Effective Retirement
Programs: Model Design
Features and Financial
Education
Thomas Buckner
MRS Program
I

INTRODUCTION
“Effective Retirement Programs: Design Features
and Financial Education” designing
retirement/individual plans and providing financial
education in the workplace for lower income
households

These two elements are critically important
considerations for plan providers.

Both must be carefully constructed to maximize the
effectiveness of a retirement program in helping
participants build adequate funds for when their
working career ends.

Without a successful plan design, financial education
will not be effective, and even a well-structured plan
can fail to achieve retirement goals without financial
education.

Can Employers Help?

The 2006 Pension Protection Act is mentioned as permitting
employers to offer financial investment advice and
automatic enrollment into a default investment fund.

Women appear particularly vulnerable to adverse events
and a husband’s death can precipitate his widow’s entry
into poverty [Weir and Willis (2000)].

Other studies report evidence of lack of preparation for
retirement. The 2001 Employee Benefit Research
Institute’s (EBRI) Retirement Confidence Survey (RCS)
indicates that a large proportion of workers have done
little or no planning for retirement.

Only 39 percent of workers in 2001 have tried to
determine with some accuracy how much they need to
save to fund their retirement.
Shift In Pension Plan Design

shift from defined benefits to defined contribution plans and the many social and economic
changes that have occurred since World War II—changes that are likely to effect the
retirement security of this population in many ways.

Major changes have occurred through several factors.
First, for their portability across jobs, employees find DC plans attractive (Munnell and
Sunden 2004).

Second, structural changes in the U.S. economy have occurred, namely a shift in the labor
force in manufacturing sector and unionized jobs where DB plans are more offered, toward
services sector and nonunionized jobs where DC plans tend to be offered (Wiatrowski 2004).

Third, changes in the law since the 1974 Employee Retirement Income Security Act (ERISA),
with respect to funding requirements for DB plans or the introduction of 401(k) plans, have
decreased incentives for employers to offer DB plans. Schieber (1999) documents a shift in
focus of the federal regulation from limiting the loss of federal revenues through excessive
deductions associated with employer-sponsored retirement plans prior to ERISA to
increasing short-term federal tax collections in the 1980s and 1990s.

Fourth, pension accounting standards used for calculating long-term pension obligations of
DB plans have changed, which has slowed the funding of pension plans for the baby-boom
generation during the early part of their career.

As a result, increases in unfunded liabilities with subsequent Financial Accounting and
Standards Board (FASB) rules.
Does Shift from DB to DC
Reduce Pension Wealth?

As a result, if the shift from DB to DC plans reduces the pension wealth
of workers at the bottom of the income distribution, these workers may
be the least inclined to adjust by increasing other forms of savings.

Moreover, it is conceivable that, even if pension wealth is unaffected by
the shift to DC plans, the degree of pension offsetting may be altered by
the shift to DC plans. Another important concern with the shift to DC
plans is that many workers will choose not to annuitize their balances at
retirement.

Consequently, the shift to DC plans increases the chance that workers
outlive their resources. Another important question that remains is how
this shift from annuitized benefits to lump sums affects the distribution
of pension wealth. As noted by Brown (2003), a shift away from
uniformly priced annuities will financially benefit workers with shorter
than average life expectancies (less educated black men, for
example). Nevertheless, the increased risk of outliving their
resources may leave a risk-averse worker worse off even
though expected retirement income would be higher without
annuities.
Why Financial Literacy?
increase retirement savings and reduce debt
burdens and provide retirement security for
lower income households.
 lower income households encompass either low
and moderate-income households, or households
with incomes below 80 percent of area median
income.

Families with incomes of $10,000 - $25,000
heavy debt burdens classify many of them as highrisk borrowers, limiting their access to credit and
increasing the price of any loans they can obtain.

Can Lower-Income Net Worth
be Measured?

Almost half of the families with incomes between
$10,000 and $25,000 were not home owners.

