Undoing Retirement Unease
Tim Lane is managing director of institutional relationships for TIAA-CREF in New York City. In this interview, he discusses shared trends that have been developing and have been a focus for TIAA-CREF and The TIAA-CREF Institute, which generates research and information on financial security and higher education issues and disseminates this knowledge through reports, conferences, webcasts, and other forums available at www.tiaa-crefinstitute.org
Issues of financial security and retirement preparedness are on the minds of many these days. How might this shake out within the higher education employment arena?
Lane: There is a rethinking of old standards of what people thought comprised good basic financial planning. For instance, more are coming to understand that the new norm surrounding financial preparedness includes factoring in increased medical costs after retirement. In part this is the reality of people living longer in retirement, but employers and employees alike are trying to get their arms around what may be a key long-term employment trend—that of more employees delaying retirement. So the retirement health-care issue is something that will continue to impact employers and employees. For the employer, this will include the question of whether they should carry certain financial liabilities.
From the employee's perspective, it used to be that you could retire and look ahead to receiving a pension to cover a number of costs in retirement without a focus on the cost of other benefits as a major factor—and certainly not in your early years of retirement. That's no longer the case. A big question for many employees now is how much will I have to save for medical expenses when I retire, which is something we've collectively never talked much about before as a retirement expenditure.
For some employees, their retirement savings expectations may also be inflated from the huge stock run-up during the 1990s when they saw an incredible increase in value of their investments. Some had made their plans for when and how they would retire based on those increases. Now they must face the fact that they may no longer be able to count on that rate of return. I do think employees generally are becoming more aware. The message may be a bit hackneyed in terms of the three legs for building a financially stable retirement—that of Social Security, an employer pension, and personal savings. Yet, with increasing concerns about the first two, I think more are starting to realize that any additional costs in retirement must primarily be covered by employees creating additional personal savings.
As a result, I think another trend we are seeing is that more employees want more help with managing their retirement, whether that is through high-touch advisors or greater simplicity through streamlining of investment options. And I think those simpler investment options are especially appealing to younger employees who typically are not as engaged in retirement investing, as well as for some entering their pre-retirement years. A key question for employers will be how to help employees transition into this new economic reality of retirement, which may be shocking for some.
How can colleges and universities do a better job of helping employees prepare for these new economic realities?
Lane: One question for institutions is to what degree they want to get involved. Ensuring longer-term financial health of their employees is not the sole responsibility of an employer, but I do think that in some sense it could become a valuable business practice for them to adopt. Institutions of higher education are ahead of a lot of other employers in America in terms of focus and commitment to employee financial health and security, but they may benefit by going further. This could take the form of better program design with more structured savings plan options offered to appeal to their full range of employee segments, providing greater access to objective advice, and perhaps a greater push for automatic enrollment and automatic savings programs. This might also include a stronger focus on education and promotion of savings plans and offering other targeted vehicles such as health savings accounts.
Another issue employers must face is the volume of choices that have cropped up in many plans. Over the years, this proliferation of choices may have created a little paralysis by analysis for employees. If an employer offers too many funds, employees may simply throw up their hands in confusion. After years of adding investment options—with the prevailing notion that more or unlimited choice is better—I think we now realize that too much choice may be a disincentive to participation. Employers probably don't need to offer five different money market or international funds. They must still offer broad choices, but they need to balance choice with plan simplification. Going forward, organizations also have to do a better job of helping employees make sense of what is offered.
How will the trend toward delayed retirement impact higher education employment practices?
Lane: From an HR perspective, institutions must continue to consider their overall staffing mix, which is a large part of the brand of any institution. Retirement has a huge psychological impact on most people, and it affects when employees are comfortable "letting go." Then there are the financial factors—for instance, whether the institution will continue to cover retiree medical expenses.
Within higher education, we have already seen new arrangements to address workforce balance challenges related to faculty, since there is no longer a mandatory retirement age. Some institutions have moved to offering phased retirement and other flexible work options for faculty as strategies for maintaining a healthy balance of continuity and turnover. I think a key challenge going forward for higher education employers will be the continued integration of flexible work arrangements across the board. This is emerging from a demographic shift we're seeing even among younger workers who want more flexibility. The standard practice of working full time straight through until you are 65 and then retiring is not what is happening now and will not continue as the norm. There is greater need for more flexible approaches to careers not only for faculty but also for administrative staff. To maintain a healthy balance of committed employees, employers must embrace this reality and understand the related cost and workflow implications.
So, as I see it, three primary challenges going forward for higher education employers will be facing the implications of retiree health care head-on, simplifying employee savings plans and helping employees prepare for retirement, and integrating more flexible work arrangements for all employees.
