RetireSecure Blog

July 21, 2015

Public Pension Changes Can Be Costly

Filed under: New Research,PRC in the News,Retirement Research — The Pension Research Council @ 3:16 pm

A recent study, “Lessons for Public Pensions from Utah’s Move to Pension Choice,” showed that many public sector workers offered less generous pensions did not boost their supplemental saving to make up for it. Robert L. Clark (Poole College of Management at North Carolina State University); Olivia S. Mitchell (Wharton Professor of Insurance/Risk Management & Applied Economics/Policy  and Director of the Pension Research Council); and Emma Hanson (North Carolina Department of State Treasurer Retirement Systems Division) coauthored the study.

The team followed pension reforms in Utah implemented in 2011 that closed the state’s defined benefit plan to new employees and established a less-generous two-option replacement. To make up the shortfall, new hires could contribute to a state supplemental plan, but many people did not.

The authors report that nearly three of five new hires failed to elect between the two-option plan, so they were defaulted to the hybrid pension. And defaulters also saved less, on average, than did the active choosers. Moreover, turnover rates rose by one-third among the new hires. The researchers conclude that plan administrators should be aware of possible side effects of changing plan generosity.

To read more on this story click here.

July 10, 2015

The Vanguard Group Joins Wharton’s Pension Research Council as Director Level Member

Filed under: Uncategorized — The Pension Research Council @ 10:00 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that The Vanguard Group has joined the Council for 2015. Read the full press release here.

July 7, 2015

Borrowing from Your Retirement?

Filed under: Financial Literacy,Planning for Retirement,Retirement Research — The Pension Research Council @ 2:20 pm

Two-fifths of workers allowed to borrow from their plans have done so within the past five years, according to a recent Pension Research Council study, “Borrowing from the Future: 401(k) Plan Loans and Loan Defaults .”

Co-authors Timothy Lu Jun, Olivia S. Mitchell, Steve Utkus, and Jean Young also show that younger and lower-paid employees are most likely to take out 401(k) loans. Those who borrow against their retirement and leave their jobs are most likely to default on the loans – meaning that they own income tax on what they’ve borrowed plus a 10 percent tax penalty.

Money taken from a retirement plan but not returned becomes part of retirement plan “leakage.” To learn more about this, click here to read the full article on Benefitspro.com.

July 1, 2015

What Do the Experts Say About Long-Term-Care Insurance?

Filed under: Personal Finance,Planning for Retirement,PRC in the News — The Pension Research Council @ 8:53 am

The median price of a private room in a nursing home in 2014 was $240 per day ($87,600 per year). Despite the staggering cost of long term care, very few insurers sell policies covering it. A recent study by Wharton Professor Daniel Gottlieb and Wharton Professor of Insurance/Risk Management & Applied Economics/Policy, and Director of the Pension Research Council, Olivia Mitchell explains why.

“People hate buying insurance, thinking they could die the next day,” Mitchell said. “They feel they won’t get value for their money.”

Erin E. Arvedlund of the Philadelphia Inquirer asked a panel of financial advisers what kind of long-term care insurances they buy for themselves.

To read their answers click here.

June 5, 2015

Burnishing Our Golden Years

Filed under: Personal Finance,Planning for Retirement,PRC in the News — The Pension Research Council @ 11:22 am

Robert Powell recently interviewed Olivia S. Mitchell, Wharton Professor of Insurance/Risk Management & Applied Economics/Policy, and Director of the Pension Research Council, to discuss solutions for America’s retirement system problems.

Dr. Mitchell and a few of the country’s other leading retirement experts outlined several ways to help Americans preserve their living standards through retirement, including:

  • Workers must save more;
  • People can claim their Social Security benefits later;
  • Retirees can buy insurance products to hedge longevity risk;
  • Homeowners can access their home equity via reverse mortgages;
  • Policymakers can reform Social Security by pegging benefit growth to price rather than wage inflation;
  • Plan sponsors can boost access to retirement saving plans;

As Americans live longer into retirement, following these recommendations will help maintain our standards of living and ensure the promise of our golden years.

Read more about this story here.

TIAA-CREF Institute Joins Wharton’s Pension Research Council as Associate Member

Filed under: Uncategorized — The Pension Research Council @ 8:48 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that the TIAA-CREF Institute has joined the Council for 2015. Read the full press release here.

