Aging Committee Studies 21st Century Retirement Security Solutions
Boosting retirement savings through innovation, new technology, and even a dancing pig was the subject of Wednesday’s hearing by the Senate Special Committee on Aging: “Closing the Gap: Innovations to Promote Americans’ Financial Security.”
Susan Collins, R-Maine, and Claire McCaskill, D-Missouri, committee chairman and ranking member, respectively, listened to testimony from retirement industry insiders who cited familiar solutions, but also cutting-edge, creative ones, to, hopefully, trim down some sobering statistics. According to a Gallup poll Collins cited, 60% of Americans’ top financial worry was running out of money in retirement. Possibly because, as another survey found, the gap between what they have saved and they’ll need is $7.7 trillion.
That gap has only been growing, it appears. Tim Flacke, executive director of the Doorways to Dreams (D2D) Fund, pointed to three decades of consistently falling savings rates—the rate now stands at 5.4%. More than 50% of Americans have less than $10,000 set aside for retirement, he said.
At least in theory if not in practice, retirement plans are considered very important to the great majority of Americans. According to the Transamerica Center for Retirement Studies (TCRS) 16th Annual Retirement Survey, 89% of workers value retirement benefits as an important workplace benefit, and 37% expect their 401(k), 403(b) account and/or individual retirement account (IRA) to be their main source of retirement income; Social Security was mentioned next, at 26%.
The point, of course, is to increase their use, availability and, for those that don’t have them, find other means to save.
As would be expected, the survey found that more large companies (92%) offer retirement plans than smaller ones, yet, the gap may be narrower than was previously thought, said Catherine Collinson, president of the center and Transamerica Institute. Seventy-two percent of micro-sized companies and 89% of small companies offer some form of retirement plan.
While those percentages could still be improved, she said, a further focus should be covering part-time workers. Just 38% of employers that offer a retirement plan extend eligibility to part-time staff, she said. Of those that do not, 91% intend to continue that policy, blaming impracticality (39%) and cost (37%).
“By addressing the coverage gap among part-time workers, policymakers can also help improve the retirement outlook of women and lower income workers who are more likely than other demographic segments to work part-time,” she said.
NEXT: An offering/receptivity gap
TCRS agreed with other industry findings that retirement security can be greatly enhanced through use of automatic plan features. Yet, while “71% of workers find the idea of automatic enrollment appealing,” just 21% of plan sponsors offer it, Collinson said. Similarly, 67% of workers like the idea of automatic escalation, but only 28% of plan sponsors offer it. Whether the Treasury Department’s recent “much-needed relief relative to the administrative burdens on employers offering automatic enrollment” will help adoption rates, she said, it is too soon to tell.
Other advice for plan sponsors included to expand availability of professionally managed services such as managed accounts and asset allocation suites; target education to reduce plan leakage; and update business practices so workers who want to work past 65 and transition into retirement can do so. In that way, “employers can play an invaluable role in helping pre-retirees continue to earn income, grow their savings, and stay involved while they are transitioning into retirement,” she said.
For policymakers, TCRS presented a “10-Step Plan to Increase Retirement Security,” containing what it termed “recommendations focused on timely, cost-effective, workplace-oriented solutions within the context of the existing retirement system,” it said, stressing that the steps suggest reforms that optimize existing innovations and opportunities—“not new programs or overhauls [that] could be expensive and time-consuming to implement.” These steps are:
1) Increase plan sponsorship rates through MEP reform and additional incentives;
2) Expand coverage by providing part-time workers the ability to participate in employer-sponsored plans;
3) Increase default contribution rates in plans using automatic enrollment;
4) Reduce leakage from retirement savings accounts;
5) Illustrate savings as retirement income on retirement plan account statements;
6) Implement more personalized retirement education, communication, and planning tools;
7) Facilitate working longer and a phased transition into retirement;
8) Facilitate retirement savings to last a lifetime;
9) Promote and expand the saver’s credit; and
10) Provide support to unpaid family caregivers to help protect their future retirement security.
