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The Retirement Setback: As 401(k) and Other Defined Contribution Plans Grow in Popularity U.S. Retirement Accounts are at RiskPosted by solo 401k on: 2006-12-12 09:39:43 in category:
401(k) [ Print | Permalink / 0 Comment(s) ] The Retirement Setback: As 401(k) and Other Defined Contribution Plans Grow in Popularity U.S. Retirement Accounts are at Risk Guardian Study Reveals, Nearly Half of U.S. Employees Would Discontinue Contributions to their Retirement Accounts in the Event of an Illness or Disability Consumers Have a Better Understanding of, and are More Likely to Review, their Auto Insurance than Disability Coverage NEW YORK, Nov. 13 /PRNewswire/ -- Millions of Americans are ignoring the impact that an illness or a disability can have on their retirement savings according to a new survey by The Guardian Life Insurance Company of America (Guardian). The study entitled Insurance & Behavior -- Spotlight on IDI shows that nearly half (48%) of Americans say they would probably have to stop making contributions to their retirement account should they become disabled. ADVERTISEMENT Retirement at Risk "This statistic is very alarming as we shift toward a defined-contribution model for retirement in which more Americans have personal responsibility for their retirement savings," said Matthew Gottfried, ASA, Director of Individual Disability Income at Berkshire Life Insurance Company of America (Berkshire), a wholly owned stock subsidiary of Guardian. "Americans are at risk because they are not protecting their ability to save for retirement. If they are unable to work for a period of time due to accident or illness they may be forced to stay in the workforce longer than desired to make up for the lost savings, or worse, forced to retire without an adequate nest egg." Automatic Deposits Cease When Paycheck Stops For most employees at companies with 401(k) or 403(b) plans, retirement saving is fairly easy: Tell your employer how much you'd like to contribute and the deductions are made from your paycheck. But, if an illness or injury is severe enough to prevent you from returning to work, those automatic deductions to fund retirement stop, along with the regular paycheck. The Numbers: How Retirement Contributions Are Impacted For example, take a 45-year-old who makes $100,000 per year and contributes 10% of his/her income to a 401(k) account. The annual $10,000 contributions to a defined contribution plan would by age 65 accumulate to $494,229 (assuming an annual investment return of 8% compounded), not including employer contributions. If the same 45-year-old were only able to make five $10,000 contributions before becoming disabled at age 50, he or she would have $293,243 less due to the break in individual contributions. And, the employer's contributions could also stop. Even if the disability weren't permanent, the 45-year-old could still experience a dramatic loss in retirement plan value. A two-year disability could mean that his or her plan could have $61,094 less in individual contributions by age 65. A five-year disability could result in a $136,788 shortfall. Berkshire offers Retirement Protection Plus, one of the few such programs on the market that will cover up to 100% of retirement contributions made to a qualifying defined contribution plan in the event that contributions are temporarily suspended due to a work-stopping illness or injury or-in a worst- case scenario-stopped permanently by a total disability. Income Protection an Even More Fundamental Issue Added Berkshire's Gottfried, "In addition to protecting the ability to save for retirement, individuals need to think about protecting their ability to earn a living. Americans need to strike a balance between protecting income now and preserving income for later." Guardian's research shows that there is a general lack of understanding and disengagement when it comes to income protection. Several industry studies have shown that consumers say they value or understand the need for income protection, but they consistently fail to take action. Guardian's Insurance & Behavior survey offers insight on why there is a gap between perceptions and actions. One salient point to explain this gap is that consumers do not regularly review and assess their disability insurance needs and, according to the Guardian study, seem to have a better understanding of protecting tangible assets such as their cars. Tangibles vs. Intangibles * 76% of the individuals surveyed said that they understand their auto insurance versus 58% who believe that they understand their disability insurance. * 75% review their auto insurance at least once a year in contrast to 54% who review their disability insurance at least once a year. An alarming 24% admit that they never review their disability insurance. At their peril, according to Gottfried: "The worst time to find out you are under-insured is when you need the coverage," he observed, "or, if the disability ends up being permanent, to realize you can never buy any more." The lack of understanding seems to have an impact on the amount of insurance protection purchased. * 30% believe that they do not have adequate disability insurance coverage versus 11% who believe that they do not have adequate auto insurance. Disability Insurance Divide According to the survey, men are more likely than women to feel that they understand their disability insurance coverage. Gender * 62% of men versus 55% of women said that they understand their disability insurance coverage very well/extremely well. Respondents were also split along generational lines, with Boomers and Gen Xers more likely to feel that they understand their disability insurance coverage than Gen Y. Age * 20% of individuals age 18-24 believed that they understand their disability insurance coverage extremely/very well. Compared to: 47% age 25 -34, 61% age 35-44, 65% age 45-54, 68% age 55-64 * 1 in 4 of those ages 55 to 64 said that they do not understand their disability insurance coverage. These are people who are relatively close to retirement age and would have less time to recover retirement savings lost due to a disruption in work caused by illness or injury. The Price Is Right, but the Estimate is Wrong Despite the disability insurance disconnect, most Americans value the concept of income protection. In fact, close to one-third of consumers are willing to pay even more than is really necessary to protect their income. * More than 30% said that they are prepared to pay more than 10% of their monthly salary for disability income protection. But income protection for most individuals actually costs closer to 2% of their monthly salary. Added Gottfried, "The Guardian survey shows