Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting

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Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
i ssu e 2 6 , S PRi n g 20 19

Confero    Magazine

        R e t i r e ment Savings Trend s
A quarterly publication of Westminster Consulting, LLC
Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
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                                                                                                  Welcom e to th e Sprin g 2019 Issue of Con fero

                                                                                              Spring is here, and that is a time for new beginnings.
                                                                                              The weather is changing, and so is the world of
                                                                                              retirement. In fact, the retirement world is always
                                                                                              in flux, and that is why our goal with this issue is to
                                                                                              update you the plan sponsor, on retirement savings
                                                                                              trends and what is impacting those trends.

                                                                                              In this issue, we address some of the most important
                                                                                              and current topics — everything from health care costs
                                                                                              in retirement to how young adults are attempting to
                                                                                              save for retirement. We know that through this issue
                                                                                              of the magazine you will pick up on trends that you
                                                                                              can bring back to your own companies and improve
                                                                                              the current plan.

                                                                                                                Ma x Ke s s e l ri n g
visit westminster-consulting.com/publications/confero to view the online version.
                 Subscribe to Confero by sending your email address to info@conferomag.com.

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Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
conten t
                                                                                                                             10
                                                                                                                             01   Editor’s Letter
                                                                                                                                  By Max Kesselring

                                                                                                                             04   Contributors

                                                                                                                             08   The Roland Roundup
                                                                                                                                  By Roland Salmi

                                                                                                                             10   The Growing Dilemma of Debt
                                                                                                                                  and Financial (In)Security in
                                                                                                                                  the United States
                                                                                                                                  By Michael DiCenso

 14       Retirement Market Update
          By Prudential Retirement   24   A New Way to Plan for health care
                                          costs in retirement
                                                                              28   Do young adults with student
                                                                                   debt save less for Retirement?
                                                                                                                             34   Diversity and Inclusion
                                                                                                                                  in Retirement
                                          By Jean Young                                                                           By Charles Privitera
                                                                                   By Matthew S. Rutledge, Geoffrey T.
                                                                                   Sanzenbacher, and Francis M. Vitagliano
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Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
o u r c o n tri b u t o rs
                                                                                                                                                                                              P u bl isher
                                                                                                                                                                                              Westminster Consulting, LLC

                           Charles Privitera Jr.                                                                                                    Michael DiCenso
                                                                                       Geoffrey T. Sanzenbacher                                     Newport Group                             E d itor -iN-C hief
                           SHRM-SCP, AIF®                                              Center for Retirement
                                                                                                                                                                                              Max Kesselring
                           Westminster Consulting, LLC                                 Research at Boston College
                                                                                                                                                    Michael DiCenso leads Newport
                                                                                                                                                    Group’s combined sales organization
                           Charles is a                                                  Geoffrey T. Sanzenbacher
                           senior consultant                                             is the associate director
                                                                                                                                                    in the further development of business
                                                                                                                                                    strategies and goals.                     E d itor ial Staf f
                           at Westminster                                                of research at the Center
                           Consulting. He                                                                                                                                                     Sheila Livadas
                                                                                         for Retirement Research                                    A nationally recognized speaker and
                           will have client                                              at Boston College. He                                      knowledge expert, Michael has nearly      Roland Salmi
                           relationship                                                  conducts research                                          30 years of experience in the industry
                           responsibilities                                              on health insurance                                        with a proven history of success in
                           primarily in the Metro                                        coverage, job mobility,
New York and Mid-Atlantic regions. He assists            the shift from defined benefit to defined contribution      sales, marketing and product development. Most recently, he provided     S taf f C ontr ibutor s
                                                         pensions, and the pension participation decision and        vision, strategy, practice management, product development, sales
his clients with the design, implementation, and                                                                                                                                              Charles Privitera Jr.
                                                         has an interest in how these issues relate to low-          and distribution strategy, and merger and acquisition consulting to
investment monitoring of their retirement plans.
                                                         income workers. Before joining the Center, he earned        recordkeepers, TPAs, advisors, RIA’s and private equity firms.
                                                                                                                                                                                              Roland Salmi
Prior to joining Westminster, Charles was a part         a doctorate in economics from Boston College in the
                                                         fields of labor economics, applied econometrics, and        Prior to that, Michael was president of Gallagher Fiduciary Advisors
of the Gallagher retirement plan consulting team.
                                                         applied microeconomics. He worked for several years         and a national practice leader for the company’s retirement
He has over 20 years of financial experience
that has encompassed all areas of the employee           after finishing his Ph.D. as an economic consultant at      service division. He also served as executive vice president of sales,
                                                                                                                     marketing, relationship management and product development for
                                                                                                                                                                                              F eatur ed
benefits industry. The last 10 years have been           Analysis Group in Boston. He also currently teaches
specifically focused on investment consulting,           intermediate microeconomics and the economics of            RSM McGladrey.                                                           Contr ibutor s
fiduciary liability consulting, and plan design          inequality at Boston College.
consulting for midmarket defined contribution                                                                                                                                                 Geoffrey T. Sanzenbacher
plans.
                                                                                                                                                                                              Matthew S. Rutledge
Charles earned his bachelor’s degree in
                                                                                       Matthew S. Rutledge
management science/economics from the                                                  Center for Retirement                                                                                  Michael DiCenso
State University of New York at Cortland and                                           Research at Boston College                                   Jean Young                                Jean Young
the London Metropolitan University. He has also
received the industry designation of Senior                                            Matthew S. Rutledge is                                       Vanguard Retirement Group                 Prudential Retirement
Certified Professional from the Society for Human                                      an associate professor
Resource Management (SHRM-SCP).                                                        of the practice of                                         Jean Young is a senior
                                                                                       economics at Boston                                        research analyst with the
Charles resides in New Jersey with his wife,                                           College. He is also a                                      Vanguard Center for Investor
                                                                                                                                                                                               For a copy of the magazine, please email
Kathy, and their son. In his free time Charles                                         research fellow at the
                                                                                                                                                                                               info@westminster-consulting.com or call
enjoys spending time with his family, training,                                                                                                   Research. Her research                                     800-237-0076.
                                                                                       Center for Retirement                                      topics include the design
hiking and volunteering. He spends much of                                             Research at Boston
his time at the Boys and Girls club of Harlem,                                         College. He conducts                                       of employer-sponsored                       The information contained in this magazine
and is a board member of the National Future             research on labor market outcomes for older workers,                                     retirement programs and the                 is for general information purposes only.
Insurance Leaders Program, which is dedicated            Social Security claiming behavior, disability insurance                                  psychological and behavioral
                                                                                                                                                                                              The information is provided by Westminster
                                                                                                                                                                                              Consulting, LLC (WC) and, while every
to promoting diversity and inclusion in the              application, pension coverage, retirement saving,                                                                                    effort is made to provide information
insurance industry.                                      retirement expectations, employer demand for                aspects of participant decision-making. She is also the                  that is both current and correct, WC
                                                                                                                                                                                              makes no representations or warranties
                                                         older workers, unemployment insurance, and health           lead author for Vanguard’s annual publication “How                       of any kind, express or implied, about
                                                         insurance coverage. He has also worked for the              America Saves.” Before her current position, Ms. Young                   the completeness, accuracy, reliability,
                                                                                                                                                                                              suitability, or availability with respect to
                                                         Economic Research Initiative on the Uninsured and           was a client relationship manager in Vanguard’s defined                  the magazine or the information, products,
                                                         the Federal Reserve Bank of Boston. Before joining          contribution recordkeeping business. Ms. Young earned a
                                                                                                                                                                                              services, or related graphics contained
                                                                                                                                                                                              within the magazine for any purpose. Any
                                                         Boston College, he earned a doctorate in economics
                                                         from the University of Michigan in the fields of health     B.A. in business administration from Franklin & Marshall                 reliance you place on such information is
                                                                                                                                                                                              therefore strictly at your own risk.
                                                         economics, labor economics, and public finance.             College and an M.S. in taxation from Widener University.
                                                                                                                                                                                              In no event will WC be liable for any loss
                                                                                                                     She is a certified public accountant.                                    or damage, including, without limitation,
                                                                                                                                                                                              indirect or consequential loss or damage,
                                                                                                                                                                                              or any loss or damage whatsoever arising
                                                                                                                                                                                              from loss of data or profits arising out of, or
                                                                                                                                                                                              in connection with, the use of this magazine.