The 1998 Survey of Consumer Finances found, for
example, that 32 percent of families with incomes under
$10,000 devoted more than 40 percent of their incomes
to debt service .

According to this study, almost 30 percent of families with
incomes under $10,000 had no financial assets, not even a bank
account .

Even among the 70 percent with financial assets, median holdings
totaled only $1100. In the case of families with 1998 incomes
between $10,000 and $25,000, about 10 percent had no financial
assets. Among those with assets, median holdings totaled less
than $5000.
PLAN DESIGN
With regard to optimal plan design, strong evidence suggests
that inertia or inactivity lowers participation rates substantially in
simple, opt-in savings programs.

Some plans remedy this by establishing participation as the default
(with the ability to opt-out), but research shows that many of these
plans have default funds and contribution rates that are problematic
for retirement savings.

Some research suggests moving away from the opt-in and opt-out
framework altogether and focusing on an active-decision model.

The idea is to develop mechanisms that require a worker to make a
formal decision about the savings program by a certain date. In
addition, plan design often seeks to reduce the complexity associated
with saving for retirement by simplifying investment choices.


Phased Retirement
Plan Design Suggestions

The most basic feature of a retirement for low income program, and
one that plays a significant role in determining participation rates, is
the enrollment approach used in the plan. Retirement programs are
generally designed using either an opt-in or automatic enrollment
strategy. In an opt-in plan, the default is nonparticipation for
employees who are required to indicate their desire to be involved in
the program, most often by submitting an enrollment form.

Under automatic enrollment, employees are, by default, account
holders in the retirement plan. They can opt-out of the plan but usually
must fill out paperwork to do so. Madrian and Shea (2000) find in their
study of a large U.S. company that switching from an opt-in to an
automatic enrollment plan increases participation substantially and
lowers discrepancies in 401(k) participation among different
demographic groups. Similar results are demonstrated in a report by
Holden and VanDerhei (2005), which finds, for all eligible employees in
the study, that automatic enrollment increased 401(k) participation by
26 percentage points. Automatic enrollment allows employees to avoid
deciding whether to participate in the plan by making participation the
default. This factor is particularly important because inertia and the
desire to avoid making a complicated decision can have a significant
impact on participation.
Phased Retirement

A phased retirement program that provides access to a
guaranteed income stream, available predominantly
through a pension plan, can offer the security needed to
transition from fulltime employment to ultimate
retirement.

Phased retirement programs must be easy to design,
implement and administer. They must also not be
subject to nondiscrimination tests that they would fail
because of who actually uses or is allowed to use them.

And they must be structured to allow a requirement of
supervisor/management approval for each employee to
work reduced hours.
Social Security May Actually Benefit
Lower-Income Retirement?

Subsequently, minorities are more likely than whites to
have lower lifetime earnings, they are advantaged by
Social Security's progressive benefit formula that
provides larger relative benefits for lower-paid workers.
Moreover, blacks in particular are more likely to receive
other important Social Security benefits, such as
disability, that help protect against lost earnings.

Certain reforms that would reduce benefits to help
restore solvency could have a disproportionate effect
on low-wage earners, including African Americans and
Hispanics, depending on how they are structured.

For example, raising the age of retirement would lower
the average lifetime benefits of blacks relative to
whites because of blacks' lower life expectancy.
The Effectiveness of Financial Education On Lower
Incomes

In designing a retirement program that counts the
adequacy of long-term retirement savings among
participants as a goal.

Financial education can be especially helpful to certain
subgroups of the population, including minorities,
women, and those with low income and education levels

The core aspects of financial education are controlled
by employers: the topics covered, the delivery methods
used, the frequency with which it is offered, and its
general availability.

