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How to Optimize Retirement Plan Design for Your Client

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This infographic is available as a poster.

Retirement Plan Design

Retirement Plan Design

This infographic is available as a poster.

How to Optimize Retirement Plan Design for Your Client

More than ever, retirement plans are looking at an employee’s entire retirement picture.

In line with this trend, advisors are offering personalized services to help people reach their goals. But as retirement plans begin to expand their products and services, unidentified gaps remain in employees’ retirement needs.

To help advisors identify these disconnects, this infographic from New York Life Investments shows the key priorities across both employees and their employers to help optimize retirement plan design.

Are People Achieving Their Retirement Vision?

Today, retirement is an issue that can no longer be ignored.

Nearly 70% of Americans say the country faces a retirement crisis and 54% are worried about a financially secure retirement. Making matters worse, the pandemic has led one in three workers to rethink their retirement timeline.

To look deeper into retirement plan design, NYL Investments partnered with RTI Research, surveying 800 people:

  • 500 Plan Participants: Employees with 401(k)/ 403(b) plans
  • 150 Plan Sponsors: Companies offering 401(k) plans
  • 150 Plan Providers: Advisors providing 401(k) services

Here are the results they found.

Preparedness for Retirement

Two structural trends—lack of savings and not having access to a retirement plan at work—are impacting retirement readiness today.

By a significant margin, the survey found that men (45%) feel more prepared for retirement than women (30%), which may be explained by historically higher earnings.

How does retirement preparedness break down by age group?

AgeVery Well PreparedSomewhat PreparedNot Very Well Prepared
20s45%23%21%
30s42%44%14%
40s30%41%29%
50s34%38%28%
60s37%53%9%
Average37%42%21%

On average, 37% of employees felt very prepared. Despite those in their 40s often hitting their highest-earning potential, employees in this age bracket felt the least prepared.

Retirement Plan Features

What aspects of their retirement plan did survey participants feel very satisfied with?

Feature% Who Feel Very SatisfiedSomewhat PreparedNot Very Well Prepared
Employer commitment to retirement preparedness58%23%21%
Plan provider62%44%14%
Plan performance58%41%29%
Ease of account management66%38%28%
Number of investment options given58%53%9%

Compared to other variables, participants felt most satisfied with the ease of account management of their retirement plan along with their plan provider.

Retirement Plan Design: 3 Key Priorities

When it comes to actual planning for retirement, what were the three most important factors among participants?

  • Right balance of growth & risk in portfolio: 84%
  • Saving enough for retirement: 86%
  • Work-life balance: 87%

Interestingly, the importance of work-life balance increased with age.

While 78% of people in their 20s said this was very important, it increased to 92% of people in their 50s. The same pattern emerged for having enough savings for retirement. Over 75% of people in their 20s said this was extremely important. For those in their 50s, this jumped to 96%.

Retirement Plan Design: 3 Gaps

Let’s now look at some of the biggest gaps in retirement plan design. Here is where participants were least satisfied with their plan provider:

Service% Satisfied
Managing the cost of healthcare53%
Having a roadmap to ensure I’m doing the “right thing” to plan for retirement57%
Working to get out of debt67%

As the above findings suggest, not only are participants looking for guidance with their 401(k) investments, they are looking for personal financial advice on managing debt and healthcare costs.

These gaps make sense: the U.S. has the highest healthcare costs in the world, averaging $12,500 per person per year or three times higher than the OECD country average.

The Employer’s Perspective

Let’s now take a look at how employers viewed retirement plan design.

Retirement Plan Design: Key Priorities

Across all firms, what were the three most important factors for their employees?

  • Managing the cost of healthcare: 90%
  • Saving enough for retirement: 85%
  • Work-life balance: 85%

Both employers and employees alike placed saving enough for retirement near the top.

Retirement Plan Design: 3 Gaps

Which services do employers offer the least?

Service% Offered
Working to get out of debt23%
How to access Social Security and other retirement accounts33%
Saving enough for retirement34%

Interestingly, while 85% of employers place saving enough for retirement as a key priority, the vast majority of employers don’t offer these services in retirement plans.

To address these gaps, advisors can create a well-thought-out financial wellness program for employers that bridges the disconnect.

Understanding the Disconnect

Over the last five years, retirement plans that offer advice have risen 44%.

The evidence is clear: employers value providing their employees personalized advice. Here are some key insights on providers, and where the disconnects lie.

Plan Providers: Key Disconnects

While 93% of all plan providers surveyed offer advisory services, just 62% offered services that were educational.

Meanwhile, younger advisors felt employees had stronger financial literacy and knowledge of retirement services compared to more tenured advisors by a wide margin. A similar trend followed for advisors at smaller plan providers versus larger firms.

However, more tenured advisors at larger firms were more likely to offer in-person consultations at the workplace. The same was true for providing employees with information to make more informed investment decisions.

Next, while some of the largest disconnects from participant and employer needs center around managing debt and healthcare costs, the majority of plan providers don’t offer them:

3 Gaps in Providers% Offer Service
Working to get out of debt35%
Managing cost of healthcare29%
Work-life balance34%

Importantly, new opportunities arise when advisors connect with participants and employers in areas that matter most.