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Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
Note: The articles included in this publication are general information and are not intended as legal advice, nor
should6 you
          SPring 2019them as such. You should not act upon this information without seeking professional consent.
            consider                                                                                                Confero 7
Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
The
Roland
                                           The Roland Roundup is a compilation of
                                           court cases that have recentl y been in
                                           the news. Each case focuses on a violation
                                           of ERISA guidelines. The outcomes of
                                           these cases may have a lasting impact
                                                                                                                             the Georgetown plan’s substantial bargaining power
                                                                                                                             to benefit participants and beneficiaries, defendants
                                                                                                                             failed to adequately evaluate and monitor the plans’
                                                                                                                             expenses and caused the plans to pay unreasonable
                                                                                                                             and excessive fees. Among other lines of argument,
                                                                                                                                                                                              Anthem continued offer the 4 bps version. The parties
                                                                                                                                                                                              in the lawsuit have reached a settlement agreement,
                                                                                                                                                                                              the resolution details will be revealed when it receives
                                                                                                                                                                                              class approval. (Settled.)

                                                                                                                             the plaintiffs claimed defendants failed to negotiate a          Moore, Rebecca. “Parties in Anthem ERISA Fee Litigation

Roundup.                                   on the fiduciary environment.                                                     “separate, reasonable and fixed fee for recordkeeping
                                                                                                                             with a single administrative provider to the plans.”
                                                                                                                             Instead, the Georgetown defendants “continuously
                                                                                                                             retained three different service providers – TIAA,
                                                                                                                                                                                              Propose Settlement.” PLANADVISER, Strategic Insight, 22
                                                                                                                                                                                              Feb. 2019, www.planadviser.com/parties-anthem-erisa-fee-
                                                                                                                                                                                              litigation-propose-settlement/.

                                                                                                                             Vanguard and Fidelity.” Ruling in favor of the university’s
                                        December 12, 2018                         complaint goes on to state, “Year          motion to dismiss these claims, District Court Judge
                                                                                  after year, Transamerica selected          Rosemary Collyer published a colorfully worded opinion           February 22, 2019
                                        Schultz et al. v. Edward Jones            and     retained     poor-performing       that chides the plaintiffs for failing to acknowledge
                                                                                                                                                                                              Wong v. Fidelity
                                        et al.                                    proprietary investment portfolios for      basic facts about the way annuities work and their
                                                                                                                                                                                              A participant in the T-Mobile USA, Inc. 401(k) Retirement
                                        The parties in an ERISA lawsuit           the plan when superior investment          well-established role in 403(b) plans. According to the
                                                                                                                                                                                              Savings Plan and Trust has sued FMR (Fidelity) and
                                        alleging self-dealing by Edward           options were readily available.”           judge, no party disputes that annuities constitute long-
                                                                                                                                                                                              several of its affiliates claiming the firm engaged in
                                        Jones in its own 401(k) plan have         Specifically, Transamerica is accused      term investments for anticipated long-term benefits.
                                                                                                                                                                                              prohibited transactions by charging a “secret” fee for
                                        reached a proposed settlement.            of “imprudently retaining” the             Judge Collyer added, that for a plaintiff to have
                                                                                                                                                                                              mutual funds and engaging is self-dealing. According to
                                        Beyond self-dealing, the defendants       following portfolios: Transamerica         standing to sue about their defined contribution plan,
                                                                                                                                                                                              the complaint, Fidelity began requiring asset managers
                                        are also accused of causing the plan      International     Equity     Portfolio,    he or she must show fiduciary breaches that impair
                                                                                                                                                                                              and investment instruments that are offered to the
                                        to pay excessive recordkeeping            Transamerica Small Core Portfolio,         his or her individual account’s value. Judge Collyer’s
                                                                                                                                                                                              plans through the “Fidelity Funds Network” to make
                                        and plan administration fees to the       Transamerica Large Value Portfolio,        last closing point that it is “notable” that plaintiffs
                                                                                                                                                                                              “secret” payments or “kickbacks” in return for providing
                                        recordkeeper, Mercer HR Services,         Transamerica        Large      Growth      do not allege that the currently available investment
                                                                                                                                                                                              the mutual funds with access to its retirement plan
                                        which is not a defendant in the case.     Portfolio, Transamerica High Yield         resources would remain available at their preferred
                                                                                                                                                                                              customers. The lawsuit alleges that these payments
                                        Edward Jones had originally moved         Bond Portfolio, and Transamerica Mid       price of $35/year. (Dismissed.)
Rolan d Sa l mi                         to dismiss all claims. The court          Value Portfolio. The complaint goes
                                                                                                                                                                                              clearly constitute indirect compensation that Fidelity
                                                                                                                                                                                              is required to disclose to retirement plans under ERISA
Westminster Consulting, LLC             has twice denied the brokerage            on to say, “The underperformance of        Manganaro, John. “Judge Rules to Dismiss Georgetown              Section 408(b)(2), but Fidelity does not disclose them.
                                        company’s motions to dismiss. After       these portfolios, relative to several      University 403(b) ERISA Lawsuit.” PLANSPONSOR, Strategic
                                                                                                                                                                                              The kickbacks are internally described by Fidelity
Roland is an Associate Analyst at                                                                                            Insight, 9 Jan. 2019, www.plansponsor.com/judge-rules-dismiss-
                                        a set of complex motions and rulings,     meaningful benchmarks, was neither                                                                          as ‘infrastructure payments’ and reimbursement
Westminster Consulting, where he                                                  modest nor temporary.” The plaintiffs      georgetown-university-403b-erisa-lawsuit/.
                                        the parties have now opted to settle                                                                                                                  for expenses incurred in providing services for, to,
executes performance analysis, client                                             put emphasis on the long period
                                        the matter rather than proceed to the                                                                                                                 or on behalf of the mutual funds, and deceptively
projects and investment support         full trial. Edward Jones has agreed       of underperformance of several of
for senior consultants. He brings
                                                                                                                             February 22, 2019                                                characterized as such to retirement plans and their
                                        to pay $3,175,000 into an account         these funds in the one-, five-, and                                                                         participants. The plaintiff argues that the services
research knowledge, industry trends     that will subsequently be wired into      10-year periods. plaintiffs say that       Bell v. Anthem                                                   provided by Fidelity that may incidentally benefit
and a commitment to client success      class members’ retirement accounts.       Transamerica therefore neglected           The complaint alleges that plan fiduciaries allowed
                                                                                                                                                                                              mutual funds are actually services that Fidelity has
to the Westminster team.                (Resolved.)                               its duty to monitor the plan’s             unreasonable expenses to be charged to participants
                                                                                                                                                                                              historically provided to its retirement plan customers
                                                                                  investments and remove imprudent           for administration of the plan, and that they selected
                                                                                                                                                                                              as a necessary part of its business in return for fees
                                                                                  ones. (Pending resolution.)                and retained high-cost and poor performing
Prior   to   joining   Westminster      Manganaro, John. “$3M Settlement                                                                                                                      directly collected by it from such customers, and these
                                        Reached in Edward Jones Self-Dealing                                                 investments compared to available alternatives. The
Consulting, Roland worked as a                                                                                                                                                                fees generally do not change as a result of Fidelity’s
                                        Lawsuit.”    PLANSPONSOR,     Strategic   Manganaro, John. “Transamerica Faces       complaint suggests the Anthem plan, “as one of the
financial advisor at Morgan Stanley                                                                                                                                                           receipt of the kickbacks from the mutual funds and
                                        Insight, 12 Dec. 2018, www.plansponsor.   Familiar Allegations in Self-Dealing       country’s largest 401(k) plans … with over $5.1 billion in
Wealth Management and as a staff                                                                                                                                                              are not reduced in a manner that corresponds with the
                                        com/3m-settlement-reached-edward-         ERISA     Complaint.”     PLANADVISER,     total assets and over 59,000 participants with account
                                        jones-self-dealing-lawsuit/.
                                                                                                                                                                                              amount of the kickback payments received. “Fidelity’s
accountant at St. Bonaventure                                                     Strategic Insight, 15 Jan. 2019, www.      balances,” should have gotten as good or better a deal
                                                                                  pl anadviser.com/trans am erica-faces-
                                                                                                                                                                                              receipt of the kickback payments at issue violate
University. He received an Associate                                                                                         than anyone in the institutional investing markets, but
                                                                                  familiar-allegations-self-dealing-erisa-                                                                    ERISA’s prohibited transaction and fiduciary duty rules
of Science degree in business                                                                                                it failed to do so in a variety of ways, leading to about
                                        January 2, 2019                           complaint/.
                                                                                                                             $18 million in unnecessary fees/losses for participants.
                                                                                                                                                                                              and should not be countenanced since the receipt of
administration and a Bachelor of                                                                                                                                                              such payments places Fidelity in a conflicted position in
Science degree in psychology from       Rhodes et al. v. Transamerica                                                        Surprisingly, most of the “imprudent” funds cited by
                                                                                                                                                                                              which the interests of its retirement plan customers can
                                                                                January 9, 2019                              name are provided by Vanguard, widely known for
Elmira College. He then received        corporation et al.                                                                   transparency and affordability, and are actually quite
                                                                                                                                                                                              be and are sacrificed in the interest of Fidelity earning
his MBA from St. Bonaventure            Similar to a lawsuit the firm settled a Wilcox et al. v. Georgetown                  cheap from an industry-wide perspective – below 25
                                                                                                                                                                                              greater profits through the receipt of such payments,”
University. Roland has earned his       few years ago, a newly filed district                                                                                                                 the lawsuit contends. (Pending Resolution.)
                                        court complaint says Transamerica University et al..
                                                                                                                             bps in annual fees. One fund cited has just a 4 bps
Series 7 and 66 licenses.                                                                                                    annual fee but according to the complaint an otherwise
                                        “saddled its defined contribution         The judge in the case has ruled to                                                                          Moore, Rebecca. “Fidelity Charged With ‘Secret’ Payment
                                                                                  dismiss the Georgetown University          identical 2 bps version could have been obtained by an
                                        plan participants with substandard                                                   investor with the size and sophistication of the Anthem          Scheme in Violation of ERISA.” PLANSPONSOR, Strategic
                                        investment portfolios that were           403(b) ERISA lawsuit. Plaintiffs                                                                            Insight, 22 Feb. 2019, www.plansponsor.com/fidelity-charged-
                                                                                  suggested that instead of leveraging       plan. Therefore, an alleged breach occurred when
                                        managed by an affiliate.” The new                                                                                                                     secret-payment-scheme-violation-erisa/.

