The Wealth Gap

Taking Stock In The Longevity Of Our Savings

How can advisors best help employees achieve guaranteed income for life?

by Tim Walsh

Mr. Walsh is Senior Managing Director, with TIAA . Visit tiaa.org

We’ve seen all too well businesses, large and small, struggling to stay afloat during the pandemic. The economic uncertainty, shutdowns, and stay-at-home orders curbed consumer spending in some areas resulting in layoffs and furloughs.

Now, although progress has been made as the economy begins to recover, organizations and their employees are taking a hard look at their finances and asking tough questions. Are we prepared for another crisis or a health emergency? Will our employees be able to retire comfortably?

They are far from the only ones taking stock.

An Uneasy Financial Future

The global crisis is not only exacerbated by existing healthcare, economic, and financial disparities in the United States and around the world, but its fallout is shaking our collective confidence. Many Americans are uneasy about their future, prompting many to examine their finances, rethink their saving strategies and question their retirement readiness.

According to TIAA’s 2021 Lifetime Income survey, only about half of working Americans (56%) think their retirement savings are on track. And when asked about the longevity of their savings, that confidence drops significantly. Only 42% think their savings will last 20 years or more in retirement and only 32% believe their savings will last 30 or more years.

Respondents cited numerous roadblocks to retirement savings such as having debt (44%), not being able to afford to save more (42%) and wanting to build up emergency savings (22%). Because of these roadblocks and challenges, people are increasingly interested in exploring how they can become more confident about the future of their finances.

As an employer and retirement plan sponsor, there are some distinct actions you can take to help ensure your employees are on the right track to enjoy the type of retirement they’ve always envisioned and worry less about running out of money and having enough time in retirement.

But first, let’s look at three reasons why you should take action to help improve employees’ retirement income plans.

1.) Employees are counting on your partnership

If you think financial and retirement wellness are not areas where you should lead, think again. Over the years, defined benefit pension plans that provided lifetime income in retirement have become increasingly rare in the job market. In addition, along with the decline of pensions came an increased expectation of personal accountability in retirement planning. However, many employees see the situation quite differently.

About 57% of employees believe employers have a responsibility to provide employees a path toward achieving lifetime income in retirement, according to TIAA’s 2021 Lifetime Income Survey. Six in 10 workers said they were highly interested in participating in an annuity that provides lifetime income if it was offered through their employer’s retirement plan.

These statistics highlight a unique opportunity for employers to design a retirement plan that meets the needs of employees who seek security and peace of mind.

2.) The pandemic highlights the risk of bad timing

Far too often people expect their investment returns to be the “average” through every year of their retirement. This is a significant retirement planning oversight, as investment returns year over year can vary. If one retires when the market is up, then it can bolster an investment portfolio for years to come. But what if the year one plans to retire is during the year of a market downturn, much like the recent pandemic-driven recession?

Without access to market downturn protection and guaranteed lifetime income in retirement, this “sequence of return” risk has the potential to completely decimate retirement plans.

3.) You can stand out in a competitive job market

In today’s job market, some have lost their jobs and are struggling to find gainful employment. Meanwhile, many are leaving the jobs in droves in what’s being called “the Great Resignation.” Amid the highly competitive job market, more than 70% of workers say they would choose to work for or stay with a company that offers access to guaranteed lifetime income in retirement over one that doesn’t. Furthermore, 57% say their employer’s match is highly important to them and 74% of employees (with a pension or in-plan lifetime income) say they are much or somewhat more likely to change employers if not offered an option for lifetime income in retirement. By establishing lifetime income options in retirement plans, employers have an opportunity to recruit and retain employees.

