By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

Mercer has partnered with the World Economic Forum (WEF) for many years, and together they are now exploring how to redesign retirement in such a way that builds financial resilience for longer lives in the face of many competing challenges and pressures. Part of this process has been considering the true complexities of retirement, wherein investing and building assets, etc., are important, but also taking into account other critical issues, such as your (or your partner’s) health, the ability and environment to work longer, among others.

I participated in one of the WEF’s virtual designed thinking sessions in the US on June 3. There had been prior designed thinking sessions around the world including the inaugural session at the WEF Annual Meeting 2020 in Davos (details at Redesigning Later Life). But my more recent experience with this topic was made more particularized and personal — the results of our designed thinking session engaged around a case study of Francis, a successful HR leader, age 62.

Francis: Caring for loved ones in retirement

Francis is married to Helen, and they have an adult son living in London. He has indicated he wants to slow down and spend less time in the office.

At first glance, Francis has a healthy pot of retirement assets in a 401(k) and IRAs.

But, in Francis’ own words, he is “worried about the prospect of his wife needing long-term care.” Unfortunately, Helen has some early signs of dementia, something that has been common in her family. Her mother had passed away this year from COVID-19 while living in a long-term care facility.

Our discussion group included several defined contribution (DC) plan sponsors, several academics and some WEF representatives.

For me, the discussion was intriguing, particularly since Francis’ case was not unlike other situations that some of the participants in the session had seen or experienced in real life. Our discussion culminated in three observations for me:

1. Francis may want to retire early to make sure he can enjoy some time with his wife and visit his son before mobility and communications become more challenging.
2. He may need to start to consider how to adapt their living arrangements, perhaps including where they live, to address the demands that dementia may bring.
3. Given the likely need for some form of assisted living or long-term care, Francis’ retirement assets may be insufficient. He simply may need to work longer.

What was clear was that Francis faced several competing challenges. One possible career strategy we liked was focused on encouraging Francis to work less now, but for longer. So he would potentially need to look for a more flexible working position, ideally with his current employer. The second issue centered on shortfall risk. Even though it was clear that Francis had saved and prepared well for retirement — he appeared to have made all the right choices — his future prospects were put at risk due to his wife’s unfortunate health issue.

Of course, this was all an academic exercise, and at the end we could turn off Zoom and just go back to our normal lives. However, it served as a great reminder of the challenges that many people face in retirement and why flexibility is needed to deal with these complexities.

World Economic Forum and Mercer: Retirement Reinvented

Given its very real and human dimension, this one discussion had a profound effect on me. But the WEF and Mercer have spent a lot more time considering the many issues that arise from life transitions. Francis’ was but one of many other real-world retirement insecurity scenarios that was constructed. In fact, the research team compiled the insights of more than 200 experts from a variety of global health, finance, business, insurance and academic organizations, which you can find here.

Based on the research, a 10-point checklist for retirement success was developed, which very importantly requires a coordinated effort across at least four constituencies (individuals, employers, financial services providers and governments). It is clear that defusing the timebomb of an aging workforce will require far more than making a few simple design adjustments to retirement systems. Here’s the checklist, quoted in entirety:

You

1. Unlock creative additional income sources that can support you in later life — teach if you can, participate in the sharing economy, make things.

2. Improve your financial know-how so you can plan with confidence — don’t leave financial outcomes to guesswork.

3. Your health and your skills underpin your ability to work, earn and save — invest in them.

Employers

4. Create more flexible work and retirement models so that people can work, earn and save into later life to supplement low pensions.

5. Employees trust you to help them retire well — promote wellbeing programs that include physical, mental and financial support and education, in order to deserve that trust and develop resilient employees.

6. Enable mid-life and ongoing regular check-ups so that people can assess their short-, medium- and long-term financial resilience, with time to get on track.

Financial services providers

7. Make it easier for people to understand their total financial position. Financial resilience means being able to survive short-, medium- and long-term scenarios.

8. Redesign age-appropriate financial tools and products with age in mind — remember, no one self-identifies as old! Accessibility to such vital resources is key.

Governments

9. Raise levels of awareness of the financial implications of longevity; ensure that employment and pensions regulatory frameworks support flexible work and flexible retirement. This means enabling drawing pension while still working, and drawing pension earlier or later depending on personal circumstances.

10. Impose tougher penalties for age bias — too many older workers become excluded from the workforce because of age. Financial resilience will never be achieved if people cannot work, earn and save.[1]

So, what now?

It’s left to us to reflect on what the reality of retirement will look like, and consider what part we all have to play in reinventing retirement into something that better addresses the real needs and concerns of individuals. A useful starting point is to consider how we would ourselves like retirement to look like (and I don’t just mean two Adirondack chairs overlooking the beach).

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

[1] Andre Belelieu and Yvonne Sonsino, “Coronavirus is creating retirement insecurity. These 10 steps can defuse the timebomb of an ageing population,” World Economic Forum, August 3, 2020. https://www.weforum.org/agenda/2020/08/here-are-10-steps-to-diffuse-the-timebomb-of-an-ageing-population-post-covid19/

So, how well do you understand the realities of retirement? was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

Mercer’s June 24, 2020 “Retirement reinvented” webinar focused on three disruptors changing the defined contribution (DC) landscape in the US: the COVID-19 turmoil’s impact on employers; the increasingly litigious environment for plan sponsors; and the 2021 introduction of Pooled Employer Plans (PEPs) authorized under the SECURE Act. One could probably add regulatory developments to the list, with the Department of Labor (DOL) releasing a flurry of proposals in the second and third quarters of 2020. All of these we believe will lead to continued increased demand for outsourcing options, especially in outsourced investment solutions, or OCIO. But we also see the potential for increased adoption of pooled plans including PEPs.