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          2019                                                                                                                                                                                                                                Confero 9
Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
The Growing Dilemma of
                  Debt and Financial
           (in)Security in the United States
                                        By Michael DiCenso

      Personal financial stress in the United States
      continues to create concern and awareness of
      economic instability.

      •   Household debt-to-income ratios and financial
          statistics show 40% of Americans’ net worth at
          only $10,000 (GOBankingRates; March 12, 2018)
      •   Retirement plans are not offered to more than
          55 million employees, according to a 2014 study
          from Employee Benefits Research Institute
      •   Bankrate found that in 2018 a whopping 65% of
          Americans are not prepared for retirement, with
          no savings or arrangement with a plan
      •   A 2017 report on automation by the McKinsey
          Institute estimated that 25% of potential jobs
          today will be outsourced to technology and/or
          robotics over the next few years
      •   Individuals budgeting paycheck to paycheck
          in the US reached 78% in 2017 according to
          CareerBuilder.

      The growing concerns in economic stress trends may
      not have yet been fully recognized. This issue of the
      escalating household debt in the United States is
      detrimental. As of December 31, 2018, U.S. Household
      debt climbed to a staggering and record setting $13.1
      trillion dollars according to the Federal Reserve. This
      is almost $1 trillion more than the total US household
      debt in 2007, prior to the financial crisis, according to
      the Federal Reserve Bank of New York.

      Gross domestic product (GDP) is the monetary value
      of all the finished goods and services produced within
      a country’s borders in a specific time period. The
      average American household carries $137,063 in debt,
      according to the Federal Reserve’s 2017 numbers.

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Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
What makes up the debt and how does it differ            As of February 2019 the unemployment rate sits at         The average college debt among student loan
  from the past? According to the Federal Reserve:         3.7% according to the Bureau of Labor Statistics -        borrowers in America was $32,731 in a 2016/2017

  •   Student loans: $1.56 trillion
                                                           its lowest mark in nearly half a century, economic
                                                           growth, and relatively low interest rates along
                                                                                                                     report by the Federal Reserve:
                                                                                                                                                                         “ Financial security and
  •   Auto notes: $1.65 trillion                           with low oil cost typically impact financial stability.   •   This is an increase of approximately 20% over
  •   Mortgages $9.14 trillion                             What will happen when we see a rise in interest               four years                                         freedom of debt can help
  •   Revolving accounts or credit cards: $1 trillion      rates and oil prices?                                     •   44.7 million Americans hold student loan debt

      •   Revolving debt default, account application      Student Loans: $1.56 Trillion
                                                                                                                     •   Most borrowers have between $25,000 and
                                                                                                                         $50,000 outstanding student loan debt
                                                                                                                                                                            provide reduced stress and a
          rejections, and involuntary account closures                                                               •   More than 600,000 borrowers in the country
          have inclined creating negative financial        Student loan debt continues to rise. It’s costing             are over $200,000 in student debt                  better quality of life.”
          credibility and overall unaffordability.         more to attend college, and taking longer for             •   100 borrowers in the country have more than
      •   The government states these developments
          are “potentially concerning,” given the
                                                           students to earn their degrees. In addition, the
                                                           cost of living goes up each year.                         •
                                                                                                                         $1 million in student loan debt
                                                                                                                         5.1 million borrowers’ student loans are in
                                                                                                                                                                                                - Michael DiCenso
          strength of the economy and comparatively                                                                      default equating to $101.4 billion
          low interest rates. Americans receive            And that plays a role, too. Student loans are             •   11.5% of student loans are 90 days or more
          margin in excess of income, creating             not just for college anymore. These funds are                 delinquent or are in default
          overwhelming debt liabilities. What              sometimes used towards lifestyle expenses,                •   Average monthly student loan payment
          created these issues of concern with             allowing job freedom, intended to provide for                 (among those not in deferment): $393
          revolving debt accounts? The Federal             educational time and focus, and more. Priority                                                                Where Advisors Can Help
          government concluded alarming trends per         and choices for these students can mean                   Student loan issues create questions around
          results in “Credit Access Survey,” possibly      that welfare funds are often abused, creating             educational worth and affordability. Many           Financial advising could lead employees to a future
          creating credit lenders’ caution with risk       overwhelming student debt and damaged                     employers are assisting repayment by offering       of financial security and freedom of debt. Developing
          management. Credit rejection rates for           financial creditability. Damaged financial                plans that provide up to half payment matching.     and executing financial plans and budget, credit
          revolving credit-card applicants came in at      creditability affects personal interest rates,            In fact, one company has received a private         counseling, wealth management, investments and
          20.8% in the October 2018 survey, up from        therefore costing more to finance and limiting            letter ruling from the IRS allowing a matching      retirement strategy are areas where advising and
          14.4% a year ago, while the rejection rate       opportunity for asset and financial growth.               program like a 401(k) to help individuals pay       assistance can help financial organizations. Financial
          for credit-limit increases ticked up to 31.7%,                                                             their student loans.                                security and freedom of debt can help provide
          compared with 24.9% a year ago.                                                                                                                                reduced stress and better quality of life. Employers
                                                                                                                     Auto Loans: $1.65 Trillion                          will experience greater work productivity and job
                                                                                                                                                                         appreciation with an overall positive environment.
                                                                                                                     Personal vehicles are depreciating luxuries.
                                                                                                                     Owning a personal vehicle is a privilege yet        Michael DiCenso is an Executive Vice President of
                                                                                                                     considered a necessity due to life obligations      Newport Group, Inc. responsible for leading the sales
                                                                                                                     and entertainment. Americans tend to exceed         organization in the further development of business
                                                                                                                     their vehicle budget with unpractical purposes.     strategies and goals.
                                                                                                                     Defaulted auto loans often cannot be recovered
                                                                                                                     by the vehicles market value. As reported by the    The views expressed herein are those of the author
                                                                                                                     Federal Reserve Bank of New York in February        and may not necessarily reflect the views of Newport
                                                                                                                     2019, delinquent auto loans hit an all-time high    Group, Inc. or its affiliates.
                                                                                                                     where 7 million Americans are at least 90 days
                                                                                                                     past due. This supersedes default statistics over   This material is for informational purposes only and
                                                                                                                     any historical economic crisis.                     all opinions are subject to change without notice. The
                                                                                                                                                                         comments and opinions contained herein are based
                                                                                                                     Mortgages: $9.14 Trillion                           on or derived from publicly available information
                                                                                                                                                                         from sources that we believe to be reliable. We do
                                                                                                                     According to CoreLogic in its 2018 Loan             not guarantee their accuracy.
                                                                                                                     Performance Insights report, mortgage
                                                                                                                     delinquencies stand at 4.4% which is the lowest     Neither the information provided nor any opinion
                                                                                                                     rate in 10 years. September 2018 saw a rise in      expressed constitutes a solicitation for the purchase
                                                                                                                     delinquencies bringing awareness to the possible    or sale of any security. Newport Group does not
                                                                                                                     trend. Market developments and patterns will be     guarantee favorable outcomes.
                                                                                                                     evident in future statistics.

