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For Most Employees… Retirement Isnt Going to Work Overcoming the Failure of Retirement Education If you attended benefits conferences in the late 1990s, you might have seen this at... - CEBS Symposium - Benefits Management Forum & Expo - World at Work Conference - SouthWest Benefits Conference - Profit Sharing 401k Council Conference Dennis Ackley Slides From a 1998 Presentation My current speeches have better examples and harder hitting messages …but even 15 years ago, the need to fix 401k education was clear. © Dennis Ackley
2 Presentation Objectives 1. Share ideas to increase employees understanding and appreciation of their retirement benefits. 2.Help you create a strategy for retirement and investment education. 3.Question conventional wisdom and best practices. © Dennis Ackley
3 Our Secret © Dennis Ackley
4 Our Pledge I pledge not to tell employees Our Secret unless I also tell them Compared To What Youll Need so they can become better retirement consumers. © Dennis Ackley
5 Our Secret Most baby boomers will NOT have enough money during retirement to maintain their current standards of living. © Dennis Ackley
6 How Big Is Our Secret? A couple accustomed to spending $40,000 a year wants to retire at 65, will need 20-25 years of income (to age 85-90) $40,000 x 25 years = $1 MILLION to keep their current lifestyle during retirement. © Dennis Ackley
7 How Big Is Our Secret? Ackleys Super Simple But Not That Far Off Retirement Income Estimator Current Spendable Income (Lifestyle) X Retirement Years (Time) Ballpark Estimate l May be off 10% - 20% l Most employees have no idea! © Dennis Ackley
8 Why Dont They Know the Secret? l Employees know prices of homes, cars, and TVs. l Why cant they come within $50,000 even $500,000 of their retirement price tags? l Retirement is not considered a consumer item. © Dennis Ackley
9 Why Retirement Isnt a Consumer Item Who wants to buy or sell something that: l Provides no immediate gratification l Has no easy-to-understand price tag l Cannot be attractively packaged l Has no noticeable group of unsatisfied customers demanding improvements (soon to change?) © Dennis Ackley
10 The Retirement Business Has Changed l Rich pension plans are becoming rare l Long-service employees are rarer l Retirement gets longer as life expectancy soars u up to age 81 men and 84 women (half live longer) u 20 years longer than in 1936 u nearly half the baby boomers who retire will reach 90 © Dennis Ackley
11 The Retirement Business Has Changed l Baby boomers postponed buying homes and having children still paying for both l Americans consumer debt soars while savings rate is low and falling l Organizations have quietly transferred retirement responsibility to employees © Dennis Ackley
12 The Retirement Business Has Changed l Taxes on retirement benefits are rising (kiss 5-year averaging good-bye) l Social security taxes must about double on todays kids to cover baby boomers or benefits must be changed © Dennis Ackley
13 Messages Having Little Impact 95% say they know to start saving early (Money Magazine) However… l 31% of eligible employees do not save regularly for retirement (EBRI 1997) l Free money isnt enough modest communication of $1 employer match gets no better participation than an aggressively communicated $.25 match (Watson Wyatt 1996) l 76% of baby boomers say theyre behind only 54% say they can catch up (Public Agenda 1997) © Dennis Ackley
14 Messages Having Little Impact 68% of workers are confident about their prospects for retirement income (EBRI 1998) However … l Only 33% of baby boomers have $100,000 in 401(k) less than two years average pay (Scudder 1998) l 46% of baby boomers now tap savings to meet expenses (Scudder 1998) © Dennis Ackley
15 Messages Having Little Impact 86% of workers know they need 60-80 PERCENT of pre-retirement income (EBRI 1996) However… l 64% of baby boomers have no idea of the DOLLARS (Scudder 1998) l Only 21% of baby boomers have any $ goal (Scudder 1998) l Only 16% in 401(k) set contributions by target © Dennis Ackley
16 Messages Having Little Impact 58% of workers are extremely or very knowledgeable investors (1997 Merrill Lynch) However… l 48% say bonds cannot lose (or dont know) l 90% dont know money market funds are backed only by short-term securities (most say stock) l 50% say company stock is less risky than diversified stock funds (1997 Hancock) © Dennis Ackley
17 Messages Having Little Impact What do plan sponsors do... 1998 Education seminars76% Newsletters49% One-on-one counseling44% Software29% Personal planning reports26% Hotlines18% (Plan Sponsor 1998) © Dennis Ackley
18 Messages Having Little Impact Do plan sponsors agree efforts are working... 1998 Help employees have good retirement 37% Reduce companys liability54% Reduce employees stress about future finances12% (Plan Sponsor 1998) © Dennis Ackley
