Lori Lucas: Despite Pandemic, Retirement Confidence Soars

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Our guest on the podcast today is Lori Lucas, the president and CEO of the Employee Benefits Research Institute, or EBRI. EBRI aims to provide unbiased research and data on retirement, healthcare, and other employee benefits. Prior to joining EBRI, Lori was an executive vice president and practice leader at Callan. She has also served as director of Retirement Research at Hewitt associates, vice president at Ibbotson associates, pension fund consultant at J.H. Ellwood & Associates, and as an analyst and product development leader at Morningstar. Lori received a Bachelor of Arts from Indiana University and earned a master’s from the University of Illinois. Additionally, she is a Chartered Financial Analyst.

Background

Retirement Confidence and Financial Wellness

"2021 Retirement Confidence Survey: A Closer Look at Black and Hispanic Americans," by Craig Copeland and Lisa Greenwald, ebri.org, June 10, 2021.

"Why Do People Spend the Way They Do in Retirement? Findings From EBRI's Spending in Retirement Survey," by Lori Lucas, ebri.org, Jan. 14, 2021.

"These Retirees Are More Likely to Be 'Comfortable' or 'Affluent,' Study Finds," by Kate Dore, cnbc.com, Aug. 4, 2021.

"Retirement Confidence Survey Highlights Overwhelming Participant Support for Auto Portability," Retirement Clearinghouse, prnewswire.com, April 22, 2021.

"Racial Inequities and Retirement Income: Contributing Factors and Possible Solutions," by Lori Lucas, lifeandretirement.aig.com, December 2021.

"Brigitte Madrian: 'Inertia Can Actually Be a Helpful Thing,'" The Long View podcast, Morningstar.com, April 22, 2020.

"Emergency-Fund-Focused-Employers: Goals, Motivations, and Challenges," by Lori Lucas, ebri.org, Feb. 13, 2020.

"Talking About My Generation: Comparing the Financial Wellness of Baby Boomers, Gen Xers and Millennials," by Lori Lucas, ebri.org, Jan. 13, 2022.

The Retirement System

"Senators Look at Ways to Make Retirement Saving Easier," by Susan Rupe, insurancenews.net, May 13, 2021.

"The Rising Retirement Perils of 401(k) 'Leakage'," by Anne Tergesen, wjs.com, April 2, 2017.

"401(k) Plan Leakage and the Bipartisan Budget Act of 2018," by Lori Lucas, lifehealth.com, Feb. 26, 2018.

"Participants Still Support Automatic Portability of 401(k)s: Survey," by Alan Goforth, benefitspro.com, April 27, 2021.

"Andrew Biggs: Create a Thrift Savings Plan for the Masses," The Long View podcast, Morningstar.com, May 25, 2021.

Healthcare

"What Leads to Greater Satisfaction With High-Deductible Health Plan Coverage?" ebri.org, Feb. 17, 2022.

"Projected Savings Medicare Beneficiaries Need for Health Expenses Spike in 2021," by Paul Fronstin and Jack VanDerhei, ebri.org, Jan. 20, 2022.

"Why Patients Aren't Cost-Conscious Consumers of Health Care," by Lori Lucas, ebri.org, Sept. 9, 2021.

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Lori Lucas, the president and CEO of the Employee Benefits Research Institute, or EBRI. EBRI aims to provide unbiased research and data on retirement, healthcare, and other employee benefits. Prior to joining EBRI, Lori was an executive vice president and practice leader at Callan. She has also served as director of Retirement Research at Hewitt associates, vice president at Ibbotson associates, pension fund consultant at J.H. Ellwood & Associates, and as an analyst and product development leader at Morningstar. Lori received a Bachelor of Arts from Indiana University and earned a master's from the University of Illinois. Additionally, she is a Chartered Financial Analyst.

Lori, welcome to The Long View.

Lori Lucas: Thank you for having me.

Benz: Well, thanks for being here. I just want to start by doing a little bit of stage-setting for listeners who might not be familiar with the Employee Benefits Research Institute. Can you discuss what EBRI is and what its goals are?

