience, a lot of people when they get to retirement age look back and say 'why didn't I' or 'I wish I had,'" he said.
The two biggest killers are a lack of savings and a lack of understanding of how much will be needed in retirement, according to Kehoe.
"If you look at it realistically, many see a rise in income as they mature in their career, and when they see salaries go up, instead of saying now I have a chance to save, they are spending it. A lot of people don't pay attention, and don't say I have excess cash and I should save it," he said.
Going hand in hand with this is the problem of excessive borrowing. "Consumer debt has gone but the affluent person who wants a bigger house will have taken a mortgage or taken a second mortgage to take a vacation. Excess leveraging can squash the ability to save for retirement," Kehoe said.
Among other regrets sees is retiring too early. "There are people who have taken themselves out of the work force, some even in their mid- 50s, but they are robbing themselves of extra years of savings."
"A lot of people don't realize life expectancy is longer than they think, which means they need more money," he added.
Finally, Kehoe stresses the need to plan for age-related expenses. "People look at themselves unrealistically. They are not thinking about some of the extremes in older age. But even if you keep yourself in great shape your body wears down," he said.
That means more regular doctor visits, not all of which will be covered by the government or insurance, Kehoe warned.
Not all of the retirement-related regrets pertain strictly to finances, notes Daniel Kraus, an advisor and branch manager with Raymond James & Associates in Boca Raton, Fla.
One of the biggest one he sees among clients is the lack of a plan for what to do with their time. "A recent client commented, 'I'm bored. I don't know what to do with myself,'" Kraus told Benefitspro.
"After working for 50 years, he retired at 73 and said he wasn't prepared for the lack of activity. So there's a psychological impact of going into retirement that is dreadfully overlooked," he said.
Another area that can be overlooked has to do with way of life. "We do experience clients unwilling to change their lifestyle or unable to make that change," he said.
"I've got a client who's 84 and is burning down her money because she won't change her lifestyle. So that's an investment and psychology issue."
Another client can't make the tough decisions she needs to. "In her case, she knows she has to sell her real estate but she can't bring herself to price it at a price where it will sell," he explained.
"Retirement is all about making choices and compromise."
The person who isn't willing to change their lifestyle and runs out of money has regrets, said Kraus, as does the person who retired too early and finds the market is down and the person who pulled all of their money out of the market in 2008 and 2009 and put it in the bank.
His final cautionary tale: Regret is having long-term care expenses and not having planned for it.
Pointing to statistics showing that two-thirds of those over age 65 will incur long-term care costs, Kraus said, "There's nothing certain in life but death, taxes and long-term care."
Financial fears have many workers planning to delay retirement
Originally posted by Melissa A. Winn on https://ebn.benefitnews.com
Although U.S. workers on a whole are more satisfied with their current financial situation than in years past, most (58%) remain concerned about financial stability in retirement and say they plan to continue working until age 70 or later, a new Towers Watson survey shows.
With many workers expecting to fall short on their retirement savings, nearly four in 10 plan on working longer, an increase of 9% since 2009. A large majority of these employees expect to delay retirement by three or more years and 44% plan on a delay of five years or more, the Global Benefit Attitudes Survey finds.
In 2009, 31% of workers planned on retiring before 65, and 41% planned on retiring after 65. According to the 2013 survey, only 25% plan on retiring before 65 and half expect to retire after 65. One in three employees either does not expect to retire until after 70 or doesn’t plan to retire at all.
The nationwide survey of 5,070 full-time employees found that nearly half of respondents (46%) are satisfied with their current finances, a sharp increase from 26% in 2009. Still, nearly six in 10 remain worried about their financial future.
Employees’ confidence in their ability to retire has also climbed steadily since the financial crisis, with nearly a quarter (23%) very confident of their income sufficiency for the first 15 years of retirement. However, only 8% are very confident they’ll have adequate income 25 years into retirement.
“Employees might be on firmer financial footing now than they were five years ago, but many remain nervous about their finances and prospects for a secure retirement,” says Shane Bartling, senior consultant at Towers Watson. “This is especially true for older workers who are likely better positioned to assess their retirement income than workers overall. The financial crisis hit workers age 50 and above particularly hard, with the stock market fall creating a huge dent in their retirement savings and their confidence levels.”
The survey also finds that employees of all ages are especially worried about health care costs and public programs. Only two in five employees believe they can afford any medical expenses that arise in the next 12 months and more than half of all employees (53%) are concerned they will not be able to afford health care in retirement. Most employees (83%) also believe Social Security will be less valuable in the future and 88% have similar fears about Medicare.
More than half of employees (56%) say they are spending less and postponing big purchases as a way to pay down debt and start saving for retirement, the study says. Just over half (51%) of employees say they review their retirement plans frequently.
Saving for retirement is cited as the No. 1 financial priority for all employees age 40 and older, the study notes.
“Employers and employees are both facing increasing retirement pressures. Employers understand that they have a role to play in helping their workers plan and save for a secure retirement. Today’s employees are considerably more engaged, and are looking to their employers for more information about health care costs and the value of their retirement programs,” says Bartling. The increased use of tools, including mobile apps, also represents an opportunity “for employers to help their employees plan for a successful retirement.”
U.S. corporate pension plans improve financial health in 2013
Originally posted March 20, 2014 by Michael Giardina on https://ebn.benefitnews.com
A new analysis of the 100 largest corporate pension plans finds that retirement coffers bounced back in 2013, reaching record funded-status levels and cutting away at pension deficits that have plagued them since 2008’s financial collapse.
In a new Towers Watson study, the year-end analysis finds that plan sponsors for the U.S. publicly traded companies reported significant gains through rising interest rates and beneficial investment returns.
