I had a chance recently to watch the piece about 401(k) plans by Martin Smith on the PBS program Frontline, “The Retirement Gamble.” The piece takes a critical look at the 401(k) plan as the central retirement savings vehicle for most Americans. Smith covers a brief history of the 401(k), the market turmoil that has shaken confidence in it, and the various points of confusion and conflicts of interest that can occur in the 401(k) marketplace. In short, it paints a worrisome picture of the retirement industry.

In general, this is good information for 401(k) participants to have. Lack of participant engagement is a dominant force in the retirement readiness arena that we retirement plan professionals work hard to counteract. Smith’s work to stoke the ire of 401(k) plan participants may inspire some of them to actually open and read the statements and fee disclosure notices we diligently send them. Cautionary tales about not dipping into your plan are important at a time when many people are doing just that.

However, Smith’s piece only paints part of the picture—saving for retirement doesn’t have to be such a gamble. He says next to nothing about what people can or should actually do to improve their retirement accounts besides keep working, and dream of winning the lottery. The advice to participants to request formal acknowledgment from their financial advisors of their status as a “fiduciary” is dubious at best (for one problem, it’s unlikely the average participant could draft a meaningful fiduciary contract). Smith’s piece does not reflect the recent legislative and litigation efforts—enhanced fee disclosure, increased fiduciary responsibilities—which, while slow to develop and long overdue, are nonetheless beginning to address the very problems Smith laments.

So, for participants who were left wondering, and for plan sponsors who are fielding questions, what can each of us do to improve our odds at a secure retirement?

1) Start saving! If you haven’t started already, or perhaps stopped as a result of recent economic turmoil, it’s critically important to set aside money for savings on a regular basis. How much? Typical recommendations range from 6% to 20% depending on age, investment style, current savings, and other factors. Many employers contribute regularly to 401(k) plans, as well, to help participants reach that target savings rate. A retirement income calculator such as Milliman’s PlanAhead for Retirement® tool is a great way to hone in on an amount to save.

2) Choose a diversified investment strategy. This doesn’t have to be hard. Selecting a target date fund counts as a diversification strategy.

3) Understand your plan’s investment and transaction fees (and the impact thereof) by reading the annual disclosure notice and the fees section of account statements. An HR representative can help with most questions. Employers are required to act as fiduciaries and should have additional resources for any questions they can’t answer themselves. Use this information to fine-tune #1 and #2 above.

As we wrap up the first quarter of 2013, we are receiving several inquiries from plan sponsors regarding InvestMap^TM, Milliman’s retirement glide path technology.

Let me start with some background. Model portfolios offer risk-based options to participants consisting of asset allocations comprising many of the core funds already in the plan. Target date funds are portfolios designed to achieve returns based on a participant’s target retirement date; those closer to retirement will typically have less exposure to equities and commensurate expectations of lower investment returns, while those further from retirement will be exposed to more risk and a higher potential investment return.

InvestMap is a great solution for participants and employers alike because it brings together the benefits of both target date funds and model portfolios. Conceptually, target date funds are a good idea, but product orientation and lack of customization have underscored their limitations. Specifically, target date funds take somewhat of a “catchall” approach at the plan level.

InvestMap is designed to work at the participant level, incorporating the best aspect of target date funds (the automated glide path for which equity exposure is reduced over a period of several years). However, personal risk attributes of individual participants are incorporated as well. This sophisticated “marriage” between risk-based models and an age-based target date glide path, coupled with an open architecture investment platform, provides the best of both worlds for plan sponsors and participants.

The core funds are still available for participants to select their own asset allocations if they choose not to participate in InvestMap.

Advantages to the plan sponsor:

• InvestMap offers fiduciary protection for the construction of the models
• Can be used as the plan’s qualified default investment alternative (QDIA)
• Investment management fee transparency and no additional costs

Advantages for participants:

• Investment education that is easily understood
• Personalized strategies for each participant’s individual risk tolerance
• Hands-off management from initial enrollment to retirement

Please contact your Milliman representative for more information on how InvestMap could benefit your plan.

Unlike many prior generations, Millennials will have to bear the brunt of risk associated with their retirement futures. In this USA Today article, Jinnie Regli discusses the general mindset Millennials have towards retirement savings.

Here is an excerpt:

Even if the smart, tech-savvy generation of Millennials are told about the benefits of the stock market, they still may have no appetite for risk.