Audience Snapshot

Given all the challenges mentioned earlier, headlined by the COVID-19 pandemic, we conducted a spot poll of attendees and received the following feedback regarding their time management and business priorities:

While this was not a total surprise, 48% indicating they spent “less than I’d like” and “far too little” was material, particularly remembering that this was a group that was engaged enough to attend the webinar. It would have been interesting to poll those who did not attend the webinar.

The sample for this poll was fairly small, with an audience of just over 200 attendees. So we repeated the question at our DC Quarterly webinar on August 13 with a similar audience. Again, we expected this to be a more engaged group, but in this case the 48% moved to 50%. This is in no way a criticism of the attendees, but I think, a realistic assessment of the strains on people and companies that have occurred in 2020. No one knows when the challenges we have been facing will be resolved, and it shows in the polling data.

The International Perspective

Liana Magner, Mercer’s US Defined Contribution and Financial Wellness leader, led an international panel to probe how pooled plans have had an impact on retirement systems in their regions as a way to help the audience assess how pooled plans may be received in the US. The Q&A covered many topics, including the following:

• Impact of pooled plans on the retirement market;
• Which types of employers have gravitated to pooled plans;
• Impact of pooling on costs and participant outcomes; and
• Product innovation

Joining Liana were Philip Parkinson, Mercer’s UK Defined Contribution and Master Trust Leader, and Janina Slawski, Head of Investments Consulting at Alexander Forbes in South Africa.

Here are some of my takeaways from that discussion:

• Phil estimated that in the UK, over half of single employer, trust-based plans in the UK had closed over the last 10 years, and that the vast majority (probably around 90%) of new contributions were going into various pooled arrangements.
• Janina mentioned that the South Africa regulators were encouraging pooled arrangements as a way to reduce costs and help improve outcomes for participants. Furthermore, Phil mentioned that pooled plans were not just appealing to small plan sponsors. Many larger single-employer plans are also finding the economies of scale, reduced hassle, reduced fiduciary risk, improved cost, innovation, and interestingly, participant experience of a pooled plan can give them something better, delivering an outcome more efficiently than doing it themselves.

Following the international discussion, we asked the audience which benefits of pooled plans they viewed as essential. Asked to indicate all that applied, the overall ranking of responses was interesting, with fees being the top scorer (something both Phil and Janina had mentioned in their remarks).

• 69.3% lower participant fees
• 66.5% mitigation of fiduciary risk
• 65.9% reduced administrative workload
• 57.0% a well-diversified investment lineup
• 45.8% a great participant experience

Conclusion

Within the industry there is some cynicism about the impact pooled plans will have, but to test this theory, we asked the audience to indicate which statements resonated with them. (They could indicate more than one.) The aggregate responses, arranged from lowest to highest, are listed below.

• 15% I want to maintain my own sponsored plan but consider outsourcing more of my administrative fiduciary roles
• 18% I’d like to explore pooled plans further
• 23% I want to maintain my own sponsored plan but consider outsourcing more of my investment fiduciary roles
• 26% I want to maintain my own sponsored plan and retain all related responsibilities
• 43% I’m interested in exploring some of these options, but not in the current market situation

The results indicate a definite interest in pooled type arrangements, although it was noted that in the current market situation this may not be the top priority.

We believe that pooled plans may have a meaningful impact on the US market, and it was encouraging to hear how the increase in innovation and participant focus in the UK and South Africa helped improve participant outcomes — and how such arrangements are potentially saving employers time and helping to reduce their fiduciary responsibility.

Based on polling data and questions asked following the online presentation, the observations shared by our colleagues overseas clearly engaged the audience. As indicated above, only 18% of the audience was not interested in pooled plans or further outsourcing opportunities. While the US market and regulatory environment is different from the UK and South Africa, based on the experience of our international colleagues, we expect and hope to see pooled plans offered in the US retirement market to help:

• Reduce administrative workloads
• Reduce fiduciary risk
• Lower participant fees
• Increase professional oversight of quality, market-leading investment options
• Increase innovation
• Increase better participant experience
• Ultimately increase better participant outcomes

Who wouldn’t want that?

Interested in learning more: Join us on Tuesday, September 29th @ 11:30 AM EDT

Interested in learning more? Register now

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

An International Perspective on the Impact of Pooled Plans on Retirement Markets was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

Apart from missing the coffee and water-cooler discussions, virtual meetings have been surprisingly effective.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

I have for a number of years managed a virtual team that researches defined contribution (DC) and financial wellness issues for Mercer. I live in Vancouver, Preet is in Chicago, Sara in Minneapolis, Yi in Charlotte and Spencer in Boston. Well before COVID-19 hit and upended our office lives, we already had been using Zoom to communicate. In fact, I have never actually met Sara in person (I tried once, but a snowstorm got in the way). So, as a team we were better prepared for what a world of Zoom video calls was going to bring — for example, we already knew how to unmute.

Deb Clarke, who heads up investment research at Mercer, recently wrote an article about the challenges of conducting manager research via Zoom, and I would encourage you to read it. My team, too, experienced the new wonders of virtual conferences, and while I do miss the coffee and water-cooler discussions, the virtual conferences have been surprisingly effective.

Katie Hockenmaier is Mercer’s DC Leader in the Western United States and spends the bulk of her time with clients (albeit these days virtually). I recently caught up with her to see how she is adjusting to consulting virtually with clients in the Zoom era.

