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The State of the Prospective American Retiree

Eric Freedman
CAPTRUST Chief Investment Officer

I was fortunate to represent CAPTRUST as an invitee to the 2014 meeting of the Pension Research Council (PRC), held at the Wharton School at the University of Pennsylvania in May. While I may be a bit biased as it was held at my alma mater, the PRC is the preeminent retirement forum in the country (and perhaps globally), bringing together select members of academia, government, special interest groups, asset management firms, insurance companies, consultants, plan sponsors, and others focused on solving retirement problems. The format is consistent each year; PRC members, led by Wharton professor and PRC Executive Director Olivia Mitchell, select a theme for the symposium, which is then subdivided into focal areas. Dr. Mitchell and team then commission authors to draft academic journal-quality papers within each focal area, with working drafts read by conference attendees before the PRC symposium begins. The symposium features keynote addresses by industry and policymaker luminaries, but most of the agenda centers on the authors’ paper presentations, followed by reviews, discussion, and suggestions for further research for subsequent revisions.  

This year’s symposium was titled Reimaging Pensions: The Next 40 Years. With the Employee Retirement Income Security Act (ERISA) reaching its fortieth birthday, the PRC appropriately focused on what the next forty years may bring for the American retirement system, thinking two or three proverbial chess moves ahead of the current retirement construct. Some of the focal areas included perspective from other countries’ retirement schemes, ideas on how to better share risks between plan participants and plan sponsors, alternative plan design, and regulatory context for what may come next.

While the discussion was intriguing and the papers were collectively and individually thought provoking, the conference opened with an assessment of how efficient the current retirement system is at providing retirement readiness for working Americans. The first paper presented came from a team of Boston College researchers led by Alicia Munnell; the second from Jack VanDerhei of the Employee Benefit Research Institute (EBRI). Munnell, director of Boston College’s Center for Retirement Research, is one of the retirement industry’s brightest thought leaders, and her research carries considerable gravitas. EBRI, one of the most respected research organizations in our industry, has compiled a detailed retirement readiness analysis by population segment, including age, income level, and other variables, in an effort to understand where today’s retirement system may have vulnerabilities. EBRI’s statistical prowess, commitment to analyzing relevant topics, and independence make its work compulsory reads.

Retirement readiness is not just on the mind of the small group huddled at Wharton’s Huntsman Hall. Munnell’s Center for Retirement Research cited a National Endowment for Financial Education survey in which respondents were asked to highlight their financial goals, and the following takeaways were identified:

The number one financial goal for U.S. adults is having enough money for and in retirement, with 53 percent of women and 47 percent of men indicating this as their top goal.1

63 percent of U.S. adults over the age of eighteen agreed that a significant obstacle to their achieving the “American Dream” is an inability to save enough.2

Clearly, Americans are focused on achieving retirement. But how close are they?

Retirement adequacy has been a controversial topic laden with anecdotes and figures but in need of rigorous measurement. Retirement plan administrators often publish aggregated data from across their franchises. Given their geographic, age strata, and industry reach, this information covers a broad and representative swath of American workers. Fidelity and Vanguard, two of the largest recordkeepers in the industry, recently published some encouraging data, with the former’s most recent quarterly data indicating that its participant retirement plan balances averaged $88,600 at the end of March, a 92 percent increase from the first quarter of 2009 (which also marked the equity market’s post-financial-crisis low), and the latter highlighting that, in the five years ended 2013, median and average balances both rose by about 80 percent.3

While understanding plan balance trends is helpful, a more thorough approach to evaluating retirement adequacy involves assessing costs while in retirement, spending patterns, longevity, and other demographic considerations to understand if nest eggs can endure through old age. In a seminal 2006 paper that garnered much attention from Munnell and team at this year’s PRC session, authors Scholz, Seshadri, and Khitatrakun were very optimistic about household retirement preparation. The researchers developed a complex model — using data from the Health and Retirement Study — for analyzing whether households undersaved and for determining optimal wealth targets, with inputs including forty-one years of earnings information obtained from restricted-access Social Security records.4 The authors centered their work on households nearing retirement in the early 1990s, with ages ranging between fifty-one and sixty-one.5

