Home|Careers|FAQ| CLIENT LOGIN »

ShareShare Print RSS

Benefit Plan Trends - Volume 61, Issue 5

Lundstrom Insurance Agency, Inc.

2205 Point Blvd., Suite 200
Elgin, Illinois 60123
Phone: (847) 741-1000
Fax: 847-428-8857

This publication intends to provide accurate information pertaining to the subject matter covered, however, it should not be considered as legal or tax advice. It is published and distributed with the understanding that neither the publisher nor Lundstrom Insurance Agency is rendering legal or tax advice. Before taking any action, you should always obtain specific advice and assistance from a competent attorney or tax advisor.

Serving you, your business and your community since 1956
BPT Header
A report covering plan design and legislative changes

Americans Continue To Show Inadequate Levels of Financial Literacy

A large share of Americans lack the knowledge associated with making sound financial decisions, and financial literacy levels are especially low in the area of comprehending risk, according to the findings of an annual survey conducted by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business. 
This second wave of the "P-Fin Index" survey was conducted online in January 2018 with a nationally representative sample of 1,012 U.S. adults aged 18 or older. The results of the survey were presented in a report released on April 4. To compile the index, the researchers asked respondents 28 core questions, with three or four questions devoted to each of the eight areas of functional financial knowledge covered in the survey: earning, consuming, saving, investing, borrowing/managing debt, insuring, comprehending risk, and go-to information sources.
On average, the respondents answered only 50% of the 28 survey questions correctly. While 16% of the respondents demonstrated a relatively high level of personal finance knowledge and understanding by answering more than 75% of the index questions correctly, 21% showed a relatively low level of knowledge by answering 25% or fewer of the questions correctly.
The results further showed that financial literacy is the lowest in the area of comprehending risk, as, on average, just 35% of the questions on risk were answered correctly. According to the report's authors, this finding is in line with other research identifying risk-related concepts as the most difficult for individuals to grasp, and is consistent with the findings from the 2017 P-Fin Index.
However, the survey also revealed that personal finance knowledge levels were relatively high on the topics of borrowing and debt management: on average, 60% of the questions on those subjects were answered correctly. Researchers speculated that for many individuals, knowledge and understanding of debt-related topics may emerge from confronting accumulated debt across the life cycle, often starting with student loans.
Moreover, the survey showed that financial literacy levels varied across demographic groups. Financial literacy was found to be significantly higher among men than women, as 21% of the male respondents, but just 12% of the female respondents, answered 75% of the survey questions correctly. Older respondents were also shown to have more financial knowledge than younger respondents: 7% of the respondents aged 18-28, but 22% of the respondents aged 60+, answered 75% of the survey questions correctly. Financial knowledge was also found to increase with income, as 30% of the respondents with an annual income of $100,000+, compared with 15% of respondents with an annual income of $50,000-$99,999, answered 75% of the survey questions correctly.
Not surprisingly, financial knowledge was shown to increase with education, with 33% of respondents with a college degree answering 75% of the survey questions correctly, compared to 6% with a high school degree only. However, the results indicated that respondents who reported that they have participated in a financial education class or program answered more of the questions correctly on average than those who had not: 24% of those who had received financial education answered 75% of the survey questions correctly, versus 13% of those who had not. 
The survey also looked at how the financial knowledge levels of the respondents correlated with their financial outcomes. The findings indicated that of those respondents who said they certainly or probably could not come up with $2,000 if an unexpected need arose within the next month, 49% answered less than 26% of the survey questions correctly, while just 8% answered 75% of the survey questions correctly. Moreover, of the non-retirees who reported that they have tried to figure out how much they need to save for retirement, only 22% answered less than 26% of the survey questions correctly, while 65% answered 75% of the survey questions correctly.

Financial Fragility of Retirees May Be Increasing

Observing that retired people have long been seen as financially fragile because they have little ability to increase their income, a study recently published by the Center for Retirement Research at Boston College found that most current retirees appear able to absorb a financial shock without a substantial reduction in their standard of living, but that future retirees might turn out to be more financially fragile as they derive less of their income from Social Security and traditional pensions and more from financial savings in 401(k)s.
Published in February 2018, the brief, "Will the Financial Fragility of Retirees Increase?" was written by research fellow Steven A. Sass. The analysis was based on reviews of studies by the Social Security Administration's Retirement Research Consortium and others that examine how the growing dependence on household savings affects the financial fragility of the elderly. 
The shocks most likely to hit the elderly were identified in the study as a spike in medical expenses and losing a spouse. The brief cited research showing that in 2013-2015, more than 20% of families aged 65 or older had to make a medical payment of at least $400, more than 1% of their annual income, and more than two standard deviations above the family's normal monthly mean expense on health care. In addition, the brief reported the results of a study showing that women widowed between 2002 and 2004 typically got 62% of the couple's Social Security benefit and only half the couple's employer pension benefit. 
However, the analysis found that despite being exposed to such shocks, most retirees appear to be absorbing them without incurring much hardship. For example, the brief noted, a recent study found that only 10% of households aged 65 or older reported cutting back on needed food or medication over the previous two years. "Public and private health insurance, family contributions, and the savings of the elderly seem sufficient to allow most to avoid a significant reduction in living standards," Sass said. 
At the same time, Sass acknowledged that future retirees may be less able to absorb such shocks because of their high degree of reliance on savings from 401(k) and similar defined contribution plans. For future retirees, he observed, retirement income replacement rates are projected to decline due to inadequate savings and the limited income that safe withdrawal rates provide, thereby reducing the cushion between their incomes and fixed expenses. 
Overall, he concluded, the increased dependence on financial assets is likely to increase the fragility of the nation's retirement income system given inadequate retirement savings, the limited income households are likely to get from their savings, and their greater exposure to market downturns if they hold a significant portion of their savings in equities. Among the strategies households approaching retirement can use to increase their retirement income and reduce their fixed expenses, Sass observed, are to work longer, annuitize wealth, take out a reverse mortgage, and downsize. "Whether the prospect of increased financial fragility leads them to change their behavior remains to be seen," he said. 


