Time for a Better Way to a Secure Retirement

Transcription

1 Prudential Financial s Fifth Annual Workplace Report on Retirement Planning Time for a Better Way to a Secure Retirement Younger and Older Workers Embrace Radical Redesign of Retirement Plans

2 John Strangfeld Vice Chairman Prudential Financial According to these findings, the Pension Protection Act of 2006 is a great start, but it s really just a first step toward reinventing the defined contribution plan. It s clear that the current do-it-yourself approach to defined contribution plan management isn t delivering the retirement security many Americans want and need. John Kim President Prudential Retirement Our study reveals that today s youngest and oldest workers would welcome a dramatically different approach to the management of their defined contribution programs, one that replaces total personal accountability long the hallmark of these plans with professional, third-party support and oversight. In fact, both generations believe that the autopilot approach will deliver better long-term results.

3 Make It Automatic With the passage of the Pension Protection Act of 2006, sponsors of defined contribution retirement plans will find it easier to help their participants build a secure financial future. By providing a Safe Harbor for automatic enrollment, investment default, and contribution escalation features, the Act encourages plan sponsors to put their retirement programs on autopilot and, as a result, boost participation and contribution rates. The outstanding question, of course, is: How would plan participants feel about an autopilot approach? Are they inclined to be grateful for the assistance? Or are they more likely to be apprehensive even resentful because they believe such decisions should be theirs and theirs alone? This study examines workers attitudes toward, and feelings about, automatic defined contribution plans, with a specific focus on younger workers, those between 21 and 30, and on older workers, those pre-retirees between 55 and 64. The results are revealing and, in some cases, even startling. Not only are younger workers eager to embrace this radical new approach to retirement programs, older workers speaking from the perspective of managing their own plans for nearly 30 years wish they d had automatic enrollment and other automatic plan features and wholeheartedly endorse these options. Moreover, both generations believe that the provisions of the Pension Protection Act are a good start, and both support extending the autopilot approach to other areas of plan management such as automatic asset allocation and automatic conversion of plan assets into a guaranteed monthly income at retirement as part of a complete and comprehensive Secure Retirement SM program. We hope you take the time to review this study and, more importantly, support action on its findings. Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 1

4 Are Plan Participants Really Ready? This new study from Prudential Financial evaluates the reactions of workers to a new way of managing defined contribution plans: Automatic enrollment Automatic minimum contribution Automatic contribution escalation Automatic asset allocation Automatic retirement income default Total autopilot features The study also examines whether these programs have appeal for younger workers, those between 21 and 30, and older workers, pre-retirees between 55 and 64. Profile of Study Participants Total Sample About the study Prudential Financial s fifth annual Workplace Report on Retirement Planning study on retirementplanning issues polled 600 American workers in August/September Respondents were targeted by age with 300 workers aged and 300 workers aged The margin of error is ±4% at the 95% confidence level. The study s participants are a national sample of heads of households selected from panelists in the TNS Online Access Panel. All participants work for organizations offering a workplace retirement savings plan, however a mix of participants and non-participants were targeted for study. Age Income Gender 50% 50% 21% 14% 9% 25% 31% 52% 48% <$25k $ k $ k $ k $100+k Female Male 2

5 Definitions of Autopilot Features Tested 1. Automatic Enrollment The first step in an autopilot program is automatic enrollment. In today s world, most workers have to make a conscious decision to participate in their workplace-provided retirement plans. But with the autopilot approach, they would be automatically enrolled. They could always opt out. But doing nothing means they re in the plan, not sitting on the sidelines. 2. Automatic Minimum Contributions The second step in an autopilot program involves contribution levels. Today, within the limits set by government guidelines, it s up to plan participants to decide how much of their pay to contribute to their plan. But with an autopilot approach, initial contribution rates would be set at, say, three percent of pre-tax earnings. Participants could always change that savings rate, but doing nothing means they re contributing at the set rate. 3. Automatic Contribution Escalation The third step in an autopilot program is automatic contribution escalation. Today, it s up to plan participants to increase their contribution levels. But with an autopilot approach, pre-tax contributions would gradually and automatically increase based on for example promotions, raises, and bonuses. In year one, the contribution rate might be three percent. In year two, it might rise to four percent. And so on, until contributions reach, say, eight percent of pre-tax earnings. Participants could always change their contribution rate, but doing nothing would mean savings levels would automatically escalate, and retirement savings would increase accordingly. 4. Automatic Asset Allocation The fourth step in an autopilot program is automatic asset allocation. Today, it s up to participants to make investment selections from the options offered in their plan and to adjust their investment choices as they progress through their career and approach retirement. With the autopilot approach, however, retirement-plan portfolios would be automatically rebalanced to a more conservative mix of investment options as individuals get closer to retirement. The rebalancing could be based on professional asset allocation models that are appropriate to age and risk tolerance. Participants could always opt out, but doing nothing would mean investment risk would automatically be reduced as retirement nears. 5. Automatic Retirement Income Default The fifth and final step in an autopilot program involves converting accumulated savings to retirement income. Today, it s up to participants to decide what to do with their money once they retire, and they have to choose between such options as lump sum distribution, systematic withdrawal, or annuitization. With the autopilot approach, however, some or all of each participant s assets would be automatically converted to an investment vehicle that provides a guaranteed monthly income stream. Participants could always opt out, but doing nothing would mean they would have a steady and predictable source of lifelong retirement income. Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 3