Neil Lloyd: Katie, how have you found the experience of working with clients virtually?

Katie Hockenmaier: While I absolutely miss seeing my clients in person, the move to virtual has gone surprisingly well! There were some technology hiccups the first few weeks, but they were quite easy to sort through. For example, one of the bigger hurdles was working with clients to make sure we were up and running on their preferred video conferencing/virtual meeting software. Due to heightened security concerns, some clients are required to only use certain providers. Because nearly everyone — clients, consultants, recordkeepers and investment firms — are all working remotely, I’ve found everyone to be very engaged and communications seem to be going smoothly. There seems to be a sense of camaraderie about being in the same boat.

As consultants, I think our travel schedules prepared us for remote working, as well as ensuring that we continue to keep communication lines open.

NL: With the benefit of hindsight, do you have any specific ideas on what works well, or what doesn’t?

KH: I actually find scheduling meetings and calls to be much easier. With many people working more flexible hours and eliminating time on planes, schedules seem to be easier to align. I have had multiple clients comment about how quickly they’re getting responses from our teams — often in minutes versus hours. It’s also wonderful to be able to share my screen and more effectively answer questions by being able to walk someone through performance or attribution in a more interactive way. There’s no risk of someone getting lost and asking, “What page are you on?”

On the flip side, it has been more difficult to establish new relationships. I think the virtual environment works well when you’ve already established a strong relationship in person and a sense of trust that comes from actually shaking someone’s hand or sharing a meal. I’ve seen some creative ways of trying to combat this, like virtual coffee chats and lunches, but this is one area where I feel like it’s hard to replicate the value that being face-to-face brings.

NL: You must have some funny stories or anecdotes to share with us.

KH: There are so many to choose from! I have to say, it’s been great meeting so many colleagues’ families through video conferences. I think everyone was a bit cautious about having kids or significant others or pets interrupt meetings or pass through their background the first couple of weeks of working remotely, but over time people realize that we’re all human and have really embraced taking a second to introduce their kids, as one example.

Over the last few months, I’ve traded decorating tips and paint colors with clients and colleagues. I also joined a meeting a couple minutes early to find that someone’s cat was very interested in the webcam, while their owner stepped away for a minute. It really makes for a great ice breaker!

NL: So let’s assume we resolve COVID-19 (i.e., there is a vaccine or something similar), do you think we will go back to in-person meetings? Will virtual meetings become the exception and not the rule?

KH: I go back and forth on this quite a bit, but I do think virtual meetings will be more prevalent in the future. I think we’ve all experienced that meeting virtually works and, in some cases, it’s even more efficient and effective. I think we will have in-person meetings again, but they’ll likely be less frequent and not necessarily the expectation.

NL: Thanks, Katie.

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

Cats on Webcame: Virtual Consulting in the Zoom Era was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Department of Labor provided a boost to defined contribution plan innovation by setting out a roadmap for the inclusion of private equity investments.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

The Department of Labor (DOL) provided a welcome boost to defined contribution (DC ) plan innovation by setting out a roadmap for the inclusion of private equity (or other similar investments). On June 3, 2020, the DOL issued an Information Letter setting out its views on the use of private equity investments in DC plans, where such private equity investments are contained within a multi-asset class vehicle structured such as custom target date, target risk or balanced fund. The letter was in response to a request by Pantheon Ventures (US) L.P. and Partners Group (USA) Inc., who both offer exposure to private equity investments via collective investment trusts that contain a liquidity component to manage the cash flow requirements of DC plans.

The request specifically did not address the question whether plans could allow plan participants the option to invest in private equity themselves on a standalone basis. Notably, they also did not ask whether plans might access private equity investments in a single asset class vehicle such as a white-labeled equity fund.

The DOL’s response indicated that the inclusion of private equity in multi-asset class vehicles, narrowly considered, would not violate the fiduciary duties in terms of ERISA. In addition to caveats discussed below, a responsible plan fiduciary would need to be able to show that it had evaluated the potential risks and benefits associated with the decision to include private equity (or other illiquid investments) in their plan investment lineup.

Although the letter is not an unencumbered endorsement of private equity investments in retirement plans, it is very encouraging that the DOL is supportive of more DC-plan innovation. The industry’s response has been enthusiastic, and it is applying some of the letter’s broader principles to the consideration of other illiquid investments such as direct real estate. Interestingly, although direct real estate is already a feature of some off-the-shelf and custom target date funds, private equity is far less common.

As a firm, Mercer has been promoting the idea of allowing broader diversification of retirement plan assets for some time. In June 2019, we collaborated with the World Economic Forum (WEF) to release its third white paper, Investing in (and for) Our Future. The paper argued to allow retirement systems to invest in a broad range of alternatives, including private equity, and presented the risks and challenges that need to be overcome to deal with less liquid alternatives. (Read a shorter Q&A with the paper’s principal authors, Han Yik and Amish Gandhi, here.)

Why might private equity be attractive to DC plan participants? When accessed through a diversified investment option, such as a target-date fund, private equity may offer attractive risk-adjusted returns relative to public-market instruments, largely as a result of deal access, illiquidity premia and use of leverage. In addition, given the reduction in the number of publicly listed companies, investing in private equity may provide access to a broader opportunity set as private markets represent a significant segment of the economy.