NEXT: ‘The power of technology’
For plan sponsors and providers that embrace it, technology has the power to advance retirement security, says Aron Szapiro, associate director of policy research for Morningstar. “Technology can help employees manage [their] responsibilities [for making complex financial decisions] in ways that weren’t possible even a few years ago,” he said.
Drawing on his experience in developing the HelloWallet and Retirement Manager apps, he pointed to app software that lets participants experiment with different deferral rates, projecting the retirement outcome for each, to help them choose the best amount. They can even aggregate all their different accounts, to get a holistic picture of their worth, Szapiro said.
Moreover, he said, in just a matter of seconds, “very sophisticated retirement simulations [can] test the robustness of a user’s plan under a variety of market conditions accounting for complex taxation rules.”
The cloud-based software also is a boon to developers, who can easily test—and economically tweak—their program according to users’ responses. This flexibility is proving valuable. “By using this technology, our behavioral researchers have repeatedly found that seemingly minor details in the decisionmaking environment can halve—or double—actual follow-through rates,” he said. “A simple, ‘Are you saving enough for retirement?’ encouraged the most people to click on a link for retirement guidance and then adjust their contribution elections.”
While he acknowledged that technology could go only so far in satisfying participants’ need for advice, he stressed that, technology in the context of a hybrid program, where humans handle the more complex situations, “has an important role to play.” He cited, for example, double-digit improvements (11%) in retirement savings deferrals three months after participants started using HelloWallet app and 12% improvements after a year. The result of using the firm’s Retirement Manager app has been an average 28% increase in retirement deferrals by 87% of users.
NEXT: Saving can be fun
D2D’s mission is to help financially vulnerable consumers—often people without a retirement plan—become financially secure. To that end, the firm devises strategies that aim to “motivate and support people’s positive financial behavior,” Flacke says. Technology is the common tool.
“Most people are not drawn to personal finance,” he noted, and the retirement message gets lost among competing messages in “an increasingly saturated and busy world.” Sometimes, the tone has been patronizing, he said. But even good information won’t be enough to motivate a behavioral change, he said.
As almost half of adult Americans play casual video games and these are known to reduce stress, D2D created a suite of online and mobile financial education video games, dubbed Financial Entertainment. Some “harness the allure of the lottery, giving consumers a chance to win cash prizes as a reward for savings behavior.” The award-winning SavingsQuest helps users achieve a savings goal by completing challenges, earning badges, and receiving instant praise for their in-app deposits, from a customizable dancing pig. In a pilot test of SavingsQuest, users saved 25% more often than non-users.
In further testimony, the company recommended reaching people through the technology they have available to them and frequently use—such as smartphones, which 64% of Americans own and which 57% of that number using for online banking. It also noted the growing popularity of secure APIs, which “facilitate data sharing between apps and websites and give financial tools the ability to connect to consumer’ existing financial products, creating an in-app pathway to behavioral change.”
Blue Ridge Bank, headquartered in Luray, Virginia, also engages savers through a lottery approach. A small community bank, it gained attention as the first bank in the nation to launch a prize-linked savings account.
“The name we adopted for the account is Jackpot Saving,” said Brian Plum, the bank’s president and CEO. “It consists of offering monthly prizes and a larger annual grand prize.” Each month, the bank randomly selects five winners: One receives $200, the other four, $50. Last year, it awarded a $5,000 grand prize and this year will be giving $10,000.
“It’s important to note that these customers really give up nothing,” Plum said. “We offer the same rate on the product as a traditional savings account, so we are not subsidizing the prize costs by reducing the interest rate.”
He said the account is attracting a wide range of savers, from recent high school graduates to people already retired. “We anticipate eclipsing the $1 million mark in account balances in the coming quarter,” he said.
The bank is partnering with a technology startup, Long Game, which focuses on improving financial literacy and increasing personal savings through gamification. “This partnership provides a tremendous tool to fundamentally improve the lives of consumers, and I suspect we are only at the beginning of that trend,” he said.
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