Coronavirus Crisis as Catalyst: Change the Way You Look at Your Rewards Structure

I saw these words this morning: "Your brain isn't resistant to change; it is lazy." Can we extend that? Is your corporate rewards program -- the way that you reward your employees for working for you -- resistant to change? Or is that change somehow always on the back burner?

You've looked at the survey data. You've heard the cries for help from employees. But, your rewards program remains right down the middle.

Perhaps you've tried some innovative ways to become an employer of choice. You put the ping pong table and beer keg in the break room. Alas, it didn't reduce turnover. It didn't make your employees happier (except when they hit the beer keg too often). It didn't reduce their real stresses even if it did mask them for a few minutes.

But, the crisis caused by the coronavirus pandemic has forced you to change the entire compact between you and your employees. They've forgotten their office space. The fancy espresso maker you provided them sits idly as they become reaccustomed to the coffee they make quickly in their own home. At the same time, they've likely created their own custom background for their Zoom calls. All of this, they have managed. In fact, if you've kept them employed and had to cut their pay a little bit, most of them have probably managed how to live on a little less.

What they haven't learned though is how to feel secure. They haven't figured out how they are going to deal with a health catastrophe or disability, but maybe the federal government will come to the rescue. Where the federal government has not promised to come to the resuce, even in the most grandiose of campaign speeches is in helping your employees to retire.

You remember retirement. It's what your parents did. Either or both of them worked for a company for a long time. They retired with a pension. Supplemented by Social Security and perhaps some savings, somewhere in their early to mid-60s, they stopped the daily grind and pursued all the hobbies that had been given short shrift while they were working. It was part of the "American Dream."

Not for you? You can't even dream of it?

Look back at what I said a few paragraphs ago. Most of them have probably managed to live on a little less.

Let's do some oversimplified math to figure out how we are going to use this to become an employer of choice again. Consider Taylor, a good employee.

Pre-coronavirus, your basic costs for Taylor included:

• Base pay: 100,000
• Health benefits: 25,000
• Other non-retirement benefits: 5,000
• Retirement benefits: 4,000
• Total: 134,000

With coronavirus, you've had to cut Taylor's pay by $10,000. So, the equation now looks like this:

• Base pay: 90,000
• Health benefits: 25,000
• Other non-retirement benefits: 4,800 (a couple of benefits had a pay-related component)
• Retirement benefits: 3,600
• Total: 123,400

At some point, this crisis will end. And, during the crisis, Taylor may have learned to live on $90,000 instead of $100,000. She would love to get that full $10,000 back, but since she has learned to live on it, that's not what's keeping her up at night. 

During her new social distancing life, Taylor has taken to ever family search website she can find: 23 and Me, Ancestry, MyHeritage, and more. She's learned that going back four generations, the women in her family are long-lived. That's great news for Taylor, right?

Not really. As the she saw the stock market fall and her bank decrease the interest rate on her savings account to 0.01%, Taylor wondered how she can ever afford to retire. After all, she guesses, based on her genealogical research that she will probably live to be about 95. And, after she retires at age 62 (she learned she can start collecting Social Security then), that leaves her with a 33-year retirement. She's going to have to pay for it somehow.

As her employer, you can be the solution to her problem and be an employer of choice. After all, you don't want to lose a great employee like Taylor. And, you've committed that you are willing to spend $134,000 on her total rewards.

Before we do that, let's think about what Taylor is not good at. Like many in her age group and yours and mine and everybody else's, she's not good at financial planning. What you can do to help is to create a nest egg for her. And, don't do it so that some day, she gets a pot of cash from the company, give her lifetime income.

So, let's reconfigure the $134,000.

• Base pay: 95,000 (she learned to live on 90,000)
• Health benfits: 25,000
• Other non-retirement benefits: 4,900
• 401(k): 3,800
• Subtotal: 128,700

You have $5,300 left to spend. That's 5.5% of pay. 

I don't care what you call it, but now is the time to call it something. Take that 5.5% of pay and allocate it to Taylor's lifetime income. Sell it to your employees until you can't sell it anymore. Tell them you are giving them this plan because you want them for their careers. And, tell them you are giving it to them because some day, you want them to be able to gracefully exit their careers and to do so without fear of outliving that little 401(k) nest egg that isn't worth what it was before coronavirus hit.

Once they get that benefit, your best employees won't leave.

Make the best of the coronavirus crisis. Let it be a catalyst for a great change.

Fixing Retirement Inequality

Just last week, I suggested that retirement inequality is nearing an apocalypse. It's an awfully strong statement to make as both the US and the world have plenty of problems to deal with. Since this one is US-centric (I have nowhere near sufficient expertise nor do I have the requisite data to offer an informed opinion outside the US), I thought I would step up and make some suggestions.