Lucas: Yes, certainly. EBRI has been around a long time. We were created in the 1970s to address the research needs that arose from ERISA being passed and financial professionals wanting to understand, well, how do we adhere to the requirements of ERISA? What do we need to do? And this pure research organization was developed. All we do is research on retirement, health benefits, and financial wellness. We don't have any advocacy, we don't take any positions, we don't have any axe to grind. We just want to produce fact-based research so that decision-makers can make better decisions when they're thinking about implementing retirement health benefits or financial wellness benefits for their employees.

Ptak: Where does EBRI get its funding?

Lucas: EBRI is a member-driven organization primarily. We do also get money from grants to help fund our research as well.

Benz: EBRI maintains databases on 401(k) balances and IRA balances and allocations. What are some of the headlines when you survey those data today? How would you say retirement-savers in the U.S. are doing?

Lucas: Well, the big headline is that about four in 10 workers are projected to fall short of what they need in retirement savings, and that will result in an aggregate retirement deficit across all U.S. households of nearly $4 trillion. And the other big headline is that there is a close association between a successful retirement and whether an employee has a workplace defined-contribution plan for which they're eligible. So, for example, if you look at Generation X, we estimate that if a Generation X-er has no workplace employment plan that's available for them to save for retirement, they have only about a 50% probability of having enough money saved for retirement, only 50%. But in contrast, if that same individual had 20 or more years of eligibility where they could be in a workplace retirement plan, may have a 72% probability of not running short of money in retirement. So, in other words, merely having access to an employer sponsored defined-contribution plan increases the chance that workers will have enough money to sustain themselves in retirement by 50%.

Ptak: I think we want to dig into some of those facts and figures you just cited a little bit later in the conversation. But before we did that, I wanted to talk about another signature piece of research that EBRI puts out, which is the Retirement Confidence Survey. What are you aiming to measure with that survey? And what jumped out at you as you looked at the 2021 data?

Lucas: Well, the Retirement Confidence Survey is actually the longest-running survey of its kind, and it measures both worker and retiree confidence. So, it compares the two. And in its essence, what it's trying to get at is how do the retirement prospects of workers today compare with people that have retired previously under an arguably very different retirement system, where they had a much higher probability of having a defined-benefit plan, and maybe even retiree medical.

So, what jumps out is that the retirement confidence of workers during the pandemic has been pretty high. Over seven in 10 workers said that they were at least somewhat confident about their retirement in the most recent survey, and that's actually the highest level since 1993 when we asked that question for the first time. And likewise, eight in 10 retirees are confident that they will have enough money for a comfortable retirement. That's also a pretty high number, the highest since 2005. Now, the one caveat here is that things dramatically change when workers report that they have directly experienced an income or job loss, and their retirement confidence is significantly lower. So, this is about people who were able to maintain their work in the pandemic, if they were working. And in retirement, of course, it also corresponds to the fact that the market has been pretty strong, and I think that also informs the retirement confidence we're seeing.

Benz: I want to ask about just how good people are at knowing whether they should be confident. Do you have any views? Or has EBRI dug into that? So, how does someone's stated retirement confidence square with what they actually have and their wherewithal to fund retirement? Have you looked at that issue?

Lucas: We looked at it in the Retirement Confidence Survey as well in a couple different ways. And unfortunately, our survey shows that only half of workers say they have even tried to calculate how much money they will need in retirement. And so, this is after arguably quite a long period of time in which we've tried to implement financial literacy efforts, employers and policymakers alike. And, unfortunately, that number has not changed since 1999. People are not doing the work to calculate how much they even need in retirement.

And then, the other way we look at the readiness of people for retirement is by comparing where people who are working say about what their retirements going to look like, versus what people who are retired actually report it looks like, and we often see misalignments there. So, for example, people throughout the survey's history have reported as they work that they expect to retire much later than retirees actually say they retired. And in the most recent survey, retirees said that they retired at age 62 at the median. But workers say that they expect to retire at age 65. So, people think they're going to work longer than they probably actually will. They also think they are likely to work in retirement, and when in reality, very few retirees say they do. About three quarters of workers say they work for pay in retirement--that's their intended goal--while only a third of retirees report that that actually happened.

Ptak: If I can follow up on that, an obvious question is why are people not good at forecasting when they're going to retire and their commitment to working during their retirement years? Do you have any research on that?

