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New reality of retirement income

The world of work is changing, and many aspects of the provision of retirement income must change with it.

This is one of the key messages to come from Pensions & Investments' Global Future of Retirement conference held in New York late last month, and both employees and employers will have to make adjustments.

Among the adjustments proposed by speakers at the conference:

  • Employers must help employees prepare for the longer life expectancies being revealed by actuaries;
  • Employers must simplify and improve the investment education programs to close the gap between "investment education and financial literacy"; and
  • Employers should accommodate the desire of some employees to delay retirement beyond age 65 wherever possible.

Most workers will have a series of jobs during their working lives, making the traditional defined benefit plan, with benefit levels tied to longevity of service with one employer, unsuitable for most.

Its replacement, the defined contribution plan, is more flexible. Employees own the accumulated assets, which may be moved from employer to employer or can be managed separately. But many employers and employees are not contributing enough to provide a comfortable retirement, especially in view of longer life expectancies. Also, the average employee is not investing efficiently, being too conservative in early years.

Employers must encourage employees to save more for retirement through the DC plans. Employers also should continue to match employee contributions at reasonable levels. If too many workers fail to achieve reasonable retirement savings through DC plans, the government might be tempted to mandate contribution levels, as the Australian government has.

Recognizing they might not be saving enough and finding it difficult to save more, many employees plan to work beyond the normal retirement age of 65. But unless they and employers adapt, they will be disappointed. Some will not be physically able to work past 65, and others will have to continuously upgrade their skills during their careers as technology advances. Employers will have to be willing to keep older employees on their payrolls, though they often cost companies more.

Companies should also provide ways for employees to gradually transition to retirement by allowing them to slowly reduce the number of hours they work.

Employers will have to go beyond the saving and investment issues. Programs must include retirement planning and information about longer life spans that could require employees to continue investing after retirement or buy an annuity. Employers, through their service providers, will have to explain these options.

Financial education programs must also include health savings accounts, life insurance and even budgeting.

These adjustments will place increasing burdens on employers, but if they are not made, and many workers retire with inadequate retirement savings, governments will be tempted to intervene more than they already do. The move by state and city governments to provide retirement plans for private-sector employees not already covered is the canary in the coal mine in this regard.