For Most Employees… Retirement Isnt Going to Work Overcoming the Failure of Retirement Education If you attended benefits conferences in the late 1990s,

For Most Employees…For Most Employees…Retirement Isn’t Going to WorkRetirement Isn’t Going to Work

Overcoming the Failure Overcoming the Failure of Retirement Educationof Retirement EducationIf 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 PresentationMy current speeches have better examples and harder hitting messages …but even 15 years ago, the need to fix 401k education was clear.

© Dennis Ackley

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Presentation ObjectivesPresentation Objectives

1.1. Share ideas to increase employees’ Share ideas to increase employees’ understanding and appreciation of their understanding and appreciation of their retirement benefits.retirement benefits.

2.2. Help you create a strategy for retirement Help you create a strategy for retirement and investment education.and investment education.

3.3. Question conventional wisdom and Question conventional wisdom and “best practices.”“best practices.”

© Dennis Ackley

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Our SecretOur Secret

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Our PledgeOur Pledge

I pledge not to tell employeesI pledge not to tell employees


unless I also tell themunless I also tell them

““Compared To What You’ll Need”Compared To What You’ll Need”

so they can becomeso they can become

better retirement consumers.better retirement consumers.

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Most baby boomersMost baby boomers

will will NOTNOT have have

enough moneyenough money

during retirementduring retirement

to maintain theirto maintain their

current standards of living.current standards of living.

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How Big Is Our Secret?How Big Is Our Secret?

A couple accustomed to spending A couple accustomed to spending

$40,000 a year wants to retire at 65, $40,000 a year wants to retire at 65,

will need 20-25 years of income (to age 85-90) will need 20-25 years of income (to age 85-90)

$40,000 x 25 years = $1 MILLION$40,000 x 25 years = $1 MILLION

to keep their current lifestyle during retirement.to keep their current lifestyle during retirement.

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How Big Is Our Secret?How Big Is Our Secret?

Ackley’s Super Simple Ackley’s Super Simple — But Not That Far Off — — But Not That Far Off —

Retirement Income EstimatorRetirement Income Estimator

Current Spendable Income Current Spendable Income (Lifestyle) (Lifestyle) XX Retirement YearsRetirement Years (Time)(Time)

““Ballpark Estimate”Ballpark Estimate”

May be off 10% - 20%May be off 10% - 20% Most employees have no idea!Most employees have no idea!

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Why Don’t They Know the Secret?Why Don’t They Know the Secret?

Employees know prices of homes, cars, Employees know prices of homes, cars, and TVs.and TVs.

Why can’t they come within $50,000 Why can’t they come within $50,000 — even — even $500,000$500,000 — of their retirement — of their retirement “price tags?”“price tags?”

Retirement is Retirement is notnot considered a consumer item. considered a consumer item.

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Why Retirement Isn’t a Consumer ItemWhy Retirement Isn’t a Consumer Item

Who wants to buy or sell something that:Who wants to buy or sell something that:

Provides no immediate gratificationProvides no immediate gratification

Has no easy-to-understand price tagHas no easy-to-understand price tag

Cannot be attractively packagedCannot be attractively packaged

Has no noticeable group of unsatisfied Has no noticeable group of unsatisfied customers demanding improvements customers demanding improvements (soon to change?)(soon to change?)

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The “Retirement Business” Has ChangedThe “Retirement Business” Has Changed

Rich pension plans are becoming rareRich pension plans are becoming rare

Long-service employees are rarerLong-service employees are rarer

Retirement gets longer as life expectancy soarsRetirement gets longer as life expectancy soars up to age 81 men and 84 women up to age 81 men and 84 women

(half live longer)(half live longer)

20 years longer than in 193620 years longer than in 1936

nearly half the baby boomers who retire will nearly half the baby boomers who retire will reach 90reach 90

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Baby boomers postponed buying homes and Baby boomers postponed buying homes and having children — still paying for bothhaving children — still paying for both

Americans’ consumer debt soars while savings Americans’ consumer debt soars while savings rate is low and fallingrate is low and falling

Organizations have “quietly” transferred Organizations have “quietly” transferred retirement responsibility to employeesretirement responsibility to employees

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Taxes on retirement benefits are rising Taxes on retirement benefits are rising (kiss 5-year averaging good-bye)(kiss 5-year averaging good-bye)

Social security taxes must about double Social security taxes must about double on today’s kids to cover baby boomers on today’s kids to cover baby boomers — or benefits must be changed— or benefits must be changed