Financial Education for
Second-Generation Parents

Further, older low-income second-generation parents
were more likely to reside in skipped vs. threegeneration families, as were those outside the South.
The author argues that low-income coresident
grandmothers may be adversely affected by time limits
associated with the Personal Responsibility and Work
Opportunities Act of 1996.
Wealth Accumulation

Subsequently, regardless of any possible shortcomings in
data, the net wealth position of black families is noticeably
lower of whites with similar characteristics. Interestingly,
the reason does not appear to be savings, since a large
amount of consumption research suggest that blacks save
more at any given level of income; but rather to past lower
average income than whites of that income level.

Consequently, current economic status of blacks income
data alone which generally shows roughly three-fifths as
much income are very misleading for they did not address
the relative poor net wealth position of black families.
These stark findings on wealth accumulation will continue
as this study depicts for the legacy of past economic
deprivation remains.
The Effect of Lower Wages on
Social Programs Expenses

As the study depicts low wages have not only have
immediate implications for low wage employees and
their families but also affect the expenditures of
government security programs. Employers are able to
pay low wages because government programs exist to
help low-income families meet their needs. The burden
of providing income supports and services to low-wage
workers is passed on to the public through programs
supported by taxes.
Who Are the Non-Participants

According to SCF data, 10 percent of respondents do not save
or invest at all, and certain demographic groups are
particularly at risk. the less-educated, non-Hispanic blacks,
Hispanics/Latinos, and those with low total family income are
all more likely to report that they are not saving or investing.

The largest discrepancy is between those with no high school
diploma (25 percent do not save) and those with a college
degree (less than 5 percent do not save) of their retirement
savings.

Perhaps the most striking finding in this analysis concerns
individuals between the ages of 50 and 59, who are quickly
approaching their retirement years.

Of this group, roughly 25 percent believe that their retirement
income will be totally inadequate. Importantly, as the study
suggests having a quarter of the group so close to retirement
feeling unprepared is a substantial concern.
The Unbanked

A familiarization of the unbanked population with the
advantages and mechanisms of mainstream financial
institutions and, eventually, saving for retirement for
the unbanked is important especially if Social Security
becomes privatized.

as the study denotes for this population Governmentsponsored programs called individual development
accounts (IDA), which are matched savings accounts
similar in format to 401(k)s, have popped up around the
country in such places as Pennsylvania, New Jersey, and
Delaware as components of welfare-to-work programs

although some community banks offer them in order to
attract customers. Employers currently do not offer
IDAs, but they may be able to do so soon.
Focus On Retirement Lower
Income Security

Focusing on Personal Financial Management will lead
many individuals and organizations to promote financial
education as a way to help lower income households
build retirement and develop good credit records.

More importantly, every individual needs to recognize
and understand that it is far more difficult for lower
income households to save and meet payment
obligations than for middle- and high-income households.

But absent policies that would raise the incomes of lower
income households, education on budgeting may be the
best alternative to help these households obtain the
benefits that flow from retirement and clean credit
records
Methodology

The Health Retirement Study (HRS) offers a unique set of information
that overcomes many of the shortcomings of previous research on
retirement and financial education.

This survey, covering a nationally representative sample of U.S.
households born between 1931 and 1941 provides detailed information on
wealth and the retirement process with a focus on health, labor markets,
and economic and psycho-social factors.

also utilized is the 2004 Survey of Consumer Finances (SCF) to document
the need for well-designed retirement programs and financial education.
The SCF is a triennial survey on wealth and saving that is undertaken by
the Federal Reserve Board in conjunction with the Statistics of Income
(SOI) Division of the Internal Revenue Service (Kennickell 2006).

The SCF data are intended to represent the financial characteristics of a
subset of the household unit called a “primary economic unit.” This unit
consists of an economically dominant single individual or couple (married
or living as partners) in a household and all other individuals in the
household who are financially interdependent with that individual or
couple. In a primary economic unit with a mixed-sex couple, the male is
considered the head of household; for same-sex couples, the older
individual is deemed the head of household.

Data in the MINT model are largely based on the Survey of Income
Program Participation for 1990–1993 and 1996. Characteristics, including
saving behavior, account balances, and sources of investment advice.
Why is Important To Measure?