First, the problem: according to the most optimistic data points I have seen, somewhere between 60 and 70 percent of working Americans are "on track" to retire. And, these studies, when they are nice enough to disclose their assumptions use pretty aggressive assumptions, e.g., 7 to 8 percent annual returns on assets (the same people who tout that these are achievable condemn pension plans that make the same assumptions) as well as no leakage (the adverse effects of job loss, plan loans, hardship withdrawals, and deferral or match reductions). The optimists don't make it easy for you by telling you that even their optimistic studies result in 30 to 40 percent of working Americans not being on track to retire (a horrible result). They also tend to pick and choose data to suit their arguments using means when they are advantageous, but medians when they are more so.

Yes, we do have a retirement crisis and as the Economic Policy Institute (EPI) study was good enough to make clear, it is severely biased against the average worker.

The EPI study presented data on account balances and similar issues. It did not get into interviewing actual workers (if it did, I missed that part and apologize to EPI). But, I did. I surveyed 25 people at random in the airline club at the largest hub airport of a major US-based airline. People who wait in those clubs at rush hour are not your typical American worker; they tend to be far better off. I asked them two questions (the second only if they answered yes to the first):

• Are you worried about being able to retire some day? 19 answered yes.
• Would you be more productive at work if you felt that you could retire comfortably? All 19 who answered yes to the first question answered yes to the second as well.

While I didn't ask further questions, many groused about fear of outliving their wealth. Some talked about issues that fall under leakage. A few, completely unprompted remarked that if they only had a pension ...

For at least the last 13 years and probably more than that, retirement policy inside the Beltway has been focused on improving 401(k) plans with the thought that pensions are or should be dead. Even the Pension Protection Act of 2006 (PPA) was more about making 401(k)s more attractive than about protecting pensions. Yet, 13 years later with an entire decade of booming equity markets, even the optimists say that one-third of American workers are not on track to retire.

We've given every break that Congress can come up with to make 401(k)s the be all and end all of US retirement policy. They've not succeeded. 

Think back though to when the cornerstone of the US retirement system was the pension plan. The people who had them are often the ones who are on track to retire. 

Yes, I know all the arguments against them and here are a few:

• Workers don't spend their careers at one company, so they need something account-based and or portable.
• Companies can't stand volatility in accounting charges and in cash contribution requirements.
• Nobody understands them.
• They are difficult to administer.

PPA took a step toward solving all of those problems, but by the time we had regulations to interpret those changes, the "Great Recession" had happened and the world had already changed. Despite now having new pension designs available that address not just one, but all four of the bullet points above, companies have been slow to adopt these solutions. To do so, they need perhaps as many as three pushes:

• A cry from employees that they want a modern pension in order to provide them with usable lifetime income solutions.
• A recognition from Congress and from the regulating agencies that such plans will be inherently appropriately funded and therefore (so long as companies do make required contributions on a timely basis) do not pose undue risk to companies, to the government, to employees, or to the Pension Benefit Guaranty Corporation (PBGC) (the governmental corporation that insures corporate pensions) and therefore should be encouraged not discouraged.
• Recognition from the accounting profession in the form of the Financial Accounting Standards Board (FASB) that plans that have an appropriate match between benefit obligations and plan assets do not need to be subjected to volatile swings in profit and loss.

Give us those three things and the pensions sanctioned by the Pension Protection Act can fix retirement for the future. As the EPI study points out, we'll make a huge dent in the retirement crisis and we'll do in a way that makes the problem far less unequal.

It's the right thing to do. It's right for all working Americans.

If Income Inequality is a Crisis, Retirement Inequality is Nearing an Apocalypse

I've likely inflamed just with my title. So be it.

The Economic Policy Institute (EPI) earlier this week released an article by Monique Morrissey on the State of American Retirement Savings. It's subtitle is "How the shift to 401(k)s has increased gaps in retirement preparedness based on income, race, ethnicity, education, and marital status." It is stunning.

I've been saying for at least this decade that we have a retirement crisis. Despite protestations from those who favor self-sufficiency over employer and government-provided programs, the crisis looms larger. I wrote about this summer. But, as a full-time consultant working with clients who require that I place their needs first, I simply don't have time to do the research that the think tanks do. So, I often rely on the work that they have done. Regardless of the source, my considered opinion is that all of the data are sound whether the think tanks are right-leaning, left-leaning, or centrist. 

What I quibble with are the conclusions. 

More than half of Americans being on track to retire is not a favorable prognosis. It's especially not favorable when the modeling underlying that statement assumes constant, and perhaps unachievable, returns on investments and constant rates of deferral to 401(k) plans. We're asking a populace that is largely under-educated about financial and investment matters to instantly become great investors. We're also asking them to save for their retirement (including retiree health and long-term care) above all else -- no blips allowed. You lose your job? Keep saving. You pay for a child's wedding? Keep saving. You pay for an unexpected medical expense? Keep saving.

