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Furthering Financial Literacy and Wellness Through Policy

As 2019 comes to a close, we are reflecting on the retirement policy momentum we saw this year and anticipating the themes that will be most meaningful in the years to come. To deepen our insight, we synthesize outside research and ongoing conversations with employers about the policy issues that inform their retirement plan decisions — and those that cause the greatest concern. Here, we will review active policy through the lens of sponsors’ greatest concerns: financial literacy and financial wellness.

This year’s Global Retirement Reality Report research effort revealed that US plan sponsors believe the greatest challenges facing participants are a lack of savings sufficiency (74%) and low overall understanding (57%).

When combined, the circumstances of not saving enough and not having a firm grasp of retirement readiness requirements create a recipe for retirement disaster — for employees and employers. Active policy measures address these issues with tactical approaches, but the larger issue is much harder to pin down: How do we establish financial literacy and inspire financial wellness? Let’s start by understanding how these experiences are different.

Financial literacy speaks to one’s comprehension of financial concepts, including budgeting, saving, managing debt, accruing wealth through strategic investments and compounding over time. Financial wellness reflects individuals’ relative confidence with their financial life; or, put another way, it is the absence of distracting, if not draining, financial anxiety. It seems reasonable to posit that someone who is financially literate has a higher likelihood of achieving a state of financial wellness, though thanks to the quirks of human behavior, that isn’t always the case. Just because we know what to do doesn’t necessarily mean we do it.

However, we have a chance, legislatively speaking, to connect the dots between literacy and wellness. Here we will review three policy points that we believe will help support financial literacy and three that will foster employees’ sense of wellness.

Financial Literacy Policy Points
Defined as policy that helps savers know what to do and when.

1. Lifetime Income Statement Disclosure

The biggest step forward in financial literacy is expected to come from a small enhancement: lifetime income statement disclosure. We discuss this in greater detail in Translating Retirement Savings into Retirement Income. In summary, participants could soon see a projection on their benefits statement of the monthly income they could expect to spend during retirement, based on their savings to-date. By translating the saving experience into a future income stream, participants can better assess their retirement readiness and make changes accordingly.

2. Retirement Saving Matching for Student Debt Payments

People saddled with significant debt simply can’t save. But bills like the Retirement Parity for Student Loans Act are trying to give employees the best of both worlds by allowing employers to make matching contributions to the company retirement plan, while the employee makes student loan repayments.

3. Penalty-Free Distributions for Parenthood

Parenthood, like debt, is expensive and can compromise saving activities. Policymakers have considered this meaningful event and its impact on retirement in drafting a policy that allows participants to withdraw up to $5,000 penalty-free from permitting defined contribution plans upon the birth or adoption of a child.

Financial Wellness Policy Points
Defined as policy that helps convert understanding into outcomes.

1. Increasing the Caps for Automatic Features

Saving more over time is the key to savings sufficiency, but sometimes people need a nudge. The proposal to increase automatic enrollment and automatic escalation, from a 10% cap for the first year to a 15% limit thereafter, is intended to do just that. As argued in our article What the Tax Man Can Teach Us About Participant Behavior, oftentimes these increases go unnoticed from regular paychecks, making the savings experience invisible, and the benefit meaningful.

 2. Increasing the Ease of Implementing Retirement Income

True peace of mind comes from knowing that a life’s savings will last a lifetime. Retirement income solutions are gaining the policy support required for mass adoption, including a more workable fiduciary safe harbor for selecting an annuity provider (one approach to creating a lifetime income solution) and increased portability, should a lifetime income user change employers and seek to maintain the strategy.

 3. Upping the Age for Required Minimum Distributions

People are living longer, particularly those who are invested in their physical and mental health. Healthy employees are retiring later, suggesting that they should let their money keep working, just as they are, so that they can potentially reap greater market value. This logic has informed proposed policy to increase the age — from 70 ½ to 72 years old — at which a person must take required minimum distributions from his or her retirement plans. This approach also creates an opportunity for people to retire more confidently, having potentially gained a few additional years of market contribution to their portfolio.

Making a Case for Retirement Happiness

At State Street, we are often making the case for retirement happiness, a condition that includes a saver’s sense of 1) financial preparedness, 2) trust in the system and 3) ownership of his or her role. Too often, gaps in financial literacy and wellness erode these dimensions and destabilize happiness.

Policymakers can play a role in restoring equilibrium, as suggested by the policy points presented here. As we look ahead to the new year, we will be watchful of policy progress in the service of financial literacy, wellness and retirement happiness.