There are few guarantees in life, and the ones there are - like death and taxes - aren't very appealing. What does appeal to most Americans, on the other hand, is the guarantee of a secure retirement. However, as retirement confidence surveys and savings rates continue to show, a financially sound retirement is not yet a reality for many U.S. workers. Christine Marcks, president of Prudential Retirement, believes that annuities can bring the retirement guarantee that Americans desperately want and deserve. In this exclusive interview with EBN, Marcks lays out her reasons for championing annuities and how to expand their reach within workplace retirement plans.
EBN: What is it about guaranteed income products that are so attractive to you as a solution to our retirement conundrum?
Marcks: Fundamentally, they help people not outlive retirement savings; people are living 20 to 30 years into retirement, so having a nest egg that will last is an important part of retirement security.
EBN: Why were guaranteed-income products taken out of the equation initially?
Marcks: The original form of retirement plans were defined benefit plans, and a key feature of that was guaranteed lifetime income options, but employers found them costly, difficult to administer and some accounting changes made them problematic from a financial standpoint, so they're going away.
[Defined contribution] plans were designed to be a supplement to DB plans; they were retirement savings plans, not retirement income plans. But now with DB plans going away, we need to take DC plans and transform them from savings to income plans because that's what people will need when they retire. In 2007, we brought in the option [as a Prudential product] with the intent of making it more like a defined benefit plan because it does give people peace of mind.
Over 7,000 plans use the feature now, and we know there has been improved investment behavior with those who have used it. Studies have shown that those with their money in the option didn't move money out of equity market in the 2009 downturn the way participants who didn't have guaranteed options did.
EBN: Beyond introducing products, what can employers be doing in terms of education?
Marcks: Communication and education from plans remains an important element of what they need to do as a fiduciary, but it only goes so far. We see employers who have adapted auto-enrollment and escalation get their participants on a better path to retirement security, as opposed to only doing the communication/education piece.
Inertia is a powerful force: You can sit through a seminar, understand what's going on and say you have to take action, but then get back to your desk and the phone rings, and you don't do anything about it. It's just human nature. The power [of] these auto features is a very important part to achieving retirement security.
EBN: What needs to happen for small employers to start offering retirement plans?
Marcks: The cost, fiduciary liability and the administrative burden of offering an employer-sponsored plan prevents them. However, several legislators are evaluating multiple small-employer plans, where you allow small employers to be part of a much bigger plan. So, they're pooling purchasing power and getting the economic benefit of that.
We also need to simplify provisions of plans, have independent fiduciaries and administrators, so fiduciary concerns are much more diminished to what they are in a larger traditional plan. There needs to be legislation that addressees impediments to that kind of structure, which has been introduced in the House with lots of discussion in the Senate, but nothing has been brought to light just yet.
EBN: We've seen research that Gen X may be the first generation that can never retire (in traditional terms), and Gen Y - after entering the workforce during such a dire economic time - is lacking retirement confidence as well. What specific plan options and/or education efforts can employers use to empower these younger groups?
Marcks: We've done research with Millenials, and the feedback we get is that they're very interested in a plan that packages everything together so they don't have to make all the decisions. [They're saying], "Enroll me, put me in a fund that is consistent with my age and risk tolerance, and increase contributions over time." They want the whole thing all bundled together and all information delivered over the Web or on a smartphone. They want it simple, straightforward, and that gets them on the path and that doesn't involve them in every little decision.
We also need to be educating this generation on how much to put in, which should be 10% to 15% of pay. If you have it taken out from day one, you don't miss it. A lot of employers will default at 3%, which is O.K. if there is contribution escalation over time.
The concern is that a lot of workers look at [an] employer match and say, "O.K., if they're going to match 3%, then 3% should be enough." But the reality is that it's not.
We're working with a lot of employers to look at their plan design to change it to encourage employees to go to a higher contribution match. Instead of matching up to 3%, dollar for dollar, you could match up to 6% but at 50 cents on the dollar, so you'll anchor on 6% rather than 3%.
EBN: Women also are lagging behind in retirement confidence and readiness. Given that women are an equal part of the workforce - although, granted, not generally receiving equal pay - why does this gender gap persist?
Marcks: Historically, women weren't in the workforce as long as men; they would take time out to have children, so they weren't saving at the same rate men were. They were often also working for institutions that didn't have a pension plan, but women are highly educated these days.
We need to make sure we educate them on what they should be contributing to these plans so the Millenial generation is better prepared for retirement than women in my generation. My cohorts have been in and out of the labor force, focused on taking care of children [and] aging parents, and haven't thought about taking care of themselves and how taking care of themselves is in many ways a key factor in their ability to take care of their children and parents.
You can do special education programs to help them understand the tradeoffs and help them focus on the income dimensions so what they're saving to step up what they're putting in. Women also tend to be advice seekers, which is a positive in my mind. They'll ask for help and directions. Sometimes they're slower to act though, and they want to consider everything. That's why these programs that do it for you, and quickly, are good.
EBN: Research also shows us that retirement savings among minorities - already well below the rates of whites and other ethnic groups - also took a heavy hit during the recession. If young people, women and minorities truly are that far behind, is retirement only realistically attainable for white men? How can employers structure communication/education/plan design so that confidence and savings rates start to level out?
Marcks: You have to speak in terms of your audience - sometimes materials and presentations haven't been framed right. The way a young Latina woman might think about retirement savings is different than a 55-year-old white male might think about it.
We try to think about those aspects of the culture we're working with and get them to take action. As an industry we need to do more of that to move the needle and use affinity groups that are effective voices for those constituencies, making sure we're getting the message out through those channels as well as through employers.
EBN: There are several tax reform proposals in the works right now that would limit retirement savings contributions or eliminate tax-deferred status to contributions. How would these reforms affect Americans' already inadequate savings habits?
Marcks: Incentives are important. It reduces what they have to put into the plan because you don't have to pay taxes on it as well.
I'm especially concerned about small employers because if [tax incentives] go away, it's another reason why [small employers would] say, "I'm not sure it's worth offering this if my employees are not going to have a tax benefit associated."
Some of these proposals have the government making a contribution, but then the employers may cut back on the contribution they make, so there could be unintended consequences.
20-somethings likely to prefer guaranteed income While most retirement plan participants find guaranteed income appealing, the farther the horizon to retirement, the greater the attraction, a new study from The Hartford shows.
"Our research shows that Americans, regardless of age, want the ability to create a guaranteed income for their retirement as traditional pension plans vanish from the scene," says Patricia Harris, assistant vice president of product management for The Hartford's retirement plans group. "Surprisingly, we also found that the farther retirement appears on the horizon, the greater the appeal of guaranteed income."
The study finds that three out of five Americans (64%) say their employer's 401(k) or other retirement plan does not allow them to turn their savings into guaranteed income in retirement or they are unsure if it does. Overwhelmingly, those respondents say they would welcome the opportunity:
* Overall, 87% of respondents of all ages say they find it "very" or "somewhat" appealing to be able to turn at least a portion of their retirement savings into a guaranteed income.
* The same sentiment was expressed by 90% of those aged 30-39, 89% of those aged 40-49, 88% of those aged 50-59, and 77% for those aged 60 and older.
"Although the economy and the financial markets are on the mend, many younger employees are seeking sources of greater long-term financial security," Harris says. "Few younger workers have access to traditional pension plans and many wonder whether Social Security will continue in its current form. They are clearly saying they want the ability to create a guaranteed income for themselves in retirement.
"However, the study did pinpoint some differences related to gender. For instance, women (89%) have a greater preference for guaranteed income than men (84%).
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