From the U.S. Government Accountability Office, www.gao.gov

Transcript for: AskGAOLive Chat on Retirement Security

Description: Online video chat with Charles Jeszeck, Director,
Education, Workforce and Income Security.   

Related GAO Work: GAO-14-310 401(K) Plans:  Improvements Can Be Made to
Better Protect Participants in Managed Accounts

Released: August 2014

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Ask GAO Live
[ Narrator ] Welcome to AskGAOLive. 

[ Sarah Kaczmarek ] Thank you so much for taking the time to tune in and
join us today. My name is Sarah Kaczmarek. I'm in our Office of Public
Affairs. I'm joined today by Charlie Jeszeck, a director in GAO's
Education, Workforce, and Income Security team. Charlie, thanks so much
for joining us today.

[ Charles Jeszeck ] Well Sarah, it's my pleasure to be here.

[ Sarah Kaczmarek ]  We're very happy to have you here. And today we're
going to be talking about retirement security and some of the recent
work that GAO has done on this. Charlie's team actually issued a report
on Tuesday looking at managed retirement account services. So, if you'd
like a little more context for one of the reports we'll be discussing
during our chat today, you can find that report on our website. Just
look for the report number GAO-14-310. And again, that report came out
on Tuesday on managed retirement account services. Before we get started
I'm going to talk about how you can send in your questions to us today.
For those of you on social media you can send them in over Twitter. Just
use the hashtag #AskGAOLive. You can also send them in over e-mail to
the e-mail address askgaolive@gao.gov. Thanks to those of you who have
already sent in your questions over e-mail and Twitter. We're going to
do our best to get everybody a response today, so please do throughout
the chat send us in your questions and comments. So Charlie, before we
get started could you tell us a little bit more about yourself and your
work at GAO?

[ Charles Jeszeck ] Yes. Thanks Sarah. Yes. I've been at GAO now for
over 29 years. I'm working on retirement security issues for the last 13
years. I have a Ph.D. in economics and I feel very passionate about the
work that we do in our mission here.

[ Sarah Kaczmarek ] Now, you have done a lot of work on retirement
security. What are some of the recent topics that you've looked into?

[ Charles Jeszeck ] We've done a number of things recently. One as you
mentioned, Sarah, we did a major report on managed accounts. We've also
looked at issues about the impact of marriage, marry trends, recent
trends in marriage and retirement security. And also we've done an
evaluation of retirement security prospects or the challenges to a
secure retirement facing women workers in America.

[ Sarah Kaczmarek ] Could you tell me a little bit more about the
managed account report that came out last week? What sorts of things did
you look at and what did GAO find in this report?

[ Charles Jeszeck ] Sure. You could think of managed accounts really as
like the next big thing in retirement. Basically, managed accounts are a
service where a trained professional rather than an individual directs
the individual's investment funds. If you look at figure 1 you'll see
that typically in a 401K in scenario A [ Screen: Figure of examples of
how managed account providers make investment decisions for participants
] an individual sent, you know, has their contributions and they
self-direct them. They decide whether to put them all into target date
fund or a bond fund or wherever they'd like, whatever, according to the
options of the plan. In scenario B the individual provides access to the
contributions to a managed account provider, a professional, who then
allocates those funds to different investment options.

[ Sarah Kaczmarek ] Well, we're going to go our questions now from the
audience. And our first one is from Alex over e-mail and it is on this
managed retirement accounts report. Alex would like to know, they say I
keep hearing about 401K plans that are offering managed accounts. What
are they? And I know you've covered this a little bit, but if you could
tell us again a little bit more about what managed accounts are.

[ Charles Jeszeck ] Well, managed accounts as a service have been
growing by leaps and bounds. If you go back to the 1990s, you look at
figure 2 [ Screen: Bar chart showing the number of managed account
providers serving 401(k) plans since 1990 ], virtually there was one or
two companies that provided a managed account option to plan
participants. That's grown dramatically in the last 10 years. Today
there are 12 different, that we found, 12 different providers offering a
managed account service to plan participants. In 1990 or back I guess
around 10 years ago or 2005 about 25 percent of plan sponsors offered a
managed account feature. Today that's up to 36 percent. And actually if
you look at total assets under management, managed accounts now oversee
about $100 billion in assets.