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Messages Having Little ImpactMessages Having Little Impact

95% say they know to start saving early95% say they know to start saving early(Money Magazine)(Money Magazine)

However…However… 31% of eligible employees do not save 31% of eligible employees do not save

regularly for retirement regularly for retirement (EBRI 1997)(EBRI 1997)

““Free money” isn’t enough — modest Free money” isn’t enough — modest communication of $1 employer match gets no communication of $1 employer match gets no better participation than an aggressively better participation than an aggressively communicated $.25 match communicated $.25 match (Watson Wyatt 1996)(Watson Wyatt 1996)

76% of baby boomers say they’re behind — 76% of baby boomers say they’re behind — only 54% say they can catch up only 54% say they can catch up (Public Agenda 1997)(Public Agenda 1997)

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68% of workers are confident about their 68% of workers are confident about their prospects for retirement income prospects for retirement income (EBRI 1998)(EBRI 1998)

HoweverHowever…… Only 33% of baby boomers have $100,000 in Only 33% of baby boomers have $100,000 in

401(k) — less than two year’s average pay 401(k) — less than two year’s average pay (Scudder 1998)(Scudder 1998)

46% of baby boomers now tap savings to 46% of baby boomers now tap savings to meet expenses meet expenses (Scudder 1998)(Scudder 1998)

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86% of workers know they need 86% of workers know they need 60-80 60-80 PERCENTPERCENT of pre-retirement income of pre-retirement income (EBRI 1996)(EBRI 1996)

However…However… 64% of baby boomers have no idea of the 64% of baby boomers have no idea of the

DOLLARSDOLLARS (Scudder 1998)(Scudder 1998)

Only 21% of baby boomers have any $ goal Only 21% of baby boomers have any $ goal (Scudder 1998)(Scudder 1998)

Only 16% in 401(k) set contributions by targetOnly 16% in 401(k) set contributions by target

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58% of workers are “extremely” or “very” 58% of workers are “extremely” or “very” knowledgeable investors knowledgeable investors (1997 Merrill Lynch)(1997 Merrill Lynch)

However…However… 48% say bonds cannot lose (or don’t know)48% say bonds cannot lose (or don’t know) 90% don’t know money market funds are 90% don’t know money market funds are

backed only by short-term securities backed only by short-term securities (most say stock)(most say stock)

50% say company stock is less risky than 50% say company stock is less risky than diversified stock funds diversified stock funds (1997 Hancock) (1997 Hancock)

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What do plan sponsors do... What do plan sponsors do...

19981998

Education seminarsEducation seminars 76%76%

NewslettersNewsletters 49%49%

One-on-one counselingOne-on-one counseling 44%44%

SoftwareSoftware 29%29%

Personal planning reportsPersonal planning reports 26%26%

HotlinesHotlines 18%18%(Plan Sponsor 1998)(Plan Sponsor 1998)

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Do plan sponsors agree efforts are working... Do plan sponsors agree efforts are working...

19981998Help employees have Help employees have good retirement good retirement 37%37%

Reduce company’s liabilityReduce company’s liability 54%54%

Reduce employees’ stress Reduce employees’ stress about future financesabout future finances 12%12%(Plan Sponsor 1998)(Plan Sponsor 1998)

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What do plan sponsors say…What do plan sponsors say…

Will even Will even halfhalf of the 401(k) participants of the 401(k) participants be adequately prepared for retirement?be adequately prepared for retirement?

60%60% say say NONO 62% 62% who have “excellent communications” who have “excellent communications”

also say also say NONO (RogersCasey 1998)(RogersCasey 1998)

Why pursue “best practices” — find new ideas!Why pursue “best practices” — find new ideas!

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In summary…In summary… 47% of baby boomers plan to retire before47% of baby boomers plan to retire before

age 65 age 65 (Scudder 1998)(Scudder 1998)

Mutual fund investors expect 22% average Mutual fund investors expect 22% average return over next decade — 1926-1996 large return over next decade — 1926-1996 large companies averaged 10.7% companies averaged 10.7% (WSJ 1997)(WSJ 1997)

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In summary…In summary… 73% cannot give any dollar figure for retirement 73% cannot give any dollar figure for retirement

cost cost (EBRI 1997)(EBRI 1997)

76% say they’re planning well 76% say they’re planning well (EBRI 1997)(EBRI 1997)

94% say 94% say othersothers will not be prepared will not be prepared (EBRI 1997)(EBRI 1997)

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Like the “eat healthy” messages...Like the “eat healthy” messages...

the current retirement and investment the current retirement and investment

education education messagesmessages are being heardare being heard!!

