Videos and Webinars

Credit Check: Reaching Retirement Readiness in the Age of Debt

Apr 30, 2019

In this environment, is it possible for plan participants to go from “in the red” to “retirement ready?”

In our webinar, “Credit Check: Reaching Retirement Readiness in the Age of Debt," you’ll hear how our industry is responding to the retirement crisis with services, solutions and strategies to help employees become better prepared for retirement.
The numbers are alarming:
  • U.S. household debt is in the trillions of dollars and growing*
  • 40 percent of Americans have less than $10,000 saved for retirement**
  • And 55 million U.S. workers aren’t even offered a retirement plan option by their employer***
Presented by Executive Vice President Mike DiCenso, this webinar will discuss:
  • Debt and Retirement
  • Types of Debt
  • Retirement Plan Options (such as non-qualified deferred compensation plans)
  • Multiple Employer Plans (MEPs)
  • Auto-Enrollment and Auto-Escalation strategies
  • New Trends in Participant Education
  • Upcoming Legislation and More
Click here to download a copy of this presentation.

A case study about how Newport and its advisor partner helped a client with an integrated approach to a complete retirement solution is available here. 

Read our latest white paper, "The Growing Dilemma: Debt and Financial (In)security in the United States.
If you have additional questions or would like to contact our Sales Team, click here.


Mike: Everybody today would do is like to start with some polling questions just to make this interactive. Also, just wake up everybody's minds, get ready to participate, listen and make this a great webinar for everybody involved.

Mike:  The first question is, do you think we have a retirement readiness crisis in the United States? If you could please click yes, no or not sure. What we'll do is after people respond, we will show the results as to whether people think we have a retirement readiness crisis in the United States right now, and the results are 97% of the participants say, yes, we do, and so that's a good thing that you're attending this webinar because this is exactly what we're going to address today.

Mike:  Our next question is, what is the current total U.S. Household debt? This is debt by household and that's whether it's a single household or a family. Is it 1.5 Trillion, 13.5 trillion or 50.5 trillion? If everybody could please click on one of the answers and from there we will again show the results.

Mike: The results are? All right, 67% of the people said 13.5 trillion, 10% said 1.5 and 23% said 50.5. The actual answer there is 13.5 trillion. This 13.5 trillion number is a number that has been growing. In fact in 2007 before the financial crisis, the total number was 12.65 trillion. So it is almost grown a trillion since the financial crisis. What we see is households are taking on more debt.

Mike: I mean that's, we're going to go through here. As we talk about the retirement savings crisis what we see is States and the federal government are getting involved to try to help to alleviate this retirement crisis. With this retirement crisis what we're seeing is that the States are starting to introduce what are called state IRA programs, and the federal government is looking at RESA. They're looking at the Secure Act, which the House Ways and means is moving forward actually here in May.

Mike: Then we have the Trump initiative for open MEPs. With those three initiatives, RESA, the Secure Act and the Trump initiative these are all looking to give tax benefits to small companies who start a retirement plan, as well as, looking at creating open MEPs that have less issue and easier implementation for small companies to come into a plan coupled with a number of other small companies together.

Mike: As we go through this presentation, we're going to talk about the retirement coverage, the types, and amounts of debt, life expectancy, inflation, savings, plan designed for both qualified and non qualified plans and testing issues and providing a solution to you should your plan have testing issues from the past or going forward.

Mike: Now, as we look at the U.S. Retirement crisis, currently there are 55,000 or 55 million individuals who are employed in the workplace, but do not have access to a retirement plan in the workplace. This is exactly why the States and the federal government are looking to expand retirement coverage through either the state payroll IRA programs or through these initiatives, through legislation and the Trump initiative.

Mike: What we're seeing is there is great activity in this area because the retirement crisis is starting to gain so much ground with baby boomers moving through the system and finding that, literally, 48% of people 55 and older have zero dollars saved for retirement. That is a stat from the GOA that came out about two and a half weeks ago. Again, 48% of people, 55 and older have zero dollars saved for retirement.