[ Sarah Kaczmarek ] And I believe we also have another figure on this.
Could you talk a little bit more about how common managed retirement
accounts are now as an option?

[ Charles Jeszeck ] Well, they are -- now, they're about 36 percent of
all plan sponsors offer a managed account option. Workers, participants
are certainly looking at it more closely as to whether it's right for
them. So, it's really been growing dramatically, particularly in recent
years.

[ Sarah Kaczmarek ] Great. I'm going to go to our next question from
Robert over e-mail. And Robert would like to know of the eight managed
account providers you surveyed how many track returns resulting from
their participant advice? And of these managers, their total assets
under management represents what percent of the total surveyed?

[ Charles Jeszeck ] Well, we did find that a number of them did track
the performance of managed accounts. But, they didn't provide us data
that we really could look at in more detail. So I can't really -- I
don't have a good sense of the magnitude of this occurrence. But, it did
-- we do know that some of the managed account providers did do so.

[ Sarah Kaczmarek ] Our next question over e-mail comes from Courtney.
And Courtney would like to know, she says the report states that the
additional services offered by managed account providers to participants
in or near retirement could lead to potential conflicts of interest
regarding for example, how to spend down their savings and retirement.
What kinds of conflict of interest is this referring to?

[ Charles Jeszeck ] Well, potentially if you have a managed account
provider they could continue to manage your account into retirement. And
so you could have situations where the managed account provider would
like to keep those assets under his or her own management and not for
example, have them go to some other investment opportunity for example,
the purchase of an annuity, which might for this particular individual
be their best choice. So, there is potentially a -- given the
individual's situation and the other options available, it's possible
that you could have some conflicts of interest.

[ Sarah Kaczmarek ] Now, we did get a question over Twitter from Delphi
Pensions from John on Twitter. But, I know this wasn't included in this
report or in the previous reports you've done. So, I'm going to go ahead
and go to our next question that we received over e-mail from Lindsay.
And Lindsay would like to know why should she consider a managed account
and what would some of the advantages be?

[ Charles Jeszeck ] Well, actually a managed account can provide a
number of advantages. For example, we know from the research that a lot
of people with account balance -- with 401K accounts now really don't
diversify as much as they should. And when they're in a managed account
situation, the managed account provider, the advisor will help them to
encourage diversification, so that's a positive thing for individual
participants. Similarly, we've found that individuals who choose a
managed account service often save more. They're often more likely to
take full account of the company's match. In a lot of cases a lot of
people don't take advantage of that. They essentially leave money on the
table that the company is offering them. So, they're more -- at least
they're more knowledgeable about this and they can take more advantage
of the match that might be offered in their plan. And finally it really
-- it improves retirement readiness and financial literacy. The
individual participant will get statements from the managed account
provider about how ready they are for retirement, what they need to do.
That generally contributes to better financial literacy and better
retirement planning.

[ Sarah Kaczmarek ] So, it sounds like there’s a lot of benefits to
these especially for those of us who are not retirement experts. I have
to ask you though what would you say some of the drawbacks are?

[ Charles Jeszeck ] Well, I think one of the downsides is that right now
the managed account services are not a uniform product. So, you get a
different degree of service depending on what managed account provider
your sponsor has chosen. It could be simply just personalized in general
for you or it could really get -- customized or it could be very
personalized depending on your particular interests or in fact it might
be -- not be all that personalized at all. They may simply be allocating
your money into investment options that you could just do on your own.
None of these are problems except that typically because of this kind of
managed account service you're going to pay higher fees. And the other
issue is, is that we -- about fees is that we've seen fees are just all
over the map. I mean they can be very expensive managed account
providers and they can be ones that charge very low fees. So, it's hard
for individual participants to assess the value of the account service
in comparison to the fees that they're paying.

