What steps can plan sponsors take to help participants understand the risks of underestimating how long their retirement may last? Longevity risk is real, and helping plan participants grasp its ramifications should be part of a plan sponsor’s overall participant education and engagement efforts.
Defining the risk
Longevity risk is the risk of living longer than anticipated and exhausting the financial resources designed to cover the costs of retirement. It is more common than realized. Studies have consistently found that when people are asked to estimate the probability that they would live to a specified age, they tend to underestimate actuarial life expectancy values by a wide margin.
Research undertaken by the Stanford Center on Longevity found that two in three pre-retirement age men surveyed underestimate the life expectancy of the average 65-year-old man. Of this group, 42% underestimate average life expectancy by five years or more. Additionally, 50% of pre-retirement age women underestimate the life expectancy of the average 65-year-old woman.
While COVID-19 has had a negative impact on life expectancies, the historical trend in the US has been one of expanding life expectancies. In fact, demographic data indicate that the average life expectancy of 65-year-olds improved by almost six years since 1950.¹
Below are some average life expectancies at different ages as shown in the most recent IRS Single Life Expectancy table:²
Life expectancy (in years)
One of the many takeaways from this table is that the average participant should be planning for a retirement that could easily last for two decades—and possibly much longer. By building sufficient retirement savings during their working years and managing their money wisely after they retire, participants can be in a better position to avoid depleting their savings prematurely.
Plan sponsor strategies
Plan sponsors are in a unique position to help participants take a more realistic approach to life expectancies and to remind them that the decisions they make about saving and investing can make a big difference in the type of retirement they will experience.
Evaluate plan metrics. A good first step may be to determine participation and contribution levels using current data. Are average contribution levels close to the benchmarks for your plan size and industry? How many participants increased or reduced their contribution percentages in the last two years? Having access to meaningful numbers such as these allows plan sponsors to create effective strategies.
Leverage automatic features. Would retooling the plan’s design increase participation and contribution levels? For example, with automatic enrollment, contributions can be set at a default deferral rate that automatically increases on a specified schedule, unless the employee opts out or elects a different contribution percentage.
Stay relevant. Plan sponsors should deliver relevant content. Communications should focus on the issues that matter for participants while recognizing that they are individuals with their own personal experiences and goals.
Communicate regularly. Plan Sponsor communications with employees should not be a one-time or occasional effort. They should also take advantage of multiple platforms— e-mails, videos, messaging apps, direct mail, seminars and face-to-face meetings—to reinforce the importance and value of starting retirement planning as soon as possible and to outline the steps that will help bring your employees closer to financial security.
Ideally, many of the materials plan sponsors provide will be interactive. Calculators, videos and written materials that help participants learn how to estimate their future retirement needs and determine the amount they will need to contribute to their plan accounts to attain their goals are valuable. Providing general education on asset allocation, diversification, risk and return, and dollar-cost averaging and supplying the historic returns of various asset classes can help participants make informed investment choices.
Consult your plan advisor on helping you design engagement, education and financial wellness programs for participants that will enhance their understanding of longevity risk and the importance of planning for all the years of their retirement.
Plan sponsors are responsible for ensuring that employee plan contributions are deposited into the plan trust in a timely manner. The faster funds are deposited in the plan, the earlier they can be invested on behalf of plan participants. Late deposits of salary deferral contributions must be reported on Form 5500 (the Annual Return/Report of Employee Benefit Plan), and are considered “prohibited transactions” that can give rise to fiduciary liability and excise taxes.
Department of Labor regulations clearly state that participant contributions to a 401(k) plan, as well as amounts representing repayment of participant loans, become assets of the plan as of the earliest date on which they can reasonably be segregated from the employer’s general assets.³ The regulations additionally state that in no event may deposits be made later than the 15th business day of the month following the month in which the employer receives the amounts or withholds them from participant wages.⁴
Plan sponsors must understand that the 15th business day represents an outside limit of the time that may be considered for segregation of the assets. If contributions and loan repayments can reasonably be segregated and deposited into the plan earlier, they must be deposited before the 15th business day. In fact, the regulators will determine how quickly a plan sponsor can reasonably deposit elective deferrals into the plan trust based on the earliest date the sponsor has been able to do so in the past.