Mike: As we look at the other stats that we've put out here you see that over 40% of Americans have less than $10,000 of net worth. 65% of Americans have saved zero dollars for retirement. We see the median retirement savings balance for working households is $3,000 and the median balance for those close to retirement, that's 55 and over is $12,000.

Mike: Now, the reasons we have a retirement savings crisis are lifestyle, health care costs, debt, and people just not saving enough money. That's what we're going to talk about during this presentation today is those different factors. Let's look at the factors that hinder a successful retirement savings program. You have debt, you have lifespan, inflation and, of course, the personal savings rate.

Mike: Let's start with debt. Now, as you look at debt, there's several different types of debt out there. As we look at student loans, credit cards, autos, mortgages and other signature debt, what we see is that the debt is growing, especially in the student loan, the credit card and the area of autos. This equates to about 4.36 trillion of total debt. The issue with this type of debt is, is that there's nothing backing it. On the autos as we know, they depreciate over time, so they're depreciating asset. The student loans, there's nothing backing it, it's a signature. Same thing with credit cards. As we watch the developments out there and as we see these trends continue to climb, because they are climbing, we see that this is going to put more stress on the financial institutions because they don't have anything to recover.

Mike: Next, if you look at the average balances for these types of debt, so you look at student loans, and the average student loan is about 32 almost $33,000. The average credit card is about $8,200 and the average auto loan is about $31,000. When you take a look at this, the auto prices are actually escalating. We've seen that the auto loan balances are rising dramatically. When you look at this in total, if somebody has all three of these elements that comes out to annual payments of about $15,660 or a monthly payment of $1,305.

Mike:  When you look at this and the amount of expense taken out of take home pay you see it is taking a large chunk out of people's income. As we look at the auto loans, one of the things that's very interesting, there's a report that came out just about a month ago that was talking about auto loans. Currently there are 7 million people that are 90 days late on their auto loan currently. So what that's showing is there stress on people from the standpoint of income levels and being able to meet their debt obligations.

Mike:  Next, we go to student loans. This is a very, very interesting slide. Now when you take a look at student loans, about 44 million Americans that have an outstanding student loan. Yes, 44 million and it's not just millennials. It does run through the entire age bracket. Some of the things that are surprising in this chart, number one is that the largest amount of outstanding student loans is for the 30 to 39 year olds. They have about 400 billion of outstanding student loan debt, but even more surprising is people that are over 50 years old. People over 50 years old have 225 billion of student loan debt outstanding. If you're looking at a comfortable retirement and a successful retirement, you can't carry debt into retirement. What we're seeing is that people nearing retirement age are carrying student loans into retirement. So just very interesting statistics.

Mike:  Another factor that we talked about was life expectancy. We've always had this trend in the United States, at least since this has been calculated, that life expectancy has been expanding. What we're starting to see for the first time in history is that life expectancy is actually retracting. We're seeing this, especially for males. We see that it's starting to level off for females, but overall for male and female together, the life expectancy is declining.

Mike: There's a number of reasons for this. There's actually an HBO special that's been running around stress and stress is one of the factors, as well as, the opioid crisis is another factor that has played into this. So what we see is that people are not living longer like we've always been told or we've always expected that we see that and it's actually going backwards.

Mike: Now if we look at inflation and see over 30 year periods of time, and you see an inflation rate of 2% over that 30 year period, what you see is, from the beginning of that period, a gallon of milk would be $3.75, but then over that 30 year period at 2% inflation rate, that gallon milk will now cost $6.79 and that's just at a 2% inflation rate. If we go to a 3% inflation rate, that gallon of milk is going to cost $9.10. So we see inflation has an absolute effect on not only retirement savings, but people that are on a fixed income in retirement. That's why watching inflation and hedging for it is so important.

