Workplace Visions®

A Publication of the Society for Human Resource Management

Issue 1 | 2012 Changes to Retirement Benefits: What HR Professionals Need to Know in 2012

By now, it is no secret that older workers are delaying retirement and staying in the U.S. labor force at a higher rate. The main factors driving this trend are financial difficulties related to the recent recession, decreased value of retirement savings accounts and longer lifespans that allow healthy seniors to remain on the job.

In 2006, 11.2% of workers age 50 or older expected to retire at age 70, but in 2010, this number increased to 14.8%, according to the Employee Benefit Research Institute (EBRI)(see Figure 1). The expected date of retirement at other ages also increased: 1.7% planned to call it quits at age 80 in 2006, but that number jumped to 5.2% in 2010.

Figure 1 | Expected Retirement Age of Those in the Labor Force Age 50 or Older

Source: Employee Benefit Research Institute (December 2011)

7.4%

5.6%

4.9%

16.1%15.0%

14.6%

2.9%3.6%

4.0%

11.2%

14.8%

4.3%5.7%

7.0%

1.7%

3.2%

5.2%

22.4%

16.3%

18.7%17.8%

14.3%

62 65 66 70 75 80 NeverDon’t Know

2006 2008 2010

9.7%

21.0%

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Perhaps of greater significance is that more than 30% of respondents to the 2010 survey either did not know when they would retire or had no plans to stop working at all (16.3% said “never,” 14.3% said “don’t know”).

With that in mind, HR professionals and benefits experts can expect to spend more time focusing on retirement-related issues for older workers in the near future. There are also several changes coming to retirement plans in 2012, including the following:

QQ Increased 401(k) plan fee disclosure. Approved by the U.S. Department of Labor (DOL) in 2010, this rule is expected to provide more information for employers on the costs of offering retirement plans for their employees.1 Although workers are responsible for making their own investment decisions on 401(k) and related plans, the DOL has argued that companies and employees need greater disclosure on fees and expenses associated with those investment plans. DOL officials agreed to enact those changes in April 2012, but retirement plan providers have asked for more time to comply with the new rules. It’s still not clear if they will be granted an extension before the April deadline. Eventually, the new rules will pay off for employers and HR professionals who want to know if they are getting the best investment for their employees at the lowest cost. The DOL estimates that 72 million workers are covered by “participant-directed” accounts, such as 401(k) plans, and those plans contain nearly $3 trillion in assets.

QQ Improved access to 401(k) counseling for account holders. In essence, this rule broadens the availability of investment advice for workers as provided by their employers. Previously, retirement plan providers had to hire an independent third party to dole out investment advice for account holders in order to prevent conflicts of interest when recommending funds.2 The new rule allows that advice to be dispensed by an employer’s fund manager, provided that the fund manager’s compensation does not benefit based on the investments selected. In 2011, 42% of employers offered individual investment advice for their workers, according to the SHRM 2011 Employee Benefits research report.3

QQ Increase in saver’s tax credit. The saver’s tax credit is designed to help low- and moderate-income families save for retirement. It helps reduce taxes on the first $2,000 that eligible workers contribute to IRAs, 401(k) plans and related retirement programs.4 In 2012, those eligible for the credit include married

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couples filing jointly with household income up to $57,500 (up from $56,500 in 2011); heads of household with incomes up to $43,125 (up from $42,375 in 2011); and married individuals filing separately and singles with incomes up to $28,750 (up from $28,250 in 2011).

QQ Changes in Social Security. For the first time since 2009, retirees will see a slight increase in Social Security payments in 2012. Monthly benefits for more than 60 million Americans increased 3.6% this year.5 The income level on Social Security taxes has also been raised. The maximum amount of earnings subject to the tax will jump to $110,100, up from $106,800 in 2011. HR professionals will also need to keep an eye on Congress regarding the Social Security payroll tax rate, which remains at 4.2% after a two-month extension of President Obama’s payroll tax cut was passed by Congress late in 2011. If an agreement cannot be reached, the payroll tax will revert to its 2010 level of 6.2%.

