FINAL REPORT FOR. Evaluating Employer-Provided Financial Education Programs for Pre-Retirees. Funded by FINRA Investor Education Foundation

Transcription

1 FINAL REPORT FOR Evaluating Employer-Provided Financial Education Programs for Pre-Retirees Funded by FINRA Investor Education Foundation Principal Investigators Robert L. Clark Professor Department of Economics Department of Management, Innovation, and Entrepreneurship North Carolina State University Melinda Sandler Morrill Assistant Professor Department of Economics North Carolina State University Steven G. Allen Associate Dean of Graduate Programs and Research Poole College of Management North Carolina State University Submitted June 2011

2 EXECUTIVE SUMMARY For the past three years, the principal investigators have worked with nine large national employers to examine the financial education and retirement planning programs they provide for their employees nearing retirement. This final report presents the findings of this study which is based on information included in three separate data files. The first data file is based on information obtained from 1,182 individuals who completed surveys before and after participation in seminars provided by five of the employers. Using these data, we develop the Participants Attending Retirement Seminars (PARS) data file. The second data file is based on a follow-up survey of the PARS respondents which was sent to these individuals approximately one year after their participation in the seminar, named the PARS3. The third data file is constructed from a survey sent to all retirement eligible participants in three companies that did not offer retirement planning programs at the time of the survey. This data file is the Retirement Expectation Survey (or the REXS) data file. The research from this project has produced a series of important findings that have received considerable national and international attention. The research methodology and the data are described in detail in the various chapters of the final report. As the project ends, we have already published several papers (see last section of this report) and made a series of national and international presentations based on this research. Our research is unique in its focus and our findings have received considerable attention. We have observed interesting behavioral patterns and have shown that financial education and retirement planning can increase knowledge and on the basis of newly acquired information, many workers modify their retirement behavior. However, we have only begun to examine the information contained in the surveys that was gathered over the past four years. The unique data sets that we have produced i

3 provide an opportunity for us to continue our research on workplace financial education and retirement planning programs. The unique data files provide the potential for a series of papers and future presentation in the years to come that will help define the role of financial education in the workplace. In this Executive Summary, we highlight the most important findings from our research. The information from the PARS shows that workers who participate in the retirement planning seminars significantly increase their level of financial literacy and their knowledge of retirement programs including employer-provided pensions and health plans, Social Security, and Medicare. On the basis of this new knowledge, many workers alter their retirement plans including their expected age of retirement from their career employer, their plans to work after retirement, their age of claiming Social Security benefits, and the method of accessing pension accounts. We show that learning occurs for all groups; however, greater gains are achieved by those with relatively low pre-seminar levels of financial literacy and for groups that tend to be more at risk such as those with less education, lower earnings, and women. An important consideration for employers is the finding that participants in these programs rated the seminars very highly and indicated that they provided substantial and important information that workers need to develop their retirement plans. The seminars increased employee understanding of retirement benefits and the employees indicated that they valued these programs. Survey responses showed that participants appreciated the programs provided by their employers. The findings can be used to support the business case for employers offering their older employees financial education and retirement planning. The PARS3 survey showed that workers retained much of the increase in financial literacy one year after the seminar. Seminar participants maintained their high opinion of the ii

4 programs and they believed that due to the retirement planning program they will be better able to make retirement decisions. On the basis of this research, there is evidence that retirement planning seminars have long term effects in enhancing financial literacy. The REXS survey enabled employers without retirement planning programs to get a direct measure of worker preferences and attitudes about the need for such events. Responses to REXS clearly indicate that older workers have a strong desire for their employers to offer a retirement planning program and that they would attend programs if offered. This survey also revealed a rather low level of financial literacy among the employees and the need for financial literacy programs. A unique finding in the analysis of the REXS was that informational errors have asymmetric effects. Workers who believe Social Security and pension plans have higher retirement ages that they actually do plan on retiring later; whereas workers who believe the retirement ages are lower than they actually are sometimes plan to retire earlier. Thus, learning and enhanced knowledge will affect workers differently depending on their prior beliefs. While the researchers have already written a series of papers using the data they have collected, further research using these data is warranted. The PARS and PARS3 contain a wealth of data that should be used for additional research. The seminars occurred over an 18 month period from June 2008 to December Thus, the survey period spans the economic downturn and the subsequent recovery. Analysis should allow researchers to examine the impact of the recession on retirement plans. Unexplored topics include the effect of health and life expectations on retirement plans such as the choice of lump sum distributions and annuities, the impact of spousal health and work status, a more detailed assessment of how changes in knowledge affect retirement plans, and whether the length of the seminar affects the extent of learning. iii

