NEPC’s Bill Ryan was featured in a recent Pensions & Investments article which focuses on the uncertain future of Social Security and what plan sponsors can do to prepare participants. View the article on Pensions & Investments’ site here.
Given Social Security’s uncertain future, defined contribution executives say that it’s important for plan sponsors to offer participants holistic retirement planning and encourage additional savings.
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A reduction in Social Security benefits would lead to an increased strain on the defined contribution system, according to Bill Ryan, Chicago-based Partner and Head of Defined Contribution Solutions at NEPC LLC.
In the case of lower benefits, many individuals would need to rely more on their 401(k) plan for retirement income, he said. To do so means that “it’s going to put more pressure on the 401(k) balance, draw down faster, and you could see it depleting sooner,” Mr. Ryan said.
Mr. Ryan called it a “compound effect: Social Security reduces; more money comes out of the 401(k) plan (and) runs out quicker. And so, assuming returns are constant for everyone, the only way to start planning for this is to incrementally save more to backstop that.”
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NEPC’s Mr. Ryan said Social Security needs to be discussed more within the retirement industry, as well, since it “tends not to be (at) the forefront of the participant communications.”
“I think Social Security should get more attention (from) consultants and plan sponsors, especially in light of the attention towards annuities,” Mr. Ryan said. “Social Security is an annuity, and it’s a lower-cost annuity. So it’d be unfortunate if that wealth management strategy was compromised.”
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If Social Security benefits are reduced, “it’s not going to change a person’s need to pay their mortgage, pay their car loan, (or) pay whatever they were planning,” Mr. Ryan said. “That (loss) is going to have to come from other forms of savings like DC, and if we’re not planning for that,” it could cause people budgetary issues.
That’s why Mr. Ryan said “there should be more guidance to encourage faster escalation of savings rates or maybe tax credits for higher matches.”
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Mr. Ryan said delaying the age at which someone takes Social Security is still valuable, but it’s a hard sell.
“If someone were to take it later, it puts less of a strain on the trust,” he said. “And there’s an absolutely incremental value that the participant will actually be able to get more from it, but it’s hard to make that human trade,” and give up immediate money for possible money in the future, especially given the system’s uncertain future.
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