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Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
Retirement Market Update
          By Prudential Retirement
          Research Briefing by Analytics & Research, Global Communications

          STUDIES/SURVEYS
          Single Women Face Biggest          Research    Briefing
                                                Retirement         by Analytics
                                                               Shortfall:    EBRI& Research,
                                                                      Global Communications
          Widows and single women are more likely to face income
          shortfalls in retirement, according to a new study by the
           STUDIES/SBenefit
          Employee        URVEYS Research Institute (EBRI). The study
           Single Women
          concluded        Face
                         that    Biggestare
                               women      Retirement
                                              likelier Shortfall: EBRI than men,
                                                        to live longer
 e        develop
           Widows and costly  chronic
                         single         medical
                                women are           conditions
                                             more likely           and spend
                                                          to face income          time
                                                                           shortfalls   in
 at       outside    theaccording
           retirement,    workplaceto a caring
                                        new studyforbychildren   and other
                                                       the Employee     Benefitfamily
                                                                                 Research
3% of     members,      ThinkThe
           Institute (EBRI).    Advisor   reported.that
                                  study concluded      Forwomen
                                                             married     households
                                                                    are likelier to live longer
          where    thedevelop
           than men,    woman     dieschronic
                                costly  first, the  retirement
                                                medical   conditionssaving    shortfall
                                                                       and spend   time
ows        outside  the workplace
          for  the widower      wascaring  for children
                                     $18,476,    comparedand other
                                                               withfamily   members, Think
                                                                      $22,783
BRI)       Advisor
          for       reported. where
               households     For married
                                       the households
                                            man dies where      the woman
                                                         first, EBRI   found.diesThefirst, the
           retirement
          gender       saving shortfall
                     disparity          for the widower
                                 was starker     for singlewasmen
                                                               $18,476,    compared with
                                                                     and women:
           $22,783 vs.
          $72,883     for $37,690.
                          households where the man dies first, EBRI found. The gender
           disparity was starker for single men and women: $72,883 vs. $37,690.

ngs                      Retirement Deficits By (Pre-Retirement) Wage Quartiles
n with     Means of Retirement Savings Shortfalls for Gen Xers by age-specific pre-retirement
 plan,     income quartile, marital status and gender (includes bifurcation for sequence of death
           for married)

with

t
 was
465
rtile.
               Married, female dies first   $67,829          $48,105           $27,868   $8,522
               Married, male dies first     $86,479          $55,887           $30,109   $11,354
               Single female                $110,412         $72,673           $46,208   $28,951
               Single male                  $80,676          $46,615           $31,027   $16,487

            Source: EBRI Retirement Security Projection Model, Version 3449.

           Other Survey Findings:
              Among households with a projected retirement-income shortfall, the
         14 SPring 2019shortfall was $76,896 for widows and $82,937 for widowers.
              average                                                                               Confero 15
Issue 26, SPRing 2019 - Retirement Savings Trends - Westminster Consulting
“48% of single women at the lowest income quartile had at least a $100,000 deficit;           Other Survey Findings:
                                                                                                 • Among households with a projected retirement-         “63% of Millennial respondents
   33% of single men and 42% of widows faced a similar situation.” (EBRI)
                                                                                                    income shortfall, the average shortfall was          found the term “plan participant”
                                                                                                    $76,896 for widows and $82,937 for widowers.         to be unclear, compared with 44%
   “Lack of eligibility for participation in a DC plans significantly increased savings          • Single women in the lowest pre-retirement             of total respondents.” (Empower
   shortfalls. For single women with no future eligibility in a DC plan, the average shortfall      wage quartile had an average savings deficit
                                                                                                                                                         Institute Survey)
   was $97,325, compared with an average $24,486 for those with 21 to 30 years of                   of $110,412, compared to women in the highest
   future eligibility.” (EBRI)                                                                      quartile of $28,951.
                                                                                                 • The median retirement savings deficit for single
                                                                                                    women was $19,900 and 10% face a deficit of
   For single men in the lowest wage quartile, the shortfall was $29,736, compared to               atleast $222,592.                                    “Nearly three in five plan sponsors
   $12,465 for those in the highest quartile. (EBRI)                                             • 48% of single women at the lowest income              (57%) offer employees the
                                                                                                    quartile had atleast a $100,000 deficit, 33%         opportunity to draw down their
                                                                                                    of single men and 42% of widows faced a
                                                                                                    similar situation.
                                                                                                                                                         funds in installments, up from 37% in
                                                                                                                                                         2013, according to a report by Alight
                                                                                                                                                         Solutions.” (Alight Solutions Report)
                                                                                                 Participants Often Confused About Financial
                                                                                                 Terms: Survey

                                                                                                 Many employees misunderstand terms commonly
                                                                                                 used by the financial planning industry, a study by
                                                                                                 the Empower Institute concluded. For example, 66%       “Workers deferred an average of
                                                                                                 of respondents don’t understand what “rebalancing       7.1% of their pay to their 401(k)
                                                                                                 investments” means and the meaning of “asset            plans in 2017, up from 6.2% in 2010.”
                                                                                                 allocation” eluded 69% of respondents, PlanSponsor
                                                                                                 reported. “Such multiple meanings can cause             (PSCA Survey)
                                                                                                 confusion and create barriers to confident decision-
                                                                                                 making,” the report said. Millennials in particular
                                                                                                 found financial terms difficult to understand. Even
                                                                                                 the term “defined contribution retirement plan”
                                                                                                 was unclear to 76% of respondents overall and 88%
                                                                                                 of Millennials. The survey also found participants
                                                                                                 perceive retirement plan communications as
                                                                                                 wordy and long, complex and confusing, generic,
                                                                                                 overwhelming and wasteful. They expressed a
                                                                                                 desire for communications that were concise,
                                                                                                 efficient, simple and easy to understand, relatable,
                                                                                                 personalized and engaging or attention-grabbing.
                                                                                                 When asked how they prefer to receive messages
                                                                                                 about their retirement plan, 51% favored personal
                                                                                                 email, followed by a website visit (44%). Least-
                                                                                                 preferred communication methods included post
                                                                                                 cards, social media-page visits, text messages – each
                                                                                                 of which were preferred by about 2% of respondents.