5 The final report also includes a template that employers that currently do not have a retirement planning program can use to assess their workers desire for such programs. This document includes the survey used to construct the REXS data file. Employers can modify this survey instrument to suit their own needs by focusing on specific characteristics of workers, tailoring the questions concerning benefits to fit their own situation, and to identify the preferences of their own workers. We also have developed a template that will enable employers with retirement planning programs to evaluate and improve their seminars. This document includes the surveys used to construct the PARS and PARS3 data files. Employers who are spending the resources to offer retirement planning and financial literacy programs should be interested in evaluating these programs for their effectiveness in increasing financial knowledge and assisting workers to make better retirement decisions. The templates provided in this report provide useful evaluation tools that can be adopted by employers to assess the knowledge gains of their employees and to observe how the increased economic knowledge alters retirement plans. iv

6 TABLE OF CONTENTS EXECUTIVE SUMMARY ACKNOWLEDGEMENTS TABLES AND FIGURES i vi vii CHAPTER ONE 1 Employer-Provided Retirement Planning Programs: Overview of Research CHAPTER TWO 23 Can Employer Provided Pre-Retirement Planning Seminars Increase Financial Literacy and Retirement Preparedness? CHAPTER THREE 52 Pensions Plan Distributions: The Importance of Financial Literacy CHAPTER FOUR 93 Knowledge Retention From Retirement Seminars: One Year Follow-Up Survey CHAPTER FIVE 111 The Role of Financial Literacy in Determining Retirement Plans CHAPTER SIX 149 Employer Templates for Evaluating Financial Education and Pre-Retirement Planning Programs REFERENCES 153 PUBLISHED PAPERS BASED ON FINRA GRANT 159 PRESENTATIONS AND EVENTS 160 TEMPLATES FOR SURVEYS 162 v

7 ACKNOWLEDGEMENTS This project began in March 2008 when the FINRA Investor Education Foundation awarded a three year grant to North Carolina State University to examine the effectiveness of retirement planning programs offered by employers to their retirement eligible workers. The research team of Robert Clark, Steven Allen, and Melinda Morrill sought employer partners who were willing to allow the investigators to monitor and evaluate their retirement planning programs. We appreciate and acknowledge the cooperation of employer partners without whom this research could not have been conducted. Our employer partners in this research were BD, BB&T, North Carolina State University, State Farm, Progress Energy, the University of Washington, WakeMed, Weyerhaeuser, and The Williams Companies. Throughout the project, Jen Maki, Stephanie Riche, and Evan Rogers have provided important assistance with data development, statistical analysis, and economic insights. vi

8 TABLES AND FIGURES Table 1.1. Company-Specific Knowledge Questions Table 1.2. Response Rate and Sample Creation REXS Table 1.3. Construction PARS Dataset Table 1.4. Employer Means Figure 2.1. Knowledge Score Pre- and Post-Seminar Figure 2.2. Changes in Knowledge Scores Pre- and Post- Seminar Table 2.1. Construction of PARS Dataset Table 2.2. PARS Data Descriptive Statistics Table 2.3. Participant Knowledge Before and After the Seminar Table 2.4. Participant Index of Knowledge Pre- and Post-Seminar Table 2.5. Estimated Coefficients from Knowledge Equation Before and After the Seminar Table 2.6. Respondents Retirement Plans Pre- and Post-Seminar Table 2.7. Estimated Coefficients from Planned Age of Retirement Equation Pre- and Post-Seminar Table 2.8. Estimated Coefficients from Change Planned Age of Retirement Equation Preand Post-Seminar Table 2.9. Demand for Program and Evaluation Table3.1. Mean Values of Respondent Characteristics Table 3.2. Disposition Choices by Respondent Characteristics Table 3.3. Disposition Choices by Spouse Employment Status and Investment Information Source Table 3.4. Disposition Choices by Health and Subjective Survival Probabilities Table 3.5. Disposition Choices by Wealth, Savings, and Earnings Table 3.6. Disposition Choices by Investment Strategies and Financial Knowledge Levels Table 3.7. Disposition Choices by Spousal Characteristics Table 3.8. Disposition Choices for Defined Benefit and Defined Contribution Plans Table 3.8(a). Disposition Choices for Defined Benefit and Defined Contribution Plans by Knowledge Table 3.8(b). Disposition Choices for Defined Benefit and Defined Contribution Plans by Information Table 3.8(c). Disposition Choices for Defined Benefit and Defined Contribution Plans by Economic Indicator Variables Table 3.8(d). Disposition Choices for Defined Benefit and Defined Contribution Plans by Health Indicator Variables Table 3.8(e). Disposition Choices for Defined Benefit and Defined Contribution Plan by Spousal Variables Table 3.9. Changes in Disposition Choices after Attending the Seminar Figure 3.1. How Learning Affects Plans for Disposition of Employer-Provided Pensions Figure 3.2. How Learning Affects Plans for 401(k) Disposition Choice vii