With a nearly $170 billion drop in the group’s pension deficit, the Towers Watson report states that the overall funded status increased by 13 percentage points to 91%. That is the best funding level since the end of 2007, when the average stood at 103%. Additionally, the number of plan sponsors with fully funded plans surged from five at the end of 2012 to 22 at the end of 2013. At the end of 2007, half of these 100 plans were fully funded.
The average discount rate increased by 83 basis points to 4.85% in 2013, while investment returns averaged 10.8%.
According to the analysis, companies continued to contribute relatively large amounts to their plans during 2013, with sponsors’ median contribution being 60% more than the value of benefits accruing during the year. However, the contribution levels were much lower than in prior years. For 2013, plan sponsors contributed $27.8 billion, down from $45.2 billion in 2012. That’s the smallest contribution since 2008, when companies added $16.8 billion to their plans. After many years of making large contributions, some sponsors took contribution holidays or decided to contribute significantly less in 2013. Six of the 10 largest cash contributors in 2012 pumped $11.3 billion into their plans, compared with $0.8 billion in 2013.
“Plan sponsors made great strides to shore up the financial condition of their pension plans last year,” says Dave Suchsland, senior consultant at Towers Watson. “…This is good news for employers, as stronger pension fund balance sheets will reduce required cash contributions in the near term while lower pension costs will improve corporate earnings.”
Even with these benefits, Towers Watson expects that additional pension de-risking measures will be seen among corporate pension plan sponsors as they prepare themselves for the next downturn.
“The improved funded position, combined with recent increases in Pension Benefit Guaranty Corporation premiums and a newly released Society of Actuaries mortality study, will make de-risking actions very attractive in 2014,” says Alan Glickstein, senior retirement consultant at Towers Watson.
Previously, the PBGC premium increases, along with longer living retirees, were discussed by industry pension consultants. Mercer stated that plan sponsors need to consider investment policies and liability-driven investments, purchasing annuities for some or all plan participants and offering former employees lump-sum buyouts.
According to the PBGC, premium rates jumped up by $6 per participant in 2014 and $5 per $1,000 of unfunded vested benefits for single-employer plans. The single-employer rate increase was previously laid out in the Moving Ahead for Progress in the 21st Century Act, the PBGC says.
Mercer estimates that new mortality projections point to pension liability increases between 2% and 8% over the next few years. Gordon Fletcher, a partner in Mercer’s financial strategy group, stated earlier this month that new estimates point to individuals living to 87-years-old or slightly longer in some cases.
Retirement confidence rebounds from five-year lull
Originally posted March 18, 2014 by Michael Giardina on https://ebn.benefitnews.com
Retirement confidence among Americans regained some of the losses reported over the past five years – where approximately 18% are very confident and 37% are somewhat confident with the future financial needs – according to a new survey from the Employee Benefit Research Institute.
In its 24th installment, the EBRI annual Retirement Confidence Survey states that there was a 5% point jump in Americans workers who reported they were very confident and there was no statistical change among the population that were not at all confident at 24%.
Last year, 21% reported that they were not too confident and 28% - the highest level in the survey’s history – are not at all confident about the future needs of a comfortable retirement. 2013’s lowly sentiment also resonated with the very confident and somewhat confident, which reported 13% and 38% markers, respectively.
The Washington, D.C.-based nonpartisan, nonprofit research organization states that there was a 10% jump in worker confidence with a retirement plan who report being very confident at 24%. For the cohort without a retirement plan, the very confident level dipped down one percentage point to 9%.
“Retirement confidence is strongly related to retirement plan participation,” says Jack VanDerhi, EBRI research director and co-author of the 2014 report. “In fact, workers reporting that they or their spouse have money in a defined contribution plan or IRA or have a defined benefit plan from a current or previous employer are more than twice as likely as those without any of these plans to be very confident.”
The findings indicate that 1 in 10 of participant households currently enrolled in a retirement plan were listed as being not at all confident. At the same time, half of respondents without a retirement plan reported the same confidence level.
While 64% of workers report that they or their spouses have saved for retirement – a statistically equivalent figure to 2013 – 90% of workers currently signed up to a retirement plan list they have saved for their future income needs when they exit the workforce.
Also, retiree confidence, typically higher than worker confidence levels, continues to climb in 2014. Twenty-eight percent felt were very confidence in their financial security, a 10% jump from 2013.
Roughly half of participants state that financial hurdles such as the cost-of-living and daily expenses – as well as lingering debt – hinder worker savings.
“Just three percent of workers who describe their debt as a major problem say they are very confident about having enough money to live comfortably throughout retirement, compared with 29 percent of workers who indicate debt is not a problem,” says Matt Greenwald, of Greenwald & Associates, which conducted and co-sponsored the survey.
During America Saves Week earlier this year, Dallas L. Salisbury, president and chief executive officer of the EBRI and chairman of the American Savings Education Council, highlighted that employers can assist with the current savings epidemic. Salisbury explained that workers who conducted retirement-needs calculation were more confident to save what is needed for retirement. Complementing this goal, he says that the theme for this year’s America Saves Week is “to set a goal, to make a plan and to save automatically.”
Other findings of this year’s RCS:
- Workers acknowledge the need for savings: Approximately 22% of the sample believes that they need to save between 20-29% of their income and another 22% believe that 30% of income is warranted.
- Estimating retirement savings needs is still unpopular: Roughly 44% state that they and/or their spouse have participated in this calculation.
- Financial advice is even less popular and falls on deaf ears: one in five workers and 25% of retirees report they have sought the help of a financial adviser; Only 27% of workers and 38% of retirees say they used all of the professional’s financial advice.