Today's Economist: Rowboats for Retirement

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State AG Opposes Master in Judicial Retirement Age Case

The Pennsylvania Attorney General's Office is opposing the request of six plaintiffs challenging the mandatory retirement of judges in the year they turn 70 for the appointment of a special master.

Economic View: An Automatic Solution for the Retirement Savings Problem

But some problems are frustrating in another way: we know how to fix them and we can afford to fix them, but we drop the ball. That’s the situation with a crisis facing many Americans: saving enough for retirement.

Here is one measure of the problem: A Boston College economist, Alicia H. Munnell, and her colleagues have estimated that more than half of Americans are saving too little to support an adequate lifestyle if they plan to retire at 65. Why is the situation so serious? One reason is that traditional pension plans — in which employees have almost no decisions to make — are being supplanted by defined-contribution plans like 401(k)’s. In these plans, employees have to decide for themselves how much to save and how to invest their money. For many people, being asked to solve their own retirement savings problems is like being asked to build their own cars.

To fix this, we need to do two things. First, make payroll retirement savings plans available to everyone. Then, add empirically proven design features to them, making it easier for workers to make good choices. In other words, improve the plans’ choice architecture.

Payroll savings plans are vital because they are essentially the only way that middle-class Americans reliably save for retirement. Your grandmother probably knew that the best way to save is to put money aside before you have a chance to spend it. That approach has always worked — and is a core idea embedded in these plans.

In the past, homeowners used another form of forced saving, building home equity by paying off their mortgages. But the ease of refinancing has eroded the norm that people should pay off these loans by the time they reach retirement age. Among households with someone over 60, mortgage debt has grown drastically in recent decades. (Here’s a savings tip: If you are over 45, use today’s low interest rates to refinance with a 15-year mortgage.)

Given the importance of payroll savings, it’s alarming that only about half of the American work force has access to a retirement savings plan in the workplace — and that number falls to 42 percent in the private sector, according to Boston College research.

The Obama administration has proposed a simple solution to this problem: the automatic I.R.A. This plan, originally proposed by scholars at the Brookings Institution, would require any employer that doesn’t offer its own plan to enroll workers automatically into individual retirement accounts, with the option to opt out. The burden on employers would be tiny, and the benefit to workers could be life-changing.

The concept puts to work part of what we behavioral economists, along with industry experts, have learned about effective 401(k) retirement plans over the past couple of decades. The operative word common to many best practices is “automatic.”

When employees are first eligible for a retirement savings plan, they should be enrolled unless they choose to opt out. This solves the procrastination problem that keeps roughly a fifth of workers who are eligible for a plan from joining, even when the employer is matching some of their contributions. Companies that adopt automatic enrollment find that few employees opt out initially, or later.

But we should move beyond automatic enrollment alone. That’s because most companies set a low default savings rate for new enrollees, often at just 3 percent of their income. Of course, employees can choose a different, higher rate, but many just accept the default percentage and stay with it indefinitely.

My colleague Shlomo Benartzi, a business professor at the University of California, Los Angeles, and I devised a successful solution to this problem that we call Save More Tomorrow. Under it, a worker can join a plan in which their savings contributions are increased, say, one to two percentage points a year, each time the employee gets a raise. In the first company that tried this plan, the savings rate more than tripled in three years.

Some companies find that linking savings increases to pay increases puts a burden on their payroll and human resource departments. Such companies can avoid this problem by using a generic version of the plan, called automatic escalation, that steps up savings rates each year until the employee hits a predetermined maximum.

In a recent report in Science magazine, Professor Benartzi and I estimated more than four million people were using some form of automatic escalation, and had collectively increased annual savings in the United States by over $7 billion a year. This is significant progress, but we could do much better.

Many employees don’t know that their workplace has such an option, and finding out how to enroll can be hard. This helps explain why only 11 percent of eligible workers have signed up for it.  Promoting automatic escalation and making sign-up easy, or even automatic (with the ability to opt out, of course), could greatly increase enrollment. In our original study, in which a financial adviser was available to explain the plan and, importantly, fill out the appropriate forms, nearly 80 percent of workers who were offered the plan took it.

THE third piece of the automatic plan involves investments. Retirement savers tend to be relatively passive investors, often sticking with whatever asset allocation they selected on the day they joined the plan. But those who do make changes often do so at exactly the wrong time: they buy high and sell low.

Although the stock market has doubled in the past few years, 401(k) investors have collectively been selling stocks to buy bonds during this period. (Note that in January this year, there was a sharp reversal, with investors pouring money into stocks. This might make some trend watchers nervous about future stock market returns!)

A solution to bad market timing is to offer a default investment vehicle, like a target-date mutual fund, that automatically rebalances an investor’s portfolio, both cyclically as the market rises and falls, and as the client ages, reducing stock holdings as retirement approaches. Of course, it is essential that these target-date funds have reasonable fees.

For evaluations of how corporate plans stack up, consider the ratings offered by services like BrightScope.com. If you aren’t happy with what you find, complain to your company’s management. And if you are part of management, get busy.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He has informally advised the Obama administration.

Mandatory Retirement Policy Prompts Weil Partner to Move to K&L Gates

Mary Korby, a longtime partner at Weil, Gotshal & Manges in Dallas, joined K&L Gates' Dallas office as a partner on January 1.

Korby says she moved to K&L Gates because she had reached Weil Gotshal's mandatory retirement age and wanted to continue to practice law.