19 Messages Having Little Impact What do plan sponsors say… Will even half of the 401(k) participants be adequately prepared for retirement? l 60% say NO l 62% who have excellent communications also say NO (RogersCasey 1998) Why pursue best practices find new ideas! © Dennis Ackley
20 Messages Having Little Impact In summary… l 47% of baby boomers plan to retire before age 65 (Scudder 1998) l Mutual fund investors expect 22% average return over next decade 1926-1996 large companies averaged 10.7% (WSJ 1997) © Dennis Ackley
21 Messages Having Little Impact In summary… l 73% cannot give any dollar figure for retirement cost (EBRI 1997) l 76% say theyre planning well (EBRI 1997) l 94% say others will not be prepared (EBRI 1997) © Dennis Ackley
22 Messages Having Little Impact Like the eat healthy messages... the current retirement and investment education messages are being heard! But they are being largely ignored. Sending the same messages is a waste of effort. © Dennis Ackley
23 Conduct Your Own Survey Ask employees… Whats the estimated price of your retirement? These people are responsible for the most expensive and important purchase they will make. © Dennis Ackley
24 The Cost of Ineffective Retirement Education Because employees dont know the price of their retirement, they… l Save too little l Choose conservative investments l Prefer a current account vs. a promised income in the future even 65% over age 60 take lump sum over annuity (Watson Wyatt 1997) © Dennis Ackley
25 The Cost of Ineffective Retirement Education What can employees do who reach retirement age with too little money? l Keep working l Lower their standards and expectations l Pursue deep pockets u Vote for government benefit improvements u Sue previous employers © Dennis Ackley
26 Will Plan Sponsors Be in Court in Ten Years? Members of the jury…back in 98, Mr. Smiths employer hid the secret that he could not afford retirement. Had my penniless client been told the price of retirement back then, he would have saved more and invested better. His rich employer conducted a shameful social experiment burdening poor Mr. Smith with full responsibility for saving and investing without providing any understanding. © Dennis Ackley
27 The Cost of Ineffective Retirement Education Ineffective retirement education will not change how much employees need only how much theyll have. © Dennis Ackley
28 It May Not Be Too Late Join Ackleys Compared To What Youll Need Crusade to turn employees into retirement income consumers. They get better CTWYN information buying tires, refrigerators, or Snicker bars. © Dennis Ackley
29 Breaking Through Use high impact CTWYN messages l Vivid easy-to-understand, dollar and cents targets not percentages l Personal simple explanations u How much money do I need to retire in the lifestyle I want? u How much money do I need to have saved to get there? © Dennis Ackley
30 Breaking Through Use high-impact CTWYN messages l Explain retirement like a purchase l Use consumer-oriented terms u Retail price total needed if fast forwarded to retirement today u Discounts amounts already paid (current savings, projected pensions, and social security) u Layaway payment amount needed to purchase financial independence © Dennis Ackley
31 Estimated Layaway Payment Retail price of retirement $30,000X 20 = $600,000 $30,000X 20 = $600,000 annual spendableyears annual spendableyears Discounts amounts already paid l Current single sums (401(k), -$ 98,000 IRAs, lump sums) l Lifetime payments (social security at retirement) $18,000 X20 = - $360,000 $18,000 X20 = - $360,000 annual benefityears annual benefityears Your layaway payment (savings target) $142,000 Your layaway payment (savings target) $142,000 © Dennis Ackley
32 Why Retirement Education Isnt Working Current efforts arent bad not good enough l Retirement education techniques are rooted in paternalism l Investment education techniques were adopted from Wall Street for short-sighted stock pickers Retirement totally changed education didnt © Dennis Ackley
33 Why Retirement Education Isnt Working Replacement ratio target antique concept l Worked with big, lifetime, cost-of-living adjusted pensions l Hides key elements how to set your savings targets, what sources of income youll have, how to control your future l Assumes everyone should keep current lifestyle l Leaves employees clueless about dollars © Dennis Ackley
34 Why Retirement Education Isnt Working Retirement jargon l Blizzard of content-free terms seems intended for the older, richer, smarter l Blizzard of content-free terms seems intended for the older, richer, smarter u defined benefit/defined contribution u qualified plan u salary reduction u annuitant u financial security…etc. © Dennis Ackley
35 Why Retirement Education Isnt Working Retirement jargon l Future Dollars meaningless and scary u keep in todays dollars u dont project increased pay, inflation, or benefits (how much will bread cost?) u teach employees the basics before using software to project future dollars © Dennis Ackley