A few caveats

To temper a responsible plan fiduciary’s enthusiasm for alternatives, the DOL letter sets forth specific issues to address during the review and documentation process:

1. Will the addition of private equity enhance the risk/return profile of the investment? Fiduciaries will need to evaluate returns net of expenses which, in the case of private equity, are likely to be higher than many other investments.
2. Do sponsors have the expertise to assess and monitor private equity investments, or should they consider obtaining outside expert advice or delegating some or all of the management responsibilities?
3. How much should be allocated to private equity? A recent Groom Law publication notes that the DOL cited an SEC limitation of 15% for illiquid assets for registered open-end companies.
4. Is the option being considered appropriately structured for a DC plan? With respect to this question, the DOL highlighted the challenges of cost, complexity, disclosures and liquidity.
5. Will plan participants receive sufficient information to be able to assess the characteristics and risks of the portfolio, of which the private equity investment is a component? This is a challenging issue since the DOL sets out that the participant needs to be able “to make an informed assessment regarding making or continuing an investment in the fund.”

From our own experience, there are additional considerations that plan fiduciaries need to review: intergenerational issues resulting from performance-based fees, comfort with leverage, and corporate actions including restructurings which can challenge investment rebalancing (particularly if corporate actions occur at the same time as market volatility).

What now?

In 1952, Nobel Prize Winner Harry Markowitz declared that diversification was the only “free lunch” in investing. Both the DCIIA Custom Target Date Fund (cTDF) Survey and our own research on off-the-shelf target-date funds show that DC plan participants mostly are not benefiting from a number of asset-class diversifiers, including private equity. Now that DOL has laid out a roadmap for plan fiduciaries to follow, providers can with greater confidence develop products that will make fiduciaries’ jobs easier. And, thanks to the DOL, that is welcome news indeed.

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

DOL Shows Greater Support for DC Innovation by Offering Views on How to Include Private Equity… was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

The COVID-19 pandemic has impacted us all greatly, but maybe none more tragically than the families of nearly 40,000 people who died from the disease at long-term care facilities as of May 29, 2020, according to the Kaiser Family Foundation. Thirty-nine US states have reported deaths at such facilities, representing 43% of the total. While long-term care has always been a challenging post-retirement issue, it now is squarely under the spotlight.

Anna Rappaport chairs the Society of Actuaries Committee on Post-Retirement Needs and Risks and researches the challenges facing Americans in retirement. I took the opportunity to talk to her about recent work she has been doing researching COVID-19 and the long-term care crisis.

Neil Lloyd: What are some of the concerns regarding long-term care, and how has COVID-19 exposed them?

Anna Rappaport: The Society of Actuaries Committee I chair has conducted extensive research on individuals age 85 and over as well as an online conversation among a multi-disciplinary group about the implications of COVID-19 for retirement risks, and their concerns and experiences. Our report, Impact of COVID-19 on Senior Housing and Support Choices[1], provides an overview of the issues linked to housing and support.

Our research with individuals age 85[2] and over indicated that most people eventually need some assistance and family members are often the first source of aid. Although most people prefer to age at home, their need for support often increases gradually over time. They may have no choice but to consider moving to a senior community that includes activities, meals and transportation, and offers the potential for more extensive or specialized help.

The COVID-19 pandemic has uncovered systemic vulnerabilities in senior communities. With congregate dining rooms and activities, they offer the potential for rapid spread of the disease. The data on the spread in nursing homes has confirmed that indeed this has led to tragic outcomes — for residents and caregivers alike.

NL: How have these communities responded to the outbreak, and what has been the reaction of the residents and their families?

AR: Most senior housing facilities are discontinuing all community activities and dining and require residents to stay in their own rooms with meals being delivered. This can be very difficult for the residents’ well-being.

Many such communities have banned all visitors, including family members who help with the care of their loved ones. This is particularly challenging if the resident has dementia or is hard of hearing, and the family member has been serving as their advocate. While some of the residents are able to communicate independently with friends and family members using cell phones and video technology, others can do so only if they have help.

Some long-term care communities were allowing residents to leave and visit family but were requiring a two-week period of quarantine upon return. This has been very difficult for the residents, and some families have taken their family member out of the senior residence.

NL: Did unexpected financial issues surface in your research or discussions?

AR: Yes, some of this housing combines a variety of levels of support in single communities, or Continuing Care Retirement Communities (CCRCs). They have an array of financial arrangements and have traditionally allowed for prepayment of long-term care through the use of substantial entrance fees. Many people view these arrangements as offering a guarantee of long-term care, but it does not always work out that way. My essay, Are CCRCs and Senior Housing Communities a Good Choice?[3] provides insights into the risks, regulation and due diligence needed for such communities.

NL: Anna, you mentioned that providing home care for seniors also has challenges, but that the pandemic may actually make them worse. Could you explain?

AR: Older family members living at home often are able to do a lot for themselves, but not everything. As a result of the pandemic, older individuals and particularly those with compromised health are encouraged to socially distance themselves. Many who are staying home with little contact with other people now lack basic support. For example, people who were once able to go shopping on their own may now need more help.

Family members who are helping older relatives may have competing responsibilities, placing them under greater stress. Furthermore, multi-generational households need to figure out how to appropriately social-distance, which can be problematic if some of the household members work in health care or are first responders.

In addition, some people have paid homecare support. During the pandemic, that support may have been discontinued, given COVID-19-carrier concerns. Providers may have become ill, or they may need public transportation to reach the person they are helping.

NL: Any ideas about the path forward?

AR: People needing help and support as they age is not going to change. Seniors who have families who can help will try hard to avoid long-term care residences longer than they might have previously. I see the cost of such residences rising as they need to do more to be careful about infection spread.