[ Sarah Kaczmarek ] That sounds like a tricky situation where you can't
really know am I paying more than, say, another colleague who works
somewhere else if they have the same service.

[ Charles Jeszeck ] Yes. And under the current regulations from the
Department of Labor, because managed accounts are a service and not an
investment option they aren't covered under the current regulations
requiring some disclosure about fees and for different investment
options. And one of the recommendations we made in the report is that
individuals would be -- should get more information about fees and also
benchmark information about how well their managed account service
performs.

[ Sarah Kaczmarek ] I am going to turn now to a slightly broader topic
we got over e-mail from Liam. And Liam says in the past he had a lot of
people he knew who mostly for retirement they had pensions. But now, it
seems like people more and more have to save for their own retirement
with things like 401K plans or other investments. Is this change making
people more or less secure as they prepare for retirement?

[ Charles Jeszeck ] Well, I think first that it's important to step back
and understand that originally 401Ks were a supplemental plan to
traditional pensions. And as traditional pensions have disappeared, the
401K really has grown or people are trying to have it grow to fill that
vacuum of retirement security. The major change to an account-based
system that we're moving towards is that the responsibility for saving,
for investing prudently, for contributing is now much more squarely on
the part of the individual participant. And so over your lifetime you
really do, if you want to have a secure retirement, contribute
faithfully to your plan or first of all try to get a plan. Make sure you
have one or some other investment vehicle, retirement vehicle.
Contribute to your plan. Invest wisely. And then the other issue as you
approach retirement is, how do you spend the money down in retirement in
a way that it lasts your entire life? You don't outlive your savings.
So, that can be quite challenging.

[ Sarah Kaczmarek ] Certainly and I'm going to go to another question
now from Richard over e-mail. And Richard would like to know is there
any evidence that professional investment advice works? Indexing appears
to consistently outperform active managers.

[ Charles Jeszeck ] Well, you know we have done some work in the past on
target date funds. Increasingly people are moving towards target date
funds. So, there is some notion to at least -- you don't have to think
as much. You don't have to make as many individual decisions in the
context of target date funds. In the case of managed accounts you know
some of the, the benefits that I've mentioned earlier, I think you have
certainly there increased diversification, a tendency to save more. But,
in terms of actually comparing performance, we really didn't have that
kind of data. I mean we -- there is a little bit that we mention in the
report but we really didn't have comprehensive data to compare the
performance of managed accounts with other investment strategies.

[ Sarah Kaczmarek ] It sounds like people really have to consider
carefully whatever is going to be available to them either through their
employer or otherwise when they're making these types of decisions.

[ Charles Jeszeck ] Yes, absolutely. I mean I think you get an employer
who offers you a plan. First of all you should definitely sign up for
it. You should contribute as much as you can and then you have to figure
out, yeah you really should take a good look, careful look at the
investment options your plan offers you and the fees. And then also ask
some questions about yourself. How much risk are you comfortable with?
What are your long-term goals? Will you stay with the plan a long time
and so on?

[ Sarah Kaczmarek ] Now, you did mention earlier you have done some work
on marriage and retirement security. We have our first question that
came in over e-mail on this topic. The question is from Joanna. And
Joanna would like to know is it true that married people are more
financially secure in retirement? And if so how does that work?

[ Charles Jeszeck ] Well, I think that there are certain benefits to
being married that you don't have as a single person. First you can pool
resources. You have two people as opposed to one. You can specialize in
certain areas. One person can work and maybe be able to work at home and
help provide childcare services more easily than the other person. So,
you can divide things up that way. And then the third thing is it
breaks, it divides your risk up over two people in the labor market risk
rather than one. So, if there's one spouse is unemployed the other
person is still working. So, you still have some income going in over
difficult financial or economic periods. So, for all those reasons
there's just more -- you do have a lot of advantages being in a marriage
situation.