Lucas: Well, it's just been remarkably consistent. So, you might think that there will be a lot of variation in when people think they're going to retire, but it's 65 pretty consistently. Especially the further away you are from retirement, the longer you think you're going to work. But clearly, what's happening is that as people get older, they realize that maybe they would like to make a change; maybe that is correlated with working in retirement. They say, "OK I'm ready for a change, and maybe I'll retire sooner than I thought, but I can continue to work in retirement, maybe do some consulting or whatever it's going to be." And that just doesn't play out.

And then, the other reason we find even more prevalent is that people retire earlier because of factors that are out of their control. So, I just painted the good scenario in which people say, “OK, I'm ready to make a change.” But very often, it's not because they're saying they're ready to make a change, but because they've gotten ill or their spouse has gotten ill or they've been laid off, or some bad change has happened that makes them unable to continue to work as long as they thought they would.

Benz: How has the pandemic figured into this? The question is for workers who do have the discretion to continue working--would potentially some of these work/life-balance changes that have been ushered in as a result of the pandemic make it easier for people to work if they don't have to commute, for example, or maybe can live in some other geographic locale? How does that factor into your thinking on this?

Lucas: Well, what seems to be a big force here is what's happened with the stock market in the past couple of years. And people actually feeling like they are wealthier than they were and perhaps in a better position to retire than they thought. And so, I think that's a reason we're seeing this great resignation. People feel like, "Well, the market has done pretty well for me in the past couple of years and I'm in a better position than I thought I was going to be." That could very easily change, though, if the market turned around and we had a big decline in the market, people will suddenly start feeling that they don't have enough to continue in retirement, and we might see a lot of people actually come back into the workforce.

Ptak: EBRI also looks at the retirement confidence levels in various demographic groups. A report on the findings among Black and Hispanic workers noted that "Black and Hispanic Americans reported disproportionately lower financial resources, and how they feel about retirement and financial security is clearly impacted by having less resources." What are some things employers can do to help improve financial wellness and retirement preparedness for Black and Hispanic workers?

Lucas: The real sobering finding about Black and Hispanic workers' situation is that even when they're in the same income bracket as their white counterparts, they're worse off financially. So, it's not just because of income inequality; you're holding income steady. We're still seeing differences in their financial disparities compared with their white counterparts.

The other kind of dispiriting thing is that Black and Hispanic workers and retirees, they really don't know where to go for financial advice in greater numbers than their white counterparts. So, even when they are seeking the financial advice, they don't feel really confident about where to go to get it. Employers really do need to address the unique needs of these groups. For example, even thinking about what it is that Hispanic Americans, for example, are looking for when it comes to financial help. The Hispanic workers who filled out our survey, said they were more likely to agree that it's important to help friends and family, rather than save for their own retirement compared with their white counterparts. So, thinking about this, the messaging that employers should be directing to these cohorts are ones that's going to resonate with them. And if it's tone-deaf to the fact that they're really prioritizing helping friends and family, then it's not going to resonate with these workers. And likewise, both Black and Hispanic workers were more likely to consider debt to be a problem for their household than white American workers in each of the income groups. So, again, whatever help the employers are providing needs to acknowledge that this is an obstacle and help to solve that as part of the larger retirement equation.

Benz: I was struck by the financial-advice component of the survey as well, where sticking with Black and Hispanic workers, a high percentage said that working with an advisor with a similar life experience or upbringing was important to them. And yet, when you look at the financial-services industry and the percentage of certified financial planners, for example, it's really low in terms of Black and Hispanic folks in those jobs. So, how does the financial-services industry grapple with this, where its workforce isn't that diverse and it's attempting to serve a diverse population?

Lucas: There have been a lot of efforts and more recognition of the importance of these efforts in the past couple of years. And even some really powerful initiatives like the FARE Coalition, which is seeking to increase the presence of people of color in financial services. So, hopefully, there will be more availability of a wider and more diverse group of financial planners going forward.

But the other thing to keep in mind is, in addition to that one finding, that obviously people feel comfortable with people that seem to understand their situation from a life perspective, the survey also found that across race and ethnicity, people in the survey said that they also thought it was really important that their financial advisor had expertise with their particular financial goals, and that they specialize in households with similar assets. So, there are other ways that people can get comfortable with financial advisors, even if they don't perhaps have the same exact life experiences and don't look like them.