Decisions to go to CCRCs were often lifestyle choices, with the idea that they offered a great lifestyle and the assurance of care later on. Going forward, these decisions will need to follow a more robust, less emotive, due diligence process.

I also see families starting to make different decisions about housing and location, with more people choosing multi-generational solutions. More people may consider proximity to family when choosing where to live. Finally, I think people may be more concerned today about living in highly populated center cities and will opt to live where there is more open space.

NL: Thanks, Anna.

As an industry, we design solutions aimed at helping retirees meet the challenges they face in retirement. It has becoming increasingly clear that retirement is not simply solving a complex actuarial or engineering problem, but one where there are many uncertainties and human realities that we need to consider. The pandemic has clearly revealed many of the problems, in fact tragedies, facing aging people and children with aging parents. We may not have immediate solutions to such a complex problem as long-term care, but if our goal is to help people have a successful retirement, this is an issue we need to address with some urgency.

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

[1] https://www.soa.org/resources/research-reports/2020/covid-19-senior-housing/

[2] Rappaport, Anna, Retirement Experiences of People Age 85 and Over, Society of Actuaries, 2019. https://www.soa.org/globalassets/assets/files/resources/research-report/2019/retirement-experiences-people-over-85.pdf

[3] https://www.soa.org/globalassets/assets/files/resources/research-report/2020/covid-19-aging-essay-rappaport.pdf

COVID-19 Shines Spotlight on Long-Term Care was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

Business leaders are now dealing with relaxation of many COVID-19 restrictions, including a return to work — and possibly reimagining their business models.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

A month ago, Mercer’s Asia CEOs hosted a webcast where they discussed being at the leading edge of the epidemic, and how they were dealing with the recent relaxation of many of the COVID-19 restrictions, including return to work. This is a topic that has been gaining a lot of attention in the U.S. lately, and I thought several observations were particularly relevant to employers who are just now beginning to contend with these issues:

• Returning to work is not that simple, and senior managers have admitted it was taking more time to figure out than they had initially expected or appreciated.
• For example, Singapore had seemingly managed its epidemic instance early on, yet in early April had to go on lockdown again as a result of a second wave of infections.

The contours of this pandemic were predicted in Tomas Pueyo’s March 19, 2020, Medium article, “Coronavirus: The Hammer and the Dance,” in which the national lockdown, which he called the hammer, would eventually morph into the dance, in which certain sectors of the economy could reopen, including schools and some factories — but at some risk of secondary but less severe outbreaks. Both sides of the equation, Pueyo thought, would take weeks, not months.

Within Mercer, we have been sharing a similar view of the current- and future-state pandemic response lifecycle, as represented by the following illustration:

Like the hammer phase, the current state is concerned with the peak of the outbreak and the response of employers to execute business disruption plans and support for workers. The future state — the dance, if you will — is largely concerned with companies reopening and attempting to reduce the potential for resurgence. The illustration reveals the complex reality of the environment that both employees and employers are now experiencing, an environment none of us has fully experienced before.

Balancing employee needs and organizational objectives — with empathy

Viewed through this lens, a key component of how we advise clients on retirement and financial wellness issues, at any time but clearly during a crisis, is that first we both need to understand the diversity of a company’s employee demographic and their varying needs and, second, we need to reasonably balance those needs against organizational objectives.

I had the opportunity to talk with Will Ferguson, a Senior Partner in Mercer’s Career business, about some of the discussions the firm has been having with clients in this regard.

Neil Lloyd: Will, could you briefly outline what this respond-return-reinvent continuum means for organizations and employees?

Will Ferguson: As we think about how companies and employees will experience the pandemic, we are envisioning a progression from “respond” to “return” to “reinvent.” However, these phases are not necessarily sequential, as you can see from the looping arrows in the illustration. We believe that we will likely see cycles between “respond” to “return” and then back to “respond.” However, as we think more about “return” questions, we need to realize that the “return” is not necessarily the end state. In fact, as companies go through these cycles, there are opportunities emerging to reinvent the business model or people programs. In some cases, these opportunities will be imperatives for the future success of the business. Indeed, they may separate the companies that thrive in the future from those that don’t.

NL: What can employees expect as companies go through these various stages of response, return and reinvention?

WF: The current situation is clearly testing our personal resolve, readiness and resilience. Our experience as employees will be a mix of progress, lack of progress/regression, refinement of approaches, and then moving forward again. So, we have to be prepared for a variety of work environments that we can’t predict, while at the same time find new ways to be adaptive and supportive of each other. If organizational leaders do this well, we should see a clear initial focus on employee safety, naturally evolving into ensuring well-being. This transition generally will help employee engagement and productivity.

NL: From an employer’s perspective, what do you see as being the critical factors that will distinguish the most successful companies?

WF: If companies are able to navigate the respond-return-reinvent cycle well, and provide the type of employee experience described above, they will emerge with a happier, more engaged, productive and resilient workforce. In other words, while most companies clearly will need to manage costs amid revenue uncertainties, the eventual winners will also focus on employee engagement along the way. I think it will be through active employee engagement that companies will be able to find the opportunities to reinvent their employee experience while also finding the ways to reinvent their business models.

NL: Any final words of advice?

WF: Empathy toward employees is important and retirement benefit communications need to carefully consider the assumptions and realities that all employees are confronting. With all the uncertainty and the disruption in work and personal routines, this is a time to emphasize some basics in human interaction. Take the time to connect with people, beyond a perfunctory, How are you doing? As social distancing has changed all our typical methods of interaction, it’s critical to take the care and extra steps to personalize our day-to-day relationships.