Optimizing Retirement Plan Design

When employees and sponsors are active participants in their retirement journey, advisors can provide human-centered advice, personalized skills, and holistic planning models.

Based on the above findings, advisors can strategically enhance retirement plan design to align with participants’ and employers’ financial needs.

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Infographics

How Experts Think About Bear Market Opportunities

We look at quotes from investing legends like Warren Buffett and Peter Bernstein to take cues on how investors should approach a down market.

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How Experts Think About Bear Market Opportunities

Today, the majority of Americans are worried a bear market is looming.

The good news: there are silver linings. Bear markets can present bargains for investors, thanks to inefficient pricing and fear in the market. Going further, many investing greats have made key investments during market downturns including:

  • Warren Buffett: Automotive sector during the 2008 Global Financial Crisis
  • Shelby Davis: Financial sector during the 1997 Asian Financial Crisis
  • Peter Bernstein: Gold during the 2000 Dot-Com Crash

In this infographic from New York Life Investments, we show four quotes on bear market opportunities and the data behind their insight.

How Experts Think About Bear Market Opportunities

When faced with the challenges of a bear market, how do experts respond?

1. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

— Warren Buffett, CEO of Berkshire Hathaway

Just like a bargain on socks may be an opportunity for buyers, a bargain on stocks is an opportunity for potential upside. In fact, the S&P 500 Index has seen double-digit gains 85% of the time after extremely pessimistic sentiment since 1987.

Investor pessimism can be measured by a ‘bull-bear spread’. This is based on an AAII survey that measures investor expectations for the market in the next six months. It is calculated by taking the percentage of investors who are ‘bullish’ on the market minus those who are ‘bearish’.

For example, in the week of April 29, 2022:

  • Bullish: 16.4%
  • Bearish: 59.4%
  • Bull-Bear Spread: – 43

Here’s how the S&P 500 Index performed after periods of extreme investor pessimism:

DateBull-Bear SpreadS&P 500 Index
12-Month Return
10/19/1990-5426%
3/6/2009-5167%
10/5/1990-4422%
9/21/1990-4325%
11/16/1990-4321%
4/29/2022-43?
8/17/1990-4118%
1/11/2008-39-36%
3/14/2008-39-41%
8/31/1990-3823%
2/21/2003-3735%
10/16/1992-3614%
7/9/2010-3625%
9/14/1990-3521%
10/26/1990-3526%
2/20/2009-3544%
4/12/2013-3514%
12/21/1990-3417%
7/21/2006-3424%
1/25/2008-34-38%

Source: Bloomberg, 5/12/22

As the above chart shows, investor pessimism is at its highest in 20 years.

Instead of thinking of how bad the market is doing, investors may be better of thinking of the market as being significantly less expensive.

2. “History provides crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.”

Shelby Davis, founder of Shelby Cullom Davis & Company

Bear markets hurt. On the bright side, they only account for 29% of the market environment, with bull markets making up the lion’s share (71%). What’s more, stocks have spent the vast majority of time at or near their all-time highs.

Market EnvironmentDescription% of Time in Market Environment
All-Time HighStock market hits all-time high35%
Bull Market DipStock market falls under 10% from all-time high33%
Bull Market CorrectionStock market falls over 10% but less than 20% from all-time high3%
Bear Market DrawdownStock market falls over 20% from peak to trough10%
Bear Market RecoveryTime it takes to reach next all-time high19%

Source: Morningstar Direct, PerformanceAnalytics, UBS 4/30/2022. Based on monthly returns from 1945.

Overall, stocks have spent around two-thirds of the time at or near all-time highs.

3. “The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.”

— Peter Bernstein, economist and financial historian

To avoid falling for the behavioral pitfalls of a market cycle, investors can identify key macro indicators of each stage. Below, we show the economic indicators and how they associate with each type of market cycle.

Market CycleMonetary Policy Shock*Consumer SentimentEmploymentSalesPurchasing Managers Index (PMI)
BullPositivePositivePositiveHighly PositiveHighly
Positive
CorrectionPositiveNegativePositiveNegativeNegative
BearPositiveHighly
Negative
Highly NegativeHighly NegativeHighly
Negative
ReboundHighly
Negative
PositiveNegativeNegativeNegative

Source: Goulding, L. et al., May 2022. *Represents an unexpected move in monetary policy.

As the above table shows, bear markets are associated with low consumer sentiment, high unemployment, low corporate sales, and weak manufacturing performance—with a high number of macroeconomic shocks.

4. “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

— Winston Churchill, former Prime Minister of Britain

Just like bear markets can stoke investor uncertainty, rising interest rates can cause stock market disruption. However, since 1954 the S&P 500 Index has returned an average 9.4% annually during Fed rate hike cycles.