…retirement savings does not create much top-of-mind awareness among Gen Y. “With Millennials that I talk to, retirement is so far off that it doesn’t seem to be something that needs to be talked about now,” says Jinnie Regli, a Millennial who is a client service administrator at Milliman, a consulting and actuarial firm.

…For Millennials life is a balancing act between saving money and paying down debt. Regli advises them to contribute whatever they can to their retirement account. “Never think that anything you contribute is too small,” she says. “And if your plan offers a match, remember that not contributing to the plan is like throwing away free money.”

Read Jinnie’s article, “Retirement planning: 12 practical tips for Millennials”, where she offers retirement planning suggestions for twentysomethings.

Are you on track to meet your retirement goals? If you’re unable to answer or would rather avoid thinking about it, you’re not alone.

In a 2012 retirement confidence survey conducted by the Employee Benefit Research Institute, 56% said they determined their retirement savings needs by guessing. The fact is this percentage is much higher than it needs to be. Recordkeepers and administrators have made enormous strides in creating tools and calculators, such as Milliman’s PlanAhead For Retirement®, which work to align retirement saving strategies to estimated required retirement savings needs. Of those surveyed who have utilized a calculator to estimate required retirement savings, 59% reported saving or investing more as a result.

A retirement calculator’s primary objectives is to take the information provided about current retirement plans, offer a rough assessment of retirement readiness, explore possible changes in current investment or savings strategies, and project how those changes could affect retirement outcomes. Contrary to popular belief, these calculators have not been created to scare plan participants into contributing more but rather to educate and bring an awareness of how that lump of money sitting in your 401(k) account will translate to income at retirement. No matter what your age or profession, it’s important to take the time to utilize a retirement calculator to estimate required retirement savings in order to avoid finding oneself unprepared when nearing retirement.

Here are a few quick retirement calculator dos and don’ts:

• Do:

o Be realistic about your retirement age and life expectancy
o Be honest about retirement expenses; it’s OK to plan to travel or buy a sports car after retirement but make sure to factor those costs into the expenses
o Periodically review your investment strategy and consider speaking with an investment professional to make sure it matches with your retirement strategy
o Continue to check back and update your information even if retirement calculators project that you are on track to meet your retirement goals

• Don’t:

o Change your inputs just to get a successful projection; changing life expectancy to age 50 just to attain an “on track” projection, for example, does not do any good, nor is it realistic
o Panic if the projection says you’re not on track; most calculators will offer suggestions and even allow adjustments to variables to see how each change could affect retirement savings
o Rely on these calculators as a sole basis for your retirement planning decisions—they are for educational purposes only

Poll:

I am pleased to announce that Milliman is again sponsoring the Mid-Sized Retirement & Healthcare Plan Management Conference, March 17- 20, 2013, at the Fairmont Hotel in San Francisco, California. This is our third year sponsoring the San Francisco conference, and we are excited to participate again in this educational event for employee benefit plan professionals. The small scale and comfortable setting of the conference create an atmosphere of open-minded discussion and collaborative problem solving, where plan sponsors can share ideas with their peers and gain access to insight from industry leaders.

The conference will address both healthcare and retirement plan topics, with sessions designed to appeal to HR and benefits representatives of small and mid-sized companies, as well as CFOs and other company officers with plan fiduciary or risk management responsibilities.

This year’s program features an extensive agenda of more than 45 workshops that will guide attendees through current issues facing employee benefit plans. In the healthcare track, the conference workshops will cover strategies to prepare for the full implementation of the Patient Protection and Affordable Care Act in 2014; analysis of how a company’s benefit plans can create the right benefit mix to fit the unique needs of each organization; and more. On the retirement side, the workshops include strategies to improve retirement readiness, analysis of investment platform options and considerations (target date funds, stable value options, and annuitized income strategies), and more, including these two by Milliman:

• Reducing Retirement Plan Risk in a Volatile Market, presented by Steve Hastings and Mahrukh Mavalvala. This session will cover types of risk inherent in defined benefit pension plans and approaches to mitigate them, including plan design, asset allocation, and settlement strategies. The pros and cons of each risk mitigation strategy will be discussed.

• Fee Leveling in DC Plans: Disclosure is Just the Beginning, presented by Genny Sedgwick and Nate Sherman. In the context of heightened disclosures and scrutiny of fees and revenue sharing in participant-directed retirement plans, how well do plan sponsors (and participants) understand the allocations of fees in their retirement plans? This session will discuss various fee allocation strategies, the incorporation of revenue sharing in a plan’s fee assessment methodology (fee leveling), and the fiduciary considerations therein.

