In July, Morningstar researchers Jack Vanderhey and Spencer Look released a new model for measuring retirement outcomes in the United States.
Vanderhey, director of retirement research at Morningstar, has been working on these retirement models for decades, including during his long stint as research director at the Employee Benefits Research Institute. He said the new model has the advantage of being able to use not only the latest public data, but also its own planning-level data.
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“If you go into a (defined contribution) plan, you now have this much accountability,” he says. “It’s much more than just age, wages and gender. We’ll look at the terms of the plan.”
Look, associate director of retirement research at Morningstar, said the model can help predict long-term outcomes because it takes into account real-world situations such as changing jobs, getting married, separating, and managing long-term care needs. said. The research team “predicts the life path of a representative sample of the U.S. population and simulates it as much as possible to reflect the reality of people’s lives.”
The results show promise in a number of ways. The DC system has worked and continues to work for millions of Americans. However, this story is not the same for all groups. Women are at greater risk of not having enough income in retirement than men. Single women are at higher risk than women with families. Most notably, Hispanics and non-Hispanic black Americans are more at risk than non-Hispanic whites.
More than half (61%) of Hispanic Americans between the ages of 20 and 64 expect to run out of money for retirement if they retire at age 65, according to Morningstar research. This number is similar for non-Hispanic black Americans: 59%. The situation is much better for non-Hispanic white Americans and non-Hispanic Americans such as Asian Americans, who together face a 40% shortfall risk.
at risk
What is behind this disparity? There are many factors at play, and VanDerhei and Look plan future research to examine that question. But Look and other researchers point out that first, access to a DC plan, and second, the ability to continue with it.
“At the end of the day, it’s about participation,” he says. “For those who are actually participating in the plan and saving money, there is a clear difference…and of course access rates also play a role in participation.”
In their report, Look and Vanderhey found that people who had access to and participated in a DC plan for at least 20 years had dramatically better retirement ratios. Specifically, 57% of those not participating in a DC plan felt underfunded, compared to 20% of those participating.
Christian Weller, a professor of public policy at the McCormack School of Policy and Global Studies at the University of Massachusetts Boston, led a research project published in April that examined retirement wealth by race and ethnicity. In a webinar held Wednesday by the National Institute on Retirement Income to discuss the report, Weller said that when people of any ethnic or racial group have the opportunity to save in a workplace retirement plan, most Stressed if you’re doing it.
“Research shows that if people are eligible to participate in a plan, 90% to 95% of them will participate, regardless of race,” he says. “What this ultimately means is that the inequalities we see are the result of structural problems, not individual failures. …Access is a big part of the gap. Masu.”
unequal access
The study found that black and Hispanic households have unequal access to employer-sponsored and tax-advantaged plans, even when those plans are available to eligible employees. , both groups were found to be less likely to qualify for benefits.
Additionally, when Black and Hispanic individuals have access to plans, mitigating factors are more likely to undermine the long-term success of their contributions, Weller said.
For one thing, higher liquidity needs for everyday life, such as helping a family, “depress the rate of return.” This demand for cash can, by necessity, lead to higher loan and withdrawal rates, lower equity allocations, and shorter financial decision-making periods. “Improving liquidity is accompanied by slower growth in account balances,” Weller said in a briefing. Webinar.
Furthermore, he argued that these groups are at higher risk of economic disruption than non-Hispanic white groups, and the costs associated with those risks are also higher. For example, blacks and Hispanic Americans are more likely to experience long periods of unemployment or unexpected demands from family members. They’re also more likely to deal with costly health problems and higher rates of family incarceration, Weller said.
Sharon Carson, executive director and retirement strategist at JPMorgan Asset Management, commented on a joint study with EBRI on the impact of this “spending spike” on retirement savings. According to the U.S. Bureau of Labor Statistics, even for those earning above the median income level ($59,384 in the fourth quarter of 2023), unexpected spikes in spending can negatively impact long-term outcomes. There is.
“In some cases, your income just isn’t enough and you don’t have any savings, so you end up rushing to borrow money and taking out debt,” Carson said. “It was about the same between public and private sector employees.”
Carson said the research supports increased use of emergency savings programs, whether planned or unplanned, so participants have a cushion. More generally, she believes that “access equals savings.” To help more Americans prepare for retirement, they need access to plans with automatic enrollment, automatic escalation, and, ideally, financial health and emergency savings programs to keep them saving. access is required.
“Those who participate in the plan (outcomes) are much better than those who don’t,” she said, adding that state mandates, currently in place in about 20 states, according to ADP, It points out that this is an important step to expand the scope of application.
national program
One legislative effort to mandate national reporting will be in the spotlight after the November election. The Auto-IRA Act of 2024 was first introduced in February by Rep. Richard Neal, D-Mass., and industry officials say it could be passed next year, depending on the outcome of the election. The bill would require employers with 10 or more employees to offer a retirement plan or automatically enroll employees in an individual retirement account or similar plan.
In a paper published in September to coincide with the 50th anniversary of the Employee Retirement Income Security Act of 1974, VanDerhei and Look argue that if automatic IRA legislation with opt-out features and automatic escalation is passed, conducted an analysis of what was happening.
In their base scenario, they predicted that the total average retirement asset ratio for all groups would increase by 23.8%. This would have been particularly impactful for Hispanics and non-Hispanic blacks, who currently do not see much benefit from the current system.
For Hispanic savers, their wealth ratio would have increased by an average of 25.8%. Non-Hispanic blacks would see a similar increase of 26.3%. Interestingly, non-Hispanic whites had a lower rate of increase at about 22.9%, further evidence that this group now has better access to savings options.
“If we’re going to get started on this access issue, we’re going to either do something like this (IRA law) or wait until the other 30 states implement some kind of state automatic IRA,” Vander said. Mr Hay says. “Personally, I don’t see it happening any other way.”