“The new normal” ..........................................................

A weak economy, coupled with declines in household wealth and savings rates for retirement, is changing the face of the U.S. labor force. Although a steady percentage of Americans are still retiring in their early to mid-60s, expectations of that scenario for many workers have been replaced by one of extended careers and, in some cases, doubts about ever leaving the workforce.

It is what EBRI has called an age of “the new normal.” According to the institute’s 2011 Retirement Confidence survey, 27% of all workers were “not at all” confident about having enough money for a comfortable retirement (see Figure 2). That is the highest level in the survey’s 21-year history.

As recently as 2007, a combined 70% of respondents had some level of confidence in their retirement savings (43% said “somewhat,” 27% said “very”). That number fell to a combined 49% in 2011 (36% said “somewhat,” 13% said “very”).

It is easy to see why that confidence has fallen dramatically—EBRI says that 29% of workers have less than $1,000 saved for retirement. More than half of workers surveyed (56%) said that the total value of their household’s savings and investments, excluding the value of their home and any defined benefit plans, such as pensions, is less than $25,000.

Other surveys show that some level of retirement confidence has returned among workers, but long-term concerns remain. Professional services company Towers Watson found that 68% of workers were “very or somewhat confident” about having enough resources to live comfortably 15 years into retirement.6 But less than half (47%) said they “very or somewhat confident” about having

enough resources to last 25 years into retirement, and nearly three out of five workers (59%) remain “generally unsatisfied” with their financial situation.

More responsibility for workers ......................

For those fortunate to have access to a retirement plan through their employer, the contribution burden continues to shift more toward the workers rather than the companies that administer the plans. In 2007, a sizable proportion of companies (40%) still provided traditional defined benefit retirement plans, most commonly in the form of pensions. In 2011, that dwindled to 22% (see Figure 3). During that same timeframe, employers gradually ramped up their use of defined contribution plans, most commonly in the form of 401(k) packages (from 83% in 2007 to 93% in 2011).

Employers, though, are becoming more proactive in encouraging workers to plan for the future. According to SHRM’s 2011 Employee Benefits survey report, 41% of companies had automatic enrollment into defined contribution retirement plans—where all employees participate unless they opt out of the plan—in 2011, up from 32% in 2007. The survey also showed that 70% of companies offered some level of “employer match” for defined contribution plans, virtually unchanged from 74% in 2007.

So why are workers saving so little—or not saving at all—for retirement? A 2011 survey by The Institute for Women’s Policy showed that many people still struggle to find the extra money to put away for the future (see Figure 4). Nearly seven out of 10 (69%) women and 53% of men simply said, “I cannot afford to save more for retirement,” according to the study.

The study also revealed that many workers may need more guidance and motivation to plan for their golden years—6% of women and 8% of men said they “weren’t sure” which decisions to make concerning retirement.

What is HR’s role? ...................................................

In light of these findings, there is an opportunity for HR professionals to take a leading role in guiding workers toward retirement planning and use those moves to better position their companies for the changing demographics of their workforce. In a paper published by the National Association of Business Economics, Gad Levanon and Ben Cheng of The Conference Board argue that businesses can

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Figure 4 | Workers’ Reasons for Not Saving More for Retirement

Source: Institute for Women’s Policy Research (September 2011)

I haven’t gotten around to setting up a retirement

savings plan

I am not sure which decisions to make with respect to a retirement

savings plan

I cannot afford to save more for retirement

I do not have access to a retirement savings plan

Other/not sure

Men

Women

9%

4%

8%

6%

53%

69%

7%

10%

23%

11%

Figure 2 | Worker Confidence in Having Enough Money to Live Comfortably Through out Their Retirement Years

Source: Employee Benefit Research Institute (March 2011)

2003 2007 2011

45%43%

36%

17%

16%

27%

19%

10%

13%

23%

27%

45%

Not at all confident

Somewhat confident

Not too confident

Very confident

27%

Figure 3 | Changes in Retirement Benefits Offerings

Source: SHRM 2011 Employee Benefits Research Report (June 2011)

Defined benefit pension plan

Automatic enrollment into

defined contribution retirement plan

Defined contribution

retirement savings plan

2007

2011

40%

22%

32%

41%

83%

93%

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Endnotes .....................................................................1 U.S. Department of Labor. (2010, October). Final Rule to Improve

Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans [news release]. Retrieved Jan. 11, 2012, from http://www.dol.gov/ebsa/newsroom/fsparticipantfeerule.html.