9 Table 4.1. Construction of the PARS3 Dataset For Regressions Table 4.2. Comparison of PARS and PARS3 Samples Table 4.3. PARS3 Summary Statistics Table 4.4. Survey Three Knowledge Score Comparison Table 4.5. Program Evaluation and Selected Retirement Planning Questions From Survey Three Table 4.6. Comparison of Retirement Plans Reported in Surveys One, Two, and Three Table 5.1. Mean Values of Respondent Characteristics Table 5.2. Retirement Expectations and Plans of Respondents Table 5.3. Mean Responses Knowledge Questions Table 5.4. Average Knowledge Scores by Categories Table 5.5. Knowledge Score Regression Table 5.6. Mean Planned Age of Retirement by Knowledge of Ages of Eligibility Table 5.7. Planned Retirement Age Regression Table 5.A1. Response Rate and Sample Creation Table 5.A2. Percentage Answering Correctly for 14 Knowledge Questions Table 5.A3. Comparison to Nationally Representative Data viii

10 CHAPTER ONE Employer-Provided Retirement Planning Programs: Overview of Research Millions of baby boomers will make the transition from full time work into complete retirement over the next decade. As retirement approaches, these older workers must make a series of important decisions, some of which will be irreversible. These choices will determine, in part, their income levels in retirement, the sensitivity of their income to economic fluctuations, and their ability to maintain consumption through retirement. To make the transition into retirement successfully, people will need to rely on their financial literacy and knowledge about retirement programs offered by employers and the government. Without accurate information and sufficient financial literacy, many may make inappropriate employment and investment choices that could have significant consequences in their retirement years. Recent work in economics, finance, and other social science disciplines examines the level of financial literacy and its role in economic decision-making to determine whether and how individuals can improve their knowledge base. This Final Report presents evidence from a unique, three year research project funded by the FINRA Investor Education Foundation to examine the retirement planning and financial literacy programs offered by employers to their older employees. The findings from this project indicate that participants in pre-retirement planning programs can enhance their financial literacy and increase their knowledge of retirement benefits. The findings also indicate that on the basis of this new information, many seminar attendees alter their retirement plans. Consequently, employers can facilitate the transition into retirement by providing the means for workers to 1

11 increase their understanding of key retirement concepts, enabling their employees to achieve a more desirable retirement Retirement Decisions and Knowledge Requirements When individuals enter the labor force, they must immediately begin making important choices about their lifetime consumption and saving profiles. Lifecycle theory suggests that individuals set retirement goals and targets early in their careers. In order to achieve these retirement goals, workers exhibit saving and investment behavior consistent with their goals. As new information becomes available, people will re-optimize their consumption and saving patterns, and they may alter their retirement expectations using this new financial knowledge. The primary retirement goals that workers must set include their age of retirement and their savings level, including retirement income. A fundamental principle in retirement planning is that younger retirement ages and higher retirement incomes require more saving and less consumption throughout the working life. While considerable attention has been paid to the undersaving of American workers, much less attention has been focused on how older workers make decisions concerning the allocation of their resources as they enter into retirement. Workers must decide when and how to enter into retirement, and how to best use the resources available to them. Limited available evidence suggests that older workers do not have sufficient knowledge or the financial literacy needed to make the many choices that must be made as they transition from work to retirement (Bernheim 1995, 1998; Hilgert and Hogarth 2002; Lusardi and Mitchell 2006, 2007). Incorrect or insufficient knowledge can lead to suboptimal choices. For this reason, programs that increase financial literacy and retirement benefit knowledge can improve retirement decisions and produce better retirement outcomes (Clark and d Ambrosio 2003; Clark et al. 2006; Lusardi 2

12 2008). Pre-retirement planning seminars can efficiently address the numerous questions and concerns which individuals approaching retirement share, thereby reducing human resources (HR) costs. Some of the most important decisions older workers must make are: When to retire from their career jobs Whether to take a lump sum distribution from a defined benefit pension plan or to accept the annuity option When to claim Social Security benefits Whether to annuitize all or part of 401(k) and/or 403(b) account balances How to manage investments in retirement For workers to make these important choices, they must have an appropriate level of financial literacy, understand financial mathematics, and have accurate knowledge about their employers and national retirement programs. Workers can acquire the needed knowledge to make these key decisions in various ways, and one resource often available is employer-sponsored pre-retirement planning programs. Many large employers offer some type of planning seminar for retirement-eligible employees. Sabelhaus, Brogdan, and Holden (2008) report that 46 percent of pension participants covered by defined contribution plans work for companies that provide resources to assist participants in retirement choices. Thirty percent of participants have the opportunity to attend employer seminars and workshops, and almost 85 percent of these rely on this information to some or a great extent in making their retirement decisions. In a plan sponsor survey, Wray (2008) finds that 31 percent of employers offer seminars focusing on retirement assets and 3