Safe harbor for small plans
There is a safe harbor period under the regulations for plans that have fewer than 100 participants at the beginning of the plan year. Under this safe harbor, employers that deposit employee contributions and loan repayments within seven business days after the amounts are withheld from employee wages or received by the employer will automatically satisfy the law’s requirements. If a deposit is made later than seven days after the payroll date, it will not be considered a prohibited transaction as long as the deposit was made as soon as the contributions could reasonably be segregated from the employer’s assets (and not after the 15th business day of the month following the payroll month).⁵
The US Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) allows plan sponsors to correct delinquent participant contributions and participant loan repayments.⁶ In order to make use of the VFCP, an applicant must restore the plan, participants and beneficiaries to the condition they would have been in had the breach not occurred (i.e., make up for any potential lost returns between the time period of when the deposits should have been made to the plan trust and when they were actually made). The plan sponsor must then submit an application to the Employee Benefits Security Administration demonstrating that the violation has been self-corrected in accordance with the required correction method, which includes restoring any lost earnings to the plan. Upon successful completion of the VFCP process, the Department of Labor may issue a “no-action” letter with respect to the violation.
To avoid the potential costs of correcting late deposits, plan sponsors will want to have sound administrative procedures in place to ensure that participant contributions and loan repayments are timely deposited.
The 2023 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) and Greenwald Research⁷ explores the retirement outlook of employees and retirees. The survey provides important insights into the retirement planning process and the progress workers are making with their planning.
Compared with 2022, the 2023 survey found a steep decline in confidence among workers regarding their retirement security. In 2023, only 18% of workers felt very confident they would have enough money to live comfortably throughout retirement, down from 28% in 2022. The decline in confidence was the largest since 2008 at the height of the global financial crisis.
What’s behind the lack of confidence?
Workers identified several sources for their lack of confidence, including a lack of savings, inflation, high levels of debt and a decline in the value of their retirement accounts.
Lack of savings. Among surveyed workers who said that they are not confident about their future retirement security, 40% said it was due to having little or no savings. They are unprepared for retirement and cannot afford to retire.
Inflation. About 84% of workers are concerned that the increasing cost of living will make it harder for them to save money for retirement, and 40% worry that their money will not keep up with inflation in retirement. Almost three-quarters (73%) said that they will have to make substantial cuts to their spending because of inflation.
Debt. High levels of debt can impede an individual’s ability to set money aside for both short- and long-term goals. Sixty-two percent of workers in the 2023 survey said that their debt is a problem, up from 56% in 2022, with 19% saying it is a major problem. Almost half (47%) said that debt is having a negative impact on their ability to save for retirement.
Decline in retirement account balances. Forty percent of workers in the 2023 survey said that their account balances had decreased in the prior 12 months. Of that population of 40%, 29% reported experiencing a decline of between 16% and 25% and 8% reported experiencing losses of between 26% and 50%. However, another 32% of workers reported that their account balances had increased in the same period.
Tackling the challenges
The survey did demonstrate that some participants have been proactive about tackling these challenges. The majority of workers reported that they (or their spouses) are currently saving money for retirement. Also, among the population of workers who made changes to their workplace retirement plan, 37% of them increased the amount they contribute. Additionally, the survey found that half of workers have attempted to calculate how much money they will need to live comfortably in retirement and that 64% are confident they know how much money to withdraw from their retirement savings and investments in retirement.
Moving employees closer to retirement security
Employers can take steps to help employees move closer to retirement security. For example, by regularly reviewing the effectiveness of their plans, employers can identify potential deficiencies and make changes to better meet the needs of their employees.
Additionally, employers are increasingly recognizing the benefits that come from focusing on employees’ overall financial well-being. More employers are looking for ways to incorporate financial wellness education within broader plan participant education with the goal of helping their employees develop the financial knowledge that can have a positive impact on their lives.
Encouraging plan participants to become more actively involved in retirement planning is an ongoing process. For input and assistance with your participant education and engagement efforts, consult your plan advisor.