Is that practical? Of course it's not.

The EPI study has presented us with 20 charts. Each has a headline which, in my opinion (understanding that yours may be different) fairly depicts the data it shows. Here are a few of the more eye-catching ones (indented notes after the headlines are mine and should not be attributed to or blamed on EPI)::

• Retirement plan participation declined even as baby boomers approached retirement
• A smaller percentage of workers are now participating in employer-sponsored retirement plans than were 10 years ago. With the rise of the gig economy, this rates to get worse.
• The share of families with retirement savings grew in the 1990s but declined after the Great Recession
• Fewer than 60% have retirement savings. Period. How are the rest to ever retire?
• Retirement savings have stagnated in the new millennium
• Despite that savings of those above the age of 55 have increased fairly dramatically, those for the entire working population have barely moved suggesting that the runup in equity markets over the last decade has done little for most of America.
• Most families—even those approaching retirement—have little or no retirement savings
• This is frightening. In any age range, median (meaning half are better off and half are worse off) retirement savings are well beneath $50,000 ... in total.
• More people have 401(k)s, but participation in traditional pensions is more equal
• We'll return to this later, but this suggests that poorer people and minorities are less likely to make use of 401(k)s. Identifying the root cause is a highly charged issue and cannot be done with certainty, but identifying this as a sign of a problem is clear.
• High-income families are seven times as likely to have retirement account savings as low-income families
• Most black and Hispanic families have no retirement account savings
• Single people have less, but retirement savings are too low across the board
• The data show that single women, in particular, lack retirement savings. But, even among married couples, levels of retirement savings are abysmal.
• 401(k)s magnify inequality
• Those out of the top 20% when stratified by income represent a disproportionately low level of savings account balances.

I said I would return to the statement that participation in traditional pensions is more equal. It seems clear that this is because in most cases, an employee becomes a participant in a pension not through an affirmative decision to do so, but as part of his or her employment. It doesn't require an income disruption. It's not more difficult to participate when you have an unexpected expense.It's not easier for the wealthy to participate, nor for men nor ethnic or racial majorities. 

Yes, pensions have a horrible stigma attached to them right now. Many public pensions are horrifically underfunded and potentially place their sponsors (cities, states, etc.) in grave financial danger. The same could be said about some of what are known as multiemployer plans (that's a story for another day) except that their sponsors are, generally speaking, employers that employ very specific types of employees. 

For the rest of the populace and potential plan sponsors (employers), sponsorship of traditional pensions has waned considerably. About 18 months ago, I explained why. 

Before we write them off completely, however, let's look at what pensions do. According to the EPI study, participation is somewhat equal. They provide lifetime income protection, the single greatest fear of people nearing retirement. They can be part of the employment covenant.

And, thanks to the Pension Protection Act of 2006, they need not bring with them the cost volatility that has maddened CFOs across the country.

The data in the EPI study and not simply their interpretations absolutely scream that more than income inequality, retirement inequality is the looming personal financial crisis. Congress will bat this around and try to make it a partisan issue. But, it shouldn't be. It's a people crisis. It's a dire crisis. It needs a fix and the fix is available, but it needs to get started.

Do We Have A Retirement Crisis? Of Course We Do.

Do we have retirement crisis in the US? Showing my age and with apologies to Messrs. Rowan and Martin, you bet your sweet bippy we do. Despite all the pundits citing data and telling us that we don't have that problem, I'm telling you we do.

I was inspired to write this by an excellent piece that I read in Investment News this morning. The theme was that Vanguard's data shows that the average combined savings rate (employee plus employer) has increased since 2004 from 10.4% of pay to 10.6% of pay. To understand this better, let's look at what else has happened during this period.

The Pension Protection Act (PPA) of 2006 became law. Many defined benefit (DB) pension plans were frozen and or terminated. The new in vogue terms in the 401(k) world all suddenly started with auto: auto-enrollment, auto-escalation, auto-pilot. At the same time, the new fear became that of outliving your savings.

That's right, people are living longer. People know that people are living longer. This frightens many. From a retirement perspective, they don't know how to deal with this. So, the old normal (2019) cannot continue to be the new normal (beyond 2019).

Why do I say that? What's wrong with the analysis from pundits?

Suppose I told you that 55% of Americans are "on track to retire," whatever that means (every recordkeeping firm who puts out data like that has their own basis for what that does mean). Is that good news or bad news? Most who think that the 401(k)-only system is as close to nirvana as one can get would tell you it's great news. They say so on social media. They go out of their way to bash those who disagree.