2 U.S. Department of Labor. (2011, October). Investment Advice—Participants and Beneficiaries. Retrieved Jan. 11, 2012, from http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=25414&Month=10&Year=2011.

3 Society for Human Resource Management. (2011). 2011 Employee Benefits: A Research Report by the Society for Human Resource Management. Retrieved Jan. 11, 2012 from www.shrm.org.

4 U.S. Internal Revenue Service. (2011, December 16). Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement [news release]. Retrieved Jan. 11, 2012 from http://www.irs.gov/newsroom/article/0,,id=251338,00.html.

5 U.S. Social Security Administration. (2011, October). Social Security Announces 3.6 Percent Benefit Increase for 2012 [news release]. Retrieved Jan. 11, 2012 from http://www.ssa.gov/pressoffice/pr/2012-cola-pr-alt.pdf.

6 Towers Watson. (2012, January 19). U.S. Workers’ Financial Situation and Confidence in Retirement Security Improve, Towers Watson Survey Finds [news release]. Retrieved Jan. 24, 2012 from http://www.towerswatson.com/united-states/press/6239

7 Levanon, G., & Cheng, B. (2011, October). U.S. Workers Delaying Retirement: Who and Why and Implications for Businesses. The Conference Board.

8 U.S. Bureau of Labor Statistics. (2011, December). The employment situation. Retrieved Jan. 11, 2012 from http://www.bls.gov/news.release/pdf/empsit.pdf.

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Project TeamProject lead: Joseph Coombs, specialist, Workplace Trends and Forecasting

Project contributors: Jennifer Schramm, M. Phil., GPHR, manager, Workplace Trends and Forecasting; Mark Schmit, Ph.D., SPHR, director, Research

Copy editing: Katya Scanlan, copy editor

Design: Blair Wright, senior graphic designer

This report is published by the Society for Human Resource Management (SHRM). All content is for informational purposes only and is not to be construed as a guaranteed outcome. The Society for Human Resource Management cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information.

© 2012 Society for Human Resource Management. All rights reserved. Printed in the United States of America.

This publication may not be reproduced, stored in a retrieval system or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the Society for Human Resource Management, 1800 Duke Street, Alexandria, VA 22314, USA.

For more information, please contact:

SHRM Research Department 1800 Duke Street, Alexandria, VA 22314, USA Phone: (703) 548-3440 | Fax: (703) 535-6432 Web: www.shrm.org/research

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adjust to the retirement trends in their industry and region by restructuring job options, if necessary.7 According to Levanon and Chen, “in particular, policies regarding executives may be needed—businesses can move senior executives into advisory roles, thus using their knowledge and experience while allowing for promotions among the less tenured.”

Recent federal data spell out the situation even more clearly. In December 2011, there were 29.4 million workers aged 55 years or older in the labor force.8 That is up from 26.2 million at the start of the recession in December 2007, and significantly higher than 19.3 million in December 2001. The December 2011 total for older workers was also nearly on par with those aged 35 to 44 (30.3 million) and those aged 25 to 34 (30.8 million) for that month.

Above all, HR professionals need to weigh the positives and negatives of employing an older workforce. Having seasoned employees on the payrolls for longer periods of time can be a benefit—it can help stem the loss of experienced and knowledgeable Baby Boomers. However, older workers are often costlier to keep on board, due to higher salaries and health benefits costs.

Therefore, HR professionals must strike a balance through innovative approaches to ensure that the interests of both their organizations and their employees are best served.