13 income planning. While not universal, employer-provided retirement planning programs are common, accessible to perhaps one-third of the labor force. Although many believe this type of program is beneficial to employees, relatively little is known about the effectiveness of these programs in enhancing the knowledge of, and altering the retirement decisions of, employees. In this research project, the pre-retirement programs of several large national employers were examined. The principal objective of the research was to assess whether these programs are successful in improving workers knowledge base as they near retirement. Also studied was whether employees alter their retirement plans on the basis of this learning. Finally employee views of these programs are explored, including whether they thought the programs were worthwhile and whether the seminars are seen as a valuable employee benefit. The key findings are that participants increase their financial knowledge and in response to enhanced financial literacy, many alter retirement behavior. Workers appreciate these programs offered by their employers. Knowledge gained varies with age, sex, income level, education, tenure, and wealth. Participants also report that they changed retirement plans, including altering their expected retirement ages, plans to take lump-sum pension payouts, and when they anticipated claiming Social Security benefits. Employees value these programs and report that the programs enhance their opinion of their employers Employer Partners To evaluate employer-provided pre-retirement planning programs, we assembled a team of nine large employers ranging in size from 8,000 to 40,000 employees. Our employer partners are Becton, Dickinson, and Company (BD), Branch, Banking, and Trust (BB&T), North Carolina State University, Progress Energy, State Farm, University of Washington, WakeMed, 4

14 Weyerhaeuser, and the Williams Companies. The employee populations of these companies vary by gender, education, earnings, and geographic location. This section briefly describes each of the employers, their retirement benefits, and their pre-retirement planning programs for retirement eligible employees. Table 1.1 summarizes some key information about the retirement benefits offered by these nine employers. [Table 1.1] Becton, Dickinson, and Company (BD). BD is a global medical technology company. According to their website, their focus is on improving drug delivery, enhancing the diagnosis of infectious diseases and cancers, and advancing drug discovery. BD develops, manufactures and sells medical supplies, devices, laboratory instruments, antibodies, reagents and diagnostic products through its three segments: BD Medical, BD Diagnostics, and BD Biosciences. It serves healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry, and the general public. BD was founded in 1897 and is headquartered in Franklin Lakes, New Jersey. BD employs approximately 28,000 people in approximately 50 countries throughout the world. BD converted its traditional defined benefit plan to a cash balance plan in April The traditional plan was integrated with Social Security and had a formula of 1 percent per year of service for earnings up to the average final covered compensation plus 1.5 percent times years of service times any average excess earnings over the Social Security earnings limit. All employees hired prior to the conversion date were given a choice to remain in the old plan or shift to the new plan. This recent pension choice may have stimulated employees to learn more about their retirement benefits and enhanced financial literacy among BD employees. BD also offers a Saving Income Plan with a company match that was increased from $0.50 per each dollar of employee contribution up to 6 percent of salary prior to 2007 to a match of $0.75 per 5

15 dollar of employee contributions up to 6 percent of salary. Retirees are eligible to participate in the company health plan provided they are age 55 with 10 years of service or age 65 with 5 years of service. BD offers a pre-retirement planning program that is presented by the Ayco Company. The typical program is 4 hours long and has on average 20 employees attending per session. Branch Banking and Trust (BB&T). BB&T is a publically traded company and is the 10 th largest financial service corporation in the United States. BB&T is a full service financial institution with business segments including banking, insurance and investments. The company was founded in 1872 and is headquartered in Winston-Salem, North Carolina. They have over 30,000 employees and operations in 13 states and Washington D.C. BB&T offers employees who have completed one year of service (12 consecutive months in which the employee has completed at least 1,000 hours of service) and have reached age 21 the opportunity to participate in the BB&T Corporation Pension Plan. In addition to the pension plan, BB&T offers a supplemental savings plan, the BB&T Corporation 401(k) Savings Plan. BB&T provides a 100% match on the first 6% of compensation contributed to the plan. Employees are eligible to participate in the plan on the first day of employment but do not qualify for the match until they complete one year of service and reach age 21. Currently BB&T requires that managers discuss retirement planning with employees at annual reviews. They do not have a formal pre-retirement planning seminar, but conducted a survey of employees in 2008 to gauge interest in such a program. The survey results showed a strong preference for employer-provided financial education programs and according to Steve Reeder, Benefits Manager, BB&T will develop and begin offering such a program in the coming year. 6