6 For Young and Old A Secure Retirement Feels Elusive Younger Workers Many younger workers those with 30 to 40 years to plan for retirement are understandably confident about their ability to achieve retirement security. But even among this group, nearly half feel they are behind schedule. Only four out of 10 say they are on or ahead of schedule. Not surprisingly, 13 percent of young workers are simply unsure. Older Workers After managing their own retirement plans many for 20 years or longer only one in four older workers feel their retirement planning is on or ahead of schedule. Two out of three say they are behind schedule even though most in our survey have fewer than 10 years before they reach traditional retirement age. Behind Schedule Older Younger Assessment of Progress Toward a Secure Retirement 65% 45% On/Ahead of Schedule Older Younger 27% 42% Older Younger 8% 13% 4

7 Youthful Confidence Fades With Age Younger Workers The confidence of youth, combined with a generally strong economy and solid financial market performance, contributes to expectations of a successful retirement among seven out of 10 younger workers. Still, nearly one out of three recognize that retirement planning is a matter of great concern and are unconvinced they are on track to meet their long-term financial goals. One wonders what a similar survey will reveal in 30 years. Older Workers Faced with the steady erosion of traditional defined benefit plans and the increasing uncertainty of Social Security, only three out of 10 older workers with defined contribution plans feel confident they are saving enough to retire on time and live comfortably. Most expect to have to work longer before retirement or to need to work in retirement. One wonders whether a similar survey 30 years ago would have shown greater confidence among these workers who now nearing retirement are clearly concerned about financing and living an abundant retirement. Are You Confident You re Saving Enough to Retire On Time and Live Comfortably? Confident Younger Workers Confident Older Workers Yes 31% Yes 70% No 69% No 30% Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 5

8 Automatic Enrollment Strong Support Across the Board Younger Workers Recognizing the importance of starting early, more than two out of three younger workers would welcome automatic enrollment in their workplace-provided defined contribution plans. Less than 30 percent are apprehensive about an automatic enrollment feature or feel that plan participation is a decision best left to each individual worker. The responses of 21- to 30-year-olds constitute strong support for the Pension Protection Act of Older Workers Based on their experience with do-it-yourself management of defined contribution plans, three out of four older workers wish they d been automatically enrolled in their plans at the start of their careers and at the start of each new job. The responses of older workers represent overwhelming support for not only automatic enrollment, but also for the Pension Protection Act of Not surprisingly, 80 percent of older workers recommend an automatic enrollment feature for their younger colleagues. Automatic Enrollment Younger Workers 66% 6% 28% Positive Neutral/ Negative Older Workers 75% 8% 17% Wish I d had it Neutral/ Negative Recommended for Younger Workers by 80% of Older Workers 6

9 Automatic Minimum Contributions Favored by Both Ages, Strongly Endorsed by Older Workers Younger Workers Younger workers are less enthusiastic than their older colleagues about having a set minimum contribution automatically deducted from their pay, but a clear majority still favor this autopilot feature. Those who feel behind in their retirement planning are strong advocates. Older Workers The experience of older workers with self management again informs their reaction to automatic minimum contribution levels, as three out of four wish they d been automatically enrolled in their plans at a set minimum rate. Older workers who feel behind in their retirement planning are the biggest supporters of this feature. Eight out of 10 recommend automatic minimum contributions for younger workers. Automatic Minimum Contributions Younger Workers Total 54% 6% 40% Behind in Retirement Planning 59% 4% 37% Positive Neutral/ Negative Older Workers Total 75% 8% 17% Behind in Retirement Planning 78% 5% 17% Wish I d had it Neutral/ Negative Recommended for Younger Workers by 80% of Older Workers Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 7