                                                                                                 Defined Contribution Plans

                                                                                                 Auto Drawdown Increasingly Popular 401(k) Option

                                                                                                 Auto drawdown may soon become as popular a
                                                                                                 feature of many 401(k) plans as auto enrollment
                                                                                                 and auto escalation are today, Pensions &
                                                                                                 Investments recently reported. Of the 43% not
                                                                                                 offering automatic payments, 32% said they may
                                                                                                 offer the capability in 2019. Participants who do not
                                                                                                 need or want annuities still need mechanisms to

16 SPring 2019                                                                                                                                                                     Confero 17
withdraw funds other than in a lump sum or                               profit-sharing plans and 253 employers that                                                    RETIREMENT MARKET                                                 “12.3% of DC plans indicated they
  rollover to an individual retirement account,                            sponsor both types of plans.
  plan sponsors say. Mortgage Guaranty                                                                                                                                                                                                      provide an annuity as a form of
                                                                                                                                                                          Largest Retirement Funds Top $11 Trillion: P&I                    distribution. 3.8% said they use an
  Insurance Corp. added installment payments                               Most DC Plan Sponsors Shunning Annuities
  as a distribution option to its $280 million                                                                                                                            Total assets of the 1,000 largest U.S. retirement plans           annuity placement service, and
  401(k) plan in 2015. Retirees can choose to                              Half of defined contribution (DC)                        FEBRUARYplans2019  offered– Page 3                                                                      3.8% offer an in-plan guaranteed
                                                                                                                                                                          reached $11 trillion as of Sept. 30, a 6.4% increase from
  receive payments either monthly or quarterly,                            some sort of retirement income solution to                                                     a year earlier, and a 31.8% increase from five years prior,       income for life product.” (Callan
  according to Brenda Grabowski, total                                     employees last year, according to Callan’s                                                     Pensions & Investments’ (P&I) annual survey found. Defined
  rewards manager in MGIC’s human resources the percentage                 2019ofDefined
                                                                                      workers with 401(k) accounts. “The increases in
                                                                                                    Contribution Trends Survey. The                                                                                                         Survey)
                                                           retirement contributions from both plan participants and plan sponsors                                         benefit (DB) plans within the P&I 1,000 universe represented
  department. In addition, in 2017 the company                             survey of 106 plan sponsors also found that                                                    $6.91 trillion in assets, while defined contribution (DC) plans
                                                           confirm the positive impact of company-sponsored retirement savings
  gave participants the ability to selectively                             the most common solutions were providing
                                                           plans,” PSCA executive director Jack Towarnicky said. Among plans that                                         accounted for nearly $4.1 trillion in assets as of Sept. 30.
  decide from which investment funds the                   automatically   access
                                                                                enroll to     a defined
                                                                                         employees               benefit
                                                                                                         in 401(k)s,       60%  (DB)had aplan      (27.4%)
                                                                                                                                             default    contribution      Among the 200 largest retirement systems, asset growth
  drawdowns should come and in which                                       or   offering        a   managed            account
                                                           rate that was higher than 3% in 2017. Only 30% had rates that high in         service                          among DC plans, which oversaw $2.47 trillion in assets,
                                                                                                                                                                                                                                            “Regular due diligence remained
  order, an arrangement that industry experts 2007, according              (14.2%),       PlanSponsor
                                                                                     to PSCA.                      reported.
                                                                                                  The survey includes                  Despite
                                                                                                                                 responses       froma345 2014 401(k)     once again outpaced that of DB plans, with $5.46 trillion         the most common reason for
  describe as cutting edge. Without drawdown plans, seven                  Treasury
                                                                              profit-sharingDepartment
                                                                                                   plans and 253     ruling
                                                                                                                         employersmaking         it easier
                                                                                                                                          that sponsor      both          in assets, the survey found. Of note, assets of DB plans in       conducting an investment
  options, participants are more likely to move types of plans.            to do so, only 1.9% of respondents reported
  their savings to an IRA, a choice that many                              offering qualified longevity annuity contracts
                                                                                                                                                                          the top 200 grew 4.4% compared to the previous year and           structure evaluation. The next
                                                                                                                                                                          22.4% compared to five years earlier. Assets in the top 200       two most common reasons were
  experts say isn’t always in the best interest ofMost DC Plan                  SponsorsorShunning
                                                                           (QLACs)               longevity  Annuities
                                                                                                                    insurance. Asked why                                  DC plans grew 10.7% from a year earlier and 53.5% from five
  participants. “12.3% of DC plans indicated               Half of defined theycontribution
                                                                                     do not offer    (DC) anplans annuity-type
                                                                                                                      offered some sort      product         in
                                                                                                                                                 of retirement            years earlier. The asset growth differences can be attributed
                                                                                                                                                                                                                                            to identify overlaps and gaps in
                  they provide an annuity as a             income          their
                                                                       solution      DC
                                                                                    to     plans,
                                                                                       employees        plan
                                                                                                        last     sponsors
                                                                                                              year,   according     reported
                                                                                                                                      to  Callan’s    being
                                                                                                                                                      2019
                                                                                                                                                                          to a number of factors, including DC plans “benefiting from       the fund lineup (44.2%) and to
  401(k) Average     Savings
                  form           Rate Hits
                        of distribution. 3.8%12.2%
                                               said In     Defined Contribution
                                                                           uncomfortable  Trends Survey.         The survey
                                                                                                        or unclear           about of 106     plan sponsors also
                                                                                                                                          fiduciary                       market gains and new contributions,” said Jay Love, an            add additional diversification
  2017: PSCA they use an annuity placement                 found that implications.
                                                                            the most common            solutions
                                                                                                    Plan     sponsorswere providing
                                                                                                                                also report access that
                                                                                                                                                      to a defined
                                                                                                                                                              an
                                                           benefit (DB)       plan (27.4%) orproduct
                                                                           annuity-type                offering a is  managed
                                                                                                                         unnecessary account service
                                                                                                                                                   or   not (14.2%),
                                                                                                                                                               a
                                                                                                                                                                          Atlanta-based partner and U.S. director of strategic research     opportunities (18.2%).” (Callan
                  service, and 3.8% offer an in-                                                                                                                          at investment consultant Mercer. “(Among) the top 1,000 DB
  The average 401(k)       savings   rate   was   12.2% in PlanSponsor         reported.and
                                                                           priority         Despite
                                                                                                  that   a 2014
                                                                                                           there     Treasury
                                                                                                                       is  a   lackDepartment
                                                                                                                                         of          ruling making
                                                                                                                                             participant                                                                                    Survey)
                  plan guaranteed income for life                                                                                                                         plans, I would imagine that half of them are probably frozen
  2017, an increase    from(Callan
                  product.”    the average
                                    Survey)
                                               of 9.7% in it easier toneed  do so, only 1.9% of respondents reported offering qualified
                                                                                      or demand – notwithstanding that                                                    and another 20% to 30% are closed,” he said.
                                                           longevity annuity contracts (QLACs) or longevity insurance. Asked why they
  2010, according to the Plan Sponsor Council                              studies show that participants would prefer
                                                           do not offer an annuity-type product in their DC plans, plan sponsors
  of America’s (PSCA) 61st Annual Survey of                                retirement-income certainty. Other reasons                                                                                                                       “DC plans among the 200 largest,
  Profit Sharing “Regular
                   and 401(k)     Plans.  Workers
                                                           reported being uncomfortable or unclear about fiduciary implications. Plan
                                                                           forreport
                                                                                 not offering            an annuity-type                  product or not a                RETIREMENT PLANNING
                            due diligence remained
  deferred an average of 7.1% of their pay to
                                                           sponsors also                 that an annuity-type           product is unnecessary                                                                                              passive indexed equity assets
                  the most common reason for               priority and that there is a lack of participant need or demand –in
                                                                           cited      by   respondents              include         difficulties
  their 401(k) plans in 2017, up from 6.2% in              notwithstanding communicating
                                                                                    that studies show     to that
                                                                                                               participants
                                                                                                                     participants and    wouldconcern
                                                                                                                                                  prefer retirement
                                                                                                                                                                          Gen Xers Less Confident About Retirement Than Boomers             increased by 14.5% in the 12 months
                  conducting an investment                                                                                                                                                                                                  ended Sept. 30, to $538.8B, while
  2010, Ignites.com reported. Meanwhile, the                               over insurer
                                                           -income certainty.                     risk. for not offering an annuity-type product
                                                                                       Other reasons
                  structure evaluation. The next                                                                                                                          Three-quarters of Baby Boomers think they will have enough
  average employer contribution grew from                  cited by respondents include difficulties in communicating to participants
                                                                                                                                                                          money to live comfortably during retirement, but only 35%
                                                                                                                                                                                                                                            passive indexed bond assets
                  two most
  3.5% to 5.1% during     thecommon
                                same reasons
                                       period.were         and concern over insurer risk.
                  to average
                     identify overlaps andrates
                                            gaps in                                                                                                                       of Gen Xers are equally optimistic, according to a new            remained unchanged over the
  The increase in                savings
                  the fundto
  is likely attributable    lineup (44.2%)
                               higher       and to
                                       default                      Does Your Plan Offer The Following Investment Types Within                                            survey from Retirement Living. The report, “Retirement            year, at $50.2B….DC plan clients
                  add additional
  contribution rates              diversification
                        set by employers        who                                                 The Fund Lineup?*                                                     Preparedness Study 2019: Baby Boomers vs. Generation X,”          in particular have recognized
  automatically opportunities
                   enroll their(18.2%).”
                                  employees,(Callan                                                                                                                       found that while Boomers rely primarily on pensions and           "that you don't want to be so
                                                                                                                               2017           2018                        401(k) plans, Gen Xers are more likely to rely on 401(k)s and
                  Survey)
  the report states.   Further, many plan                                                                                                                                                                                                   dogmatic (when considering)
  sponsors have reduced the eligibility                                                                                                                                   IRAs, Plan Advisor reported. Both generations rely or expect
                                                                                                                                                                          to rely on Social Security. Seventy-three percent of Boomers      active vs. passive" approaches in
  requirements for employee participation,
  helping to increase the percentage                                                                                                                                      rely on Social Security for 25% to 100% of their monthly          your portfolio, said Josh Cohen,
  of workers with 401(k) accounts. “The                                                                                                                                   income; 85% of Gen X’ers expect to do the same.                   Chicago-based head of institutional
  increases in retirement contributions                                                                                                                                   Other Survey Findings:                                            defined contribution at PGIM Inc.
                                                                                                                                                                          • 50% of Boomers and Gen Xers have saved or are on
  from both plan participants and plan
                                                                                                                                                                              track to save $700,000 or less. Boomers think that is
                                                                                                                                                                                                                                            ‘We think there is a case for active
  sponsors confirm the positive impact                                                                                                                                                                                                      and passive,’ depending on the
  of company-sponsored retirement                                                                                                                                             adequate, while Gen Xers do not.
  savings plans,” PSCA executive director                                                                                                                                 • Asked what they would have done differently with                asset class.” (P&I Survey).
  Jack Towarnicky said. Among plans                                                                                                                                           regards to savings, Boomers responded: Investing
  that automatically enroll employees in                                                                           8.5%
                                                                                                                                                                              differently or playing the stock market better, reducing
  401(k)s, 60% had a default contribution                                                                      3.1%                                                           spending and living on a budget, and investing more in a
  rate that was higher than 3% in 2017.                                                                                                                                       Roth IRA rather than a traditional IRA.                       “65% of Boomers saving for
                                                            Additional categories (2018 data); Pooled insurance accounts (3.1%); Standalone ETFs (1.6%); Other (1.6%)     • Of the 14% of pre-retirees not saving wfor retirement,
  Only 30% had rates that high in 2007,                                                                                                                                                                                                     retirement are male and 35% are
  according to PSCA. The survey includes
                                                            *Multiple responses were allowed. Some respondents offer multiple asset classes in each vehicle type; e.g.,       reasons cited for not saving included stagnant wages,
                                                            both stable value and another asset class are offered as a collective trust and/or separate account.
                                                                                                                                                                              student loan debt and the cost of living.                     female. Among Gen X, this is evenly
  responses from 345 401(k) plans, seven
                                                                           Source: Callan 2019 Defined Contribution Trends Survey.                                                                                                          split.” (Retirement Living Study)

