Milliman today announced that the company has joined the Alliance for Lifetime Income as a founding member. The Alliance, a newly launched nonprofit organization supported by 24 leading insurance and financial services organizations, is focused on educating Americans on the risk of outliving their savings and about the importance of protected retirement income.
“There are an estimated 10,000 Baby Boomers retiring each day in the U.S., and many lack adequate sources of protected retirement income,” said Ken Mungan, Chairman of the Board, Milliman, Inc. “As people move from their working years to retirement, the retirement planning narrative has to shift. Milliman is privileged to play a role in this unprecedented industry collaboration.”
Milliman clients include pension plan sponsors, defined contribution plan sponsors, and providers of guaranteed lifetime income solutions. The firm brings a broad perspective on retirement security to the Alliance, while also providing some of the sharpest minds on the retirement income challenge facing many Americans.
“The insurance industry is poised to play a major role in solving the retirement income crisis in America,” Mungan added. “Through the pooling of risk, a cornerstone of insurers, retirees can help fill the income gap between their Social Security and employer-provided retirement, and their true lifetime income needs.”
The Alliance will offer thought leadership, research, third-party expert views, and tools on an ongoing basis. To learn more, visit RetireYourRisk.org. Follow the Alliance on Twitter @alincome.
This Pulse Benefits in Asia update by Mark Whatley and Juraidah Hussain highlights the results of Milliman’s retirement attitudes survey conducted among human resources and other professionals who visited Milliman’s employee benefits booth at the HRM Asia HR Summit & Expo Asia in Singapore recently. The survey was intended to harness attendees’ views on their own retirement plans in order to establish a snapshot of retirement readiness among professional-level employees in Singapore and across Asia.
As Australia’s Baby Boomer generation continues to retire, the country’s superannuation system enters a drawdown stage. While super funds have focused on accumulation, new legislation will make it clear that their purpose is to provide retirees with income. Under that premise, Milliman’s Jeff Gebler explains why a new retirement consultant “with a new skill-set focused on the implications of drawdown” is needed.
The following excerpt highlights the necessary skill-set.
The modern retirement consultant will need to add and co-ordinate a broad mix of skills to meet the increasingly complex needs of the superannuation industry, including:
Funds have an increasing need for actuarial skills which can help them model member behaviour, changes in legislation and the impact of the Age Pension, risk management strategies, and post-retirement product design.
The business world is now awash with information thanks to advances in technology and affordability. The data scientist can analyse and turn this ‘big data’ into practical insights in areas such as membership, investments and risk.
Funds and asset consultants have tended to focus on long-term returns generated during the accumulation phase. However, changing demographics and legislation suggest funds should increasingly focus on the risks of drawdown such as volatility and potential capital losses. With this comes an expanding list of relevant asset classes, many of which (such as derivatives) are traditionally beyond the expertise or depth of existing asset consultants.
Behavioural finance and communications
Funds need to design their products and services taking into account the behavioural tendencies of older investors. For example, financial literacy scores naturally decline by about one percentage point each year after age 60 while older investors are more prone to ‘loss aversion’ than younger investors.
Older investors are highly engaged with their super, including through digital channels. Automated-advice provider Decimal recently released research showing that older investors were the most active users of its enterprise financial advice service.
In a defined contribution (DC) world, retirees are forced to make critical decisions, often with little or no assistance. Most of these individuals choose to take a single lump-sum distribution either immediately or soon after they terminate employment.
This paper from the Center for Retirement Research at Boston College asserts that distribution provisions in DC plans are critical factors in evaluating the risk of falling into poverty in old age.
Specifically, the paper states that reliance on non-annuitized DC benefits with fairly easy access to lump-sum distributions puts elderly households at risk of not having sufficient income (or assets) to sustain themselves or, if they are not already in poverty at retirement, falling into poverty as the household members age or die off.
As workers continue to age, this will become a greater problem as those covered by defined benefit plans retire from the workforce and are replaced by those covered only by DC plans. So what can plan sponsors do to minimize the probability of their retirees falling into poverty?
Extrapolating from thoughts in the paper, the conclusion is that plan sponsors should encourage the following behaviors:
• Not taking lump-sum distributions before retirement
• Annuitizing some or all DC benefits when possible
• Choosing joint-and-survivor options when available
Retirement plan sponsors should evaluate the assumptions used by providers in their retirement readiness calculator formulas. This can result in more accurate projections that help participants make better long-term savings decisions. A recent PlanSponsor article quoted Milliman consultant Kevin Skow discussing some assumptions that sponsors need to assess to improve retirement readiness projections.