10 Automatic Contribution Escalation Appealing to Both Age Cohorts Younger Workers A majority of younger workers favor automatic contribution escalation, believing it will help them achieve a secure retirement. A minority four out of 10 remain skeptical, perhaps because they still have confidence in making their own financial decisions. Could the same have been said of their older colleagues 30 years ago? Older Workers Keenly aware that the traditional do-ityourself approach failed to deliver retirementready financial results, nearly seven out of 10 older workers wish they d had automatic contribution escalation. Older workers strongly support an automatic link between contribution increases and promotions, raises, and bonuses. Three out of four recommend automatic contribution escalation for their younger counterparts. Automatic Contribution Escalation Younger Workers 51% 8% 41% Positive Neutral/ Negative Older Workers 68% 8% 24% Wish I d had it Neutral/ Negative Recommended for Younger Workers by 75% of Older Workers 8

11 Automatic Asset Allocation Especially Popular Among Older Workers Younger Workers Less popular than any other autopilot feature, automatic asset allocation is still viewed by half of younger workers as fundamental to building a secure retirement. The confidence of youth in managing their own assets is understandable, but if history is the judge that confidence may well wane with the passage of time. Older Workers The experience of managing their own defined contribution plans has taught older workers that professional, automatic portfolio rebalancing is a better way to go. Six out of 10 believe they would be better prepared for retirement today if their assets had been automatically adjusted based on age, risk tolerance, and years to retirement. Some 70 percent recommend automatic asset allocation for their younger colleagues. Automatic Asset Allocation Younger Workers 49% 8% 43% Positive Neutral/ Negative Older Workers 60% 6% 34% Wish I d had it Neutral/ Negative Recommended for Younger Workers by 70% of Older Workers Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 9

12 Automatic Retirement-Income Default Embraced by Young and Old Younger Workers Eager to generate a guaranteed retirement paycheck and perhaps influenced by the steady decline of traditional defined benefit pension plans younger workers strongly favor automatic retirement-income defaults. Some 65 percent would welcome this feature as part of a comprehensive Secure Retirement SM program. Older Workers Clearly concerned about the distribution phase of retirement planning, older workers are also eager to embrace an automatic plan feature that would convert all or part of their assets into a guaranteed monthly income. Seven out of 10 view an automatic retirement income default feature as a welcome alternative to such confusing options as lump-sum distribution, systematic withdrawal, or annuitization. Nearly three out of four older workers recommend an automatic retirement-income default for younger workers. Automatic Retirement-Income Default Younger Workers 65% 8% 27% Positive Neutral/ Negative Older Workers 70% 7% 23% Wish I d had it Neutral/ Negative Recommended for Younger Workers by 72% of Older Workers 10

13 Complete Autopilot Program A Positive Consensus for a Better Way Younger Workers Recognizing that defined contribution retirement programs will be their primary means to achieve a secure retirement, nearly six out of 10 younger workers are eager to embrace a program that offers all autopilot features. They feel that putting their plans on autopilot will lead to better, long-term results and an abundant retirement. In a very real sense, younger workers are advocating a radical redesign of workplace retirement programs because they re willing to turn over some degree of personal control in favor of automatic plan management delivered by third-party professionals. Younger women are strong supporters of this concept. Older Workers Looking back on 20 to 30 years of managing their own defined contribution programs, seven out of 10 older workers feel they would be in better financial shape today if they had simply put their plans on autopilot. The responses represent a radical departure from past beliefs, in that personal control has long been considered a plan hallmark. Women who traditionally spend less time in the workforce and, as a result, may be less financially prepared for retirement are especially strong proponents. More than three out of four older workers recommend all autopilot features for their younger colleagues. Complete Autopilot Program Younger Workers Total 57% 6% 37% Women 60% 6% 34% Positive Neutral/ Negative Older Workers Total 70% 5% 25% Women 74% 3% 23% Wish I d had it Neutral/ Negative Recommended for Younger Workers by 76% of Older Workers Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 11