Ptak: I think you might have alluded to this earlier in the conversation, but the 2021 survey found that four in 10 workers said they didn't know where to go for financial and retirement-planning advice, and about a third of workers said they relied on advice from family and friends. And so, there's one dimension is, "resonating"--to use a word that I think you used earlier--with whoever it is or whatever it is that's delivering you the advice. But then, there's also the mundane of just finding it. So, does that strike you as problematic? And are there any innovations that employers are embracing to ensure that their employees can find their way to good-quality advice?

Lucas: Well, there is a lot of employer interest in a new breed of financial wellness initiative. And another survey, this one of employers that EBRI has done, found that the majority of employers--and these are employers with 500 or more employees--say that they believe their company has a responsibility for the physical, mental, emotional, and financial health of their employees. So, they feel that their company is responsible for that. And to achieve this, they focus on initiatives that are taking more of a targeted approach. So, we're seeing some really interesting initiatives in things like targeting help around student loan debt and emergency saving. And there's a behavioral economics cast to these approaches. Like I said, we spent so many years trying to educate people on financial literacy, and we haven't gotten very far. So, what we're seeing is the financial-help industry stepping back and saying, "How do we leverage some of the lessons from behavioral economics and make it easier for people to do things that are going to help them from a financial perspective?" And so, a great example is emergency savings. You can educate people on emergency savings and then hope that they can figure out how to save better. Or you can provide not only the education, but emergency savings vehicles through payroll deduction or other ways of making the emergency savings easier to actually do for these individuals. And the new breed of financial wellness initiative is trying to focus more on the latter.

Benz: I wanted to ask you about that emergency savings thing specifically. We had Brigitte Madrian on our podcast in 2020. And we discussed at length the idea of incorporating these so-called rainy-day funds or emergency funds into employee-benefits menus. Do you think these sorts of options will catch on? What's the impediment? It seems like such a no-brainer to me. Is it the cost? What's dragging on them getting incorporated into more plans and more employee-benefits menus?

Lucas: I think the jury is still out on what impact these options may have. A lot of what is being counted on here is this concept of mental accounting. And when you label something as an emergency account and people have some money in this emergency account, then people will focus on that and not be accessing their 401(k) retirement balances in case of emergency. So, that's a good outcome. And people, they label their 401(k) plan as for retirement, and they have this emergency account that they can dip into as opposed to taking withdrawals from the 401(k) plan or loan.

But we don't have a lot of data to suggest that's exactly how it would play out. It could play out very differently, for example. So, imagine if people have these emergency savings accounts and everything is an emergency. It's just that they're constantly accessing them. So, they're constantly replenishing them. And then, that actually diverts money from actual retirement savings, because people have finite amount of resources and they are putting it all into this emergency savings account that's being used all the time. Now, that's a bad-case scenario. But what we need is more research to understand how these actually work and what is the likely outcome that will happen if people have access to such emergency savings accounts.

Ptak: I wanted to go back to another thing that you mentioned a little bit earlier in the conversation, and I think maybe it builds on a recent blog post of yours that noted that financial wellness is generally lower for the generations below the baby boomers. Gen X and millennials, they're more likely to carry debt and less likely to own homes, for example. What are some of the key drivers of those lower states of financial wellness among those groups?

Lucas: Well, that's an easy one, because the key driver is student loan debt. Millennial families, in general, the much larger share of their overall debt coming from student loan debt, even relatives Generation X families, and Black, and lower-income millennials are particularly impacted by student loan debt. So, again, I mentioned that employers were targeting specific areas like student loan debt, and that's why, because it's become a very big impediment to savings, the student loan debt, that people are bearing, in particular millennials.

Ptak: What should be done to address that, in your opinion?

Lucas: Well, again, the idea of educating people on how to address their student loan debt is the traditional approach. But there's more efforts now around things like leveraging potentially the 401(k) plan to help people pay down their student loan debt. So, one very innovative approach has been, say, I have student loan debt, and I can't afford to save in my retirement plan, because I'm so busy paying off my student loan debt. The employer would say, "Why don't I match your student loan debt payment? You pay down your student loan debt, and I will match that in your 401(k) plan, so that you actually have some savings." Because what we find is that to the extent people have student loan debt, it really does interfere with their ability to save for retirement. And the people that are most worse off when it comes to student loan debt are people that assume the student loan debt and then they don't actually get a degree and now they've got debt and they're not getting a higher-paying job, and they're paying off the debt, and they're not in a financial position to save, because they didn't get that higher-paying job because they never got the degree. So, these efforts that employers are trying to implement are recognition that people with student loan debt really need help when it comes to not only understanding how to pay down student loan debt, but the impact it's having on their retirement savings.