16 North Carolina State University. North Carolina State University (NC State) is a public land grant university with more than 31,000 students and nearly 8,000 faculty and staff. NC State is located in Raleigh, NC. Faculty and staff of NC State are employees of the state of North Carolina and are eligible to participate in Teachers and State Employees Retirement plan (TSERS). The benefit formula is 1.82 percent of average salary during the employee s four consecutive highest-paid years of employment times years of service. Faculty members also have the option of enrolling in an Optional Retirement Plan (a defined contribution plan) instead of the state plan; however, the seminar was restricted to employees enrolled in TSERS. The University offers employees several supplemental retirement plans (401(k), 457, and 403(b) plans) but does not provide any employer match. Retirees are eligible to remain in the state health plan after retirement without any retiree premium as long as they are receiving a monthly pension benefit. Prior to the start of this project, the HR division of NC State offered several short retirement planning programs; however, an all day program was developed in 2008 for employees enrolled in the state retirement plan. Progress Energy. Progress Energy is a Fortune 250 energy company with more than 21,000 megawatts of generation capacity and $9 billion in annual revenues and has over 10,000 employees. The company has a cash balance pension plan that was established in 1998 for all new employees. Employees hired before the conversion were previously in a traditional defined benefit plan. They were moved to the cash balance and provided conversion credits from the old 7

17 plan. The company also offers active employees a 401(k) plan with an employer match, health insurance, and they allow retirees to remain in the company health plan. For some years, this employer has provided day-long seminars to its retirement eligible employees. Company personnel conduct the programs; however, several outside experts and representatives are used to augment the program. Retirement eligible employees are invited to attend the program; however, employees can attend a pre-retirement planning program only once every five years. Each year, the company offers a series of programs at various sites between July and September. In the summer of 2009, Progress Energy transitioned to providing half-day seminars, a cost savings measure. The program content was shortened by eliminating outside presenters, including Fidelity (the 401k provider) and the Social Security representative. State Farm. State Farm is a large insurance company which insures more cars than any other insurer in North America and insures more homes than any other insurer in the United States. State Farm also provides a wide array of financial products and services. State Farm employs more than 17,000 agents and 68,000 employees in the United States and Canada. State Farm provides regular pre-retirement planning programs to retirement eligible employees across the country, with each region being organized at a local level. The programs are conducted by Ernst and Young. Beginning in March 2009, State Farm used the survey evaluation method in a sample of their programs in two geographical regions. However, participation was low with only 88 surveys completed. Although we were not able to obtain a count of the total number of seminar attendees receiving invitations to the survey, we approximate the response rate was below 1% and therefore do not include these data in our analysis. 8

18 University of Washington. Founded in 1861, the University of Washington is one of the oldest state-supported institutions of higher education on the West Coast. The University has campuses at Bothell, Tacoma, and Seattle and has over 30,000 employees. The retirement plan the individual is enrolled in depends upon his job classification. Contract classified and classified non-union employees participate in the Public Employees Retirement System (PERS) Plan. Faculty and professional staff participate in the University of Washington Retirement Plan (UWRP). The PERS plan has been amended over time and currently includes three different plans, two of which continue to be open for enrollment. PERS 1 and PERS 2 require employee contributions of 6% and 3.9% of gross pay respectively and the employee receives a pension payment which is based on years of service and final average compensation. PERS 3 is a hybrid which combines a defined benefit account with an investment savings account. The UWRP plan requires employees under age 35 to contribute 5% of income while employees over 35 are required to contribute 7.5 percent of income (employees 50 and older have the option of increasing their contribution amount to a total of 10% of income). The University matches 100 percent of contributions made in this plan. Enrollment is mandatory after two years of employment. The University also has a defined benefit aspect of its savings plan, which acts as a safety net and only pays out if the employee s primary savings plan, the UWRP, fails to a reach a minimum balance. The required minimum and benefit amount due to the employee if the minimum is not reached is determined by a complex calculation performed at the time of the employee s departure. Plan documents state that approximately 5% of employees are entitled to receive a payout form this plan. The University of Washington also offers 9

19 employees the option of participating in a supplemental savings plan, for which there is no employer match. Retirees are eligible for employer sponsored health insurance. The University of Washington does offer a limited number of seminars, but during the time frame studied we were only able to collect a total of 22 surveys from participants. Due to the low participation, we have chosen not to incorporate this data into our final analysis. WakeMed. WakeMed is an 804-bed private, not-for-profit health care system based in Raleigh, NC. WakeMed employs over 7,000 workers including medical professionals, registered nurses, medical staff, and support staff. WakeMed provides a pension to all workers age 55 and older with at least three years of service, as long as the worker has worked the equivalent of full-time during those three years. The pension plan allows for either a full lump sum or an annuity, with no partial lump sum option. Retiree medical insurance is only available through COBRA for 18 months following retirement. WakeMed does allow employees to work after retirement, but only with a break in service. Currently, WakeMed has contracted with AIG to provide seminars lasting 75 minutes for their employees nearing retirement. These programs focus primarily on the pension and 403 (b) plans offered by WakeMed. Although we did distribute surveys at these short seminars, participants were asked to mail them back and less than 10 in total we received. We did not incorporate these data into our analysis. Because of the limited nature of these programs, WakeMed was interested in learning more about the preferences of their employees for more extensive programs. We sent a survey to approximately 7,700 workers, of which 2,088 were born between 1943 and 1959 (ages 49-65), which became part of the REXS data described below. 10

