Almost every working day, I am deluged with studies and articles decrying how far behind US workers are in saving for retirement. In contrast, Social Security reports roughly 8,600 people each day enter into the Social Security program through the traditional retirement channel. These 8,600 people, mostly Baby Boomers, have seen the birth of the defined contribution system and the death of the traditional pension benefit program during their working career -- yet have somehow made it to the goal of retirement. So how is a set of programs so derided able to deliver these types of results?
1. Employees are working longer -- In almost every plan we consult, we are seeing average ages increase, and a surge in savings rates among employees over the age of 50. In aggregate, participants seem to be aware of their retirement needs and have adjusted their retirement ages and savings rates accordingly.
2. Overestimating savings needs is just as easy as underestimating them -- Undoubtedly one of the consequences in the transition from pension to defined contribution plans is that the certainty of retirement income has decreased. Financial services firms have focused on propounding income replacement rates between 75-90% in their employee communication pieces. For some, these rates may grossly overestimate their actual needs. Generally, taxes decline, saving for retirement stops, child-care ceases (hopefully), and work-related expenses cease. For others, mortgages are paid and out-of-pocket health care costs may also decline.
3. Retirement income is grossly under-reported -- Most doomsday scenarios for retirees rely heavily on data from the Social Security Agency (SSA). Unfortunately, SSA data from the Census Bureau's Current Population Survey ignores nearly all of the income that retirees receive from defined contribution plans and IRA's. This gap in data will skew the analysis further as defined contribution assets continue to soar upward.
4. Ask the retirees -- Ohio State University economist Jason Selingman reports in the Health and Retirement Study data that two-thirds of current retirees deem themselves "very satisfied" in retirement, with another quarter calling themselves "moderately satisfied." Just 14% report that their retirement years are "not as good" as the years immediately preceding retirement.
5. The defined contribution plans being used by new entrants to the workforce are vastly superior to their predecessors -- Many of today's defined contribution plans enroll participants by default, and in most cases manage the allocation and investment of assets. Increasingly, participants are being exposed to retirement income estimates to help get a more realistic picture of the income their portfolio will provide in retirement. These changes seem to be decreasing the effectiveness gap between defined contribution and traditional pension plans.
More work will need to be done to help participants get the most realistic estimates of their retirement income needs. However, much of the noise today seems to emanate from the financial services industry, which has much to gain from increases in retirement savings. Multnomah Group has developed a piece on participant Retirement Readiness as a tool to help plan sponsors produce the types of retirement plans that successfully prepare participants for retirement.