But they are being largely ignored.But they are being largely ignored.

Sending the same messages Sending the same messages

is a waste of effort.is a waste of effort.

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Conduct Your Own SurveyConduct Your Own Survey

Ask employees…Ask employees…

““What’s the estimated price What’s the estimated price

of your retirement?”of your retirement?”

These people are responsible for the most These people are responsible for the most

expensive and important purchase they will make.expensive and important purchase they will make.

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The Cost of Ineffective Retirement EducationThe Cost of Ineffective Retirement Education

Because employees don’t know the “price” of Because employees don’t know the “price” of their retirement, they…their retirement, they…

Save too littleSave too little

Choose conservative investments Choose conservative investments Prefer a current account vs. a promised income Prefer a current account vs. a promised income

in the future — even 65% over age 60 take in the future — even 65% over age 60 take lump sum over annuity lump sum over annuity (Watson Wyatt 1997)(Watson Wyatt 1997)

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What can employees do who reach retirement age What can employees do who reach retirement age with too little money?with too little money?

Keep workingKeep working

Lower their standards and expectationsLower their standards and expectations

Pursue “deep pockets”Pursue “deep pockets”

Vote for government benefit improvementsVote for government benefit improvements

Sue previous employersSue previous employers

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Will Plan Sponsors Be in Court in Ten Years?Will Plan Sponsors Be in Court in Ten Years?

““Members of the jury…back in ‘98, Mr. Smith’s Members of the jury…back in ‘98, Mr. Smith’s employer hid the secret that he could not afford employer hid the secret that he could not afford retirement. Had my penniless client been told retirement. Had my penniless client been told the price of retirement back then, he would have the price of retirement back then, he would have saved more and invested better.saved more and invested better.

His rich employer conducted a shameful social His rich employer conducted a shameful social experiment — burdening poor Mr. Smith with full experiment — burdening poor Mr. Smith with full responsibility for saving and investing without responsibility for saving and investing without providing any understanding.” providing any understanding.”

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Ineffective retirement education Ineffective retirement education

will not change will not change

how much employees need how much employees need

— only how much they’ll have.— only how much they’ll have.

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It May Not Be Too LateIt May Not Be Too Late

Join Ackley’sJoin Ackley’s

““Compared To Compared To What You’ll Need” CrusadeWhat You’ll Need” Crusade

to turn employees intoto turn employees intoretirement income consumers.retirement income consumers.

They get better “CTWYN” information They get better “CTWYN” information buying tires, refrigerators, or Snicker bars.buying tires, refrigerators, or Snicker bars.

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Breaking ThroughBreaking Through

Use high impact “CTWYN” messagesUse high impact “CTWYN” messages

VividVivid — easy-to-understand, dollar and cents — easy-to-understand, dollar and cents targets — not percentagestargets — not percentages

PersonalPersonal — simple explanations — simple explanations

How much money do I need to retire in How much money do I need to retire in the lifestyle I want?the lifestyle I want?

How much money do I need to have savedHow much money do I need to have saved to get there? to get there?

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Breaking ThroughBreaking Through

Use high-impact “CTWYN” messagesUse high-impact “CTWYN” messages Explain retirement like a purchaseExplain retirement like a purchase Use consumer-oriented termsUse consumer-oriented terms

Retail price Retail price — total needed if “fast — total needed if “fast forwarded” to retirement todayforwarded” to retirement today

DiscountsDiscounts — amounts already paid — amounts already paid (current savings, projected pensions, and (current savings, projected pensions, and social security)social security)

Layaway payment Layaway payment —amount needed to —amount needed to purchase “financial independence”purchase “financial independence”

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Estimated “Layaway Payment”Estimated “Layaway Payment”

Retail price of retirementRetail price of retirement

$30,000$30,000 X X 2020 == $600,000 $600,000 annual spendableannual spendable yearsyears

Discounts — amounts already paidDiscounts — amounts already paid Current single sums (401(k), Current single sums (401(k), -- $ 98,000$ 98,000

IRAs, lump sums)IRAs, lump sums) Lifetime payments (social Lifetime payments (social

security at retirement)security at retirement)

$18,000$18,000 XX 2020 == -- $360,000$360,000 annual benefitannual benefit yearsyears

Your layaway payment (savings target)Your layaway payment (savings target)$142,000$142,000

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Why Retirement Education Isn’t WorkingWhy Retirement Education Isn’t Working