that people tend to over- estimate the cost of disability insurance. That may be because disability insurance is often described as expensive in articles and news reports. But expensive is a relative word. "Consumers, even those living paycheck-to-paycheck, are often willing to spend top dollar for luxury goods. But in an era of conspicuous consumption where many Americans have little or no savings, the value that you get for income protection products such as disability insurance is hard to beat." Indeed: * 78% of the individuals surveyed revealed that they would take a lower salary in exchange for income protection. So why does there appear to be a gap between attitude and behavior -- as evidenced by the relatively low market penetration of disability insurance? Gottfried offered a possible explanation: "When disability income insurance is described as income protection people understand it, but when they hear the words disability, the invincibility factor comes into play and people go into denial." Income Extremists * On the opposite side of the spectrum, according to the study, more than 1 in 5 Americans (23%) are not willing to pay any amount to protect their income. Said Gottfried, "This number is particularly disturbing. Some people may have the means to self-insure, but most Americans cannot afford to go without an income safety net. And, those who do choose to self-insure are putting their other financial plans at risk: college savings, retirement income or even their desire to leave a legacy are all impacted by putting personal, rather than insurance company, dollars to work." The numbers of those directly affected are not small: A 2004 report released by America's Health Insurance Plans (AHIP) notes that more than 1.5 million Americans have left the U.S. workforce due to a disabling condition. Society of Spenders Why is the prospect of Americans being forced to leave the workforce due to disability so troubling? Recent personal savings data shows that Americans continue to live paycheck to paycheck and have become a nation of debtors. Indeed, according to a report released by the U.S. Department of Commerce earlier this year, the personal savings rate in the U.S. fell into negative territory -- something that's happened for an entire year only twice before: 1932 and 1933, at the height of the Great Depression. * The Guardian survey shows that 50% of consumers have three months or less of their living expenses saved. Of those with three months or less saved, 29% admit that they don't have enough savings to cover any of their living expenses if they have to stop working. According to Berkshire's Gottfried, rules of thumb and one-size-fits-all advice are often off the mark. "I've read articles where people are advised to have three to six months of their expenses saved for emergencies, but a long-term, or even a short term disability, especially one without an insurance safety net, can easily eliminate a stockpile of one year's worth of living expenses. Furthermore many individuals would have to discontinue contributions to their retirement accounts which can have an impact on their ability to retire comfortably." Solutions Berkshire works regularly with insurance producers to help them better understand disability insurance and consumer perceptions so that financial representatives can better service their clients. "Those working in financial services usually do a good job making sure their clients have life insurance in place," noted Gottfried. "However, many producers are not even raising the subject of disability with their clients. It's a concern, because while they can feel good about making sure a death benefit is in place, they are not prepared for the phone call telling them that their client has become disabled, and no insurance is in place to help." Among affluent Americans, formal financial plans prepared by a professional are most likely to cover life insurance, asset allocation, investments, estate plans and planning for a child's education, frequently overlooking disability insurance, according to a 2002 Life Insurance Market Research Association (LIMRA) study. However, the same study revealed that the affluent who prepare their own formal plans are actually more likely to cover disability insurance in their plans (60% included it) than those who have formal plans prepared by professionals (47%). Another point of education: * According to the Guardian study, 66% of consumers were not aware that their workplace disability benefits are often taxable. "If more individuals were aware that employer-paid benefits were taxed they might be more inclined to maximize their group coverage and then purchase a supplemental individual policy," said Gottfried. "Consumer and producer education is critical in the fight against underinsurance." The Guardian study represents the findings of a telephone survey conducted among a national probability sample of 1,072 adults comprising 519 men and 553 women 18 years of age and older, living in private households in the continental United States. Interviewing for this survey was completed during the period September 8 - 11, 2006. About Guardian Founded in 1860, The Guardian Life Insurance Company of America, New York, NY (Guardian) is one of the largest mutual life insurance companies in the United States. As of December 31, 2005, Guardian and its subsidiaries had $36.9 billion in assets (on a consolidated statutory basis). With more than 5,000 employees and 3,000 financial representatives, as well as over 85 agencies nationwide, Guardian and its subsidiaries protect individuals, businesses, and their employees with life, disability, health, long-term care, and dental insurance products, and offer 401(k), financial products and trust services. More information about Guardian can be obtained at http://www.GuardianLife.com. About Berkshire Berkshire Life Insurance Company of America, Pittsfield, Mass. (Berkshire), is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, N.Y. Its key missions are to grow Guardian's disability income and long -term care lines of business and to research and develop new insurance products. More information about Berkshire can be obtained at http://www.BerkshireLife.com. About Opinion Research Founded in 1938, Opinion Research Corporation has been an industry innovator for nearly 70 years, delivering actionable insights to solve the toughest market research challenges of clients worldwide. The company conducts commercial market research programs as Opinion Research Corporation in the US and as ORC International outside the US. It also operates ORC Macro, a subsidiary specializing in social research programs for government agencies. |
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