Voluntary Benefits Integral to Employee Benefit Strategy

Though long dismissed as "something nice to offer," a growing share of U.S. employers now see voluntary benefits as an integral component of their core employee benefit strategy, and are expanding the range of voluntary benefits and services they offer to help workers improve their overall financial well-being and security, the results of a survey released on April 10 by human resources consultancy Willis Towers Watson indicate. 
Conducted in November 2017, the survey includes responses from 336 U.S. employers representing more than 4.3 million employees and a wide range of industries. The survey showed that just 5% of the employers polled say voluntary benefits have little importance to their employee value proposition and total rewards strategy. Researchers noted that this finding represents a considerable shift in attitudes from five years ago, when 41% of the employers surveyed said voluntary benefits have little importance. 
The findings also indicated that while just 36% of respondents see voluntary benefits as an important component of their current employee value proposition, more than two-thirds (69%) believe voluntary benefits will become an important component of their employee value proposition within three to five years.
Moreover, the survey showed that education benefits that address rising student loan debts and support parents saving for their children's future college cost are becoming increasingly important financial well-being benefits. While 8% of the employers surveyed said they currently offer student loan consolidation programs, 34% expect to have such programs by 2021. Similarly, whereas 10% of respondents said they currently offer student loan refinancing arrangements, 35% anticipate providing such arrangements by 2021. 
When asked about other voluntary benefits they currently offer and might offer within the next three to five years, 36% of respondents said they currently provide identify theft protection, and 63% said they anticipate offering it by 2021; and 34% of respondents reported that they currently offer pet insurance, and 57% said they expect to offer it by 2021.
The survey also showed that growing shares of employers are offering health care-related voluntary benefits. For example, 16% of respondents said they currently provide long-term care insurance, and 33% said they expect to offer it by 2021; 43% of respondents reported that they currently offer critical-illness insurance, and 71% said they anticipate providing it by 2021; and 24% of respondents indicated that they currently offer hospital indemnity, and 50% said they anticipate offering it by 2021.

The Challenges of Moving Up To the Top Job

The chief executive officers of some of the world's largest companies report that although they felt confident in their experience and operational know-how when they were appointed CEO, they struggle with the human demands of the role, and recognize that they need to transform themselves in order to keep up with the pace of business disruption, according to a study conducted by leadership advisory firm Egon Zehnder.
The study, "The CEO: A Personal Reflection," explores the human side of the CEO role. Released on April 17, the report's findings are based on a survey of 402 CEOs from companies headquartered in 11 countries who lead organizations with estimated combined revenues of $2.6 trillion. The study found that a majority of CEOs believe they had the hard skills and professional experience to step up to the role, but found certain personal aspects of the role more challenging than they had expected: while 74% of respondents said their prior achievements and experience prepared them to be CEO, less than one-third (32%) said that with hindsight, they felt fully prepared. In addition, 50% of the respondents said driving culture change had turned out to be more difficult than they had anticipated, and 48% indicated that finding time for themselves and for self-reflection turned out to be harder than they had expected.
The findings further indicated that many of the CEOs surveyed believe they lacked some necessary supports before stepping up to their current position, with 44% of all respondents—54% of those promoted externally and 36% of those promoted internally—saying their appointment was not part of a planned and formal succession process. The survey also showed that the CEOs appointed from within a company felt less prepared than those hired from outside: only 28% of internally-selected CEOs said they felt fully prepared, compared to 38% of external hires. Moreover, while 65% of respondents said there was some succession planning underway for their own successors, just 32% said that there was currently a clear process in place. 
The survey results also suggested that the CEOs are moving toward a more reflective and collaborative approach to leadership, as they recognize the importance of these soft skills and their need to adapt and change. More than half (54%) of respondents agreed that transitioning into the role required an intense period of personal reflection, and 79% said they recognized they needed the capacity to transform themselves as well as their business. However, while 78% of the CEOs said they are comfortable admitting mistakes and 70% said they are comfortable taking the heat for unpopular business decisions, only 57% of CEOs indicated they are comfortable showing emotions.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

2205 Point Blvd. Suite 200 | Elgin, IL 60123
p 847.741.1000 | f 847.428.8857