[ Sarah Kaczmarek ] And I do think we have a figure on this, figure 3 if
we bring it up. It shows a little bit about what you're talking about
here. [ Screen: Bar chart showing 2012 poverty rate estimates of the
population age 65 and older by marital status and sex ]

[ Charles Jeszeck ] Yes.

[ Sarah Kaczmarek ] Could you elaborate a little bit more?

[ Charles Jeszeck ] Absolutely. I think figure 3 really illustrates the
advantages that I just outlined for being married. What figure 3 shows
is the poverty rates for people over age 65. And you can see for people
who are married, both men and women in total we're talking -- we're in
the 4 to 5 percent range. If you look at people who are widowed it's
more than double that. And then you get to divorce and the never-married
group is probably the highest. It's -- the poverty rates for women who
have never been married are 4 times the poverty rates for women who are
in marriage situations and are over age 65.

[ Sarah Kaczmarek ] Before we keep going with questions I just want to
remind people how you can continue to send in your questions today. You
can send them in over Twitter using the hashtag #AskGAOLive. And then
again our e-mail address to send in your questions is
askgaolive@gao.gov. Thank you so much for everybody who has been sending
in your questions so far and your comments. We really do appreciate it.
And I am going to turn back to our next question from the audience going
back to the issue of marriage --

[ Charles Jeszeck ] Um huh.

[ Sarah Kaczmarek ] And this question deals with the decline in marriage
that we've seen over time. So, Stephanie over e-mail asks what do you
think are the main causes of the decline in the rates of marriage today?

[ Charles Jeszeck ] Well, this is actually a hotly contested topic in
the --

[ Sarah Kaczmarek ] I would imagine.

[ Charles Jeszeck ] In sociology. In a world of sociology a lot of
people have different theories for the work that we did for the
particular congressional committee that requested this. This was outside
of the scope of what we were going to do. Basically we were pretty much
tasked with what are the trends and what are the implications of those
trends for retirement security rather than you know, why is it that
fewer people are getting married today than they did say 30, 40 years
ago.

[ Sarah Kaczmarek ] Fair enough, definitely not an easy question to
answer. I am going to go back to talking about managed accounts and take
another question that came in from Robert over e-mail. Robert would like
to know, did GAO in the course of the study that you were doing,
identify any managed account providers that tracked their returns but
are not publishing them? If so, these managers’ total assets under
management represent what percent of the total surveyed?

[ Charles Jeszeck ] We did find some managers who did collect this
information, some managed account providers. They didn't provide that
information to us during our work in any you know way that we -- that
was something that we could use for the report. We do know however that
the companies that said they did this would be willing to provide that
information to plan sponsors. So, presumably their -- the sponsors who
have them as the managed account provider are getting this information.

[ Sarah Kaczmarek ] Coming back to talking about different demographics
with retirement, we have a question from Gregory over e-mail. And
Gregory would like to know, are there particular groups of Americans who
are at greater risk for poverty in old age?

[ Charles Jeszeck ] Well, I think the -- one of -- looking at the work
we did on marriage one group is certainly single women. If again -- if
you -- single women or as you've just seen just previously their poverty
rates are far higher than for other groups, this is often for the
minority women, African-American women who are single. This is probably
again a group there that has higher rates of poverty. So, those are
probably some of the key groups that we focused on in that work.

[ Sarah Kaczmarek ] And I'm going to pull up another figure that relates
to this. I think figure 4 shows some of these trends in poverty and old
age. [ Screen: Line chart showing estimated labor force participation
rates by sex and marital status 1960-2010 ] Could you tell us a little
bit more about what we're seeing in this figure here?

[ Charles Jeszeck ] Well, in figure 4 actually one of the things is in
this situation is sort of what can single women do to avoid poverty in
retirement? And one of the first thing is that we now know that single
women work a whole lot more than they used to, and that's a good thing,
because they're going to get higher wages. They still don't get the
wages that men do, and so that's a problem. But, they are working and so
they have the opportunity to save for retirement. And if any -- so if
you look at this figure you see that single women now pretty much have
caught up with single men in terms of labor force participation. So,
working more and also saving more. If they're in a 401K plan they should
definitely take advantage of contributing as much as they can. Invest
wisely because women tend to live longer too, they make want to work
longer to build up more Social Security credits. That will allow you a
higher benefit from Social Security when you go into retirement. But,
probably working and saving more are probably the two number -- the two
things that single women can do to minimize the threat of poverty in
retirement.