Mike: Next, we're going to go into deferral rates. These are deferral rates inside of defined contribution plans such as 401(K). In this presentation some of these points that we're going to make, and some of the stats, you're going to say, "Yeah, I fully embrace that. That makes sense." Somebody's going to say, "I don't know if I believe that or not." This is one of those slides for me where I don't know if I believe this data or not. The reason I say that is, this is showing that in every age group of millennials, the zillennials and the Gen Xers is that all age groups are contributing 27 to 33% of their income into their 401(K) plan. That's showing that the 10% of them are contributing those rates. Then it's showing that 42% on average are saving five to 10% into their 401(K) program. If that's true, then how are we coming up with these median account balances?

Mike:  If you take a look at the average account balance by age group in 401(K) plans today, what you'll see is the 20 to 29 year olds. Average balance is 11,600 the median balance is $4,000. We see that 30 to 39 year olds, it's $43,000 for the average and 16,500 for the median. We see 40 to 49 year olds that the average is 106,200 with 36,900 is the median. We see the 50 to 59 year olds where it's 179,000 with a $62,700 median. Then we see the 60 to 69 year olds with 198,000 average with a 63,000 median.

Mike: If people are putting away 10% more of the retirement assets and 27 the 33% of them are doing that. How are these medians so low? So we all have to look at our plans, look at our participant basis, and see how we can help them to save more for retirement. Whether that be through automatic enrollment, automatic escalation, also helping them to save in different patterns, helping them to manage debt in order so they can save more. This is all how we will coach them and help them and enable them to better secure that successful retirement.

Mike:  Next one we're got to go into are some plan design features. What you see here is what type of qualified plans are the most utilized out there in the marketplace? What we see, of course, it's the defined contribution 401(K) plan with an employee contribution. That's 60% of the plans out there in the marketplace. This is where, in our environment, most plans are initiated.

Mike: Now, if you take a look at what is considered to be the $29 trillion that is out there in retirement savings, what we find is there are some surprises, such as, 9.5 trillion of that 29 trillion is in IRA's, 8.1 trillion is then the defined contribution plans, 6.1 trillion is in government pensions, 3.2 trillion is in private pensions and 2.3 trillion is in non qualified plans.

Mike: As we look at the breakdown of plans and types and things that are going on in the environment, one of the things that employers and advisors need to look at and consider is, is a 401(K) the right solution for this participant base based on executives, based on demographics, based on the geographics, is this the right solution? Because what we see in the industry is the 401(K) plan has been the overwhelming solution for corporate retirement plans.

Mike: Now, as we get into auto enrollment, first, and these are stats from our executive survey and from in this are you using automatic enrollment? What we see is that 48% of the plans are using automatic enrollment and 20% of the plans are looking to add automatic enrollment. Automatic enrollment is a great way to help individuals save very successfully and easily coming right out of their paycheck.

Mike: With automatic enrollment one of the things I would suggest is that you don't just do automatic enrollment when the plan is installed, but you constantly do automatic re-enrollment every year so that you keep pushing people who have declined to enter the plan. So you keep re-enrolling every year automatically and making them decline.

Mike: Now, an interesting fact is what is the general percentage rate that is used for automatic enrollment and 3% is the most popular. There's a reason why 3% is the most popular, when the Department of Labor wrote the regs for automatic enrollment, they presented a sample that showed sample automatic enrollment savings. In that sample they showed 3% as the sample or suggestion and what happened was people took that as the Department of Labor's opinion that 3% was the percent that it should be. What's happened since then is people have realized that that was just a sample and so what we've seen is other automatic enrollment percentages are starting to grow now at a 41% rate and they're all over the board.

Mike: Next, we get into automatic escalation. What we see is 42% of plans are offering automatic escalation and 17% of plans are considering adding automatic escalation. Automatic escalation is where somebody is in the plan and on the anniversary they're then escalated up to another deferral percentage, whether it be 1%, 2%, 3% or something else. The most popular is 1%, so it's not too onerous on the individuals and so that they can comfortably in their paycheck and their take home pay handle, increasing their deferral amount by 1% a year.