                     For financial professional use only. Not for use with the public.
18 SPring 2019       Copyright 2014 Prudential Financial, Inc. and its related entities. All rights reserved. Used under license.
                                                                                                                                                                                                                                                                   Confero 19
“RESA would make           PUBLIC POLICY
it easier for smaller      Retirement Reform Bill (RESA) Reintroduced In House
employers to join open
multiple employer          The Retirement Enhancement and Savings Act (RESA)
plans.” (Pension &         has been reintroduced in the House by Reps. Ron Kind,
Investment Reported)       D-Wis., and Mike Kelly, R-Pa., Pensions & Investments
                           reported. Kind and Kelly initially introduced the 2018
                           version of RESA, which, despite garnering bipartisan
                           support, was not passed. Among other provisions, the
“Expect the ma jority      bill would make it easier for smaller employers to join
of states will delay any   open multiple employer plans, ease non-discrimination
action until the SEC’s     rules for frozen defined benefit plans and add a safe
                           harbor for selecting lifetime income providers in
final rule is released.”
                           defined contribution plans. “As a nation, we have a
(George Michael            problem when it comes to retirement savings,” Kind
Gerstein, Stradley         said. “We need to take commonsense steps to ensure
Ronon, Stevens & Young)    our businesses are offering their employees flexible
                           retirement plans that set our workers up for success
                           in their golden years.” Wayne Chopus, president and
                           CEO of the Insured Retirement Institute, said that
                           RESA contains several measures to help Americans by
                           expanding opportunities to save for retirement. “RI is
                           thankful to Reps. Kind and Kelly for their leadership
                           and commitment in pursuing legislation that will
                           help more Americans achieve a financially secure
                           retirement,” Chopus said. “We believe the enactment
                           of RESA will provide Americans with commonsense
                           measures to help them address the challenges and
                           overcome the obstacles they face as they plan and
                           save for their retirement.”

                           States Advance Fiduciary Rules As SEC Mulls National
                           Standard

                           New York, Nevada, Maryland and New Jersey are
                           among states moving toward a fiduciary standard
                           for advisers of all stripes, Investment News reported.
                           While state activity ramps up, the Securities and
                           Exchange Commission is considering its own reform
                           proposal. Industry opponents of state-level fiduciary
                           laws assert say the SEC should set policy. “We
                           always have preferred a national level of standard of
                           conduct for predictability and uniformity,” said Andrew
                           Remo, director of legislative affairs at the American
                           Retirement Association. Various state laws “would make
                           the situation for companies that operate in different
                           states complex and costly.” “The vast ma jority of
                           states will probably wait” to see the SEC’s final rule
                           before taking substantial action, said George Michael
                           Gerstein, counsel at Stradley Ronon Stevens & Young.
                           Many observers expected the SEC to release a final
                           rule by this summer, but that timeline may be delayed
                           thanks to the partial government shutdown that halted
                           most SEC activity. The longer it takes, states could
                           grow impatient.

20 SPring 2019                                                                       Confero 21
Actions recently taken by states include:

      •   Nevada introduced draft regulations requiring brokers to meet a
          fiduciary standard of care at all times if they manage a client’s assets
          or create periodic financial plans.
      •   A New York legislator reintroduced his Investment Transparency Act,
          which requires brokers and other non-fiduciary financial advisers to
          tell clients that they can recommend high-feeFEBRUARY  2019
                                                           products   – Page
                                                                    even      6
                                                                         if they’re
          not in the clients’ best interests.
      •   Maryland’s Financial Consumer Protection Commission released a
          report urging state lawmakers to raise investment-advice standards.

                                                INFOGRAPHIC
                              For The Wealthy, Work Is The New Retirement
                   Here’s why affluent, educated Americans are choosing work over retirement.

                   Affluent, educated Americans are choosing work over retirement
          Higher-income jobs are less wearing on                            … so the more educated you are, the
          workers …                                                         longer you tend to work
          Average susceptibility of US occupations to age-related decline   US men’s labor force participation rate

                                                                                              80
                     64         65         63                                           68
                                                                                                                62

                                                       41
                                                                                                           41                   42

                                                                  25                                                       30

                 (lowest)                                      (highest)
                            Mean annual wage quintile                                                     Age
                                                                              2012 high school grads             2012 bachelor’s degree

          Source: US Bureau of Labor Statistics; US Census Bureau; Federal Reserve Bank of Chicago; Center for
          Retirement Research; Boston College; Bain Macro Trends Group analysis, 2017.