[ Sarah Kaczmarek ] Well, we have a related question that came in over
e-mail from Brenna. And Brenna would like to know, she says, I have some
older female relatives who are divorced or widowed and should she be
worried about their ability to retire comfortably?

[ Charles Jeszeck ] Well, we know that for people who are married,
divorce or widowhood is a tremendous shock to their retirement
prospects. And the work that we did in our women and retirement report
in both cases the drop in income after widowhood or divorce is in 35 to
40 percent range. And it's much higher for women than for men for a
variety of reasons they work -- they have lower wages. They don't work
as much historically. And so the shock of widowhood or divorce can
really be devastating for women in terms of their retirement prospects.

[ Sarah Kaczmarek ] Well, it does sound like a very difficult situation.
And I am going to go back to another question that we got from Robert
over e-mail. And Robert would like to know has GAO considered how plan
advisors duplicate the services of a managed account provider? To what
extent do you think they will be subject to any new proposal or guidance
from the Department of Labor for managed accounts?

[ Charles Jeszeck ] Well, during the course of our work on managed
accounts we were aware of some of the developments among the plan
administrators here. We really -- that was really outside the scope of
our report. You know people hadn't really understood what managed
accounts were previously so that really was our central focus. Certainly
Labor in its -- as we recommended to Labor to have -- to make -- to
basically require managed account providers to provide fee information,
benchmarking information. They could include some of these plan
administrators as well. But, right now we don't know to what extent
Labor plans to do that.

[ Sarah Kaczmarek ] Let me ask you a little bit more about the
recommendations your team made in this report. Did you make other
recommendations, or was that the main recommendation that you made?

[ Charles Jeszeck ] Well, I think those -- there were two. The two -- we
did have a couple of other recommendations. We found that some of the
management account providers did not provide the same level of fiduciary
responsibility as others. And to avoid getting too technical, too
lawyerly here, there are different levels of fiduciary responsibility.
And so we wanted to make sure that this -- that Department of Labor
addressed that issue. The major recommendations that we made on that
report though was that both to plan sponsors and -- plan participants
and plan sponsors that information on fees for managed account services
as well as benchmarking information be provided to those groups. And
finally, the other thing that we recommended, which we think is
important to foster competition among managed service providers is that
plan sponsors should ask their plan administrators to get options to --
from other managed account providers rather than the one that the plan
administrator is recommending. So, you’ll have sort of fee choices from
more than one managed account provider. And while we didn't recommend
that this be a mandate we thought that it would be useful for plan
sponsors if they couldn't get any other quotes from other managed
account providers, from their planned administrator to provide that to
the Department of Labor.

[ Sarah Kaczmarek ] There’s a lot of good recommendations in that
report. I am going to go back to the topic of marriage, and Alicia sent
a question over e-mail. And she would like to know if marriage is such
an important factor in retirement is the government doing anything to
encourage people to marry or stay married?

[ Charles Jeszeck ] Well again, that was outside the scope of our
report. You know probably certainly creating jobs, job creation is
something that we'll encourage, keep people together you know and so
that's something. But, other than that but that really was outside the
scope of our report.

[ Sarah Kaczmarek ] And another question that may be a little hard to
answer.

[ Charles Jeszeck ] Yeah.

[ Sarah Kaczmarek ] I'm going to come back to 401Ks. And Steve asked, if
I leave my job what options do I have for my 401K plan savings?