Mike: Now you also have to watch for cutoffs and making sure that people don't start putting in too much to where it's starting to create a burden on their living due to their take home pay decreasing and that then they start taking on more debt. So it is a balancing act to continue that escalation for a certain period of time.

Mike: Next, we get into matching contributions. This is something that we have seen increase again since the financial crisis. We see that 74% of plans are offering a matching contribution in their 401(K) plan. There's different ways to do matching. I know most people are doing, say, 50% match up to 6% of pay. There are other ways in which to do matching contributions.

Mike: You could do matching contributions from the standpoint of what's called a stretch match. So instead of doing 50% of pay up to 6% of deferral contribution, you could say I'm going to do 25% up to 12% of deferral. So that makes the employees put in more money of their own through salary deferral to capture all the employer dollars. It forces the individual employees to save more for retirement and to capture that match through that stretch matching equation. I don't know how many people out there are doing a stretch match today, but this is something that is definitely gaining in popularity.

Mike: Next, we get into evaluating retirement plan services and, of course, level of service and quality of service is the number one item out there. Next, comes cost of investments and when we look at costs and investments, of course, we're seeing much more popularity around institutional shares, zero revenue sharing funds, ETFs and CITs. Next on the list is the reputation of the provider. These are the three largest factors for evaluating a retirement plan services provider in RFPs, as well as, on an ongoing basis.

Mike: Next we get into 3(16) services. I don't know how many of you in your plans have 3(16) fiduciary services today. As we see what's happening out there in the market, 3(16) is where 3(21) was about five years ago from the standpoint of investment fiduciary and we're 3(38) was three years ago. 3(16) is just now coming into favor and a big part of this is because the 3(21) investment advisor and the 3(38) investment fiduciary are gaining in popularity with plans where plans are trying to outsource and offload their fiduciary duties and responsibilities and then hiring an expert to handle the services.

Mike: 3(16) is the same thing, but on the operation side. This is where plans can offload the administrative side of the service menu. Things such as tracking eligibility, tracking the beneficiaries, actually making decisions, qualifying, reviewing, signing off and executing loans, hardships, QDRO withdrawals, terminations. Taking the work off of the plan sponsor and enabling that plan sponsor to focus on their business and having a professional firm manage the operations of the plan.

Mike: Now, Newport is the largest 3(16) in the nation today by revenue. When you look at the 3(16) services that we offer, they are gaining in popularity greatly out there in the environment. This year we're seeing about 40% of new sales are including the 3(16) services. So plan sponsors are and advisors are embracing 3(16) services. With the 3(16) services the other thing that it does is it helps so that there is no conflict of interest between the employer and the employee.
Mike: You have certain transactions that are emotionally charged, take a financial hardship withdrawal or a QDRO. In both of these situations you can have emotion on the employee side of the equation. When you have a hardship withdrawal, what we've seen is we've seen employers who have inadvertently made an incorrect decision. For example, an employee comes to them wanting a hardship withdrawal, the employee really doesn't qualify for the hardship withdrawal but is a favorite employee of the employer so the employer executes that withdrawal anyway.

Mike: That creates a fiduciary breach and a conflict of interest. When Newport acts as a 3(16) fiduciary in this situation, this is a transaction between the employee and the Newport , not the employee and the employer. So strictly the employee and Newport and Newport  follows all the plan requirements and executes the withdrawal as per the plan document. So it helps protect the employer from having any conflict of interest or fiduciary breach in those types of situations.

Mike: Next we're going to move into non-qualified plans. As we look at what's happening in the environment out there, there is a talent war in certain industries because we are now entering over-employment with such a low unemployment rates. What we have is companies are starting to steal each other's key employees and prime employees. They're doing this from the standpoint of they can't find the talent in the market because the labor pool is shrinking from the standpoint of those that are available.

Mike: So what's happening is employers are now starting to look for other ways in which they can attract, retain and reward key employees to keep them in their company so that they don't leave. What we see right now is about overall 37% of employers offer a non qualified plan to their employees and that's of plans across the board of all sizes.