         The trend toward longer, healthier lives benefits higher-income individuals
         disproportionately.
     The trend toward longer,  Higher-income
                                     healthier workers      are morehigher-income
                                                 lives benefits         likely to be in individuals
     disproportionately. Higher-income workers are more likely totobe
         occupations   in which   physical  decline   is  less  of an impediment         working
                                                                                            in occupations in
         into one’s late  60s  or 70s.  Those  in  the  bottom     three
     which physical decline is less of an impediment to working into one’sincome    quintiles  facelate 60s or
         a 64%  chance    of suffering  an  age-related     decline  in  ability to work,
     70s. Those in the bottom three income quintiles face a 64% chance of suffering an     for
         example, decline
     age-related   while those    in the top
                              in ability      quintilefor
                                          to work,       of example,
                                                             income face    only those
                                                                          while   a 25%in the top quintile of
         chance.  As  a result, the  highly  educated     tend  to  work  longer.
     income face only a 25% chance. As a result, the highly educated tend to work longer.

22 SPring 2019                                                                                                                            Confero 23
A new way to plan for Health
                 care costs in retirement
                 By Jean Young

                         W
                                        orkers approaching retirement have
                                        become increasingly concerned about
                                        the effect that health care costs may
                                        have on their postretirement financial
                          security. A new Vanguard research paper, Planning
                          for Health Care Costs in Retirement pdf , lays out a
                          new model developed in partnership with Mercer
                          Health and Benefits to forecast the range of U.S.
                          retiree health care costs.

                          Although health care costs—a crucial component
                          of retirement readiness—keep rising, there are
                          important steps people can take to prepare for the
                          challenge, and the Vanguard-Mercer model offers
                          critical guidance for individuals, advisors, and plan
                          sponsors alike.

                          “Most Americans understand that annual health care
                          costs have been growing faster than inflation, as
                          workers are experiencing rising premiums and out-of-
                          pocket costs within their current employer benefits,”
                          said Jean Young, a senior research associate with the
                          Vanguard Center for Investor Research and one of
                          the paper’s authors.

24 SPring 2019                                                                    Confero 25
Many people also realize they are likely to consume more health care services each year
 as they age, Ms. Young said. Thirty-eight percent of baby boomers surveyed listed health
 care costs as their top fear about retirement, ahead of running out of money.                              •   Long-term care. Long-term care
                                                                                                                costs represent a separate planning
                                                                                                                challenge. They should be explicitly
                                                                                                                addressed as part of the retirement
 Health care costs are baby boomers' most important retirement concern.                                         planning process. Individuals
                                                                                                                need to understand that there is
                                                                                                                a low but real probability they
                                                                                                                will experience high long-term
                                                                                                                care costs.

                                                                                                            An understanding of personal
                                                                                                            health care cost factors provides
                                                                                                            a baseline for people to predict
                                                                                                            incremental anticipated costs
                                                                                                            in retirement.

                                                                                                            “We believe that planning
                                                                                                            for health care costs
                                                                                                            in retirement should
                                                                                                            be personalized to an
 Vanguard recommends, based on the analysis prepared with Mercer, several important changes to the          individual’s attributes,”
 way health care costs are typically discussed and modeled:                                                 said Jacklin Youssef, a
                                                                                                            Vanguard senior wealth
 •   Health care cost factors. Understanding how an individual’s annual health care costs will change       planner and also an author
     at retirement requires understanding the impact of key personal attributes, including health status,   of the paper. “Costs may
     coverage choices, geography, income, and loss of employer subsidies. Routine health care costs         increase at retirement
     include insurance premiums and out-of-pocket expenses associated with paid long-term care.             because of the possible
 •   Replacement ratios. Replacement ratios—the percentage of pre-tax income at retirement that             loss of employer health                                  Health care spending rises as people
     individuals will need to maintain their current lifestyle—are commonly used to provide estimates       insurance premium                                        age, but overall spending declines.
     of retirement spending needs, which in turn are used to estimate required saving rates. For some       subsidies. Health care
                                                                                                            costs are also influenced
                                         workers, accounting for changes in health care costs will result
                                                                                                            by a range of factors over
                                             in higher replacement ratios than many traditional defaults,
                                                                                                            which retirees have varying
                                                especially if their employer offers generous health care
                                                                                                            degrees of control, such
                                                   benefits.
                                                                                                            as plan choice, geography,
                                                     •      Annual cost framing. Health care costs in
                                                                                                            income, retirement age, and health
                                                         retirement should not be estimated as a lump
                                                                                                            status.”
                                                             sum. Instead, individuals should focus on
                                                                annual costs, especially the incremental
                                                                                                            Stephen Weber, a research
                                                                                                                                                             “Unless they have an employer-sponsored retiree health care plan,
                                                                annual changes they will experience         analyst in Vanguard’s U.S.                     workers with generous employer health care benefits, those at higher
                                                                  at retirement and at Medicare             Wealth Planning Research                      risk of chronic conditions, or those planning to retire early might need to
                                                                     enrollment.                            Group and another author                     target higher replacement rates,” Mr. Weber said.
                                                                                                            of the paper, noted that
                              •   Substitution effects.                                                     some individuals should                   Long-term care costs may actually be the biggest concern for most
                                  Health care costs                                                         save at higher rates                     retirement planning scenarios, because the consumption of long-term care
                                  are likely to increase                                                    during their working                    varies significantly.
                                  during retirement because                                                 years to account
                                  of both increased health                                                  for potential future                   “Half of individuals will incur no costs, and a quarter will consume less than
                                  care consumption and faster-                                              incremental health                   $100,000,” Ms. Young said. “However, 15% will consume more than $250,000.
                                  than-inflation growth. Planning                                           care spending.                       Individuals should plan for these potential costs. Factors such as individual health,
                                  frameworks need to balance this
                                                                                                                                                 family history, and presence of support networks will inform each person’s desired
                                  growth against substitution effects that
                                                                                                                                                 long-term care need.”
                                  occur when retirees spend less on other
                                  types of expenses as they age.
                                                                                                                                                 © The Vanguard Group, Inc., used with permission.

26 SPring 2019                                                                                                                                                                                                      Confero 27
D o Y o u n g A d u lt s
                                            with

                 Student Debt
                 Save Less for Retirement?
                   By Matthew S. Rutledge, Geoffrey T.
                 Sanzenbacher, and Francis M. Vitagliano

                    Introduction
                    The rapid rise in student loan debt has received much
                    attention from policymakers and the media. Student debt
                    nearly tripled in real terms between 2005 and 2017, and
                    both the share of college graduates with loans and their
                    average outstanding loan balances soared.1 Student debt,
                    of course, has clear benefits: It helps individuals pay for a
                    college education, putting those who finish their degree
                    on track to earn more over their careers. But student loan
                    payments leave young adults entering the workforce with
                    less money available to save. Even if the payments are
                    manageable, the lingering presence of a student loan
                    may loom large over other financial decisions, including
                    retirement saving. This brief, based on a recent study,
                    examines the relationship between student loans and
                    retirement saving using data from the National Longitudinal
                    Survey of Youth 1997 Cohort (NLSY97).2

                    The discussion proceeds as follows. The first section
                    briefly reviews prior studies on how student loans affect
                    financial well-being. The second section describes the

28 SPring 2019                                                                Confero 29
data and methodology for the analysis. The third         differences in 401(k) participation and assets
section presents the results on participation in         at age 30 based on student debt outstanding
401(k) plans and asset accumulation separately for       at age 25.8 The NLSY97 also includes detailed
those who finish college and those who attend but        personal characteristics, which can be used
do not graduate. The final section concludes that        to account for differences between those with
the picture is a bit mixed. On the participation side,   and without student debt.
student debt appears to have little effect on either
group. On the accumulation side, similarly, debt does    The analysis considers the effects of both the
not have a significant impact on the non-graduate        presence of a student loan and its balance.
group. However, student debt does appear to affect       Economic theory and common sense would
the graduate group – those with debt have much           predict that the size of the loan payment would
lower 401(k) assets by age 30 than those without         impact the amount of retirement saving. In
debt. This result holds whether the loans are large or   reality, however, a young worker with a student
small, suggesting that the presence of the loan may      loan may focus solely on paying off that loan
be more important than the size of the payments.         before shifting to a longer-term objective like
                                                         retirement saving. This notion is similar to the
Student Loans and Financial Well-Being                   mental accounting framework, in which people
                                                         think of their financial obligations as putting
The existing research makes two points clear: 1)         money in separate “buckets” with different
college graduates fare better financially than those     priority levels.9 In this case, just having a loan
who attend college but do not graduate;3 and 2)          could affect the retirement saving decision,
graduates without student debt tend to have better       regardless of the loan size.
financial outcomes than those with student debt.