NL: Thanks, Will.

Further thoughts on wellness and retirement security

In thinking through Will’s comments from a financial wellness and retirement-plan perspective, the “reinvent” stage seems especially intriguing. In the current environment, retirement security may not be the greatest priority for either employees or employers. But retirement security remains somewhat central to addressing the problem, since retirement savings are an essential underpinning for COVID-19 hardship distribution and loan provisions authorized under the CARES Act. Without available retirement savings, those provisions would have no impact.

To illustrate the need for empathy, a plan sponsor mentioned this week that they had been planning a “maximize the company match” campaign. But they soon realized that the outreach to participants would need to be postponed. Given the company’s large number of furloughs and layoffs, it would have seemed insensitive to the difficult circumstances many people are dealing with.

Everyone recognizes that the post-COVID-19 world likely will be different. But how different? Where different? The drivers of what it takes to build and sustain a successful organization may change by a little, or by a lot. And they will affect people programs that employers offer, including retirement plans. There is little doubt that employees could have benefited from, and in the future may really need, broader financial wellness initiatives such as emergency savings, financial coaching, short-term loan facilities or simply helping people repair their credit scores.

In the meantime, I’m back to WFH (working from home) and yet another Zoom call.

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

Respond — Return — Reinvent: Business as Abnormal was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

In addition to the usual Annual Retirement Confidence Survey, the Employee Benefit Research Institute (EBRI) and Greenwald & Associates conducted a supplemental refielding of some selected questions March 20–30, 2020 to see what toll the market and COVID-19-related turmoil is taking on more than 2,000 retirees and workers. The RCS, the longest running survey of its kind, and this supplemental survey was released on April 23, 2020.

This week I spoke with Craig Copeland, EBRI’s Senior Research Associate and co-author of the report, to glean some additional insights. (My intent here is not to summarize the results in this Q&A; the report contains a detailed executive summary and analysis. Disclosure: Mercer is one of the founding members of EBRI (over 40 years ago). Neil Lloyd, currently serves as EBRI’s Research Chair.)

Neil Lloyd: Craig, can you give some perspective on the decision to refield the survey, and any interesting takeaways that came from that?

Craig Copeland: The RCS has been fielded in January going back a number of years. We completed the project on schedule, and results were in line with expectations given the state of the economy. However, as we prepared to publish our results, the pandemic struck, which caused us to question whether the survey responses were still applicable. We decided to refield specific attitudinal questions in late March.

Interestingly, as late as the end of March, retirement confidence of both retirees and workers generally had held at January levels. That was before the widespread unemployment that occurred the first weeks of April. However, the retirement picture was bifurcated: rosy for workers who maintained their jobs, but predictably less positive for those who had lost or expected to lose their jobs in the March survey. Across the board, the share who were confident in each of the aspects of retirement was sharply lower (up to 20 percentage points in many cases) for those who lost or expected to lose their jobs compared with those who didn’t.

NL: One observation I noticed was that respondents seemed satisfied with their DC plans and the investment options available. I know you asked a question about what plan improvements would be desirable. What responses did you get?

CC: Of the workers that were offered a workplace retirement savings plan, three-quarters or more were satisfied overall with their defined contribution (DC) plans and the investment options available. However, when asked what their plans could do better, one aspect really stood out — explaining what their accumulated savings indicated in terms of income in retirement and whether their current level of savings was on track. Specifically, 39% of those offered a workplace retirement savings plan said that the most valuable improvement would be a better explanation of how much retirement income their savings will produce. Similarly, 30% said a better explanation for whether they are on track with their retirement savings would be the most valuable. Among the other top four potentially valuable improvements were a wish for more one-on-one, in-person education (28%), and access to more post-retirement investment options (24%).

NL: You mentioned that financial wellness programs are welcomed by employees, yet few plan sponsors offer them. What types of wellness programs do workers value the most?

CC: When asked about specific workplace educational or financial well-being programs’ helpfulness in better preparing or saving for retirement, more than four-fifths of workers said that certain programs would be very or somewhat helpful. In particular, programs that help plan for health care expenses in retirement (86% very or somewhat helpful); calculate how much they need to save for a secure retirement (85%); educate or offer advice on how to convert savings into retirement income (82%); and educate or offer advice on how to manage competing financial priorities (80%) all had strong support.

The one type of program that did not receive broad-based support was student-loan debt assistance, where only 49% of workers said it would be helpful. However, responses were stronger for the youngest workers (ages 25–34). In contrast, 77% of workers thought access to emergency savings accounts or programs would be helpful.

NL: Retirement income remains a persistent challenge for both workers and retirees. Can you address the different perspectives between the two groups?

CC: Accomplishing the goal of converting savings into sufficient income in retirement has been challenging for many. Consequently, 74% of workers said that they intend to work in retirement to make ends meet. While this seems like a plausible plan, only 27% of retirees say that they have actually worked for pay since they retired. This finding has been consistent going back nearly 25 years.

NL: Any final thoughts, Craig?

CC: The potentially ticking time bomb is debt. With many Americans losing their jobs, debt is likely to pile up. The RCS clearly shows that Americans who have a problem with debt also have issues with the ability to save for retirement. For example, seven in 10 workers with non-mortgage debt said it is negatively impacting their ability to save for retirement in general, and half suggest it’s impacting their ability to participate in their employer’s retirement plan or other benefits. If Americans have any hope of improving their retirement prospects, they must first deal with any debt issues. It’s a terrible Catch-22: the pandemic will increase the number of Americans having a problem with debt, thereby limiting their ability to improve their retirement prospects.