"Their philosophy is: If you don't push more mature partners out the door, you don't have room for the younger to come up. I was not at all ready to quit, so I ended up at K&L," says Korby, a transactional lawyer who chaired Weil Gotshal's associate compensation committee until August 2012.

Korby says she considered several firms for the next chapter of her practice, but K&L Gates has a "really incredible" network of offices overseas, which fits with her cross-border work.

"It was the international scope and also just the depth of expertise across the various practice areas. There are, what, 2,000-plus attorneys here," Korby says.

Korby joined K&L Gates' Dallas office with commercial litigator T. Gregory Jackson, who came from Geary, Porter & Donovan in Dallas.

Jackson says it is a good move for his practice because he has clients that "have needs on a national basis."

"I see it as a way to expand my practice and be able to retain matters that my clients have on a more national basis," he says.

Neither Jackson nor Korby would identify clients they brought with them to K&L Gates, which has 46 offices.

Craig Budner, administrative partner in Dallas for K&L Gates, says the firm is thrilled to have Korby and Jackson in its partner ranks. He says Korby adds international transactional expertise, and Jackson has done a lot of oil and gas litigation, which is an area K&L Gates wants to strengthen.

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Unemployment Compensation: Early Retirement Acceptance Doesn't Preclude Benefits

An employee who accepts an early retirement package may collect unemployment benefits under the "voluntary layoff option" proviso in the state's Unemployment Compensation Law, the state Supreme Court has ruled, overruling a string of Pennsylvania cases along the way.

Wealth Matters: Planning for Health Care Costs in Retirement

Consider this example from an annual report from Fidelity Investments: For a 65-year-old couple retiring this year, the cost of health care in retirement will be $240,000, 6 percent more than that same couple retiring in 2011 would pay. The report assumes that the man will live 17 years and the woman 20.

“Most people don’t realize Medicare covers much less than traditional employer plans,” Sunit Patel, senior vice president in Fidelity’s benefits consulting group. “The $240,000 number captures the Part B premium for physician services, Part D for prescription drugs. Then there are deductibles and coinsurance, and benefits that are not covered like vision exams, hearing aids.”

Another study, this one from Nationwide Financial, found that people who were near retirement routinely and wildly overestimated the percentage of health care costs covered by Medicare. It covers only 51 percent of health care services, according to the Employee Benefit Research Institute.

Robert L. Reynolds, president and chief executive of Putnam Investments, which has its own study, bluntly summed up the situation at a recent news briefing. “It makes no sense at all to talk about retirement savings or lifetime replacement income without talking about health care expenses,” he said.

A calculator developed by Putnam, called the Lifetime Income Analysis Tool, shows people not only how much they have saved but also, starting next year, how much they need to save depending on their health (cigarette smokers with diabetes need to save the least because their life expectancy is the shortest) and where they plan to retire (Louisiana is the cheapest, Alaska the most expensive) so they can live at their same income in retirement.

Moving to cheaper and possibly warmer climates is something many retirees naturally do. But while someone may be willing to move to Florida to reduce state taxes and avoid the ice and snow of the north, most people have so little awareness about the costs of health care in retirement that those costs are probably not a driving factor.

Carol and Richard Bechtel had worked in the San Jose, Calif., area, she for Stanford University and he at various technology companies. When it came time to retire in 2006, they put a lot of thought into where they wanted to live. They picked a community in Fairfield Glade, Tenn.

Cost of living was a factor. They were able to sell their home of 37 years in San Jose, pay cash for a house on a golf course, and still have money left over to put in their retirement account. Quality of life also mattered. By their account, the Bechtels are thoroughly enjoying their new community and friends. Mr. Bechtel found a hangar close to their home for his airplane, and they are closer to their son and three granddaughters in Wisconsin.

But when it came to knowing their health care expenses in retirement, they were pretty typical: they had to check on what the exact costs were. Their premiums, between Medicare, a supplementary policy through Stanford and a dental plan, will cost them $9,058.80 this year. That is a whopping 14 percent increase from the same policies in 2011. And that number does not include any out-of-pocket medical expenses, like co-payments or the costs of over-the-counter medications.

“Health premiums are probably one of our biggest expenses,” Mrs. Bechtel said.

Yet Mrs. Bechtel was not complaining. She said her Stanford-sponsored plan was excellent and it had given them freedom to choose the doctors they wanted, particularly for her husband, who had some health problems recently.

“Our premiums are small compared to what our bills would be,” she said. “It really makes us realize how great my Stanford benefit is. It covers everything. I worry a little bit how Medicare may change.”

While most retirees pay for insurance that supplements what Medicare pays, how comprehensive and open each plan is varies. But the fear that they will not be able to choose the doctors or care they want drives some wealthier people to set up separate accounts for health costs.

Faith Xenos, chief investment officer for Singer Xenos Wealth Management near Miami, said she counseled clients to set aside 5 percent of their annual budget for health-related costs and deductibles. (If they don’t spend it, she tells clients to use the money to do something healthy.)

“Let’s all acknowledge insurance doesn’t cover everything,” she said. “We have this idea from years back that once you get your Medicare or your retirement benefits package that everything is covered.” That is not the case.

She added: “Everyone wants the best drugs, and those might not be the ones your policy covers. They might cover a drug but that might not be the one you want.”

For people wanting to retire before Medicare starts at 65, she advises buying a high-deductible plan and using a health savings account to cover some of the out-of-pocket expenses.

Then there’s the issue of long-term care insurance. Various studies estimate that the percentage of people who reach 65 and will need long-term care is 30 to 50 percent.