Current efforts aren’t bad — not good enough Current efforts aren’t bad — not good enough

Retirement education techniques are rooted in Retirement education techniques are rooted in “paternalism”“paternalism”

Investment education techniques were adopted Investment education techniques were adopted from Wall Street — for short-sighted “stock from Wall Street — for short-sighted “stock pickers”pickers”

Retirement totally changed — education didn’tRetirement totally changed — education didn’t

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Replacement ratio target — antique conceptReplacement ratio target — antique concept Worked with big, lifetime, cost-of-living adjusted Worked with big, lifetime, cost-of-living adjusted

pensionspensions Hides key elements — how to set your savings Hides key elements — how to set your savings

targets, what sources of income you’ll have, targets, what sources of income you’ll have, how to control your futurehow to control your future

Assumes everyone should keep current Assumes everyone should keep current lifestylelifestyle

Leaves employees clueless about dollarsLeaves employees clueless about dollars

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Retirement jargonRetirement jargon

Blizzard of content-free terms seems intended Blizzard of content-free terms seems intended for the older, richer, smarter — for the older, richer, smarter — defined benefit/defined contributiondefined benefit/defined contribution qualified planqualified plan salary reductionsalary reduction annuitant annuitant financial security…etcfinancial security…etc..

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Retirement jargonRetirement jargon

““Future Dollars” — meaningless and scaryFuture Dollars” — meaningless and scary

keep in “today’s dollars”keep in “today’s dollars”

don’t project increased pay, inflation, or don’t project increased pay, inflation, or benefits (how much will bread cost?) benefits (how much will bread cost?)

teach employees the basics before using teach employees the basics before using software to project “future dollars”software to project “future dollars”

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Sales techniques hide the factsSales techniques hide the facts

Fund names and terms are intended to sellFund names and terms are intended to sell ““aggressive growth” — hides potential aggressive growth” — hides potential

aggressive lossaggressive loss ““guaranteed investment contract” — hides guaranteed investment contract” — hides

who guarantees what who guarantees what (caused problems)(caused problems) ““growth” — “you’ll get your contributions growth” — “you’ll get your contributions

and growth” — hides and growth” — hides investment investment performanceperformance

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““Risk analysis/risk tolerance” — focuses Risk analysis/risk tolerance” — focuses on “market risk” — on “market risk” — ignores risk of ignores risk of 20-30 years of too little retirement income 20-30 years of too little retirement income (employees need to know all risks)(employees need to know all risks)

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““Return” hides inflation and overstates valueReturn” hides inflation and overstates value

7% “return” with 4% inflation is only a 7% “return” with 4% inflation is only a 3% gain — rarely explained3% gain — rarely explained

Start by showing investment performance Start by showing investment performance and inflation the same — and inflation the same — today’s dollarstoday’s dollars

Then show when performance outpaces Then show when performance outpaces inflation (“value added” approach)inflation (“value added” approach)

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“Invest for long term” …… Provide mutual funds to track in newspaper

“Don’t market time” …… Give phone numbers to call

“Develop a personal investment strategy”

…… Offer “life stage” funds (solutions without explanations)

“Don’t put all your eggs in one basket”

…… Emphasize the safety of “fixed income”

“Know your risk tolerance”

…… Fail to show risks of 20-30 years of inadequate income

We SayWe Say We DoWe Do

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Improving Retirement and Investment EducationImproving Retirement and Investment Education

Use educational sequenceUse educational sequence Step 1 — make meStep 1 — make me awareaware Step 2 — Step 2 — motivatemotivate me to learnme to learn Step 3 — help me Step 3 — help me understandunderstand Step 4 — allow me to Step 4 — allow me to take actiontake action andand

gain appreciationgain appreciation

Most programs skip 1 & 2 — never reach 4Most programs skip 1 & 2 — never reach 4

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Use the CTWYN approachUse the CTWYN approach

Get employees to think like consumersGet employees to think like consumers future Social Security benefits?future Social Security benefits? future health care expenses/Medicare?future health care expenses/Medicare? future taxes on sheltered income?future taxes on sheltered income? future investment performance?future investment performance? future impact of inflation?future impact of inflation? future home ownership arrangements?future home ownership arrangements?

