Achieving Better Retirement Outcomes: Solutions for a Modern Workplace

2017 TIAA Institute Fellows Symposium

The TIAA Institute and the Pension Research Council/Boettner Center at Wharton School of the University of Pennsylvania co-hosted a research forum that focused on retirement security and featured innovative research on retirement plan design, financial literacy, and other topics designed to increase financial well-being for U.S. workers and employers.

Date: Thursday, June 22, 2017

Location: The George Hotel, Washington, DC 20001


Featured Research

During the course of the day, we heard keynote addresses from thought leaders in retirement planning and research presentations on the following studies:

Putting the Pension Back in 401(k) Plans: Optimal versus Default Longevity Income Annuities

Speaker: Olivia S. Mitchell, University of Pennsylvania, Pension Research Council and NBER, TIAA Institute Fellow

Key Findings:

■    We evaluate the impact of “putting the pension back” in 401(k) plans via deferred income annuities.

■    Our life cycle model helps us measure how much peoples’ wellbeing is enhanced by including LIA deferred annuities in the retirement plan menu. The model accounts for uncertain capital market returns, labor income streams, and mortality, and we also realistically model taxes, Social Security benefits, and 401(k) rules.

■    We show that both women and men can expect to benefit from these products, as can the less-educated and lower-paid subpopulations.

■    Plan sponsors wishing to integrate deferred lifetime annuities as defaults in their plans can do so, to a meaningful extent, by converting as little as 10% or 15% of retiree plan assets, particularly if the default is implemented for workers having plan assets over a reasonable threshold.


How Do Distributions from Retirement Accounts Respond to Early Withdrawal Penalties? Evidence from Administrative Tax Returns

Speaker: Gopi Shah Goda, Stanford University and NBER, TIAA Institute Fellow

Key Findings:

■    Our estimates show that crossing the age 59 ½ threshold leads to a $1,600 increase in annual distributions from IRAs.

■    Results suggest that this increase is primarily due to additional people taking withdrawals after the penalty is lifted, rather than higher distributions among those who were already withdrawing prior to age 59 ½.

■    People with birthdays that result in fewer months of penalty-free withdrawal in the calendar year in which they turn 59 ½ have a much smaller increase in annual distributions between the time they turn 58 ½ and 59 ½. By contrast, those who turn 59 ½ early in the calendar year see much sharper increases over the same calendar years.

■    The pattern is reversed going from the calendar year in which people turn 59 ½ to the calendar year in which they turn 60 ½.


Removing the Legal Impediments to Offering Lifetime Annuities in Pension Plans

Speaker: Jonathan B. Forman, University of Oklahoma, TIAA Institute Fellow

Key Findings:

■    Longevity risk—the risk of outliving one’s retirement savings—is probably the greatest risk facing current and future retirees in the United States.

■    One of the best ways to protect against longevity risk is by securing a stream of lifetime income with a traditional defined benefit pension plan or a lifetime annuity.

■    The federal government could promote and encourage annuitization:

– Plan sponsors could be required to include annuities or other lifetime income mechanisms in their investment options and/or in their distribution options; and

– The government could exempt lifetime income payments from income taxation or favor them with a reduced tax rate.

■    The government could also broaden the range of permissible lifetime income products—especially low-cost products that pool risk among participants, as opposed to products that necessitate high premiums to compensate insurance companies for their guarantees and profits.

– TIAA’s College Retirement Equities Fund (CREF) has been offering a variety of low-cost variable annuities that pool risk among participants for years.

– So-called “defined-ambition plans” like those in operation in the Netherlands, offer another way to share risk among plan participants.


Older Women’s Labor Market Attachment, Retirement Planning, and Household Debt

Speaker: Annamaria Lusardi, The George Washington University, Global Financial Literacy Excellence Center and NBER, TIAA Institute Fellow

Key Findings:

■    Recent cohorts of women have worked more at older ages than the cohort first surveyed in 1992 at the same age. Thus, the probability of working has risen for older women over time.

■    Women close to retirement today have more debt than their previous counterparts, and debt is positively associated with both older women being more likely to work and their planning to continue to work in the future. Among older women, total debt has more than doubled between 1992 and 2010, and the percentage of those having less than $25,000 in savings also increased sharply.

■    Only about half of older women plan or have planned for retirement. Factors correlated with retirement planning include having more income, education, and financial literacy. Those who are over-indebted and financially fragile are also those with lower financial literacy and more financially dependent children, and who experienced large income shocks. Thus, shocks play a role, but women also must be able to manage resources in order to stay out of debt and be financially secure during retirement.


Financial Communications and Allocation Decisions: The Effects of Reading Style, Financial Knowledge, and Individual Differences

Speaker: J. Wesley Hutchinson, University of Pennsylvania

Key Findings:

■    Financial knowledge was found to have two components: conceptual knowledge (e.g., financial literacy) and procedural knowledge about how to make financial decisions.

■    Generally speaking, communications media and formats had large effects on reading style and small effects (“nudges”) on financial knowledge and personal asset mix decisions. Print encouraged a more systematic, deeper reading style compared to an online format. Charts attracted more visual attention.

■    Reading style was found to have small effects on both conceptual and procedural knowledge and larger effects on personal asset mix decisions.

■    Both conceptual and procedural knowledge had large effects on personal asset mix decisions.

■    Individual differences (especially risk tolerance and financial self-confidence) had large effects on personal asset mix decisions.


Target-Date Funds, Annuitization and Retirement Investing

Speaker: Chester S. Spatt, Carnegie Mellon University and NBER, TIAA Institute Fellow

Key Findings:

■    Target-date funds, which represent age-dependent combinations of equity and bonds, span the asset allocation space without annuitized investing.

■    Financial/portfolio risks and mortality risks are independent and separable, leading to a “separation theorem” so that the structure of the holdings (including annuities) can capture completely both market risks and idiosyncratic mortality risk—rather than distorting the asset allocation in order to address more fully idiosyncratic mortality risk.

■    The target-date framework without annuities would not allow an individual with a limited bequest motive to maximize expected utility because of an inability to insure mortality risk.

■    The spanning and separation results can be interpreted as supporting the use of target-date fund products within annuitized vehicles.