Fed Rate Hike CycleS&P 500 Index Annualized Total Return
Aug 1954 - Oct 195714%
Jun 1958 - Nov 195924%
Aug 1961 - Nov 19667%
Aug 1967 - Aug 19694%
Mar 1972 - Jul 1974-9%
Feb 1977 - Jun 198111%
Mar 1983 - Aug 198413%
Jan 1987 - May 198916%
Feb 1994 - Feb 19954%
Jun 1999 - May 200010%
Jun 2004 - Jun 20068%
Dec 2015 - Dec 20188%

Source: Morningstar, Haver Analytics, March 2022

Not only that, the S&P 500 Index has had positive returns 11 out of 12 times during periods of rising interest rates. Despite the short-term impact to the market, stocks often weather the storm.

Finding Bright Spots

In summary, it is helpful to remember the following historical characteristics of a bear market:

  • Extreme pessimism
  • Short-lived
  • Higher macroeconomic shocks (employment, sales, PMI)

Investors can find opportunities by considering a contrarian point of view and learning from the time-tested experience of investing legends.

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Infographics

Retirement Savings: How to Calculate If You’re on Track

This graphic shows how to plan for sufficient retirement savings, and how the U.S. population measures up at each step.

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Retirement savings by age group, to help people gauge their own retirement planning. Retirement balances get bigger until age 65-74 and go down for those over age 75.

This infographic is available as a poster.

Retirement Savings: How to Calculate If You’re on Track

Setting a retirement savings goal can be overwhelming. In fact, one in three Americans have no idea what they need to save to retire at their target age.

Luckily, we can use a retirement calculator to help outline what you need to consider. This graphic from New York Life Investments walks you through setting your retirement savings goal, and shows how the U.S. population measures up at each step.

Step 1: Your Age

A calculator will typically start by asking for your current age and your target retirement age. This is to determine how long you have left to build up your investments. In the U.S., the average age of retirement has remained relatively stable and is currently 62.

Keep in mind that your retirement age can depend on many factors:

  • Your cost of living
  • Your job satisfaction
  • Your debts
  • Your spouse’s retirement plan
  • Your health

After you have your projected retirement age figured out, you’ll also need to estimate the length of your retirement.

The life expectancy for Americans at birth is 77 years. Once you’ve lived to age 65, that number is higher. This is because you’ve survived many untimely causes of death, including the higher mortality associated with childhood. The below table shows how the expected age of death changes as you age.

 At BirthAt Age 65
Male7482
Female8085
Both Sexes7784

To estimate your particular lifespan, you’ll also need to consider things like your genetics and your lifestyle. Having an idea of how long you might live may help you better manage longevity risk, or the risk you’ll outlive your savings.

Step 2: Your Savings

The next step in setting your retirement savings goal is to take stock of how much you’ve already saved. For context, here is how much Americans have saved for retirement by age group.

 Median BalanceAverage Balance
< 35$13,000$30,170
35-44$60,000$131,950
45-54$100,000$254,720
55-64$134,000$408,420
65-74$164,000$426,070
> 75$83,000$357,920

You’ll also need to decide how much you’ll be putting toward your retirement each year. Experts typically recommend saving about 15% of your pre-tax income. This can include your employer’s contributions, if any. Of course, this amount will vary based on how early you start saving and when you plan to retire.

Your expected investment earnings will play a big role, too. Here is what average annual returns have been for different types of portfolios based on historical data from 1928-2021.

 Conservative
(80% bonds, 20% stocks)
Balanced
(40% bonds, 60% stocks)
Growth
(20% bonds, 80% stocks)
Nominal Return8%10%11%
Real Return5%7%8%

Inflation has averaged about 3% each year. Remember to include inflation in your calculations so you can maintain purchasing power in retirement.

Step 3: Your Income

In the final step of setting your retirement savings goal, you’ll need to decide how much of your current household income you will use in retirement. Financial experts typically estimate you could need 70-80% of your pre-retirement income.

At this stage, it can be helpful to plan out a detailed budget. Here’s a spending overview for the average American over age 65.

CategoryAnnual Spending
Housing$17,435
Healthcare$6,668
Transportation$6,221
Food$5,698
Donations, Child and Spousal Support$3,119
Personal Insurance and Pensions$2,721
Entertainment$2,293
Clothing$821
Alcohol and Tobacco$635
Other$2,033

Other includes personal care products and services ($505), education ($450), reading ($157), and miscellaneous expenses ($921).

Now that you have an estimate of your expenses, you can factor in all sources of income you expect to receive in retirement. This helps narrow down what you need to have set aside in your retirement savings. For instance, most people collect Social Security in addition to their own pension. The below table shows what percentage of retirees have each income source.

SourceRetirees Age 65 and OlderAll Retirees
Social Security92%78%
Defined Contribution or Defined Benefit Pension66%57%
Interest, Dividends, or Rental Income49%43%
Wages, Salaries, or Self-employment25%32%
Cash Transfers Other Than Social Security7%11%

Respondents could select multiple answers. Sources include the income of a spouse or partner.

Based on all this information, a retirement calculator will estimate whether you are on track to sufficiently fund your retirement years.

Turning a Retirement Savings Strategy Into Action

It’s important to note that retirement calculators are a starting point. To come up with a customized strategy, you’ll likely want to consider:

  • Your current and expected tax rate
  • Increases in your income and savings rate
  • A contingency plan for unexpected events

However, retirement calculators can make the concept of retirement savings more concrete—and help you take action toward your goals.

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