The paper by Scholz, Seshadri, and Khitatrakun reached several key conclusions, most notably that more than 84 percent of households examined met or exceeded their wealth targets, and “for those not meeting their targets, the magnitudes of the deficits are typically small.”6 The authors also noted that since their data came from 1992 and 1993 (well before the strong equity market returns seen later that decade), households may be even better off than originally estimated (note: despite two significant downturns in global equities following the bursting of the Internet bubble and the 2008-09 financial crisis, U.S. stocks as measured by the S&P 500 still returned close to 500 percent from year-end 1993 through mid-year 2014). Scholz, Seshadri, and Khitatrakun cautioned that, because their research centered on one age cohort (households between ages fifty-one and sixty-one), it would be presumptuous to extend their conclusions to younger households.7

During her PRC presentation, Munnell was not as optimistic as Scholz, et al. Munnell and team incorporated Survey of Consumer Finance data from the U.S. Federal Reserve system and found that trends in wealth-to-income ratios indicated a decline in retirement preparedness. Specifically, life expectancy is rising, Social Security replacement rates are falling, healthcare costs are increasing, interest rates are at historically low levels, and the shift from defined benefit to defined contribution plans have all contributed to a less stable retirement environment. The team pointed out that consumption data in retirement suggest that Scholz, et al., made too elegant assumptions about how stable spending may be as retirees age, furthering concerns about their preparedness.

EBRI’s contribution on the topic highlighted a proprietary Retirement Security Projection Model®, a tool that grew out of states asking for research on when population cohorts would run out of money during retirement. This tool simulates both accumulation and retirement phases for baby boomers and generation X (the latter group, Americans born between 1966 and 1976, excluded from the Scholz research) and calculates the percentage of simulated life paths that do not lead to a shortfall in retirement. EBRI concludes that when including 100 percent of simulated retirement costs, including long-term care and home health costs, more than 56 percent of early and late boomers and 58 percent of generation X will not run short of money in retirement. This is somewhat encouraging, but a large percentage of workers who may run out of capital still exists; subsequent EBRI research indicates that preparation is markedly lower for lower-income earners.8 VanDerhei noted at the PRC session that risk management near age sixty-five is a critical variable in securing retirement adequacy, and for generation X one of the most significant variables is future defined contribution plan eligibility. We look forward to both Munnell’s and VanDerhei’s working paper completion so we can share their conclusions with you in greater detail.

The Pension Research Council symposium highlighted the conflicting evidence about retirement preparation, and our own experience with clients suggests the industry has a long way to go to get participants in a position to retire. Irrespective of subtle differences in model construction or simulation assumptions, employee education about topics like risk management and plan availability enhances outcomes. As retirement researcher Michael Finke writes in Financial Advice: Does It Make a Difference?, “there is ample evidence that households…lack the financial knowledge needed to make efficient choices in an increasingly complex financial marketplace.”9 This quarter’s Strategic Research Report provides further perspective on the topic from CAPTRUST’s thought leaders as we offer thoughts on how to better reach participants. Please do not hesitate to let us know how we can further help you.


1 “Half Say Retirement Savings Is Top Goal,” Center for Retirement Research at Boston College: Squared Away Blog, May 6, 2014,
2 “Survey: Redefining the American Dream,” National Endowment for Financial Education (NEFE) Survey, accessed July 1, 2014,
3 “Fidelity Announces Quarterly Data on Retirement Savings,” Fidelity, accessed July 1, 2014,
4 John Karl Scholz, Ananth Seshadri, and Surachai Khitatrakun, “Are Americans Saving ‘Optimally’ for Retirement?” Journal of Political Economy, 2006, volume 114, no. 4, p. 609
5 Ibid, p. 638
6 Ibid, p. 637
7 Ibid, p. 638
8 Jack VanDerhei, Ph.D, “‘Short’ Falls: Who’s Most Likely to Come up Short in Retirement, and When?” Employee Benefit Research Notes. June 12, 2014, Volume 35, No. 6
9 Michael Finke, “Financial Advice: Does It Make a Difference?” The Market for Retirement Financial Advice, edited by Olivia Mitchell and Kent Smetters. Oxford, United Kingdom: Oxford University Press, August 22, 2013, p. 245