Benz: You mentioned at the outset of the conversation that we have a lot of Americans who are hurtling toward a retirement shortfall. So, let's talk about our current system for funding retirement. How well is our defined-contribution system, 401(k) system, serving workers on the retirement front? What's working well, what's going right, and what are the key problem spots in your view?

Lucas: I think that it's a really positive story about what has been happening with our 401(k) system. And I consider there's a pre- and a post-2006 Pension Protection Act retirement system. Before the Pension Protection Act, defined-contribution plans really relied on individual workers to be engaged and to navigate the 401(k) plan on their own and it was really a do-it-yourself system. The Pension Protection Act, a lot of the provisions in it, were based on behavioral finance and on the recognition that the research on 401(k) participant behavior shows that people are not well positioned to save and invest on their own, and that if they had help through things like automatic enrollment, automatic contribution escalation, target-date funds, things that automate the fund and make it less reliant on do-it-yourself activity in 401(k) participants, that it can make a huge difference in what we see in terms of outcomes. And that's played out pretty well. And we've really seen a big improvement in the saving and investing behavior of people that have automation in their 401(k) plan.

But now, it's been 15 years since the Pension Protection Act and what's become glaringly obvious is that the Pension Protection Act did not address a number of other issues with the system, including access to the system by certain cohorts of people, including those that work part time or work for small businesses. Leakage from the system, it remains a big problem. You save in the plan, but then you take the money out when you switch from one employer to another, and it doesn't stay in the system. And then, post-retirement spending out of the system, what happens to people when they have an even more complex situation on their hand where they have to figure out how to spend out their money through the course of their retirement.

Ptak: I want to go back to something you wrote, which is, and I'm quoting you here: "We've come to realize in the retirement space that it's asking too much of people to make sophisticated savings and investment decisions." Do you think the uptake of automatic options like automatic enrollment and target-date funds go far enough to address that?

Lucas: Like I said, the 2006 Pension Protection Act did a great job of creating safe harbors for auto features that get people into the plan as long as they work for larger organizations. And also, we see that even among a variety of cohorts by age, gender, race, and income, those that are automatically enrolled and have these auto features do much better. It's a great leveler in terms of helping people to save and invest in these plans across all demographic groups.

And likely the same thing with these target-date funds. Professionally managed, diversified portfolios like target-date funds have really made a big difference in how people use the plan. The biggest problem used to be, prior to the advent of target-date funds, that people in the 20s were not familiar with investing, and they had a lot of money in stable value, which is exactly the opposite of what you probably should be doing when you're that young. And older people had a lot of money in company stocks because they kept accruing balances and balances and balances of company stock and not rebalancing their portfolio. And so, they were very exposed to a single security that was probably not what a financial planner would recommend them to be invested in. And so, you have target-date funds that get people to--maybe it's not the ideal portfolio for everyone, but it's certainly a much better diversified portfolio than what we used to see prior to the advent of target-date funds.

Benz: I wanted to ask about the leakage question, which you referenced earlier, Lori, this idea that when people change jobs sometimes the money leaks out. They just take the money and run. How big an issue is that? And do you have any thoughts on how that could be improved--that process of what do you do with those funds when you leave a job?

Lucas: That's really been a pet project of mine through much of my career is this idea of leakage because I don't think it gets enough attention. And the concept is that, again, we've got a lot of things to help get people into a 401(k) plan. But it's of no value if when people change jobs, they simply take the money and cash out and spend the money and they don't keep it for retirement. And we see that happens quite a bit. Each year, approximately 40% of terminated participants, people who have changed jobs, elect to prematurely cash out of their defined-contribution plans, and these are mainly younger workers with small balances. And part of the reason they cash out is that it's easy. It's actually much easier to cash out of a plan than to, say, roll your balance from one plan to another. And so, if we could just find a way to keep these younger people with smaller balances in the plan--and you change jobs a lot when you're in your 20s and 30s. So, it's a bigger problem, because there's so much job change happening in that age cohort as well. But what we find is, just keep that money in the plan, and it's going to make a really significant difference in retirement outcomes. And by keeping in the plan--finding an easy way for people to automatically have their balance from their former employer's plan go into their current employer plan and just follow them around as they move from job to job.

