Guiding Boomers through the income gap
by Mike FoyMr. Foy is Senior Director of Wealth Management Practice at J.D. Power, where he leads the company’s syndicated research studies on both investors and financial advisors and is also responsible for developing research-based solutions that drive measurable results for clients within the wealth management industry in North America. Visit www.jdpower.com
The fear of outliving their financial resources is a major concern for many Americans and a key reason they continue to seek professional financial advice and guidance. There are numerous reasons this concern has become more acute in recent decades, including the shift of risk from employers to employees as pensions and defined benefit plans have been replaced by defined contribution plans. Also, advances in health care have significantly increased both longevity and the medical costs of living in retirement, and the rising uncertainty around the long-term viability of long-trusted federal government programs like Social Security and Medicare to supplement private savings and insurance.
The Boomer Crisis
Boomers are the first generation to be retiring into this new, uncertain reality, and research data suggests they are far from prepared for it. Worse yet, many are unaware of the enormous gap between where they should be and where they are, and even the youngest Boomers have just a decade to catch up before they reach the traditional retirement age of 65.
Regardless of their preparedness, most Boomers take a relatively sanguine view of their financial future. In the 2018 J.D. Power Group Retirement Satisfaction Study of nearly 10,000 U.S. group retirement plan participants, Boomers on average scored their personal financial outlook a 7 on a 10-point scale, and among those who reported having set specific retirement goals, 84% believe they are on track to meet them.
However, when we look more closely at what they actually report they have saved, how much they are currently contributing to their savings, how much time remains until they reach expected retirement age, and their likely income at retirement, even with reasonably optimistic assumptions about portfolio returns, the average Boomer is on track to have just 3.4 years of income saved at retirement. That is about one-third to one-half of what retirement experts suggest is necessary to have a reasonably high degree of confidence that retirees will not outlive their money.
The Next Generation
There are some “catch up” options available to Americans over 50 to increase their pre-tax plan contributions above the standard maximum allowed by the IRS, but as time to retirement age gets shorter, it becomes more challenging to make up for lost time. Gen Xers and especially Millennials, however, generally still have decades of employment income ahead with which to close that gap between what they will need in retirement and what they have currently saved, provided they have an understanding of what – and how much – is needed.
How Plan Providers Can Help… and Benefit
Group Retirement Plan providers are a key stakeholder in the retirement savings ecosystem, and have increasingly stepped up to play a more active role in mitigating the risk associated with moving to a model in which individuals shoulder the full responsibility for planning for their own retirement. Group plan features like auto-enrollment, auto-escalation of contributions, and investment vehicles like target date funds all help ensure that employees default to opting in rather than out of making progressive pre-tax contributions to a portfolio that automatically re-balances to mitigate risk as an employee gets closer to retirement age. But beyond ensuring that even completely passive employees are minimally prepared, providers can do much more to engage and educate participants to make smarter and more responsible decisions to prepare for retirement.
In doing so, they also help themselves improve their chances to retain those participant assets when they are rolled over from the group plan to an individual retirement account.
With an estimated $5.3 trillion in wealth currently sitting in 401(k) plans that will eventually be rolled over into IRAs when employees retire or change jobs, retaining those assets is a major concern for wealth management firms. Increasing engagement among plan participants has a strong impact on their satisfaction with their provider, and with their intention to remain with that provider when they ultimately leave their job and rollover their assets.
Digital Engagement is Key
As more Americans – especially Millennials – increasingly interact with digital and mobile tools across more aspects of their lives, developing and driving engagement with tools relevant to retirement savings needs to be a priority for group plan providers to drive better plan participant decisions.
Within that broad framework, we’ve identified three areas that providers have opportunities to focus on: Digital Tools, Educational Resources and Mobile Engagement.
Digital Tools for Goal Setting, Planning and Investing
When we asked current group plan participants about three key kinds of tools designed to help with goal setting (Retirement goal setting), planning (Payroll contribution analysis) and investment selection (Fund comparison tools), the results were striking.
Participants who are more actively engaged with these tools are not only more satisfied with their plan provider, but also have significantly higher contribution levels, reflecting a clearer understanding of what their true retirement needs are and the benefits of maximizing tax-deferred savings and making informed investment decisions to achieve their goals. Despite this, as the table below illustrates, fully half (50%) of current group plan participants are either unaware such tools exist or have never used any of them.
|Participant Engagement Level||Incidence||% Contribution (median)|| |
Satisfaction with Provider
|Unaware of Tools||16%||6%||659|
|Aware but Unengaged||34%||7%||752|
|Used one tool||20%||8%||774|
|Used two tools||17%||9%||815|
|Used all three tools||12%||10%||856|
Educational Resources: Webinars and Seminars
Another way in which providers can help relates to educating participants on planning and investing for retirement. Access to a financial professional to offer advice and guidance is critical, but providers can augment one-on-one guidance by providing access to both online and offline (live) educational seminars that empower employees to make more informed decisions about planning for their retirement.
Nearly three-quarters of participants (71%) are either not aware that such resources exist or haven’t used them. Just 8% have taken part in a digital event over the past 12 months, but those who have had an average satisfaction score 82 points higher than those unaware or not attending any events (833 vs. 751). Digital events are increasingly critical given Millennials preferred way or interacting as well as the increasingly virtual nature of today’s corporate workforce, where bringing employees together in a single physical location at the same time is increasingly infeasible.
Despite the increasingly central role mobile devices are now playing in our lives as employees and consumers, just 23% of plan participants say they completely understand their providers’ mobile services, and even among those using this channel, the satisfaction with the mobile experience is significantly lower than online or phone channels. Even among millennials, who are significantly more likely to use mobile, satisfaction with the experience trails other channels.
One simple thing providers can do to improve this is to drive greater adoption and usage of mobile apps to replace the mobile web experience that produce the least satisfying outcomes for participants. Even a mobile optimized web experience is often not an intuitive or efficient experience on a small screen, but, as the chart below indicates, when users are aware of using an app, mobile experience scores increase dramatically.
Putting the Pieces Together
Ultimately, what we’ve found in analyzing the patterns of behavior among group retirement plan members is that a confluence of demographic, technological, and macroeconomic variables have introduced new challenges and presented new opportunities for plan providers. Increasingly, connecting in a meaningful way with retirement plan members requires an omni-channel approach that is sensitive to the preferences of different generational groups, but also able to be tailored to the individual. While technology has made it possible to achieve this high level of personalization, there is still an art to getting the investor satisfaction formula just right.
The one consistent truth our data show, however, is that that group retirement plan participants who are most satisfied and most likely to stay with their provider are those who are receiving personalized guidance and who are interacting with digital channels. These will be the two areas where retirement plan leaders will be able to set themselves apart from the pack. ◊
1. J.D. Power defines generational groups as Pre-Boomers (born before 1946); Boomers (1946-1964); Gen X (1965-1976); Gen Y (1977-1994); and Gen Z (1995-2004). Xennials (1978-1981) and Millennials (1982-1994) are subsets of Gen Y.