14 Older Workers Passionate Advice for a Secure Retirement When asked an open-ended question about what advice they would offer to aid younger workers on their retirement savings path, 287 of 300 (96%) of older study participants had something to say. Clearly they feel they have valuable insights to offer based on their own life experiences! Their comments focused on five themes: 1. The first step is to start. Just do it. Pay yourself first. That is the advice my dad gave me, and he was right. Save! Save! Save! Old Ben said it best: A penny saved is a penny earned! 2. Take advantage of your workplace savings plan. As soon as a retirement plan is offered to you, start to invest. Don t wait, don t fall into the trap so many do, saying Oh, retirement is so far away. I wish I had it to do over again. Definitely take advantage of employer-offered 401(k) and, when you switch jobs, roll it over into another 401(k) or an IRA, but do not take the money and spend it! 3. Make it easy on yourself with payroll deduction, etc. Participate in some type of plan where contributions can be deducted before taxes. Any direct deposit savings is a must even if small. Payroll deduction makes it painless and is an excellent way to pay into your plan. Every time you get a raise, increase your savings. 4. Be smart. Take advantage of 401(k) plans as soon as you are eligible. Consider the tax benefits. Don t invest in your employer. Diversify. Start saving as early as possible and do not be afraid to put your money in the stock market. 5. Consider autopilot options, if available. Try the autopilot retirement plan because you can always opt out. I would tell them to absolutely take the opportunity to enroll in a 401(k). Retirement will come up more quickly than they can anticipate and, with an autopilot program, they would not miss the contribution. 12

15 Plan Sponsors Also Recognize the Value of Automatic Plan Features Prudential also asked plan sponsors their view on the autopilot versus the do-it-yourself approach in a separate 2006 study administered by an independent research vendor. The 2006 Prudential Plan Sponsor Survey asked hundreds of plan sponsors questions on topics relating to Prudential, the industry, and plan preferences. Keenly aware that the traditional do-it-yourself approach to defined contribution plan management has not delivered the retirement security their participants want or need, 65 percent of plan sponsors believe that automatic plan management is a better way to go. Of that 65 percent, nearly nine out of 10 sponsors would consider incorporating some or all automatic features as early as their next plan review date. Plan Sponsors Favor the Autopilot Approach for Participants Percent of plan sponsors who believe the autopilot package is more beneficial to participants than the traditional do-it-yourself approach. 65% 87% (Among those favoring auto features ) Percent of plan sponsors likely to consider a plan with automatic features at next review. (N=379) (N=246) Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 13

16 Summation Increasingly aware of the lead role they must play in achieving their own retirement security, America s younger workers (those between 21 and 30) appear eager to embrace a radical new approach to defined contribution programs, believing that automatic plan features like the automatic enrollment provision in the 2006 Pension Protection Act will produce better financial results and lead to more secure retirement outcomes. Older workers between 55 and 64 overwhelmingly agree, and the vast majority say they wish they d had autopilot defined contribution plans 30 years ago. Older workers also wholeheartedly recommend the autopilot approach for those just starting out in their careers. At Prudential, we join with younger and older cohorts of the American workforce in embracing automatic plan features... and in advocating their adoption as part of a comprehensive Secure Retirement SM program. 1. America s youngest workers would welcome a radical redesign of the nation s retirement programs because they believe putting defined contribution plans on autopilot would deliver better, long-term financial results than the traditional do-it-yourself approach. Some 66 percent of young workers would feel grateful or optimistic if they were automatically enrolled in defined contribution plans. Approximately 54 percent would feel grateful or optimistic about mandated minimum contribution levels, and more than half would be enthusiastic about an automatic plan feature that would gradually increase contribution levels. Young workers are looking beyond the 2006 Pension Protection Act and are eager to extend the autopilot approach to other areas of plan management. Half, for example, said go for it or give it a shot when asked about automatic asset allocation. Perhaps most surprisingly, 65 percent of young workers would welcome a feature that would automatically convert their plan assets into a guaranteed monthly income at retirement. Some 53 percent of young workers would feel grateful or optimistic about a defined contribution plan that employed an entire package of autopilot features. 14