Mike: We see that 72% of employers off our plan when there is at least 1500 full time employees, and we said that 92% of the Fortune 1500 offer a non qualified plan. These non qualified plans, again, are very valuable for attracting, retaining, and rewarding key employees, or a group of employees that it's carved out. With these plans there's much greater flexibility across the board to design these how you want for which group you want to benefit and how.

Mike: Now, one of the things that we've come across with non qualified plans is you look at what is important and what type of plans are going into place, and of course what we see is that the voluntary differed compensation plan is the biggest plan that is utilized in the market today. About 77% of employers that put in an unqualified plan are utilizing that type of plan.

Mike: When we take a look at how important the plan is, again, we look at the executive recruiting, we look at the executive retention, financial planning, we look at tax efficiency and increased company stock ownership because company's stock can be used in these plans, as well as, mutual funds or COLI, corporate owned life insurance, which brings numerous tax advantages. Newport is one of the largest and premiere record-keepers of non qualified plans in the industry, and we do all types of non qualified plans, as well as, we are open architecture for the funding of these plans.

Mike: So we take a look at this. What you see is that number one, we see that financial planning as a tool for executives is the number one reason that these plans are put into place. From there we see that the executive recruiting and the executive retention are very high levels of why these plans are put into place. So this is something if you are having employee leakage at your key employee level, at your executive level, and you're trying to stop that leakage, this is a way in which do this. This is a vehicle that will bring benefit to those key employees, those prime employees, and it will help them to stay with their company.

Mike: Now, as we go into a case study, something we want to show you is a situation to where a plan has had testing issues. I don't know how many advisors or plan sponsors are out there in the audience have had a testing issue with their plan, and it's not a comfortable situation. Depending on how efficient things are found, how efficient things are cleaned up individuals may have to redo the taxes. There could be other implications. It's just a situation that creates just a disruption for individuals and the company.

Mike: Here's a case study of an actual situation that we're involved in where we helped an employer to alleviate that situation of having a testing issue. This is a 401(K) client. They had assets of 25 million, 200 eligible participants and 170 people actually participating in the plan. They had a problem with testing and so what we did was we put in a non qualified plan on top of the qualified plan.

Mike: What we did was consulted them, designed the plan. So this is an overlay plan right on top of the 401(K) plan. The average deferral rate inside the 401(K) was 6% so we allowed the executives to put 6% into the 401(K) plan and receive the employer match there. We then layered on the non qualified plan with an employer match, as well, because, again, the employer can carve out this plan however they want as far as the employee base and what they're going to do from the standpoint of the benefits.

Mike: In this case, it was an overlay right on top of the 401(K) with the same deferral and matching percentages. Although, here, the employees were able to defer more money and there is no limit as to how much the employee could defer. Therefore your key employees who, even if you have a high rate of deferral on average inside your 401(K) plan, are still limited as to how much they can put into the plan based off of the annual limits. Generally key employees can't put in enough. So with this based on their pay, the non qualified plan allows them to extend further their savings rate. It allows the employer to match it as far out as they want to match it and so, therefore, helps key employees to gain a more comfortable retirement and successful retirement.

Mike:  With that, I'd like to ask if there's any questions out there. Newport team? Any questions?

Speaker 2: Yeah, we received a lot of great questions. The first one is about student loans. Why have student loan amounts been increasing over the years?

Mike: That's a great question. What's happened with the student loan industry and with the education system is when I was 18 years old, and I'm in my fifties, when I was 18 years old, I didn't have to decide what my career was going to be for the rest of my life.

Mike: My first two years of college, I would go through and do my required courses and then I would get into the things that were my specialty. Today, the universities and colleges are set up when you're 18 you have to come in and declare your curriculum right off the bat. So what happens is as you're 18 and your mind changes, and you learn different things, and you experience different things, you may change where you want to go. As soon as you change that curriculum once you've added another year to your college years. You change that decision twice and you've added an additional year.

