Comings and Goings in Retirement

There were three interesting reports published over the past week, which offered insights into ways to increase savings (or not), how to retain those accounts (or not), as well as an updated perspective on how all those comings and goings are adding up.

The first to grab my attention was the Employee Benefit Research Institute’s (EBRI) update of their assessment of the nation’s retirement savings shortfall. The headline was, of course, that things have improved over the past several years. Specifically, that that shortfall has decreased by nearly 14% over the past half-decade; from $4.44 trillion (in current dollars) in 2014 to $3.83 trillion in 2019. 

When all was said and done, for 2019, EBRI’s Retirement Security Projection Model® found that about four in ten (40.6%) of all U.S. households where the head of the household is between 35 and 64, inclusive, are projected to run short of money in retirement. 

Said another – and to my eyes more important way – about 60% of those households WON’T run short of money in retirement. That’s all the more impressive because of the way in which EBRI measures the gap. EBRI has long defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement. That’s far more accurate than a measure based on mere replacement rates, which is the foundation of many models, and it considers uninsured medical costs in retirement which many models completely ignore. What’s even more reassuring is that the increase incorporates the impact of the 2018 markets.

Over Matched?

A more controversial report came from Vanguard, which – based on a study of data from some 328 voluntary enrollment plans concluded that a stretch match may not be the panacea to increase deferrals that many thought.

Advocates of this approach can be found in pretty much every retirement plan conference these days – the notion not only being that participants will stretch to the match (contributing more, which is good for their retirement and for the plan’s nondiscrimination tests), but that by stretching out the employer match, it not only won’t cost the employer more, they might actually save money.

As it turns out, Vanguard found that plans with a 100% match had participation rates that were as little as 20% - and as much as two times - higher than the plans that stretch the same match value to a higher threshold. In fact, they found that contribution rates declined by 25% to 50% when the match is stretched. 

Now, in fairness, the study wasn’t exactly apples to apples – there are lots of differences in plans, workforces, income levels and geography that could have contributed to the study outcomes.

They did limit their review to non-highly compensated workers (median income $48,264) – though that is arguably that this approach needs to reach - and their study population had a participation rate of (just) 56% and a median deferral rate of 2%, both well below industry averages (the study excluded automatic enrollment plans, though arguably a population that is automatically enrolled might be less inclined to be influenced by match rates). That said, controlling for demographic variables, the Vanguard researchers noted that higher match thresholds were typically associated with lower employee savings rates.   

Their recommendation? Go with a 100% match – that’s what seems to get folks attention. Or better still, go with automatic enrollment with a “strong initial default deferral” rate and automatic annual deferral rate increases. 

Although that approach has cost consequences.

Leave Behinds?

Finally, the folks at Alight Solutions did an analysis aptly titled "What do workers do with their retirement savings after they leave their employers?," offering what the consultancy described as a “deep dive into post-termination behavior” over the period 2008-2017. The paper outlined several key findings, including that among participants who terminated over the past decade, 40% of the assets remained in the plan as of year-end. 

Of course that’s only 26% of the people who terminated during that period, validating that smaller balance participants are more likely to take their money with them. The report also noted that participants who were age 60 or older were more likely to keep their assets in the plan when an installment option was available (though adoption rates of those options remain only in the 3%-6% range) – though overall there was a higher percentage of withdrawals among those who terminated employment after reaching age 60 than among other age groups. 

The report called out what the report termed a “remarkable consistency” in withdrawal behavior over the past decade, specifically that roughly three-quarters took some kind of distribution (either cashout or rollover) by the end of the calendar year following their termination date – but after two years, those who hadn’t taken their money were much less likely to start tapping those balances.  

Oh – and that at least among those accounts recordkept by Alight, dollars rolled over to IRAs outnumbered the dollars rolled to other qualified plans by a factor of roughly 10 to 1.  While the report attributed this trend to the “massive marketing efforts of the financial services industry,” anyone who has ever gone through the exercise of a plan-to-plan rollover might have a different perspective.

What should you take from these studies? 

Well, to me they show that workers who don’t cash out right away aren’t likely to, you can stretch a match, but only so far, and if you have access to a workplace retirement plan, your retirement prospects are much, much better than if you don’t.