17 2. Speaking from personal experience from the perspective of managing their own retirement plans the vast majority of older workers believe they d be better prepared for retirement today if they d had autopilot programs 30 years ago. A stunning 75 percent would have been grateful or optimistic for automatic enrollment. The same percentage would have been grateful or optimistic for automatic minimum contribution defaults, and 68 percent would have welcomed an automatic contribution escalation feature. Some 60 percent would have welcomed an automatic asset allocation feature that periodically rebalanced their portfolios based on age, tolerance, and years to retirement. And 70 percent would have welcomed an automatic retirement income default that converted their plan assets into a guaranteed monthly retirement paycheck. Approximately 70 percent wish they d had a complete program of automatic plan features. 3. Believing they can deliver better, more secure retirement outcomes, older workers overwhelmingly recommend automatic plan features for today s younger workers. Approximately 80 percent strongly or somewhat strongly recommend automatic enrollment, and the same percentage recommend mandated minimum contribution levels. Some 75 percent recommend automatic contribution escalation; 70 percent recommend an automatic asset allocation feature, and 72 percent recommend automatic default into a retirement-income vehicle. More than three out of four older workers recommend a total autopilot package. 4. The majority of plan sponsors are advocates of automatic defined contribution plans and are eager to embrace the autopilot approach for their participants. Some 65 percent of the plan sponsors surveyed either strongly or somewhat strongly prefer an autopilot approach for their participants. Of that clear majority, 87 percent are either very likely or somewhat likely to consider integrating automatic plan features including automatic enrollment, automatic minimum contributions, automatic contribution escalation, and automatic asset allocation into their defined contribution programs. Prudential Financial s Fifth Annual Workplace Report on Retirement Planning 15

18 Other retirement research studies from Prudential Financial Workplace Study Series 1. Workplace Report on Retirement Planning (2005) Workers closest to retirement haven t focused on how to translate their savings into a stream of regular retirement income for their post-employment years. Most workers over 55 simply don t understand the critical tradeoff between a retiree s need for regular, guaranteed income and the pre-retiree s natural inclination to hang on to their nest egg as long as possible. 2. Workplace Report on Retirement Planning (2004) The millennial generation has fundamentally different characteristics and attitudes from the Boomer generation. 401(k) plans have failed to engage the millennial generation. 3. Workplace Report on Retirement Planning (2003) Confusion, apathy and futility are leaving many employees perplexed and struggling to achieve financial follow-through. Employers are a trusted source for retirement information, yet most fall short in their efforts to provide help and guidance. 4. Workplace Report on Retirement Planning (2002) Employees are upbeat about market trends despite volatility, plan to play a more active role in managing their retirement investments, and want their employers to provide better tools to manage workplace investments. Additional Reports White Paper: Reinventing the Defined Contribution Plan Despite 20 years of DC plan growth, participants have typically not generated sufficient balances to assure a secure retirement and, absent change, risk falling further and further behind. Plan sponsors can help by focusing on some simple innovations including: Adopt positive features of DB plans such as auto enrollment, offer appropriate investments such as target maturity funds and incorporate lifetime income options to help participants focus on outcomes White Paper: The Four Pillars of U.S. Retirement Prudential has developed the Four Pillars as a framework to discuss how Americans will prepare for and live in retirement. It is based on the three traditional pillars of retirement financial security Social Security, Employment-Based Plans and Personal Savings plus a fourth pillar, Retirement Choices. Retirement Choices capture lifestyle and financial considerations that are taking on greater significance given the changing nature of retirement in America Roadblocks to Retirement Savings for retirement has taken a back seat for many Americans as they continue to focus on shorter-term financial goals. Planning for a successful retirement remains a mystery to most. This is especially concerning as roughly four in 10 Americans retire unexpectedly due to factors such as health, downsizing, or family emergencies Retirement Perceptions Study DC plans are expected to be the most important source of future retirement income; few expect to rely on Social Security. DC plan participants are not actively managing their plan assets; their behaviors could be influenced by personalized advice and communication Survey of Recent Retirees Retirees are hoarding retirement savings in their bid to maintain financial independence and avoid being a burden, rather than using advice and products to optimize the use of their retirement savings. Retirees will try to make do with Social Security and pension. For copies of any of the above studies, please contact Darrell Oliver, Prudential Global Communications, at (973)

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20 2007. Prudential Financial, Inc., Newark, NJ, USA. ALL RIGHTS RESERVED. Prudential Financial, Prudential, and the Rock logo are registered service marks of The Prudential Insurance Company of America and its affiliates. Prudential Retirement is a Prudential Financial, Inc. business. Securities products and services are offered by Prudential Investment Management Services LLC (PIMS), a Prudential Financial company. INST A Ed. 10/2006 PSPD-D2592