Future-Proofing Retirement Security

Given Americans’ mixed feelings on retirement security, below are some tactics employers can consider to help ease their employees’ concerns and help them feel more confident about their retirement:

  • See where your employees are on the retirement readiness spectrum – Have you asked your employees about their retirement readiness since the pandemic? A wide gap could exist between those who are on track with their savings and those who aren’t. TIAA’s 2021 Wealth Gap Widens Survey revealed the pandemic has derailed many Americans, with almost forty percent (37%) of households making less than $50,000 per year describing themselves as worse off because of the pandemic, while only 15% of households making more than $100,000 a year describe themselves as worse off. Depending on where your employees are and what your survey finds, it could change the way you think about retirement plan design. Additionally, it may lead to implementing more educational tools and programming to enhance employee participation and engagement.
  • Make sure your retirement plan meets the needs of a multidimensional workforce – In today’s environment, providing a retirement plan that engages a multidimensional workforce is an even greater priority, given the growing emphasis on inclusion, diversity and equity in the workplace. As a plan sponsor, you should consider stepping up efforts to understand efforts to understand the disparities in financial well-being occurring among different socioeconomic groups, ages, genders, roles and races, so you can help all employees enjoy an equal opportunity to improve their retirement readiness.
  • Improve employee retirement confidence through features such as automatic enrollment and contribution increases – Simple engagement techniques, such as automatic enrollment and contribution increases, can boost employee retirement confidence. As employees start to see their retirement savings grow, their confidence may grow, and they may do more to actively engage.
  • Address financial wellness – During the pandemic, employees became more concerned about their overall financial well-being, according to TIAA research. Nearly 60% of adults reported experiencing some kind of financial stress amid the pandemic. And while many Americans are still prioritizing saving for retirement, the majority reported falling behind, with many citing the pandemic as the reason. That same survey showed that the pandemic has changed nearly 80% of Americans’ views about what is financially important. Take views on emergency funds, for example. Prior to the pandemic, 69% of respondents reported having emergency savings, with 47% believing those funds would cover more than six months of expenses. Despite ongoing financial hardships, 77% of individuals now report having emergency savings.
  • Consider offering lifetime income in your plan – Providing participants with a “personal pension” that creates guaranteed income for life can go a long way towards increasing financial confidence. TIAA’s RetirePlus Series, for example, allows employers and their consultants to tailor model portfolios to plan demographics.[1] That way, employers can offer target-date like options, as the default, while also seeking to provide guaranteed growth, protection from interest rate risk and lifetime income in retirement.[2] This is particularly critical in a rising-rate environment, when high fixed-income allocations can prove harmful to individuals with shorter time horizons, such as those approaching, at, or well into retirement.
  • Don’t neglect educational programs. Knowledge is power – Almost half of workers, and 66% of millennials, believe if they had help creating and managing a budget, they could save more for retirement. Employers should consider offering personalized advice to ensure employees start strong, stay on track, and are comfortable retiring when they are ready.
Many Americans are uneasy about their future, prompting many to examine their finances, rethink their saving strategies and question their retirement readiness...

While many Americans felt that the covid-19 pandemic disrupted their financial wellness and retirement income plans, there may still be time to get back on track and prepare for the future. With the numerous roadblocks cited towards financial wellness, employees are sure to welcome any assistance from their employers in addressing their unique life-stage situations to achieve retirement readiness and security.

But retirement readiness doesn’t happen in a vacuum. It requires a holistic approach and is just one component of overall financial wellness. The covid-19 pandemic was unexpected but also unlikely to be the last crisis we face in the future. We can learn from this pandemic and become more resilient to the issues of tomorrow. And it’s up to advisors, plan sponsors, and participants to work together to prepare for the next challenge to financial wellness and retirement security.

 

 

 

[1] TIAA RetirePlus® and TIAA RetirePlus Pro® are administered by Teachers Insurance and Annuity Association of America (“TIAA”) as plan recordkeeper. Transactions in the underlying investments invested in based on the models on behalf of the plan participants are executed through TIAA-CREF Individual & Institutional Services, LLC, member FINRA.
[2] Any guarantees under annuities issued by TIAA are subject to TIAA’s claims-paying ability.