Moreover, the HRS provides information on several past
negative and positive shocks, including past
unemployment, episodes of distress, inheritances,
insurance settlements, and money received from
relatives and friends.

Most importantly, it provides information about
anticipated future resources and future events. This is
critically important since decisions to save are
intrinsically related to the future.

In the HRS, respondents were asked to report how likely
it is that future home prices will increase more than the
general price level, and how likely it is that Social
Security will become less generous in the future.
Types of Behavior

Five types of HRS information are critically important to
understanding retirement behavior:

information about planning,

past economic circumstances,

expectations about the future,

individual preferences,

and pension and Social Security wealth.

As the above SCF data has shown, a majority of people are
not saving for retirement, exhibit short-sightedness in
retirement planning, and do not feel satisfied with their
expected retirement income.
Financial Education Increases
Awareness of Present Conditions

In a typical budget-education course, for example, clients write down all of
their household expenditures over the course of a month or longer.

This practice forces clients to summarize their households’ expenditures
over the course of a month in various categories, providing both clients and
counselors their cumulative share of a monthly or annual budget.

Financial-management education can also teach behavioral habits that
people can use to help themselves adhere to personal spending limits and
retirement plans.

The reason for such large percentage changes is that households
at the bottom of the wealth distribution and those with low
education have little financial net worth and increases of U.S.
$2000 — the average change in wealth for those with low
education that attend a retirement seminar — represent very
large percentage increases.

Results for net worth show a similar pattern
Importance of Budgeting on Lower
Income Retirement Security

These studies looked for changes in “good” budgeting
behavior, such as maintaining a written spending plan,
saving money for emergencies, or paying bills on time.

Two of the studies, one by Gladys Shelton and Octavia
Hill and one by Sharon DeVaney and others, found a
statistically significant increase in such behavior after
participants completed a financial management course.

These estimates imply that retirement seminars can
influence the accumulation of both net worth and
broader measures of wealth.

Both financial and net worth can increase by 20 percent
and a lot more across sub-groups of low education when
workers attend retirement seminars
Ways to Retirement Security
for Lower Income Households

In addition, these individuals lack this information for such
expenditures are made in small daily or weekly increments,
and is easy to overlook.

For example, a course might include a comparison of relative
prices of a group of goods and services on which lower income
households may commonly save money. It could also include
information on understanding credit reports and on
addressing past credit-service problems. Financialmanagement education frequently emphasizes that some
retirement can be built by making only small sacrifices
financial literacy effect on
lower income households

The results of the studies suggest that the need for financialmanagement education may be effective, for lower income
individuals who live without retirement commonly speak of
the extreme personal stress this creates.

Subsequently, with lower-income households a lower level of
retirement and the corresponding heavy debt burdens of
many lower income households have created a number of
concerns with researchers for financial literacy of lowerincome households.
Financial Literacy and Credit
Concerns

Education can provide information that enables these
households to achieve retirement, address past credit problems,
and avoid costly mistakes.

Consequently, with a concise portrait of ways in which
households allocate their incomes. Without this exercise, most
people have little idea of the fraction of their incomes that goes
to such purchases as gasoline, newspapers, and outside meals.

Such habits might include withdrawing only a fixed amount of
cash at the beginning of each week to pay for recurrent minor
expenses.

They could also include immediately depositing a part of each
paycheck in a retirement account that is not used for
transaction purposes (the “pay yourself first” rule) or

using automatic payroll deductions to fund retirement plans and
other retirement goals
Effectiveness of Seminars on
Lower-Income Households

Estimated effects are sizable, particularly for
the least wealthy.

Overall, attending seminars increases financial
wealth (panel a) by approximately 18 percent.

This effect derives mainly from the bottom of
the distribution, where wealth increased by
more than 70 percent.

The effect is also large for those with low
education with increases in financial wealth
close to 100 percent.