Retirement crisis in the United States: What can be done?
10 April 2013
Since the global financial crisis of 2008, the U.S. population has struggled to recover and/or grow retirement savings. Employers providing defined benefit (DB) plans face overwhelming funding expenses, driven by increased life expectancy, stock market fluctuations, and low interest rates. The latter two factors, resulting from the severe recession and unpredictable economic environment experienced since then, have also severely impacted employers ability to fund defined contribution (DC) plans.
Kelly Greene, of the Wall Street Journal, recently discussed this issue and cited the Employee Benefit Research Institute's latest retirement confidence survey. This study states that the percentage of U.S. workers demonstrating little to no confidence regarding the adequacy of their retirement funds is at an all-time high. Only 13% of workers surveyed report being very confident they have enough saved for retirement and 38% report some confidence in their preparedness. Five years ago, those two figures totaled approximately 70% of workers surveyed. Employers and employees need to work together to remedy this situation. Depending on the design of the plan, the answer could be a defined benefit plan, a defined contribution plan, or a strategic combination of the two.
Possible solutions can be categorized from basic to more radical. One proposal is to convert traditional pension plans to cash balance plans rather than merely freezing them. However, the advantage of this strategy is still diminished by the significant issue of longer life expectancies. Better stock performance and, hopefully, within the next few years, better interest rates will relieve some pressure on benefit obligation expenses. Discussing the results of the Milliman Pension Funding Study released March 25, John Ehrhardt stated that pension funding status will continue to be tied to interest rates and until interest rates move favorably, the pension funding deficit is likely to endure.
A middle ground solution might be to introduce a profit sharing element to the retirement plan package. There are a few drawbacks to a profit sharing plan, mostly increased administration, but the positives in many cases outweigh the negatives. Profit sharing plans are discretionary and, theoretically, self-funding. These plans tie employee incentives to company growth and form a strong partnership between employers and their employees. With the stock market showing some improvement and the economy demonstrating strengths (Wall Street Journal), companies could, over time, see an upswing in business. Plan sponsors can seize that opportunity and distribute some of those profits to employees, utilizing performance accountability measurements. Other, straightforward strategies include implementing auto enrollment processes and increasing employee retirement plan education. Employees need guidance. They are not professional investors. Companies can meet the challenges of today's retirement savings environment and take pride in assisting their employees in this venture.
Kelly Greene, of the Wall Street Journal, recently discussed this issue and cited the Employee Benefit Research Institute's latest retirement confidence survey. This study states that the percentage of U.S. workers demonstrating little to no confidence regarding the adequacy of their retirement funds is at an all-time high. Only 13% of workers surveyed report being very confident they have enough saved for retirement and 38% report some confidence in their preparedness. Five years ago, those two figures totaled approximately 70% of workers surveyed. Employers and employees need to work together to remedy this situation. Depending on the design of the plan, the answer could be a defined benefit plan, a defined contribution plan, or a strategic combination of the two.
Possible solutions can be categorized from basic to more radical. One proposal is to convert traditional pension plans to cash balance plans rather than merely freezing them. However, the advantage of this strategy is still diminished by the significant issue of longer life expectancies. Better stock performance and, hopefully, within the next few years, better interest rates will relieve some pressure on benefit obligation expenses. Discussing the results of the Milliman Pension Funding Study released March 25, John Ehrhardt stated that pension funding status will continue to be tied to interest rates and until interest rates move favorably, the pension funding deficit is likely to endure.
A middle ground solution might be to introduce a profit sharing element to the retirement plan package. There are a few drawbacks to a profit sharing plan, mostly increased administration, but the positives in many cases outweigh the negatives. Profit sharing plans are discretionary and, theoretically, self-funding. These plans tie employee incentives to company growth and form a strong partnership between employers and their employees. With the stock market showing some improvement and the economy demonstrating strengths (Wall Street Journal), companies could, over time, see an upswing in business. Plan sponsors can seize that opportunity and distribute some of those profits to employees, utilizing performance accountability measurements. Other, straightforward strategies include implementing auto enrollment processes and increasing employee retirement plan education. Employees need guidance. They are not professional investors. Companies can meet the challenges of today's retirement savings environment and take pride in assisting their employees in this venture.