State of Retirement Plan Advisory During COVID-19

4 Challenges to Watch Out for in the Time of COVID-19

June 10, 2020

As a retirement plan advisor, you know the importance of communicating to plan sponsors how current events may impact the health and performance of their plan(s). But great value also lies in helping them understand how our country’s ever-shifting socioeconomic landscape could affect the retirement readiness of their plan participants. While the state of retirement in America has long been in crisis, recent months have brought another crisis—events of a magnitude that could present significant challenges even for those who had been well-prepared for retirement. 

Working longer has been emerging as a key Plan B 

We are right in the middle of the baby-boom retirement years—baby boomers are generally those born between 1945 and 1965. As has been widely noted, this generation is underprepared for retirement. Their “Plan B” has been to continue working. According to the Department of Labor’s Bureau of Labor Statistics, the number of Americans aged 65-74 who have continued to work has increased from 17.7% in 1998 to 27% in 20181.

For some, this option has worked. One of the first questions an advisor will want to ask an individual client is, “When do you plan to retire?” because continued work can increase retirement readiness in three ways:

The cost of retirement goes down. Continuing to work shortens the period during which the individual must rely exclusively on retirement income.

Assets increase. While working, retirement assets are often retained and continue to earn returns.

Contributions may be made. During the period of continued work the individual may make further contributions to savings.

For some, COVID-19 will make retirement more challenging

While some, especially “knowledge workers,” have found it relatively easy to adapt to the conditions imposed by the response to COVID-19, others have had a more difficult time. For those who sought to supplement income with service industry labor like driving a rideshare or working in retail, it has created a significant problem. Many of these jobs involve face-to-face interaction, making them especially risky for older individuals who tend to experience more severe forms of the virus. So aside from under-saving and recent stock market shocks, COVID-19 is making the retirement income problem more acute for baby boomers who can’t find post-retirement work.

This is a lesson for those generations coming behind the baby boom, and advisors will want to emphasize these points when developing a retirement plan for a client.

Lower interest rates are affecting retirement income

Retirement finance must confront interest rates. This is most obvious in defined benefit plans, where liabilities are valued using current interest rates. It’s less obvious, but just as true, for defined contribution plans. At some point, individual participants are going to stop accumulating and—when they retire—start needing income.

Interest rates have been steadily declining since around 1982. While it’s impossible to predict the future direction of interest rates, interest rates have gone down significantly just in the last year. Will this trend continue? The risk of inflation resulting from massive federal monetary and fiscal stimulus generating higher rates is very real, but it is still early in this crisis. 

While a drop in interest rates may be good for the economy or home sales and may result in an increase in stock values, it also means that the cost of retirement income, like annuities or bonds, will go up. This can be a difficult issue for individuals to understand, but the consequences are very real.

Advisors should emphasize the importance of this challenge for their DC clients and provide them with options, that include annuities, to deal with it.

Preparing for long-term care and the added risk of nursing homes

The possibility of the need for long-term care presents a special risk for retirees, especially women because they typically live longer than men. While most individuals do not need it, or do not need much of it, long-term care can mean the difference between retirement “success” or “failure” for many. As Jack VanDerhei of Employee Benefit Research Institute (EBRI) has observed: “[O]ne of the biggest obstacles to retirement income adequacy for households who might otherwise have sufficient financial resources at retirement age is the risk of long-term care costs for a prolonged period.”And even though the need for long-term care is a risk—not a retirement income need—there is no broad long-term care insurance market.

The COVID-19 pandemic has made vivid another issue with long-term care: according to one study, 42% of US Covid-19 deaths are in long-term care facilities. This is likely to make retirees think twice about nursing homes and consider alternatives to them.

How much long-term care may cost and how to manage the risk it presents are some of the critical challenges facing individuals, sponsors of retirement plans, and those advising them. Developing creative solutions that meet evolving needs and expectations in this regard should be a top priority.

How might advisors begin the discussion of potential effects on sponsors, plans, and plan participants that may be posed by the COVID-19 pandemic or other catastrophic events? With a great deal to consider amid recent economic upheaval, sponsors are likely to have many questions, and may be experiencing anxiety around the health and future of their plan(s).   

Our dedicated plan experts are available to offer insight on plan performance, share resources on recent retirement plan legislation, and support in discussing viable solutions for impacted plan sponsors. To learn more, click here.