Ptak: It sounds like helping people spend from their assets in retirement is the next phase in innovation in the retirement space. There's a lot that's suboptimal, I guess you could say, about handing people their money when they're 65 or 70 and telling them to figure it out more or less. Do you agree that DC plans need to drive improvements in this area?

Lucas: Absolutely, I do. And a lot of EBRI members agree with that. In fact, our members got together last year, and we brainstormed on how to help retirees bend down their assets in retirement. We actually created retirement personas, because there's a lot of variation in people's situation as they go into retirement. And you think the lucky people are the ones that have a nest egg and they're probably going to do pretty well. But the reality is they face challenges also. People even with a large nest egg are afraid they're going to run into a situation where they're going to run out of money. Specifically, many of them take an attitude of hoarding their money, because when they're 80 or 85 or 90 years old, and they have a big health expense, or maybe they need assisted living or something comes around the corner that they didn't expect, they want to have that nest egg preserved for that because they're out of options otherwise. And so, that's really suboptimal when you think about people self-insuring themselves and being afraid to spend down their nest egg that they've worked so hard to accumulate.

But there is evidence that it's actually some pretty simple things that can help people in that situation. One is just having a paycheck that automatically goes from your investments into your checking account. And you don't have to think about it; the money just flows in like you're getting a regular paycheck during your working years. And people are much more comfortable spending out of their checking accounts than they would be going in and making the apparently painful decision to liquidate assets from their investments.

Benz: Well, a related question is the role of annuities in the defined-contribution space. The SECURE Act did provide safe harbor for employers to offer annuities inside their 401(k) plans. Do annuities seem like a good idea to you in the 401(k) context? And also, have you seen much adoption of them to date?

Lucas: Well, again, the system is changing. And a lot of people you see today who are retired, a lot more at least, had a guaranteed income stream in the form of a defined-benefit plan, maybe retiree medical, maybe they even had an annuity. Whereas today, people are retiring with much less likelihood that they will have any kind of guaranteed source of income. And we do see that people in our surveys--I talked about these retirement personas--those people who identified themselves as having some sort of guaranteed income, registered much higher satisfaction than people that didn't. So, it's a combination of having various sources of income and guaranteed sources of income that seem to align pretty highly with greater level of retirement satisfaction.

But people are very hesitant about purchasing annuities on their own. And I think that's where the idea of embedding them into a 401(k) plan comes about, because again, you're automating something that people are having trouble figuring out on their own or adopting on their own. So, this can be a less-challenging way for people to actually get into an annuity is through their defined-contribution plan. We're still in early stages of figuring out how to make that work. And like you said, there's been some initiatives in policy to create safe harbors or other ways to make employers comfortable that they can put an annuity like that in the defined-contribution plan. But it's still pretty early days in terms of that being a widespread type of offering.

Ptak: I wanted to go back if we could. We were talking earlier about the state of the state of the defined-contribution retirement system. I wanted to talk about workers who aren't covered by any sort of retirement plan through their employer. And you alluded to that cohort at least a few times earlier in the conversation. Maybe you could talk about what percentage of working people do workers who aren't covered by any sort of retirement plan comprise and how has that figure changed over the last few decades? Has it grown? Has it shrunk? What are we looking at right now?

Lucas: There really is a system of haves and have nots when it comes to those that are going to be eligible for a 401(k) plan. And it falls very neatly in terms of the size of the company. And the Bureau of Labor Statistics has some numbers on that, showing that most people if they work for a very large company are likely to be eligible for a 401(k) plan. But something along the lines of only half of the people that work for a small business are likely to be eligible for a 401(k) plan. So, that's why we're seeing a lot of interest in things like these pooled-employer plans, or PEPs, that would make it easier for small businesses to offer defined-contribution plans. Because right now, the major impediment these small businesses have is that it's costly to them, and they don't have the resources. They don't have an HR department. They're a little tiny business. And so, pooled-employer plans and other initiatives like that are seeking to make a low-cost solution available to small employers so that they can offer these types of employer-sponsored retirement plans, or something that looks like an employer-sponsored retirement plan, without having to undertake all the expenses and allocate resources that they don't have.