NL: Thanks, Craig. For readers looking for more information, a lot more detail on the RCS is available on the EBRI website.

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

Latest Retirement Confidence Survey Reveals Job-Status Concerns was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

A month ago, my wife and I returned from visiting Asia to see my son. It is amazing what a difference a month makes, as today the isolation and social distancing we are experiencing across most of North America is much more severe than we ever experienced in Asia. And like many, we are getting used to the reality of working from home, and finding our house, with both kids back from university, more crowded than it usually is this time of the year.

By contrast, my work supporting Mercer’s US Defined Contribution and Financial Wellness areas has been tumultuous over the past four weeks. The reality of job losses and many Americans not being in a position to make a living has been staggering. In response to health and economic concerns over COVID-19, the global markets have seen significant declines in both equity and investment grade credit, and we have heard invocation of the word “Depression” in the media far too often.

We have heard invocation of the word “Depression” in the media far too often.

Fortunately, the CARES Act enacted on March 27 removed, at least for the short term, constraints on loans and distributions for defined contribution (DC) plan participants affected by the virus. Although the law immediately relieves financial pressure on participants, our priorities, in my view, need to be focused in the following three areas:

• Priority #1 is health — hoping we can stop the spread of COVID-19.
• Priority #2 is immediate financial concerns — Do furloughed or laid-off employees have money to buy food or pay rent? And when do they get a job again?
• Priority #3 is longer-term planning issues like retirement security — unless, of course, participants are near or at retirement, in which case the calculus changes.

How have DC investment products fared?

Although retirement may not be the top concern for most people right now, we wanted to look at how defined contribution plans and their participants have fared since late February. Here’s what we found:

Target date funds

We began by surveying target date fund (TDF) managers[1], who in 2019 represented over a quarter of total DC assets under management. Overall, the feedback from managers has been encouraging and, while returns were expectedly negative, we heard the funds themselves had no rebalancing and few liquidity issues, given positive inflows: TDF investors are staying the course. There was mention of near-retirement TDFs experiencing slightly stronger than normal outflows at the margin. Those funds that did make dynamic or tactical asset allocation calls appeared to move to more conservative positioning.

Stable value

The second asset class we looked at was stable value funds, which are relatively unique to the US defined contribution market. During the Global Financial Crisis (GFC) of 2008–09, stable value faced some challenges that led to some post-crisis restructuring. So how did stable value funds do this time around? During the recent market declines and volatility, returns of stable value investments have remained positive, with cash flows approximately 5% above normal levels. Managers told us that despite the tough market, the asset class was faring relatively well, and possibly more importantly, they were having no issues obtaining the insurance they use to provide participant guarantees.

Managed accounts

Managed account service providers advise on 401(k) assets by creating a personalized asset allocation taking into account an individual’s specific needs and risk tolerances. These providers then implement the strategy by selecting underlying funds and rebalancing them over time. We surveyed the four largest providers. Our key takeaway was that each of their responses to the downturn was somewhat different: their stated approaches and methodologies had not changed (with the exception of frequency of rebalancing), in two cases, the providers lowered equity allocations post the market correction in late February, and in one case the provider increased equity allocation. Depending on how equities perform going forward, we will see which decision proves to be more successful.

Managed account providers reported generally increased interest from participants in terms of engaging their services and advice, but we think it’s too early to draw many conclusions. From a business-continuity perspective, managers told us that moving to remote call centers had taken place without material disruptions despite sharply increased call volumes. The managed account providers did report that participants nearing retirement were expressing some interest in adopting more conservative risk postures.

Recordkeepers: No big movements in participant accounts

A very positive report from recordkeepers was that, although the number of participant account transactions had increased materially, the actual volume of assets being traded remained small; that is, DC participants were not making big allocation or contribution changes. As expected, there was some movement to reduce riskier exposures for participants nearing retirement age. Call-center volumes increased markedly, with some expected lengthening of wait times. At the time of our survey, demand for loans or distributions had not increased, but with the passing of the CARES Act, this may change. Recordkeepers did report that they had been fielding queries from plan sponsors about potentially deferring or suspending company matching contributions (as some plan sponsors did during the GFC).

During the end of the first quarter, the sharp market drop could have panicked many participants. Thankfully, most now appear to be prepared to stay the course. Of course, much uncertainty lies ahead. COVID-19 remains with us and we will all need to be vigilant. That means staying healthy, monitoring the numbers of new cases of infection, and taking care of the significant and growing number of the unemployed and underemployed across the country. Given what we know about the general savings landscape in the US, the latter group may need to take loans and distributions from their plans. Let’s hope the market gives all of us more joy than it did in the first quarter.

In the meantime, #stayathome, #staysafe.

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

[1] Mercer survey responses were received in the second half of March and hence may not represent all that happened in Q1.

Defined Contribution (DC) Asset Managers and Recordkeeper Survey: COVID-19 Response was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

by Steven Schinderle, Principal, Mercer Health

As a growing number of states implement actions to limit the spread of COVID-19, some employers are weighing the need to take some type of workforce action. Which path to take will depend on the organization’s unique situation, and it’s critical to understand the important consequences of each for your workforce strategy. In this article, we’ll focus on furloughs versus layoffs in terms of the impact on continuation of benefits coverage.

Generally, layoffs result in a termination of employment and a loss of benefits. That will trigger benefit continuation requirements like COBRA for health benefits and conversion and portability for some insured employee paid benefits. In contrast, a furlough is a temporary unpaid leave from work, usually for a set period. Furloughed employees may remain eligible for health and other benefits coverage. You’ll need to dig out those plan documents to confirm.

