Retirement Planning: ERBI Survey Suggests Plan Shortfalls

Should it come as a surprise that our retirement plans have not made us comfortable enough to suggest that we won't run out of money?

In the July 2010 EBRI Issue Brief, written by EBRI Research Director Jack VanDerhei and senior research associate Craig Copeland detail the travails of various cohorts in the pursuit of outliving your retirement nest-egg.

What they found was a "don't-feel-bad-for-yourself" moment we should all take note of: the rich can become less so in retirement, just like us. Okay, most of us have a greater chance of outliving our money as compared to the highest income brackets.  But the thought does have some comfort but few lessons.

The EBRI Retirement Readiness Rating™ is based on EBRI's Retirement Security Projection Model® (RSPM), which the institute first used in 2003 to evaluate national retirement income adequacy seeks to portray where we are in terms of retirement in the hope that we can make the changes we need to our plans (such as 401(k)s) while we are still working.  It is also designed to show advisers which steps to take to protect their clients.

The latest version of the survey includes auto-enrollment and auto-escalation of contributions in 401(k) plans, which have come as a result of changes on the legislative level.  It also includes updates for financial market performance and the often chaotic state of employee behavior.  The report is based on a database of 24 million 401(k) participants.

By simply looking at how much has already been accumulated across this wide swath of workers, they were able to determine when the money will run out.

The results after 10 years of retirement:

Lowest-income quartile: 41 percent are likely to run short of money.

Next-lowest quartile: 23 percent.

Third income quartile: 13 percent.

Highest-income quartile: 5 percent.

After 20 years of retirement:

Lowest-income quartile: 57 percent are likely to run short of money.

Next-lowest quartile: 44 percent.

Third quartile: 29 percent.

Highest-income quartile: 13 percent.

But what does "running short of money" actually mean?  The ERBI study used a combination of basic expenses based on information obtained from the Bureau of Labor Statistics' Consumer Expenditure Survey.  This also includes the biggest unknown but the highest projected retirement costs: health care.  By adding the cost of some health insurance and out-of-pocket health-related expenses, plus expenses from nursing home and home health care expenses, at least until the point they are picked up by Medicaid, the nest-egg most of us have will be under serious stress in a relatively short time.

While there have been some improvements in how much money we have currently accumulated, the group referred to as the early Boomers, those aged 56 to 62, the likelihood of running out of money has improved since the survey began.  But it still sees 46% of this group with less than adequate assets to cover the basic needs in retirement.  Late Boomers are only slightly better prepared with 44% likely to run short.

In short, we haven't put enough money to work for our plans to be successful.  We haven't allowed the plans to use the risk available to grow the plans the way they need to be nurtured.  And we have not harnessed our own budgets in such a way as to alleviate the pressures that accumulated debt takes away from our ability to save and invest more.

Yet Another Spotlight on Your Retirement Plan

A short while back, I wrote about a company that uses a series of benchmarks and mathematical equations to determine whether your 401(k) plan is doing what it should. Brightscope's product was designed to help plan sponsors find the problems in their plans and make an effort to correct them. As noble as that effort may be, the hurdles are numerous for plan participants to get their companies to make the necessary changes to their plans.

Now we have another entrant to the market place, this one offering the plan sponsor a look a their employee's retirement readiness. Fiduciary Benchmarks, based in Kansas will provide a snapshot look at a company's plan and the chances that their employee will arrive at retirement with enough cash to be considered adequate.

Using 100% as the retirement readiness benchmark, a number that represents different things to different income groups, the report, provided free in brief and at the cost of $100 for more detailed analysis looks at the average employee. From there, the report then analyzes various pathways that employee can take, and if they did, how well the plan allowed them to reach the optimum amount in their retirement accounts.

In a downloadable pdf, they suggest that a person earning $20,000 a year will need 94% of their pre-retirement income to survive. Although the plan does take into account conservative longevity predictions and the available investments in the plan, it does not look at the statistics for this particular group and their overdependence on Social Security benefits.

Their benchmark also suggests that someone earning three times that amount would need only 78% of their working income to hit the 100% mark in the company's index. Some industries fair much better than others. But this is not reflective of the whole of the employees in the plan, simply what the plan may do for you should you use it to its fullest.

And therein lies the rub. Most employees, no matter how good the plan, do not max out their retirement contribution, leaving them with a huge gap in what they will need and what they enter retirement with. Without full participation, there is little another tool for plan sponsors can do. The vast majority of plans are adequate even if they fall short on the educational side.

While there is emphasis on educating the participant through education of the plan sponsor, it is beginning to seem a little overdone, even as this type of spotlight is still in its infancy. Most employees wonder why their plans weren't improved sooner. And still more see the incremental improvements as a way to sustain the current level of contribution rather than an enticement to increase it.

The real improvement will come from the IRS. Once they fix the expected tax rate for retiree's plans when disbursement begins, and not leave the rate the big unknown, employees will see the future through a much clearer light. Not having any idea what those future taxes will be make it difficult to determine how much will be enough.