Benz: We had a two-part series about retirement security last year and one of our guests, Andrew Biggs, argued in favor of a big thrift savings plan that anyone could contribute to. Would something like that help address the people who either have no plan or maybe have a plan that's not so great? And importantly, do you think such an idea would ever gain traction given that you have all of these entities that have an entrenched interest in keeping things the way that they are?

Lucas: Well, there has been some effort to do this at the state level, of course. We have Illinois Secure Choice, OregonSaves, CalSavers. They all are, again, geared to help people that maybe have never had eligibility to a 401(k) plan, or any kind of employer-sponsored retirement vehicle because they tend to work for these little, tiny employers. And again, the programs are meant to give these small employers with little resources an easy way to help their employees save for retirement with no employer fees, no fiduciary liability, and minimal employer responsibilities. So, we're having this natural experiment to see, well, what happens when these offerings are made available? Will people actually use them? Because these might be people that don't even have savings and checking accounts. So, how do we successfully get them into a system like this if really they might have very limited experience with any financial instruments at all? I think we're going to have a lot of data to understand how these work, and maybe that does lend itself to some ideas about a more national system.

Benz: Well, that's what I wanted to ask about. Does it make any sense that this gets approached on the state-by-state level, similar to what we've done with 529s, where you have this mosaic of different 529 plans, and ultimately something that's confusing for the consumer, and where maybe the organizers of these plans don't have as much power as they would if they were a national entity?

Lucas: In talking to a lot of the people that oversee these programs, even they will tell you, it's not optimal to have it state by state. But this is the situation in which we find ourselves. This is what's feasible for these states to do at the present time. And again, maybe we have some significant lessons we learn from this that could lead to a path where it becomes a more national program.

Ptak: It seems like that could also help with some of the leakage that you talked about earlier--if you've got this one enveloping plan that people are putting their money to. Granted, I'm sure that there's different pros and cons that we can debate. But it seems less debatable that leakage would be as big of a problem under that sort of scheme versus the current state, where people leave a job, they might pull the money out, like we were talking about earlier. Do you think that that's an argument for having that sort of big enveloping plan that we've been talking about?

Lucas: Well, the interesting thing--and again, why I feel like it's important to recognize that the individuals we're talking about may have very different behaviors than people who work for these very large corporations--because one of the state plans, I was talking to their director, and it was pointed out that when people get their statements on a periodic basis, telling how much they have in these plans. One of the things that they see happening is a spike in withdrawal. People want to access that money. They don't want to keep it for retirement. And the plans are set up in such a way that they can have access to it. That's why I think the data is very important to mine and understand what's working and what's not if we're going to think about how to make this more broadly available.

Benz: I want to just switch over to discuss healthcare, because EBRI does a lot of research on employee healthcare benefits. You made the point earlier that the Pension Protection Act helps take the onus off of workers when it comes to making some of these complicated retirement decisions. But you've written that consumer-driven healthcare is a tall order because people think like patients in a healthcare setting rather than like consumers. Can you discuss that and discuss that analogy between what we've seen go on in the retirement space and what is increasingly being handed to employees to sort out on the healthcare side of things?

Lucas: I talked about how, before the Pension Protection Act, the 401(k) system was really predicated on a do-it-yourself approach. And we saw it was not working very well. People were not equipped to do it on their own in many instances, and they weren't succeeding very well. And you can argue that it's no easier to navigate the healthcare system. It's actually probably harder than the retirement system. I think about my own recent experience that I had being in the healthcare system because of a broken leg. And it was a traumatic break. And really, I was not thinking like a consumer when I went to the hospital. I was not going to go from hospital to hospital figuring out what's going to give me the better care at the better price. I just really wanted my leg to be fixed. And it's complicated, but also your framework is not one of a consumer when you really need treatment or even when a loved one needs treatment. You're not thinking about, well, how do I get my spreadsheet out and figure out what the best course of treatment is going to be at the lowest price. You're really just looking to get the help you need when you need it.

Ptak: For a few years, it looked like more and more companies would switch away from traditional healthcare plans like PPOs toward high-deductible healthcare plans. More recently, though, it seems that the activity has leveled off. Why do you think that is?