Mike:  The average time it takes somebody to earn a four year degree now is 5.7 years, 5.7 years to earn a four year degree. What's happened is the colleges and universities have found a way to extend the money, to extend them getting paid and making more money for professors and the universities, building larger stadiums and other from the standpoint of students are staying in school longer.

Mike: Another factor of student loans is only about 60% of the student loan is actually used for college or the university payments, 40% of it is used for lifestyle. This is why so many students in their college years are traveling Europe, are traveling all over the world. It is because they are using their student loan dollars. This is also a lifestyle issue as well as the money management issue and budgeting issue. Next question?

Speaker 2: Mike, the next question's about 3(16) services. Is 3(16) being used more by plan sponsors?

Mike: Yeah. What we're seeing is, it's funny, 3(16) is being utilized across the board. It's not just for small plans, it's not just for large plans, it's for the small, large and everything in between. What it gets down to is how a company wants their HR department to run and what they want them focused on. Also, what risks they want to alleviate and outsource. So with the 3(16) services what this does is alleviates risk by outsourcing that fiduciary duty responsibility to Newport and then it also outsources the fiduciary function, and the processing that the employer doesn't have to deal with it and Newport takes it on 100%. Next question?

Speaker 2:  Mike, we have a question about non qual plans. Are non qual deferred comp plan subject to creditors if the company goes out of business?

Mike:  They are, but there's ways to protect that through [inaudible 00:32:16] trust and other. So we can consult you through that and help you to create a process, create the platform which can bring the best protection. Next question?

Speaker  2: Next question. How many auto loans are currently 90 days late on their payments?

Mike:  Great question. We covered that in the presentation. It's currently 7 million auto loans are 90 days late.

Speaker 2: And Mike, our last question is, why do millennials struggle with saving for retirement?

Mike: You know, this is a great question. When I came out of college in the eighties, mid-eighties, I didn't have a cell phone. I didn't have triple play wifi, and I didn't spend $200 a month on coffee. If you look at the millennials, they have a different lifestyle today and an immediacy type of nature about them.

Mike: So in this, their spending habits are very different. They eat out more rather than cooking at home. Entertainment is very important to them. Travel is extremely important to them. It's much more of an experiential nature than it is than when other generations were their age. You look at this, and you look at the money that they spend on outgoing basis for a cell phone, for the triple play wifi so they can play their video games with their friends across the nation and across the world, how much they're spending on coffee and also clothing. These expenditures are what are eating up, not only their take home pay but generating debt for them. So this is a lifestyle and budgeting issue and I think as advisors and plan sponsors, we can help them to better manage their budgets and manage their lifestyle. I think we can help them to actually save more for retirement.

Speaker 2: Mike, I misspoke. We have one more question just come in. We've been hearing a lot about student loan debt and there seems to be more focus around providing plan design options to help students save for retirement. Does Newport have any thoughts on this topic?

Mike: Yeah, great question. This is something that we're hoping legislation gets passed on at some point here in the future. Employers can help individuals with their student loan debt. The problem is it's not tax deductible to the employer today. There is one private letter ruling out there, but a ruling is only allowed for one company and this company got the private letter ruling where they could make a matching contribution in order to offset the student loan payments, and it is deductible to that company alone. We do believe at some point this legislation is going to pick up steam and that we will see more relief from the standpoint of the student loan debt through the tax deductibility of the corporations. It's not there yet, but we do see it coming in time. Any other questions out there?

Speaker 2: Those have been the ones that have submitted, and we've had a few others, Mike, and that we'll be reaching out to those folks personally for some of those questions that have come in.

Mike: Excellent. Now, if you look over in the handout area on the right hand side, you'll see that we've supplied you with the case study that we presented here, the debt presentation slides and the white paper. So you guys will have access to all of this. We'll be sending it to you as well in an email, but if you have follow up questions, do not hesitate to contact us. We're more than happy to help you in any way, shape or form, and help you to create these successful retirement programs and benefits for your employees. With that, thank you all very much for your time. We appreciate your participation in our webcast and look forward to hearing from you. Thank you very much.


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