        “A young worker with a student loan may focus solely
       on paying off that loan before shifting to a longer-term
                  objective like retirement savings.”

For example, those with debt tend to have lower          The brief presents estimates on 401(k)
net worth and financial wealth.4 In addition, larger     participation and asset balances at age 30,
amounts of student debt are also associated with         based on regressions that control for factors
greater credit constraint, an increased likelihood       that may differ between those with and without
of falling behind on debt payments, and a greater        loans. The basic equation is:
risk of bankruptcy.5 Some studies indicate that
student loans also make it harder for young people       401(k) outcome at age 30 = f (having a student
to buy a home.6                                          loan at 25, student loan balance at 25,
                                                         earnings, personal and college characteristics)
Only a couple of studies have analyzed whether
student debt affects the retirement saving of the        The regression controls for the individual’s
borrowers, and these studies use hypothetical            earnings at age 30 to account for their ability
borrowers over a full career rather than examining       to pay down loans and save for retirement,
actual borrowers.7 This study provides results from      as well as for differences in demographics,
the NLSY97, a dataset with more direct information       family structure, and auto-enrollment in
on borrowing by young workers for their education.       retirement plans in their employer’s industry.
                                                         The regression analysis also includes controls
Data and Methodology                                     unavailable in most other data sources,
                                                         including measures of college quality, parents’
The NLSY97 collects information about the transition     education and income when the respondent
from childhood to adulthood for young Americans.         was age 18, and the respondent’s score on an
The NLSY97 collects information about assets and         aptitude test.
debts only at ages 25 and 30, so our study examines

30 SPring 2019                                                                                                Confero 31
Controlling for the characteristics of young workers                                                to be a constraint on their 401(k) saving. The drawback
with and without loans is important because, as Table                                               to such behavior, of course, is that some individuals end                                Figure 1. Retirement Plan Participation Rate at Age 30                            Figure 2. Retirement Plan Assets at Age 30 by Percentile
1 shows, these groups differ considerably. For example,                                             up saving less for retirement than they could afford to                                  by Percentile of Student Debt                                                     of Student Debt
within the college graduate group, those with student                                               early in their career, giving up the opportunity for a
                                                                                                                                                                                           100%                                                                               $25
debt tend to earn less, have a higher probability of                                                lifetime of investment earnings on the foregone savings.
                                                                                                                                                                                                                                                  Non-graduates
being black, and have parents with less education and                                               A related concern is that some participants also may not                                                                                                                                                                      Non-graduates
lower earnings. So, one might expect these individuals                                              contribute enough to receive the full employer match,                                                                                         Graduates
                                                                                                                                                                                                                                                                              $20                                                 Graduates
who tend to have lower socioeconomic status to have                                                 leaving money on the table.                                                            75%                                                                                          $18.2
less in retirement savings regardless of whether they                                                                                                                                                    61%           62%           62%                61%
                                                                                                    Conclusion                                                                                                                                                                $15

                                                                                                                                                                                                                                                                  Thousands
have any student debt.
                                                                                                                                                                                           50%                                  42%                 46%
Student Loans and 401(k)s                                                                           The rise in student loan debt has become a growing                                                           40%
                                                                                                                                                                                                                                                                              $10                        $9.0              $9.1             $9.3
                                                                                                                                                                                                   33%
                                                                                                    policy concern.     This brief explores whether that
The regression results show that 401(k) participation                                               growth has impacted retirement savings. The results                                    25%                                                                                       $5.4         $5.1
does not vary much between young workers with and                                                   are a bit mixed, and depend on whether one looks at                                                                                                                        $5                                   $3.6
without student loans, nor by the size of the loans (see                                            participation or asset accumulation and whether one                                                                                                                                                                              $2.2
Figure 1). In fact, for non-graduates, those with loans                                             considers graduates or non-graduates. While student                                                                                                                        $0
                                                                                                                                                                                            0%
appear to be slightly more likely to participate in a                                               loans appear to have no effect on participation and                                                                                                                                          25th ($6,744) 50th ($16,230) 75th ($28,116)
                                                                                                                                                                                                               25th ($6,744) 50th ($16,230) 75th ($28,116)
retirement plan, but this difference is not statistically                                           no significant effect on the asset accumulation of non-
                                                                                                                                                                                                    No debt                  Percentile of debt                                       No debt                   Percentile of debt
significant. In the case of student loan size, participation                                        graduates, graduates with student loans accumulate 50
rates among graduates with low, medium, and high loan                                               percent less retirement wealth by age 30. Interestingly,                                Note: Estimates are based on regressions of retirement                            Note: Estimates are based on regressions of retirement
balances are nearly identical.                                                                      graduates’ retirement plan assets are not sensitive                                     plan participation on student loan variables and personal                         plan participation on student loan variables and
                                                                                                    to the size of their student loans, suggesting that the                                 and school characteristics.                                                       personal and school characteristics.
While retirement plan participation does not appear                                                 simple presence of a loan looms large in their financial                                Source: Authors’ estimates from NLSY97 (1997-2013).                               Source: Authors’ estimates from NLSY97 (1997-2013).
to be hampered by student loans, the findings suggest                                               decision-making.     Future research should examine                                     * When using these data, please cite the Center for                               * When using these data, please cite the Center for
that retirement wealth accumulation may be affected                                                 whether this counterintuitive result holds when other                                   Retirement Research at Boston College.                                            Retirement Research at Boston College.
for the graduate group. Figure 2 shows 401(k) asset                                                 data sources are used.
levels at age 30 by individuals’ student loan status and
whether they graduated. Non-graduates have much                                                     This article was adapted from Rutledge, Sanzenbacher,
less in retirement assets at age 30 than graduates;                                                 and Vitagliano (2018). The corresponding author is
but neither the presence of a loan nor the outstanding                                              Geoffrey T. Sanzenbacher, who is the associate director
balance have a significant effect on those assets. For                                              of research at the Center for Retirement Research at
graduates, however, assets are about 50 percent lower                                               Boston College. Geoffrey can be reached at geoffrey.
for those with student loans compared to those with                                                 sanzenbacher@bc.edu and 617-552-6783.
no loans. The difference is both large and statistically
significant. These results suggest that among college
graduates, the presence of a student loan does impact
retirement saving.

Interestingly, college graduates with small loans have
no more in retirement assets than those with large loans.
This result suggests that young graduates consider the
simple existence of a student loan – rather than its size –

-Matthew S. Rutledge is an associate professor of the practice of economics at Boston College and a research fellow of the Center for Retirement Research at Boston College (CRR).
Geoffrey T. Sanzenbacher is associate director of research at the CRR. Francis M. Vitagliano is a former CRR research consultant.
1
 For nationwide student debt totals, see Federal Reserve Bank of New York (2017). The Institute for College Access and Success (2014) reports that, in 1993, 47 percent of graduates had
student loans averaging about $10,000 (in 2013 dollars). By 2012, 71 percent of graduates had loans, and the average amount tripled to about $30,000.
2
 Rutledge, Sanzenbacher, and Vitagliano (2016).
3
 Avery and Turner (2012).
4
 Fry (2014) and Cooper and Wang (2014).
5
 Gicheva and Thompson (2015).
6
 See Chiteji (2007); Brown and Caldwell (2013); Cooper and Wang (2014); Gicheva and Thompson (2015); and Houle and Berger (2015).
7
 Hiltonsmith (2013) and Munnell, Hou, and Webb (2016). Another study – Elliott, Grinstein-Weiss, and Nam (2013) – did look at actual, rather than hypothetical, behavior but its
sample consisted of households of all ages with education-related debt, which includes parents who borrowed for their children’s education.
8
 401(k) is used as a shorthand for all defined contribution plans.
9
 Thaler (1999).

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