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Consider new names — not “Capital Consider new names — not “Capital Accumulation” or “Tax Deferral Plan” — Accumulation” or “Tax Deferral Plan” — sound like apply to high-income or older sound like apply to high-income or older employeesemployees

Perhaps avoid “retirement” — focus on Perhaps avoid “retirement” — focus on financial independencefinancial independence

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Show employees’ savings account balances Show employees’ savings account balances divided by 20divided by 20

If you were retiring today and expecting to live 20 If you were retiring today and expecting to live 20 years during your retirement, your $100,340 years during your retirement, your $100,340 savings plan balance could pay $5,017 worth of savings plan balance could pay $5,017 worth of

income per year — assuming investment income per year — assuming investment performance and inflation are the same. performance and inflation are the same.

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Show employees how to hit their targetsShow employees how to hit their targets

Start early — saving from age 25 to 35 Start early — saving from age 25 to 35 beats same savings from age 35 to 65 beats same savings from age 35 to 65 (power of compound earnings)(power of compound earnings)

What an extra $25 a week — or 2% better What an extra $25 a week — or 2% better investment performance over inflation — investment performance over inflation — will dowill do

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The facts of life for retirement consumersThe facts of life for retirement consumers

1.1. If you live 20 to 25 years after retiringIf you live 20 to 25 years after retiring

(age 60 to age 80 or 85), you’ll need about (age 60 to age 80 or 85), you’ll need about 20 20

to 25 years worth of your current to 25 years worth of your current

spendable income to maintain yourspendable income to maintain your

standard of living. standard of living.

That’s how much your retirement could cost.That’s how much your retirement could cost.

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2.2. You cannot save 20 years worth of your You cannot save 20 years worth of your

spendable income in your last 10 or even 20 spendable income in your last 10 or even 20

years of work.years of work.

Start saving early.Start saving early.

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3.3. Even a sizable amount of retirement Even a sizable amount of retirement savings savings isn’t very much when it is paid isn’t very much when it is paid out over all out over all

the years you’ll be retired.the years you’ll be retired.

$100,000 for 25 years of retirement is only $100,000 for 25 years of retirement is only $4,000 worth of income each year — less if $4,000 worth of income each year — less if

inflation and taxes eat at it.inflation and taxes eat at it.

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4.4. If you have not saved enough money — or If you have not saved enough money — or have not invested wisely — you’ll have two have not invested wisely — you’ll have two

choices at retirement age:choices at retirement age: Keep workingKeep working Lower your standard of livingLower your standard of living

You are currently making a “layaway purchase”You are currently making a “layaway purchase”of the standard of living you’ll have at retirement.of the standard of living you’ll have at retirement.

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5.5. You are not avoiding “risk” by choosing You are not avoiding “risk” by choosing “safer” investments — such as U.S. Bonds “safer” investments — such as U.S. Bonds or savings accounts — if the generally lower or savings accounts — if the generally lower

rate of those investments increase your rate of those investments increase your “risk” of 20 or 30 years of inadequate income.“risk” of 20 or 30 years of inadequate income.

Know all the “risks” before you decide Know all the “risks” before you decide how much to save and how to invest.how much to save and how to invest.

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Set higher standards — use the “consumer Set higher standards — use the “consumer confidence test.” Are employees confidence test.” Are employees confidentconfident:: They know their retirement price?They know their retirement price? They are saving the right amount?They are saving the right amount? They are making the right investments?They are making the right investments?

Must pass “confidence test” to become good Must pass “confidence test” to become good “retirement consumers”“retirement consumers”

Lack of confidence is an employee relations Lack of confidence is an employee relations problem in the makingproblem in the making

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Use High-Impact Messages and ToolsUse High-Impact Messages and Tools

High-Impact MessagesHigh-Impact Messages Retail price of retirement incomeRetail price of retirement income Discounts and layaway purchaseDiscounts and layaway purchase Your savings targetYour savings target

High-Impact Follow-up Tools (after awareness High-Impact Follow-up Tools (after awareness and motivation steps)and motivation steps) Lifetime financial educationLifetime financial education PC-based retirement income planningPC-based retirement income planning Internet/Intranet benefit informationInternet/Intranet benefit information

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SummarySummary

Develop a strategy linked to your HR valuesDevelop a strategy linked to your HR values

Make retirement income a consumer itemMake retirement income a consumer item

Focus on awareness and motivationFocus on awareness and motivation

Keep your CTWYN pledge Keep your CTWYN pledge

© Dennis Ackley

For Most Employees… Retirement Isnt Going to Work Overcoming the Failure of Retirement Education If you attended benefits conferences in the late 1990s,

Documents

employees dennis ackley

secret dennis ackley

hancock dennis ackley

target dennis ackley

retirement benefits

retirement business

retirement ebri

retirement responsibility