20 Weyerhaeuser. Weyerhaeuser is one of the world's largest forest products companies. They have offices or operations in 13 countries and have customers worldwide. As of December 31, 2007, Weyerhaeuser had 37,900 employees, primarily in the United States and Canada. They employ a variety of workers, from scientists, engineers, architects and financial specialists to forestry, trade and craft workers. Weyerhaeuser offers a defined benefit pension plan that is integrated with Social Security. The benefit formula is 1.1 percent times final average salary time years of service plus 0.45 percent times excess earnings over the Social Security integration level times years of service. Weyerhaeuser also offers retirees the opportunity to remain in the company medical plan. The company offers a 401(k) plan with a $0.70 company match for each dollar of employee contributions up to 7 percent of salary. Weyerhaeuser has offered a preretirement planning program for a number of years. The company offers two and a half day programs that are conducted by Weyerhaeuser personnel with outside experts used to complement the program. Programs were offered approximately monthly. Towards the end of 2009, Weyerhaeuser experienced significant lay-offs and cut-backs, including eliminating the position of the person who ran these seminars. Although one year follow-ups to the seminar were still conducted, we worked closely with a remaining staff member to make sure surveys were not sent to individuals that had been laid off or fired since attending the seminar. The Williams Companies Inc. Williams is an integrated natural gas company that produces, gathers, processes and transports natural gas to heat homes and power electric generation across the country. The company operates approximately 14,600 miles of interstate natural gas pipeline with a capacity of more than 11 billion cubic feet per day. Williams transports enough gas to heat 11

21 30 million homes on a winter day and delivers approximately 12 percent of the natural gas consumed in United States. Williams offers a cash balance pension plan to its employees with company credits as a percentage of compensation rising with age. Company contributions are greater on pay exceeding the Social Security taxable wage base. As such, the account balances are reported in a lump sum and not as a monthly benefit. Employees are eligible to participate in the Williams Investment Plus Plan, a 401(k) plan, and Williams matches employee contributions dollar for dollar up to six percent of salary. Retirees are eligible to remain in the company health plan. Prior to the start of this project, Williams did not offer a formal pre-retirement planning program. To assess the desire of their employees for such a program, Williams allowed us to survey all of their retirement eligible population. There was overwhelming support from their employees for a more comprehensive program. As a result, the HR staff developed a day-long program and their first seminars were offered in November and December These programs were advertised to all workers age 50 and older, to encourage large attendance REXS Data The Retirement Expectations Survey (REXS) was constructed from survey responses of employees at three of our employer-partners, BB&T, WakeMed, and Williams. Each of these employers did not currently have a formal pre-retirement program at the time of the survey, although WakeMed did have hour-long lunch seminars offered to all employees. All three employers were interested in assessing the desire of workers for a more formal program. The surveys were conducted during 2008 and 2009 via an online survey tool. Each employer distributed the survey to their employees nearing retirement according to the selection criteria described in Table 1.2. The survey consisted of over 75 questions and differed only 12

22 slightly between the three employers. The survey was divided into five parts: demographic and economic characteristics of the employee, demographic and economic characteristics of the employee s spouse or partner, retirement plans of the worker and his/her spouse or partner, knowledge questions, and the desire for financial education programs. The income and wealth questions allowed the respondent to select dollar ranges rather than force them to give a specific dollar amount. The survey contained a series of questions that tested the knowledge of the respondent concerning the characteristics and generosity of their employer retirement programs, Social Security, Medicare, and financial markets. The surveys were sent to all retirement eligible employees via and they responded using an electronic survey. The responses were completely confidential with neither the company nor the researchers able to identify the respondents. Chapter 5 provides a detailed discussion of the REXS data and discusses findings that highlight the importance of financial knowledge and literacy in the formulation of retirement plans. [Table 1.2] 1.4. PARS Data The Participants Attending Retirement Seminars (PARS) data were constructed from survey responses of individuals that attended a pre-retirement planning seminar offered at five of our employer-partners. We examined the impact of pre-retirement planning programs offered by these employers to their older employees between June 2008 and December Typically, employers follow the same process to invite retirement-eligible employees to participate in the programs. First, invitations are issued, then attendance is tracked and usually, attendance rates are quite high. These programs are ongoing and the employers expect that over a number of years, most eligible employees will attend one of these programs. Thus, the 13