36 Why Retirement Education Isnt Working Sales techniques hide the facts l Fund names and terms are intended to sell u aggressive growth hides potential aggressive loss u guaranteed investment contract hides who guarantees what (caused problems) u growth youll get your contributions and growth hides investment performance © Dennis Ackley
37 Why Retirement Education Isnt Working Sales techniques hide the facts l Risk analysis/risk tolerance focuses on market risk ignores risk of 20-30 years of too little retirement income (employees need to know all risks) © Dennis Ackley
38 Why Retirement Education Isnt Working Sales techniques hide the facts l Return hides inflation and overstates value u 7% return with 4% inflation is only a 3% gain rarely explained u Start by showing investment performance and inflation the same todays dollars u Then show when performance outpaces inflation (value added approach) © Dennis Ackley
39 Why Retirement Education Isnt Working We Say We Do © Dennis Ackley
40 Improving Retirement and Investment Education Use educational sequence l Step 1 make me aware l Step 2 motivate me to learn l Step 3 help me understand l Step 4 allow me to take action and gain appreciation Most programs skip 1 & 2 never reach 4 © Dennis Ackley
41 Improving Retirement and Investment Education Use the CTWYN approach l Get employees to think like consumers u future Social Security benefits? u future health care expenses/Medicare? u future taxes on sheltered income? u future investment performance? u future impact of inflation? u future home ownership arrangements? © Dennis Ackley
42 Improving Retirement and Investment Education l Consider new names not Capital Accumulation or Tax Deferral Plan sound like apply to high-income or older employees l Perhaps avoid retirement focus on financial independence © Dennis Ackley
43 Improving Retirement and Investment Education l Show employees savings account balances divided by 20 If you were retiring today and expecting to live 20 years during your retirement, your $100,340 savings plan balance could pay $5,017 worth of income per year assuming investment performance and inflation are the same. © Dennis Ackley
44 Improving Retirement and Investment Education l Show employees how to hit their targets u Start early saving from age 25 to 35 beats same savings from age 35 to 65 (power of compound earnings) u What an extra $25 a week or 2% better investment performance over inflation will do © Dennis Ackley
45 Improving Retirement and Investment Education The facts of life for retirement consumers 1.If you live 20 to 25 years after retiring (age 60 to age 80 or 85), youll need about 20 to 25 years worth of your current spendable income to maintain your standard of living. Thats how much your retirement could cost. © Dennis Ackley
46 Improving Retirement and Investment Education The facts of life for retirement consumers 2.You cannot save 20 years worth of your spendable income in your last 10 or even 20 years of work. Start saving early. © Dennis Ackley
47 Improving Retirement and Investment Education The facts of life for retirement consumers 3.Even a sizable amount of retirement savings isnt very much when it is paid out over all the years youll be retired. $100,000 for 25 years of retirement is only $4,000 worth of income each year less if inflation and taxes eat at it. © Dennis Ackley
48 Improving Retirement and Investment Education The facts of life for retirement consumers 4.If you have not saved enough money or have not invested wisely youll have two choices at retirement age: l Keep working l Lower your standard of living You are currently making a layaway purchase of the standard of living youll have at retirement. © Dennis Ackley
49 Improving Retirement and Investment Education The facts of life for retirement consumers 5.You are not avoiding risk by choosing safer investments such as U.S. Bonds or savings accounts if the generally lower rate of those investments increase your risk of 20 or 30 years of inadequate income. Know all the risks before you decide how much to save and how to invest. © Dennis Ackley
50 Improving Retirement and Investment Education l Set higher standards use the consumer confidence test. Are employees confident: u They know their retirement price? u They are saving the right amount? u They are making the right investments? l Must pass confidence test to become good retirement consumers l Lack of confidence is an employee relations problem in the making © Dennis Ackley
51 Use High-Impact Messages and Tools l High-Impact Messages u Retail price of retirement income u Discounts and layaway purchase u Your savings target l High-Impact Follow-up Tools (after awareness and motivation steps) u Lifetime financial education u PC-based retirement income planning u Internet/Intranet benefit information © Dennis Ackley
52 Summary l Develop a strategy linked to your HR values l Make retirement income a consumer item l Focus on awareness and motivation l Keep your CTWYN pledge © Dennis Ackley
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