June 3, 2015

Towers Watson Joins Wharton’s Pension Research Council as Associate Member

Filed under: Uncategorized — The Pension Research Council @ 10:26 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that Towers Watson has joined the Council for 2015. Read the full press release here.

May 22, 2015

The Society of Actuaries Joins Wharton’s Pension Research Council as Associate Member

Filed under: Uncategorized — The Pension Research Council @ 8:43 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that the Society of Actuaries has joined the Council for 2015. Read the full press release here.

May 19, 2015

Capping Pension Costs? Cautionary Lessons from the UK

Filed under: Financial Literacy,PRC Partners,Retirement Research — The Pension Research Council @ 8:03 am

by Mike Orszag, TowersWatson

Economists typically criticize price regulation because, for most products, competition is seen as sufficient to drive pricing to reasonable economic levels. Moreover, consumers are usually better off as a result of the competitive process. Exceptions would include cases where significant economies of scale exist, as in the case of utilities, and also where imperfect information impedes the orderly operation of markets.

Many would argue that pension plans and related long-term savings products fit into the latter category: that is, the complex and abstract nature of long-term saving can make it difficult for market pressures to drive down product fees and charges. International experience suggests that these markets do not function particularly well when there is no regulation at all.

Countries have taken various different approaches to deal with such market failures, including:

  • Product regulation making the underlying product simpler and more comparable;
  • Cost regulation capping product costs;
  • Intermediary regulation regulating the sales process so it works more smoothly.

Interestingly, the UK has experimented with all three approaches over time, and hence its experience offers insights into concerns likely to arise for other countries. After the introduction of personal pensions in 1988, the UK heavily regulated intermediaries via a “polarization” regime for retail financial services. The term “polarization” was used because financial advisers either had to represent a single investment company, or remain independent and represent all companies on the market. During the early years of the UK personal pension model, administrative costs proved to be very high, and surrender values sometimes eroded years of contributions. By the mid-1990s, it had become clear that the regime did not work at all well, perhaps because the regulation was inadequate, or the approach on its own may have been insufficient to prevent product complexity and high costs. In particular, the regime did not eliminate the payment of commissions to intermediaries, possibly misaligning incentives. And in addition while various disclosure regimes were tried, all had serious deficiencies.

Next, the UK adopted stakeholder pensions in 2001, with prescribed charges, minimum contribution levels, and flexibility on timing of contributions. The regulatory regime accompanying this new pension model included a mix of product and cost regulation. Annual administrative charges were capped at 1% of assets. The government’s effort to cap charges did succeed in driving down overall pension management costs, and the regulatory change forced an industry-wide wave of cost reduction and modernization. Nevertheless, the reduction in surrender charges produced unexpected consequences, because surrender charges had subsidized fund distribution; accordingly, lowering these provided less incentive for companies to seek consumers. As a result, the regulatory and capital burden imposed under the new regime reduced the number of firms in the industry and hence narrowed options for consumers.

Even today, 15 years after the launch of stakeholder pensions in 2001, the move to impose charge caps on pensions remains incomplete. For instance, earlier this year, the government proposed a 75-basis point cap on the default investment funds used by participants who were automatically enrolled into pension savings products. This may sound straightforward in theory, but it has not been simple to implement in practice.

One problem is that existing plan participants who were previously defaulted into funds with charges over the new cap must be informed of the cap changes, and such communication can be costly, complex, and often difficult for many members to understand. Further complicating matters are implementing new rules, effective next year, to protect members by disallowing any commission payments that are indirectly paid by members.

Moreover, plan sponsors still have many unanswered questions about the charge caps. Practically speaking, pension charges are allocated variously into asset-based, contribution-based, and annual fees, making cross-plan comparisons difficult. Additionally, new measures will be required to ensure that non-contributing members are not forced to subsidize those who do contribute. Another practical consideration is how to obtain plan compliance certification, and how to clarify what to do when a pension plan inadvertently exceeds a cost cap.

The UK experience with capping pension fund changes suggests that such caps can drive down retirement plan costs. Yet the process is complex, and the regulatory burden may be unexpectedly heavy on providers as well as participants. In other words, charge caps have long-term consequences for the structure and nature of pension saving.

Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania

April 29, 2015

The Federal Reserve Office of Employee Benefits Joins Wharton’s Pension Research Council as Associate Member

Filed under: Uncategorized — The Pension Research Council @ 8:44 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that the Federal Reserve Office of Employee Benefits has joined the Council for 2015. Read the full press release here.

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