Near-retirees may question whether they have saved enough money to last throughout retirement, how they are going to pay for health care in retirement and what to do about any debt they may still owe.
Even as these worrying thoughts mingle in the minds of participants five to 10 years off retirement, plan sponsors can act as a mediator in educating and counseling participants.
An attention towards health and wellness is rising in the workplace, with employers contributing to its shift, according to Ed Farrington, executive vice president at Natixis. Instead of focusing solely on a return on investments (ROI), more companies are adopting financial wellness programs to introduce more significant, likelier risks: longevity, inflation and health care spending.
“Plan sponsors are talking about more than investments,” explains Farrington. “We tend to focus on the investment menu and the qualified default investment alternative [QDIA], and while that’s important, it’s equally important to let people know about these three forces, and what impact they can have.”
While the increasing life expectancy is certainly worth celebrating, it’s important to note the risks associated with it. Aside from an expected imbalanced workforce, those retiring at age 65 will still be considered a long-term investor. Farrington breaks it down as such: For a couple retiring in their 60s, there is a high likelihood that at least one of them will be live well into their 90s. Therefore, this perception that near-retirees are short-term investors, who must invest conservatively, isn’t realistic anymore.
Susan Czochara, practice lead of Retirement Solutions at Northern Trust Asset Management, echoes a similar notion as Farrington. “Plan sponsors should consider that many times the investments pre- and post-retirement won’t need to change drastically because retirees still have a 20 to 30 year investment time horizon. Plan sponsors may want to communicate to near-retirees to stay in the plan post-retirement and take advantage of institutional cost efficiencies.”
However, she still urges employers to routinely asses QDIAs. “Plan sponsors should review their QDIA on a regular basis to ensure it fits with the plan’s objective and plan participant demographics. “
Maintaining such a large investment time frame can pose some challenges, says Farrington. Participants will need to consider growing capital in the following years because of the second risk—inflation. Even while the environment has generally maintained a low-risk inflation profile in the past, participants who choose an excessively conservative investment approach and sit on the cash they’ve accumulated over time can end up losing purchasing power.
“[Participants] may experience purchasing power erosion if their portfolios don’t take into account the impact of inflation,” says Czochara.
The third area for concern ties into longevity and inflation—health care spending. Because individuals are living longer, and as inflation in health care spending is even higher than in other parts of the economy, participants must be aware of the risk paying for health care brings.
“People need to be aware of the potential impact for a significant health event to erode their overall savings,” says Farrington.
Market volatility at or near retirement
Longevity, inflation and health care spending aren’t the only risks pre-retirees and retirees face. Market volatility at or near retirement can induce panic.
However, it’s imperative for plan sponsors to communicate the positive effects of volatility, instead of focusing on the downturns. Even if a swing in the market looks like a significant impairment to financial wellbeing, it’s likely not, says Farrington. Rather, these shifts can aid against actual risks; for example, by allowing people to buy more stock at reduced prices.
“History has proved that given enough time, stocks have outpaced cash and bonds, and it can play a significant role in fighting the risks of inflation, longevity and rising health care costs,” Farrington notes.
Czochara mentions how the process of organizing investments altogether can lessen volatility effects while offering a safer approach than other riskier takes, such as poor tax moves.
“Thoughtful portfolio construction focused on diversification can help mitigate the volatility and soften some of the market shocks that investors face,” she states. “This is in contrast to binary decisions as to taxes and fees that can have a lasting impact and cannot be diversified away.”
To ease any participant concerns, plan fiduciaries can leverage reports from recordkeepers, to see how those facing retirement are invested within the plan, says Czochara.
Ultimately, plan sponsors can offer tools and programs to participants that don’t just speak on the dollar balance saved but what it means towards their retirement. Instead of looking at the account balance, participants should be aware of whether the amount they’ve saved can afford them a comfortable life in retirement.“That’s really the important piece to this. And that really takes into account a whole lot more variables than investment returns,” Farrington says. “It means how much income have I made during my life? What are my expenses? Am I healthy? All these variables will say to someone, ‘Look you need to save more, you’re going to have to save more aggressively to meet these standards,’ or ‘You’ve saved a ton, you’re going to be in great shape.’ Expressing it in that way is really critical to plan participants.”
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