Here is an excerpt from the article:
To calculate these projections, providers have to make numerous assumptions about key variables. Some, such as future inflation rates, do not relate to individuals specifically. But many variables do, and the default assumptions a provider uses may or may not reflect reality for a plan’s participants. “In our mind, the assumptions made are critical,” says Kevin Skow, principal and consultant at Milliman Inc. in Minneapolis.
In order to evaluate readiness formulas, plan sponsors should start by looking at three key areas where assumptions are made:
Salary, retirement date and savings. Understand what salary-increase rate a provider’s model assumes, Skow recommends. “How does that equate to what’s happened historically at your company, or what is anticipated in the future?” he says. And these models assume an average retirement age in doing the calculations, he says, so in evaluating a provider’s model, it helps to know whether that number reasonably lines up with a work force’s actual retirement patterns.
The models also hypothesize about a work force’s retirement-savings rates, going forward. In its retirement readiness calculator for participants, Milliman actually asks each to input any deferral increase he plans. When it does plan-level reports on retirement readiness, the company typically takes a “snapshot” approach and does not assume a deferral-rate increase by participants, Skow says. “But if a plan has automatic increases, a model could assume that everybody who was auto-enrolled at a 5% deferral with a 1% increase, for example, will stay with it,” he says. “Most people who are auto-enrolled stay, and very few tend to opt out….”
Additionally, retirement readiness models have to make assumptions about how long people will live… The suppositions about how long people will live have a big influence on these calculations, Skow says. “In our tools, we tend to project that an individual will need income until age 95 if that person is male, or 97 if that person is female,” he says. “Many models use the normal mortality rate in the U.S. today, which is in the late 80s.” A model assuming a shorter lifespan will improve someone’s monthly retirement-income projection, but also may create false security for some who then end up outliving their savings.
People get excited about technology. There are hundreds of websites chronicling the next big thing in technology, presenting information about how a device will save you time and money while providing entertainment. Getting people excited about or even acknowledging a retirement plan is much more complex. Over the years, there have been several new features created to help participants by increasing the flexibility of how they fund their retirements. Participant inertia is a large problem and directly relates to the usage of these new features.
As retirement plan professionals we believe having a solid retirement strategy is a no-brainer. For us, it’s a partnership with the plan sponsor that leads to great results by getting them involved and sharing responsibility of communicating and educating the participants. Human resource professionals have direct contact with employees and a great understanding of the best communication mediums and incentives that drive employees to take action.
There are several tools available for participants to project their retirement income. One of them, PlanAhead for Retirement®, enables participants to input additional income sources and variables to project their replacement incomes. Through the PlanAhead for Retirement tool, there is also a retirement readiness report that provides clients a view of the expected retirement outcomes of their participants on a plan level. The retirement readiness report displays where participants fall in relation to their projected replacement income at retirement. The report allows the client to change several variables such as the target of replacement income, return on investment, and changes to employer contributions. This is further broken out by age, service, and participant contribution rate. This interactive report helps the client make the leap from using current data such as participation rate and average deferral rate to projecting the results in the future.
At a plan sponsor level, using industry-related statistics on participation rate and average contribution rates we can show plan sponsors how they compare to their peers. Any deficiencies in the peer comparison are consulting opportunities. Using their participant demographic data, scenarios can be created to determine how changes to plan design (i.e., adding or increasing employer match) or targeting communication to specific participants encouraging them to take advantage of the benefit provided will improve results.
At an employee level, the medium of communication and the timing of the call to action are also paramount. Coordinating the retirement plan education and enrollment at the same time as other benefit enrollment periods has advantages as the employee is already completing paperwork. Showing an employee general information on plan demographics can also lead to an increase in participation and contribution rates via competition. Inertia is present in all retirement plans. What better way to promote change than to make it a competition, albeit an internal one.
Getting a plan sponsor to act on a retirement plan is just as important as getting the employees to act. As retirement plan professionals, we know that developing a partnership with sponsors can help lead to great results, keeping employees on track and taking steps to more successful retirements—using that flashy new technology that makes it easier for everyone.