Lucas: We have seen that the growth in these high-deductible healthcare plans has been slowing. And it could be due to the tight labor market, that employers are recognizing they need to make choices available that would allow for other types of health benefits in the lineup. But we even actually saw this before the pandemic. And part of what we were seeing was that research was pointing to the fact that HSA-eligible health plans may be associated with a reduction in appropriate preventative care and medication adherence. And that would obviously be a big concern to employers, if that was what they were seeing as well. And just one point of contact or one point of data here is, recent concern about workers' mental health and that they are not using the mental healthcare that they need, because they're in a high-deductible health plan. So, that might also be factoring into slowdown we're seeing or the leveling off of growth in those plans.

Benz: Well, I was struck by EBRI's research that showed that workers covered by high-deductible plans tend to be less satisfied with their plans than those who are covered by PPOs. Can you give some perspective on why that might be?

Lucas: We have a survey that asked about consumer engagement in healthcare. And the survey actually found that there is no difference in satisfaction with respect to the quality of care that people receive in either of these types of plans or ease of getting appointments or choice of doctors. So, it's not a quality thing. But what it is, seems to be that the difference in satisfaction is due to out-of-pocket spending for prescription drugs and medical services. So, that seems to be the key thing. And then, the other thing we find is that people might also be just not very experienced in navigating these high-deductible plans. We find that when tenure goes up in these plans, people report dramatically improved satisfaction. So, it might be a learning curve that we're seeing as well to people understanding how to more successfully navigate these plans.

Ptak: EBRI research also points to very few HSAs being invested even though there are big tax benefits associated with doing so. Is that because it's a strategy that will tend to appeal most to higher-income workers who have the wherewithal to cover their healthcare expenses out of pocket?

Lucas: There's definitely that element to it, certainly. But there's also again an element of lack of knowledge. So, our research has shown that account tenure is also closely linked to a decision to invest in the HSA. So, this suggests that as people become more familiar with their HSAs and they begin to accumulate balances, then they are more likely to invest. And so, an education strategy by employers to address this would be the obvious outcome of that type of research. But also, employers might want to consider the idea of seeding some money to new account holders so that the new account holders have something to invest with, because again, we see not only is it tenure, but it's size of the account that is correlated with likelihood of investing in these accounts.

Benz: You mentioned earlier this idea of, when we are talking about people in the drawdown mode in retirement, that among some retirees there might be this tendency to hoard assets because of what they might worry would be big healthcare expenses in the future. So, a key question for people in retirement is how much to estimate their out-of-pocket spending will be in retirement? Can you talk about some work that EBRI has done in that area and how people can help calibrate how much they might expect to spend?

Lucas: I think people are often surprised at how much they need to have saved to cover out-of-pocket healthcare expenses such as not only premiums but prescription drug expenses. And that prescription drug expense is the big variable. So, if people want to have, say, a 50% chance of having enough to cover healthcare expenses in retirement, our research shows that a couple needs over $180,000 in saving just to have a 50% chance of having enough money to cover prescription drugs expenses and insurance premiums. And that's if they're in the median of having prescription drug costs. If those prescription drug costs happen to be in the 90th percentile, in other words, they're consuming quite a lot of prescription drugs, that same couple needs more than $200,000 in savings. So, the two big variables are prescription drugs that they will end up using, but also, how confident they want to be that they will be able to cover their out-of-pocket costs. Because this is just the 50th percentile. Obviously, they're going to need a lot more money if they want to have a higher probability of being able to cover those costs in retirement.

Ptak: What about long-term care expenses? Does your research find that employers are adding that type of insurance as an option for employees in light of some of the sobering statistics you just mentioned?

Lucas: We don't see a lot of addition of long-term-care insurance. I think a lot of people will assume that what retirees are really afraid of is running out of money, that they just will have calculated the amount of money wrong that they need in retirement, and they will run out of it. But in our research, what we find is that's one reason they're so concerned about hoarding their nest egg. But another reason really is this idea of there's going to be some unexpected costs. Usually, it's going to be associated with long-term care or assisted living. And the probability that you're going to spend a long time in assisted living is actually not that high. But, again, if you are in that group of people that is in assisted living for a long period of time, and you're older, there's a lot of money that you would need to have available to you to be able to afford it. And no one wants to be in their 90s and not be able to afford assisted living if they need it.

Benz: Well, Lori, this has been a super-interesting conversation. We really appreciate you taking the time to talk with us today.

Lucas: Absolutely. My pleasure.

Ptak: Thanks so much.

Lucas: Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)