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TIAA: Healthcare Costs and Outliving Savings Dampen Employer Confidence in Employees' Retirement Futures

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Originally Published by TIAA.

A new 2018 TIAA Plan Sponsor Retirement Survey finds nearly half of nonprofit and corporate, for-profit employers are only somewhat confident in their employees’ retirement futures and one in five say they are not at all confident. Nearly all surveyed cited rising healthcare costs (91 percent) followed by outliving retirement savings (77 percent) as their biggest concerns, yet surprisingly few have built retirement plan offerings that solve for these challenges.


Employers also worry that many of their employees are not saving enough (75 percent) or are choosing not to participate in a retirement plan (55 percent). While employers worry about their employees’ retirement futures, budget constraints (63 percent) and attracting and retaining talent (60 percent) are also significant concerns in managing their workforce, according to the survey.

“While plan sponsors face a number of workforce challenges, employees outliving their retirement savings is a top concern,” said Doug Chittenden, executive vice president and president of Institutional Retirement at TIAA. “Creating a diversified retirement benefits menu that includes a lifetime income option will not only help ensure employees have enough money to cover basic expenses in retirement, it can also help alleviate the stress of rising healthcare costs.”

Employees would choose lifetime income over lump sum savings if they could

Giving employees access to retirement investments that guarantee income for life is something both employers and employees say they want. According to the survey, more than half (51 percent) of all employers think their employees would prefer receiving $2,700 a month for life rather than a $500,000 lump sum at retirement; this echoes an earlier TIAA study, in which 62 percent of employees said they would make the same choice. Nonprofits are twice as likely as corporate, for-profits (56% vs 25%) to believe their employees would prefer monthly lifetime income over a lump sum.

The reality is that few employees have access to guaranteed options

While employees voice a strong interest in lifetime income options, few have access through their employer retirement savings plans. According to the survey:

  • Only 12 percent of employers offer annuities as retirement income options for retirement savings; instead, the most common options are target date funds (31 percent), mutual funds (30 percent) and stable value funds (20 percent), all of which rely on spending down assets and none of which create a guaranteed income stream.
  • Fifty-seven percent of employers expect employees to generate retirement income through systematic and lump sum withdrawalsdistribution options that aren’t guaranteed.
    • Twenty-seven percent said they don’t know how their employees will generate income.
    • Only 14 percent expect their employees to generate income from an in-plan annuity.
  • Nonprofit plan sponsors are more likely than corporate, for-profit, plan sponsors to advocate for their employees to put their savings into an investment that offers lifetime income distributions once they retire (32 percent versus 23 percent).

“Retirement is a critical financial pillar in our country,” said Mr. Chittenden. “We must make it easier for employers to add lifetime income options to their retirement plans, not only to help today’s employees reduce their financial risk, but to ensure the financial wellbeing of generations to come, and support the overall economic health of our society.”

Increasing access to lifetime income

TIAA supports regulatory and legislative efforts that are underway to make it easier for all employers both nonprofit and corporate, for-profit to offer lifetime income options to employees.In a 2017 survey, TIAA found that 71 percent of individuals support legislation to make it easier for employer-based retirement plans to include lifetime income products, such as annuities, as investment options.”We are actively working with industry leaders and lawmakers to clear the path to offering lifetime income solutions and to educate plan sponsors and participants about how in-plan annuity vehicles can increase financial security,” Mr. Chittenden said.In addition to policy advocacy, TIAA recently co-founded the Alliance for Lifetime Income , a nonprofit initiative to help address the risk of Americans outliving their income. The Alliance has launched a nationwide, multi-year campaign to highlight the importance of protected income in retirement.

Opportunities for Improving Retirement Outcomes

While creating the right investment menu is important to improving the outlook for employee retirement, the survey revealed several other opportunities for plan sponsors to consider, such as:

  • Analyzing workforce demographics and employee retirement
    • Forty-three percent of plan sponsors have not analyzed workforce demographics at all, or only to a limited extent.
    • By using tools like the TIAA Plan Outcome Assessment, plan sponsors can gain important insights about their employees’ demographics, behaviors and overall retirement readiness to better tailor advice, education and other resources that their employees can utilize for their retirement planning.
  • Work with retirement plan providers to offer free financial advice, education and retirement planning tools to improve employee engagement and build financial literacy.
    • Plan sponsors say free financial advice (39 percent) and comprehensive financial education (33 percent) are the most useful resources for employees and the most critical areas for improving plans and savings.
  • Educate employees about healthcare costs in retirement and consider offering a retiree healthcare savings option .
    • Nine of ten (91 percent) plan sponsors believe that healthcare costs are the most significant retirement security issue today.
    • Customizable savings programs, such as TIAA’s tax-free Retirement Healthcare Savings Program , can help retirees retire on their terms.
    • There are tools like TIAA’s Retirement Healthcare Calculator that help individuals better understand what medical expenses they may face in retirement.
  • Revisit plan design and restructure the plan match formula to help increase savings.
    • Twenty-eight percent of plan sponsors cite increasing or modifying the employer match as the biggest opportunity to help employees maximize their retirement savings.
    • The right plan design can build a strong foundation for the plan’s structure and service, including investment solutions that provide participants with lifetime income, employee engagement with a focus on outcomes-based education and advice, and plan management that helps mitigate fiduciary risk, drive efficiency and maximize value.
    • While budget constraints (63 percent) and attracting and retaining talent (60 percent) are of significant concern for plan sponsors, lifetime income investment options can help maximize the employers’ investment in the plan.

“Employers are right to be worried about the myriad of issues employees face in retirement, but there are many tools and approaches available to maximize the effectiveness of the plan and better prepare their employees,” Mr. Chittenden said.For more information about the 2018 TIAA Plan Sponsor Survey, read the executive summary www.tiaa.org/plansponsorsurvey.

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