Benefits and Compensation

Update Your Retirement Plan to Account for Changing Abilities

by Lisa Higgins, Contributing Editor

We know, you’ve heard a lot about the differences between the generations, especially when it comes to work and benefits. What do the Millennials want from their employers? How does that compare to the Baby Boomers’ expectations? And please, just because they’re a smaller group, don’t forget about the Gen Xers.

retirement plan

These are valid considerations. But research from Harvard business economist David Laibson, the basis of a recent report from State Street Global Advisors, suggests there is more to the story than simply how to communicate and which benefits to emphasize. Timing is also a critical factor.

That’s because the development of our brains can be a help or an impediment to good financial decisions. The key is in the ways our intelligence develops over time—and how it declines.

Two Kinds of Intelligence

Laibson reports that there are two kinds of intelligence, which he calls fluid and crystallized. Fluid intelligence, the ability to learn and adapt, is most pronounced in younger people. They can easily pick up new skills and remember what they learn. Fluid intelligence declines rapidly over time, Laibson says.

Crystallized intelligence is wisdom learned through experience, and it increases over time. We hear about it in folk sayings, like “You can’t teach an old dog new tricks,” and “She’s set in her ways!” Both types of intelligence come together when we are in our 50s, setting up a perfect storm of cognitive ability; we’re still able to learn, and we have wisdom gained from experience. We’re at the exact right moment to make sound financial decisions. Soon after, though, our cognitive abilities decline.

That, say Laibson and State Street Global Advisors’ Fredrik Axsater, is the reason that around the age of 50 is the perfect time for retirement plan participants to make choices about their future retirement needs.

Axsater, who is the global head of State Street’s Defined Contribution and ESG businesses, says their firm sees three distinct phases of retirement planning: Save It, Grow It, and Spend It. “Research shows that approaching and near the age of 50 is a good time to start talking about the reality of retirement,” he says. “By exploring the Spend It phase earlier than at retirement, you can alleviate stress and allow for more time to consider both savings and spending behaviors as [people] near retirement. It helps them get a better picture of the future.”

This is in contrast to the timing experienced by many plan participants. They may not make decisions about how to receive their retirement plan account balance until they are just about there. Based on Laibson’s research, that’s much too late for a participant to make the best financial choices.

Withdrawal Strategy Discussions Should Start Earlier

Axsater recommends starting the Spend It discussion when people are around the age of 50 and cognitive abilities are at their peak. That’s the time to seriously consider issues around retirement, such as catch-up savings, asset allocation in line with your anticipated retirement date, and how that money is going to be spent, he says.

“When employees hit the 55 and older range, it’s good to start to give them the context and the tools for how to spend down that 401(k) savings. Considerations such as Social Security and a pension can play into their strategy.”

The ability to annuitize a defined contribution balance seems like a natural answer to the problem of declining cognitive abilities. In fact, Axsater says annuitization is the next evolution we need to see in the 401(k) system. “It solves a couple of problems,” he says.

“Our research indicates that only about one-quarter (23%) of participants think their employer is ‘very’ or ‘somewhat effective’ helping transition from savings to income generation.   Of course, as we saw from the aging brain research, we start to see that cognitive decline start to happen in the 60s, on up past the 80s. This is when we need to see people’s hard earned savings be protected from bad decisions.

“The second problem is longevity risk,” Axsater continues. “No one knows how long they will live—and we’re seeing that the emerging generations, like Millennials, will live into the 100s, or so the scientists are predicting. The UN reports that there has been a 7% increase in life expectancy over the last 50 years. As a result we’re trying to help people spend down their savings over 3–4 decades. Who knows how to do that but an actuary?”

Flexibility in Withdrawals

Flexibility in withdrawal strategy is important, Axsater says. “Most people want a partial annuitization—some money to spend now, and then that little extra to cover them if they live a long life. But we also know that if you just put an annuity option on the DC plan, people don’t use it.

“So we really have to take the lessons we have learned since the Pension Protection Act and embed an annuity—some kind of longevity protection—into the investment default fund, like a target date fund. That way we keep some familiarity with the target date fund, but we make it even stronger with some kind of longevity insurance.

“I think participants can understand that—particularly when they get to the late 40s and early 50s, which is when you’d want to start to include that insurance into the asset allocation of the fund. Our recent research showed that participants overwhelmingly (80%) say that a guaranteed payout is a must have as part of their retirement plan.” {Editor’s Note:  Axsater is referring to SSGA’s July 2013.Biannual DC Investor Survey.}

While paying attention to participants in and after their 50s is important, State Street doesn’t want you to ignore your youngest participants. Make plan design and investment solution decisions for all participants based in part on solid brain research.

“For example, we know younger people don’t make the best decisions—they are still learning,” Axsater says. “So help them get it—show them the value of saving early and get them in the plan and in a good diversified default.

“Talk to them more about saving, less about retirement. That’s a distant ideal, not even close to reality. Also know that your 40-plus group is a more captive audience about retirement—it’s a dawning reality.”

Axsater says it’s important to work with experts who understand this kind of research. “Actively work with partners that want to evolve your retirement plan. We are seeing significant demographic and economic shifts in our world that will not only impact retirement, but also impact how the workforce is managed. If people can’t afford to retire, that’s a problem for the employer.

“I think as we see the Baby Boomers go through this next round of retirement and the problems we will encounter, we’ll be inspired to evolve our workplace to adapt to a new world of living longer.”

You can review State Street’s report, The Challenge Every Participant Faces, online at


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