There are some things about your 401(k) you should know. In her new article, Jinnie Regli provides 10 items that can help you maximize your 401(k) retirement plan. Here is an excerpt:

1. Average 401(k) account balances are up but that average account still won’t support the average person’s retirement. During November, Fidelity Investments published research that said that the average account balance as of the end of the third quarter of 2012 was the highest they’ve seen since they began tracking account data in 2000, at $75,900. Although this is a significant increase from 2009, when the average account balance was $46,200, the fact is that $75,900 may not be enough to support the average American’s retirement.

2. You should utilize tools to calculate your retirement readiness and adjust your savings strategy. In a 2011 retirement confidence survey conducted by the Employee Benefit Research Institute, 42% said they determined their retirement savings needs by guessing. The fact is this percentage is much higher than it needs to be. Recordkeepers and administrators have made enormous strides in creating calculators that work to align your retirement saving strategy to your estimated required retirement savings need. Of those surveyed who have utilized a calculator to estimate required retirement savings, 59% reported saving or investing more as a result. Please take the time now to utilize these calculators so you won’t find yourself unprepared when nearing retirement.

3. It’s important that you understand the fees you pay to participate in your 401(k) plan. Fee transparency is important on a participant level because the fees assessed to your account will impact your account growth.

Your employer is required to deliver fee information to you in two ways. Your quarterly statement must include an itemized listing of fees, if any, that were assessed to your account over the quarter. The second requirement is an annual notice that discloses fund performance, fund expense ratios, benchmarks, information about designated investment managers, the use of revenue sharing to offset plan expenses (if applicable), and any fees that you may incur if you initiate transactions from your account. Even if you’re not currently contributing to your employer’s 401(k plan, you should expect to receive a copy of this notice every year. This document is full of useful information and shouldn’t be discarded.

While these disclosures are important to you as a participant, it’s also vital to note that an individual retirement account (IRA) may sometimes be more costly to maintain than a 401(k) plan through your employer. Fees for investment advisors or administration are often split between all of the active participant accounts in a 401(k) plan while with an IRA you may be standing alone in funding those fees. Please take the time to stay informed about the fees associated with your accounts.

To read the entire article and see all ten considerations, click here.

Milliman today announced the rollout of PlanAhead™, unique tools and targeted services to take employee retirement planning to the next level. Included in the suite of services is PlanAhead for Retirement®, a powerful participant web application that serves as a single destination for all of a participant’s retirement planning and investing activities. This tool allows participants to understand their retirement preparedness at a glance, providing insight that is very individualized and specific.

“Tomorrow’s retirement plan requires a more informed and involved plan participant, and PlanAhead for Retirement is the engine for this next generation participant experience,” said Lance Burma, Employee Benefits Practice Director. “The tool is easy to use and will make retirement plans more transparent than ever before, allowing plan participants to understand where they are, where they are going, and what they need to do in order to achieve their retirement goals.”

While the user experience is simple, the underlying technology is robust and sophisticated. Participants can supplement their defined contribution and defined benefit retirement plan information with other assets and investments, and will receive a snapshot of their progress toward retirement goals. Underlying this snapshot is a powerful Monte Carlo simulator that runs thousands of scenarios to project likely outcomes. Participants can then make adjustments and chart the long-term implications of different investment and saving strategies. These features are complemented by a robust library of retirement information and educational resources, making PlanAhead for Retirement a single retirement planning resource for any participant in an employer-sponsored retirement plan administered by Milliman.

Thousands of participants in Milliman plans have already begun to benefit from the PlanAhead experience while others will continue to be phased in over time. For more on PlanAhead for Retirement, go to milliman.com or contact your Milliman consultant.

Living to 100 years old is considered by many to be a record benchmark. But a recent article by Matthew Sparks in the Telegraph, “Pension firms preparing for customers to live to 125,” reminded us that, for insurers, the age of 100 is where things start to get interesting. That is because life expectancies have steadily increased over the past few decades and, projecting ahead, people living to over 100 years old will soon be the norm. After all, based on projected mortality table assumptions, the probability of a 65 year old living to at least age 90 is 38% while the probability of a 65 year old living to at least age 100 is 5%. Either of those probabilities coming to fruition could have some nontrivial financial implications for retirement plan sponsors and insurance companies. Insurers taking on the obligations of providing life annuities need to account for the possibility of people living well beyond their average life expectancies. In fact, it’s not uncommon for many pension models and retirement savings products to be valued under the assumption that its users could live to be up to 125 years old.