Want to read more? You can continue reading the article here.

Get the latest insights from Mercer’s US Health News.

Originally published at https://www.mercer.us on March 26, 2020.

Do Benefits Continue During Furloughs? was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.

By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

With the coronavirus (COVID-19) sadly taking so many lives around the globe, the focus of government leaders and health providers is appropriately on public health and trying to ensure the numbers do not get out of hand. It’s nearly impossible to read or watch the news without hearing about “flattening the curve.” Social distancing is now accepted, and the majority of us who are lucky to do so are working from home (not always by choice). In this environment, those who now provide essential services — health care workers, grocery store employees, drivers, delivery people, etc. — are true heroes.

Those who now provide essential services — health care workers, grocery store employees, drivers, delivery people, etc. — are true heroes.

From a financial perspective, things are clearly tough. Equity markets were down sharply in March, with volatility spiking at month-end. Hopefully markets will recover when the COVID-19 crisis begins to normalize — historically the case with other market shocks. Unless plan participants need immediate liquidity, most people have some time to ride the market volatility out. The more immediate financial hit has been on businesses that have had to close (e.g., retail stores), or have no (or few) customers (e.g., hotels, airlines). Both have taken an abrupt toll on many Americans’ ability to make a living, either through layoffs, furloughs or fewer shifts.

Congress responded in a number of ways. The latest of these, contained within the $2.1 trillion Emergency Relief Bill signed into law last week, is the 893-page Coronavirus Aid, Relief and Economic Security Act (CARES Act), which includes important provisions related to expanded unemployment insurance and tax credits for individuals and employers. It also contains some, but not all of the retirement-relief provisions that Mercer has advocated for a long time.

To get additional insights on how the CARES Act affects workers and employers, I spoke with Chris Mahoney, Mercer’s US Wealth Leader. (For a more detailed summary of the retirement provisions, please visit Mercer’s GRIST site.)

Neil Lloyd: Chris, a month ago you argued that the US needs to address broader financial wellness needs than just retirement. The direct relief provided by the CARES Act seems to do exactly that, with its immediate goal to address financial hardships. Can you describe the direct relief that will flow once CARES is enacted?

Chris Mahoney: The Act allows participants in defined contribution (DC) plans to access their funds to address immediate needs. For instance, employers can now let participants borrow up to $100,000 from their DC plans without having to pay the 10% penalty tax (prior to age 59½). And employers can double their plans’ loan limit from the lesser of $50,000 or 100% of their vested account balance to the lesser of $100,000 or 100% of their vested account balance. For participants taking out new loans or participants with existing loans, any repayment that would be due between the enactment of CARES and before Dec. 31, 2020, would be delayed for a year.

This relief is broadly available to individuals who have been diagnosed with COVID-19, as well as those who have spouses or dependents who have been diagnosed. It’s also available to people who aren’t directly affected by the virus, but who have suffered financially as a result of being quarantined, furloughed or laid off — or simply having had their hours reduced or lost access to childcare.

Neil Lloyd: What about the changes to Required Minimum Distributions (RMDs)?

Chris Mahoney: The Internal Revenue Code’s minimum distribution rules force most people to start taking money from their DC plans and IRAs when they reach a certain age. The SECURE Act raised the age of RMDs to 72, but people who turned 70½ last year would generally have had to start taking distributions in 2020. The bill gives retirees the option to not take RMDs in 2020. This is significant because the required distribution amount is based on the prior year-end account balance. For most people, account balances on Dec. 31, 2019 were significantly higher than they are now. So this helps people who don’t want to be forced to sell assets when the market is down. One thing to note — the relief only applies to certain qualified plans and IRAs. RMDs from defined benefit (DB) plans aren’t waived for 2020.

Neil Lloyd: What about relief for defined benefit plans?

Chris Mahoney: DB plan sponsors, who usually have to make contributions in four quarterly installments (plus a final contribution due 8½ months after the end of the plan year), will get an extension for all required contributions during the 2020 calendar year. Sponsors can push those contributions off until Jan. 1, 2021. This is just a deferral, though, not a waiver. When the sponsors make those contributions, they will have to include extra interest. But in the meantime, they can use that cash for more urgent needs.

Underfunded DB plans are subject to restrictions on accelerated payments such as lump sums and might need to freeze benefits if their funding levels drop too low. The Act lets sponsors use their 2019 funded percentage to determine whether they’re subject to benefit restrictions in 2020.

Neil Lloyd: I gather defined benefit plan sponsors were hoping for more funding relief from the bill. Where does it fall short?

Chris Mahoney: The contribution deferral doesn’t address some fundamental difficulties DB plan sponsors were facing before the markets turned. Interest rates are at historical lows and the equity markets have dropped precipitously, significantly reducing the funded status of many plans. Mercer, along with industry trade groups, has lobbied to get longer-term funding relief into the Act. The House version included an extension of the interest-rate stabilization that’s been in effect since 2012, along with an extension of the shortfall amortization period from seven to 15 years. But both of those proposals were dropped during negotiations with the Senate. Still, we expect another couple of rounds of relief legislation, and we hope that these provisions will be considered for inclusion in those bills.

Neil Lloyd: Thanks, Chris.

And to our valued readers out there, please stay safe and ideally, stay home.

Important Notices

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.

COVID-19, Market Turmoil and the CARES Act was originally published in Mercer Media on Medium, where people are continuing the conversation by highlighting and responding to this story.