PLANSPONSOR - October/November 2018 - 67

simply saying Americans are failing at
retirement savings, " says Ted Beck, who
just retired from the role of president and
CEO of NEFE, in Denver. " No one likes to
believe that income shocks will happen to
them. Yet, this research shows that it is
not a matter of if something will disrupt
earnings, but when and how severe the
effects of such shocks will be. "
According to Beck, workers in the
middle- and lower-income groups are more
likely to experience economic shocks from
job loss or poor health, and they are more
negatively affected. The greatest income
disruption is due to a decline in health,
including long-term illness or a disability.
" Retirement plans often are treated
as liquid savings during times of hardship, "
Beck says. " In fact, economic
shocks explain at least 32% of withdrawals
by workers in low-income households,
and possibly considerably more. "
Defining the Challenge
In the TD Ameritrade analysis, most of the
disrupted Americans (84%) were saving for
retirement before the disruptive event, with
an average savings of over $500 per month.
Nearly half said they felt having steady
income meant they were prepared for a
life-altering event, but 79% still had to
reduce their savings and expenditures.
On average, the disrupted employees
reduced retirement saving by almost
$300 per month. Half of those surveyed
needed to withdraw money from savings
or to borrow funds.
" Every human being faces the threat
of a financial disruption, because there
will always be external factors that can
upset the course of a person's life, " says
Lule Demmissie, managing director of
investment products and guidance for TD
Ameritrade, in New York.
According to Demmissie, nearly half
of those disrupted (49%) will need to delay
retirement. With the benefit of hindsight,
disrupted Americans said they would have
saved a greater proportion of their income
or started saving earlier for retirement.
A Set of Solutions
While plan sponsors cannot necessarily do
much to stem income disruptions caused
by health crises or divorce, they can optimize
plan design and communication
decisions to help this population.
According to Jean Setzfand, senior
vice president of programs at AARP in
Washington, D.C., one approach is to
provide targeted education regarding the
larger " catch up " savings limits the IRS
allows for savers over age 50. As Setzfand
points out, if a participant will turn 50 by
the end of this calendar year, the tax laws
for 2018 allow an additional $6,000 of
savings on top of the normal $18,500 limit
for tax-advantaged accounts.
But being able to put away this
amount of savings is unrealistic for many
Americans, even those who are further
along in their career. Indeed, research
shows that only about 12% of active participants
are able to make catch-up contributions
in a given year.
For lower-earning workers, plan
design features such as automatic enrollment
may be the ticket. According to T.
Rowe Price's recent " Reference Point "
report, plans with automatic enrollment
have a participation rate 42% higher than
those without the feature-87% vs. 45%.
The research also emphasizes the
importance of setting an appropriate
default enrollment deferral percentage.
Anything under 6% will likely be far too
low to truly help individuals reach retirement
readiness-especially those who
need to make up for income disruptions.
The T. Rowe Price report also points
to the importance of limiting loans, in
order to protect assets meant for retirement.
In the last year, loan usage ticked
down to 23.4%, from 24.9% in 2013; the
percentage of people with multiple loans
also decreased, to 15.6% from 2013's
19.6%. Yet, among those 50 and older,
the percentage of participants with loans
increased 2.2%, showing loan usage
remains highest among older Generation
Xers and younger Baby Boomers.
Because many workers who have
experienced income interruptions did so
while working for prior employers, they
may have DC plan accounts elsewhere.
Therefore, according to Spencer Williams,
president and CEO of Retirement
Clearinghouse in Charlotte, North
Carolina, another solution to consider
is helping participants consolidate their
savings by way of automatic roll-ins.
Sponsors that embrace automatic rollins,
Spencer says, will be helping ensure
that any small-balance accounts both their
new and firmly established employees
might have at past employers are protected.
In many cases, a former employer will
have already rolled the terminated employee's
account into a safe harbor individual
retirement account (IRA).
" I understand why the former plan
sponsors want to get rid of small balances,
but putting assets into a safe harbor IRA
is like putting them into a landfill, " he
says. " Many accounts get eaten up by fees,
and many participants will cash out these
IRAs. "
By way of context, Retirement
Clearinghouse last year introduced a
service that pairs up participant accounts
rolled out of an old employer's 401(k) plan
with the plan of the new employer, letting
that firm facilitate an easy rollover.
Small balances may not seem important,
Williams says, but by not rolling
those assets into a participant's new plan,
he loses the benefit of compounding. Also,
a roll-in provides him with protections
enjoyed by Employee Retirement Income
Security Act (ERISA) plans.
-John Manganaro
KEY POINTS
* Ninety-six percent of Americans
have experienced four or more
income disruptions, due to
health crises, job losses, divorce,
etc., one study says.
* Plan sponsors can help this
population by optimizing
plan design, education and
communications.
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