[ Charles Jeszeck ] Okay, there's actually a number of options that one
has in most cases when they leave a plan. They can leave their money
with their old provider, old -- their old plan although sometimes the
plans don't like that and they sort of encourage you to take the money
out. They can roll their money over to a new company if the new company
offers a plan. They can cash the money out, which probably for most
people is the least best outcome. You do pay extra tax on it and you're,
obviously you're draining your retirement savings. And the last option
is to roll the money over into an IRA.

[ Sarah Kaczmarek ] Now, you mentioned earlier that you have to both
think about saving enough for retirement when you are working but then
also how you spend the money once you are retired. So, I have a question
from Craig over e-mail. And Craig would like to know. is it better to
take Social Security benefits as soon as possible, or should you delay
taking those benefits?

[ Charles Jeszeck ] Well, we did a report recently looking at early
claimers and one of the things we found I think about 40 percent of
people who claim Social Security, I think about 40 percent claim it
within the first year. I think there's a lot of things to keep in mind,
an individual's health, how long you're going to live. You know if you
-- if someone is able to wait from age 62, wait ’til age 70 their
benefit would be 100 -- almost 175 percent higher than what they would
get at age 62 and that's really quite significant. Even if they wait to
age 66 it's going to be far greater than what they get at age 62. The
problem with taking your benefit at age 62 is if you're a fairly
low-wage worker is even with -- though Social Security is fully indexed
for inflation there is the potential that later in life you may -- that
benefit given rising health costs and so on, that benefit might not be
enough for you to avoid poverty in retirement. And it's very difficult
to go back to work, say, when you're you know say over 80 years of age.
So, there are a lot of things to keep in mind. You know in general other
work that we've done you know the annuity, basically the annuity value
of waiting a year of postponing Social Security benefits is it's far
cheaper to do that than if you went out and bought an annuity in the
market. So, there are a lot of things to consider. I think in general
though for most people probably waiting. Waiting is going to result in a
much -- in a larger retirement income.

[ Sarah Kaczmarek ] Well, we have time for a couple of questions now
before we wrap up today. I'm going to do one more from the audience. And
Kwame over e-mail asks, what are some of the main challenges preventing
older workers today from being financially secure in their retirement?

[ Charles Jeszeck ] Well, I think one is that we -- traditional pensions
have been disappearing. We did have the financial crisis in 2008. For
people who were retiring around that time that was a -- if they had to
retire then they likely suffered a huge financial loss. It requires
people to invest wisely over their career, to contribute over their
career. A lot of people don't do that. You know a lot of people haven't
had the opportunity or been able or willing to do that. And so these are
challenges. We hope now in the future given the work we do and that the
growth of the 401K system that people will start looking at this more
closely, the financial literacy about saving for retirement. Hopefully
we'll encourage people to do so. But, these are many, many major
challenges facing workers.

[ Sarah Kaczmarek ] Well Charlie, I've got to ask you one more question.
Thinking about sort of the bottom line here as people are preparing for
retirement or thinking about retirement. What do you see as sort of that
main take-away message for them?

[ Charles Jeszeck ] Well, I think the bottom line is, is that if you
have -- if you're lucky enough to have a 401K plan you should save as
much as you can. Try to contribute faithfully year in and year out. It's
very difficult. People have a lot of competing needs. There’s mortgages,
student loans, just basic expenditures of daily life. But, to the extent
that you can save or at least save to the level to get the complete
company match that's something I would do. The second thing I would do
is, is try to invest wisely and there are a lot of ways to do that.
Become more financially literate, target date funds, managed accounts.
All of these are possibilities to help people manage their income wisely
and then to plan for retirement. When you retire what do you want to do
with that money? Have a strategy for spending the money down either
doing it systematically on your own, purchasing an annuity or investing
it in retirement, doing something so that your account, your money lasts
you your entire life.

[ Sarah Kaczmarek ] That's some very good advice for all of us. And
Charlie, thank you so much for taking the time to join us today.

[ Charles Jeszeck ] My pleasure.

[ Sarah Kaczmarek ] Really appreciated having you here on the show and
thanks everybody who tuned in and watched today and to those of you who
sent in your questions and comments. 

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