The increased longevity could of course turn out to be both a blessing and a curse for retirees. It’s a blessing if one is able to spend more time with one’s family while still being able to live comfortably and draw from one’s savings. On the other hand, not being able to afford necessary healthcare services or not having adequate retirement income could make longevity a living nightmare.

What has been observed so far is that living beyond one’s average life expectancy can be costly and problematic. What is needed is a way to address this longevity risk. One possible solution is the creation and acceptance of a longevity plan. This is a setup where one’s personal savings and accumulations from a defined contribution (DC) plan is meant to carry you through the initial retirement years leading up to average life expectancy. Then, a longevity defined benefit (DB) plan would commence at the later stages of retirement and continue for the rest of one’s remaining lifetime. The allowance for a later commencement age would help keep the costs of this product down.

The concept of longevity plans is expected to get increased attention as Baby Boomers begin their retirements. Hopefully, legislative action can occur soon to legalize and promote longevity plans so that we can avoid a retirement crisis in the future. To read more about longevity plans, please see the article “Longevity risk and retirement,” available here.

With the release of the September 2012 Consumer Price Index (CPI) the Bureau of Labor Statistics, the Social Security Administration (SSA), and the Internal Revenue Service (IRS) have announced cost-of-living adjustment (COLA) figures for Social Security and retirement plan benefits, respectively, for 2013.

The 2013 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.

Discussions of the Millennial generation constantly indicate that our youngest working generation is waiting too long to begin saving for retirement or not taking advantage of the retirement plans that their employers offer.

New research published by economists Peter Brady and Michael Bogdan of Investment Company Institute suggest younger employees are more likely to choose cash compensation over retirement benefits. An excerpt of their findings:

Among the 23.5 million full-time, full-year employees aged 30 to 64, 7.6 million earned less than $25,750 a year. These workers are unlikely to have the capacity or desire to save for retirement. Another 3.8 million earned $25,750 to $44,999 in 2011 and were aged 30 to 44. Full-year, full-time workers earning $25,750 to $44,999 may have the ability to save, but because they have other saving priorities, they are likely to delay saving for retirement until after age 44.

Other key research findings in this study:

• Employers compete to offer attractive compensation packages. Depending on the age of the targeted workforce, this may not include a retirement plan.
• Firm size correlates to the availability of a retirement plan for the workers.
• Firms that sponsor retirement plans, regardless of size, have similar participation rates.
• Firms that do not sponsor retirement plans tend to have larger populations of part-time or seasonal employees.
• Younger employees are less likely to search for jobs based on retirement plan benefits and are more likely to save for other reasons while an older/higher-earning workforce is more likely to save for retirement.

 
For more information on their research findings, see the full paper here.

What does this mean for Millennials?

If your employer offers a retirement plan, take advantage of it! There are many others who do not have this option. Remember, if that retirement plan offers a match, deciding not to contribute enough to earn it is like throwing away free money. Along those same lines, if you are a part-time employee check with your HR department to see if you can still meet the eligibility requirements to enter the plan.

Did you know that couples who file a joint federal tax return in 2012 with income under $57,500, or individuals filing income under $28,750, may be eligible for a nonrefundable tax credit of up to $1,000 for contributions made to a qualified retirement plan? See your tax advisor for more details.

Deciding between your employer’s retirement plan or an individual retirement account (IRA)? Pooled assets in retirement plans can make funds with lower cost share classes available to participants, funds that would not otherwise be available to individual investors. Retirement plan fees are often paid by the plan sponsor or split among all participants, whereas with an IRA you alone will be responsible for paying any fees. You should also keep in mind that funds in an employer-sponsored retirement plan that are actively managed by an investment advisor can be very costly on an individual basis.

A boat will not carry you through retirement. Rather than aggressively saving all of your money so you can buy a boat ASAP, why not save smaller amounts over a longer period of time and contribute part of what you’re saving toward your retirement plan?

If you are unaware of how much money you’ll need to save for retirement, or if you’re curious to see how changing your contribution percent will affect your paycheck, visit this helpful site for tools and calculators.

More useful information about retirement for Millennials can be found in this article.