23 participants in the programs we observe should roughly reflect the population of older workers at these employers on average. The financial education literature has focused in-depth on possible selection issues associated with participation in various types of educational events. Attendance in these programs is limited to workers with certain characteristics suggesting that one might overstate the impact of financial education seminars if one only focuses on those who voluntarily attend. This is exacerbated by the fact that few, if any, records of attendance are kept. By contrast, the programs we examine are more structured; while attendance is voluntary, employees receive specific invitations from their employers and attendance is recorded. Given that most eligible employees attend one of these company-provided programs once they become retirement-eligible, the selection bias should be considerably less in our study. 1 Nevertheless, we only observe seminars offered between June 2008 and December 2009, thus, we do not monitor these programs over an extended period. For this reason, it is possible that these programs may have attracted a non-representative sample of the workforce during the 18 months of our project. The leaders of the various employer-provided programs did not report any obvious selection bias among the participants during the study period. Instead, they believe that most workers invited to participate actually attend the programs and over time, all retirement eligible workers are invited to attend one of these programs. We worked with employers in the spring of 2008 to develop an evaluation process for their pre-retirement planning programs. Our methodology included the development of two surveys. Templates of these surveys are included in Chapter 6 of this report. The first survey was to be completed by each participant prior to the start of the program. The objective was to 1 The programs offered by Weyerhaeuser, Progress Energy, and BD have been presented over a number of years. In contrast, the programs by North Carolina State and Williams are relatively new and thus a full cycle of retirees has not had a chance to attend one of the programs. 14

24 obtain baseline socioeconomic data about the individual and his/her household, as well as information concerning retirement plans and investment strategies. Employees also completed questions about their financial literacy and their knowledge of employer and national retirement programs. Two financial literacy questions similar to those developed by Lusardi and Mitchell (2006) for the Health and Retirement Study were included along with a series of knowledge questions about Social Security, Medicare, and the characteristics of company retirement plans. At the conclusion of the seminar, participants were asked to complete a second survey. This time, participants answered questions concerning the program, the employee s assessment of the seminar, and its value. The knowledge and literacy questions were repeated, to see if the participants overall knowledge of retirement programs and financial markets had improved. Seminar participants were also asked if they had changed any of their important retirement related decisions. Approximately one year later, we sent a third survey to each of the participants. The objective of this final survey was to determine the level of knowledge retention, how retirement plans have changed, and how participants rated the programs in retrospect. Chapter 4 discusses the findings from Survey 3. Some of the employers used hard-copy surveys (BD, Progress Energy, and Weyerhaeuser). The program leaders at each of these companies extended the length of their programs to allow participants 15 to 20 minutes prior to the start of the seminar to complete Survey One and similar time at the end of the program to complete Survey Two. Other employers (North Carolina State University and Williams) used electronic surveys; in this case, a link to the electronic Survey One was sent via to participants about a week prior to the seminar and a link to Survey Two was ed to the participants immediately following the seminar. Attendees were given approximately two weeks to complete Survey Two. The research 15

25 described in this final report is based on surveys from 85 seminars that incorporated our surveys into their programs between June 2008 and December Table 1.3 shows the development of PARS by each employer. Seminars varied in size and duration across the employers. During the research period, BD held 31 seminars with approximately 500 attendees. The BD seminars were 4 hours long. Weyerhaeuser had 12 seminars that were two and half days in duration and covered 281 employees. Williams and NC State University both had all day seminars. In 2008, the Progress Energy seminars were one day but in 2009 the seminars had been reduced to a half-day. Thus, we were able to develop a unique data set that included seminars ranging in length from one half day to two and half days, seminars that took place before and during a significant economic decline and some in the early stages of the economic recovery. [Table 1.3] Over the 18 months, over 1,500 individuals attended the seminars of these five employers. We received completed responses from 1,181 for a high total response rate of 75 percent. In most of the analysis, we restrict the sample to participants born between 1943 and 1959, thus participants were approximately age 50 to 65 at the time of the seminars. 2 Table 1.4 displays a summary of the PARS data. The main results show an increase in the average knowledge score and an increase in the average expected retirement age upon 2 The age-50 restriction was applied to limit the sample to individuals approaching retirement decisions. Most of the employers only invite retirement eligible employees to these programs so, in fact, this results in only a few seminar participants being deleted from the sample. The upper age limit was applied to limit the sample to those who had not yet attained the normal retirement age for Social Security. In addition, we felt that workers over age 65 had already made the decision to delay retirement and that they would most likely have very different responses to these programs than workers age 50 to

26 completing the program. The decrease in observations for knowledge score and retirement age are due to incomplete surveys and invalid responses, as detailed in the table. [Table 1.4] The other chapters, particularly chapter 2, will examine the PARS data in much more detail. Our analysis highlights four important issues concerning the effectiveness of these programs. First, we determine whether these employees improved their basic understanding of employer retirement programs, Social Security, and Medicare. Second, we determine whether individuals altered their retirement plans, on the basis of the program. Third, we examine how the participants evaluated the program. Fourth, we examine certain specific responses of individuals concerning the use of their retirement wealth. 1.5 Outline of Final Report The following chapters present the results of the research from this project. The three data sets are described in more detail and the results of a series of empirical analyses are presented. The chapters have been written so they can be read individually as stand-alone papers, thus each chapter describes the data used in the analysis and summaries the key findings. Chapter 2 examines the change in financial knowledge immediately before and after attendance in a retirement planning seminar. Using data from PARS, the investigators find substantial increases in worker knowledge and that on the basis of the enhanced financial literacy, workers modified their retirement plans. This chapters show that workplace financial education can be effective in increasing knowledge and that workers considered such programs a valuable employee benefit. Chapter 3 employees the PARS data to examine distributions from defined benefit pension plans and defined contribution retirement saving plans. In the PARS surveys, workers 17