Well, I disagree and here is why. I'm going to reword what they are saying taking what they say as factual. Suppose I told you that 45% of Americans are not on track to retire. How would you react to that? My intuition says that you would think that is a horrible thing. Yet, it is exactly the same thing as 55% of Americans being on track to retire.

Further, the data being used often assumes that Americans will take their 401(k) balances and draw them down ratably and prudently. Which Americans are those? They're not the Americans of 2019. They're not the ones who want the latest gadget. They're not the ones that love their Amazon Prime accounts. They're not the ones from the instant gratification world of today.

For most Americans, being able to guarantee a level of lifetime income protection is of nearly paramount importance. It's not easy in a 401(k) world. In-plan annuity options are rare and expensive. Taking a distribution to buy an annuity is even more expensive and requires an education in an industry that few Americans have access to.

Look at the generation that retired over the 25 years or so from roughly 1980 to 2005. They often have lifetime income. They may also have account-based savings. They, because they did not live in a 401(k)-only world, were able to get it right.

DB plans of the past had problems. Smart people designed better solutions, but the really [not so] smart people conspired to make us think that 401(k) only is the best solution.

It's time to visit those better solutions.

• Cost stability and predictable cost for plan sponsors.
• Lifetime income availability at actuarially fair prices for participants.
• Account growth through professionally managed assets, but with a guaranteed return of principal.
• The ability to take your account with you.

And, you can still have your 401(k) on the side to supplement it.

Doesn't this feel closer to nirvana. Isn't this a way to truly move the needle and get us out of the retirement crisis?

The Plight of Retirement And It's No-Mention Status in the Election

We have a Presidential election coming up. We have 34 US Senate seats that need to be filled this year and 435 seats in the House of Representatives. I've looked pretty closely. I've not see a single comment from an individual running for one of those offices that mentions retirement policy or retirement plans. That, while a majority of working Americans either worry daily about the prospects of retirement or would and should have that worry if they came out from under that rock they have hidden under.

There has been far more emphasis on other areas of workers' rewards packages and frankly, that emphasis has not had a major positive effect on the bulk of those American workers. Perhaps you have seen differently, but the three things that have gotten lots of focus ordered only by the way that I choose to type them have been:

• Health care (primarily the Affordable Care Act)
• The need (according to many to reduce executive compensation
• The hourly minimum wage

Let's assume for the moment that if you are reading this that you are over the age of 25 (if you're under 25 and you have an interest in what I write here, I expect that you will have a successful future) and that you have some useful skill set. If that's the case, then there is a good chance that you are employed, employable, and looking for work, not working by choice, or retired. 

If you are working and you fall into those categories, there is a very good chance that you have access to decent health care benefits and, in fact, you probably had them or would have had them had you been similarly situated, before the effective date of the Affordable Care Act. So, while the ACA may have made some changes to your health benefits, it's not likely that those differences were life-changing for you (yes, I understand that uncapping the lifetime maximum and allowing your kids up to age 26 on your policy could have had that big a difference for you).

Similarly, most of us are not executives and certainly not of the classification whose compensation draws the significant ire of others. As individuals, we might have opinions on levels of executive compensation or we might not, but most of us know that even reducing our CEO's pay by 75% would not change our compensation one iota. We are compensated roughly on our value in the marketplace. Our value does not change merely because our CEO takes a pay cut.

Finally, there is the hourly minimum wage. I could be wrong, but my observation is that there just aren't a whole lot of people earning less than $15 an hour (unless they are currently in school) who read this blog. So, for you, the hourly minimum wage probably doesn't make much of a personal difference (I understand that you may have very strong opinions on it, but those are from the standpoint of what's right and what's wrong).

Where is poor little retirement? Social Security gets debated. But, we all know that you just can't retire on Social Security. 

I'm not going to spout statistics here because I don't have them at my fingertips. But, my observation is that a generation ago, far more employees than not were covered by meaningful employer-provided defined benefit (DB) plans. And, among those who were not, likely the majority of the rest were in often generous money purchase or profit sharing plans. 401(k) plans were in their infancy. As I've written many times here, 401(k) plans were never intended to be a primary means of retirement savings. 

That was the way of the mid 70s through mid 80s. 

Today, as we know, more employees than not, have a 401(k) plan as their only employer-sponsored retirement plan. Many of them are not generous. Many are poorly invested. In a perfect world, the employees in many of those plans will find it difficult to retire with anywhere near the standards of living they are used to. 

It gets worse, of course. Many of us will have or have had work interruptions or, at the very least, periods where we need to reduce or even cease our 401(k) contributions.  

We have a crisis. 

There, I said it. I believe it. 

In fact, it affects and will affect more Americans more profoundly than most of the issues being hotly debated. It certainly affects us more than does knowledge about Hillary Clinton's emails or Donald Trump's tax returns.

Yet, the candidates remain silent.

So very sad.