27 are asked whether they plan to accept an annuity or take a lump sum distribution from their employer retirement plans. Once again, the evidence indicates that new knowledge leads to a revision of retirement plans. Chapter 4 utilizes PARS3 to examine worker plans and attitudes one year after the retirement seminar. Employees show that they have retained much of the knowledge they learned in the retirement planning program indicating a long term benefit from these educational events. In Chapter 5, the REXS data are used to show the desire of older employees for employer planning programs. Based on the strong revealed preference for such a program, one of these employers immediately moved ahead and developed such a program and another is now in the process of establishing a retirement planning programs for older workers. Analysis of the REXS data revealed an interesting link between types of knowledge errors and retirement plans. Finally, Chapter 6 contains an employer template that can be used to determine the desire of employees for retirement planning programs when none exist and a separate template that will aide employers who have already established programs to more effectively evaluate their financial literacy programs. 18

28 TABLE 1.1. Company-Specific Knowledge Questions Employer-Partner Lump-Sum of Pension Health Plan Phased Retirement Pension Adjustments BD Yes Yes No A. Stay the same BB&T Yes Yes No A. Stay the same NCSU Yes Yes No B. Increase by Inflation Progress Energy Yes Yes N/A N/A State Farm No Yes Yes A. Stay the same Univ. Washington Yes Yes Yes A. Stay the same WakeMed Yes No Yes A. Stay the same Williams Yes Yes Yes A. Stay the same Weyerhaeuser Yes Yes No A. Stay the same Lump-Sum of Pension Can you take a lump sum distribution of some or all of your pension plan (do not include income for your 401(k) account)? Health Plan Does your company offer you the opportunity to stay in the company health plan after you retire? Phased Retirement Pension Adjustments Does your company offer any type of phased retirement, flexible work options, or the opportunity to work part-time after you retire? The monthly pension benefit that you will receive from your current employer will: stay the same for the rest of your life be increased annually by the rate of inflation be increased annually by the same rate as wages for active workers don t know 19

29 TABLE 1.2. Response Rate and Sample Creation REXS BB&T WakeMed Williams Criteria for Receiving Survey All employees about age 55 with at least 10 years of service (the criteria for retirement). Anyone without access was excluded. All employees were sent the survey. We restricted the sample to individuals born Active employees age 50 or older. Employees Sent Survey 2,475 approximately 7700, 2088 age ,592 Completed a Portion of Survey 605 (Response Rate: 24%) 487 Total (6%) 237 Age (11%) 952 (Response Rate: 60%) Born Full Demographic Information Valid Expected Retirement Age Valid Expected SS Age

30 TABLE 1.3. Construction of PARS Dataset Employer- Partner Project Total Selected Sample Knowledge Score Retirement Age BD Seminars 31 Attendees 525 PARS NC State Univ. Seminars 4 Attendees 151 PARS Progress Energy Seminars 27 Attendees 333 PARS Weyerhaeuser Seminars 12 Attendees 281 PARS Williams Seminars 7 Attendees 314 PARS TOTAL Seminars 85 Attendees 1,604 PARS 1,182 1, *Selected Sample -Number of observations after dropping for valid age range, tenure and college responses. -2 observations lost because of invalid or missing gender responses *Knowledge Score -106 observations dropped because of 5 or more unanswered knowledge score questions on either the first or the last survey. *Retirement Age -Not all respondents gave answers for their planned retirement ages before and/or after the seminar. Also, some gave responses that were less than their current age. Respondents without a valid knowledge score were dropped. Combined, 264 observations were dropped for the expected retirement age regressions. 21

31 TABLE 1.4. Employer Means in PARS PARS BD NCSU PGN WEY WLM Number of Observations 1, Age Percentage Male Percentage Married Years of Service Percentage attending College Self-Assessed Knowledge Score (1-7) Number with Valid Knowledge Score Knowledge Score Before (Survey 1) Knowledge Score After (Survey 2) Number with a Valid Planned Retirement Age Planned Retirement Age Before (Survey 1) Planned Retirement Age After (Survey 2) Years from Retirement Before (Survey 1) Years from Retirement After (Survey 2) Notes: -Valid knowledge score composed of participants that left no more than 5 questions blank. -Valid planned retirement age accounts for people who filled in a planned retirement age in both Survey 1 and 2, the age was at least as much as their current age, and they had a valid knowledge score. 22