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Anna Rappaport and David Kaleda

By Anna Rappaport and David Kaleda

Editor’s note:
As we approach age 65, chances increase that a worker will experience a disability of several months or longer. When defined benefit plans were the norm, disabled employees had safety nets that protected their retirement security, because employers continued to make contributions/accrue retirement benefits in the defined benefit account while the employee was on disability. 

In the last several years, it has become clear that there have been unintended consequences of exposing employees to disability risk where an employer has adopted a defined contribution plan as their primary or core employer-sponsored retirement plan.  Not only has retirement funding risk been transferred, but exposure to a long-term disability has been transferred as well, because in defined contribution plans, the employee is the primary contributor to retirement savings, and most people stop making the contributions to their retirement plan – and even withdraw funds early – when they become disabled. Thus, a disability before retirement can deplete accumulated retirement savings before retirement if proper protections are not in place. Regulations with defined contribution plans are a barrier to fixing this challenge.

This excerpt from our December, 2013 webinar will make you aware of key issues and recommend actions you can take with your clients and within your employer sponsored plans to address this risk. You can view a YouTube brief of the original presentation here.

You may also choose to take the full length course and earn 1 CRC®, CFP®, and/or PACE CE credit.



We really want to help everybody understand what the issues are, how disability and retirement security overlap with each other, and we also want people to become aware of other gaps in disability coverage.

Over the last few years, I’ve become increasingly aware of the fact that there are many issues that people who are working in related areas just aren’t thinking about.   As part of this, we helped to identify what defined contribution-only plan sponsors should be doing so that they can help their employees manage their disability risks and prevent their retirement plans from becoming derailed when people get disabled.  Unfortunately, both retirement specialists and disability specialists are very focused on their own areas, but sometimes we live too often in our own silos.

I’ve just finished 50 years as a fellow of the Society of Actuaries this year.  Over my career, I thought about personal financial security from the framework of the individual, the insurance company, and the employer.  Over the past several years, I discovered that there was a relatively low awareness of these issues even among pension experts.  They were thinking about defined contribution plans in terms of building up and accumulating money and not so much the risks.   This is complex, and even for people that are already concerned about it, I think it’s very easy to discover that there are more issues than we thought.

The Importance of Disability Coverage for Retirement Security

So is this a big problem or a little problem?  In 2004, the Congressional Budget Office did a study on the early exit of the baby boomers from the labor force looking at disability.

The Importance of Disability

They found that for Americans age 50 to 61, 14 percent of the men were not in the labor force.  Of those 14 percent, about a third was retired, about two thirds were disabled, and 4 percent gave other reasons.  A much higher percentage of the disabled group was poor; 24 percent.

Now, in contrast to the 14 percent of the men not in the labor force, 24 percent of the women were not in the labor force, but about a third of them – it was for other reasons; partly they may have been homemakers.  Forty percent of that 24 percent were disabled.  Of that group, 34 percent were poor.  The question of whether disability and retirement security is a big problem or a little problem – because it doesn’t happen to many people – it’s a big problem.

What does that mean in terms of median family income and what does it mean in terms of net worth?

The Importance of Disability

For men in the labor force in this 50 to 61 age group, their household income median was $62,000.  For the retired men it was $30,000 and for the disabled men it was $20,000.  The assets of the retired men were the largest at $231,000 median net worth, but for the disabled it was only $19,000 – practically no assets – and for those still in the labor force it was $148,000.  Yes, there was a huge economic issue.

Disabled women had a slightly lower median family income and lower median net worth.

This is data from the Social Security Administration.  This is the number of people that get disabled by age per thousand people according to the Social Security definition of disability.

Percent Disabled Increases with Age

In 1998, of the population 25 to 29 years old, one person out of every thousand met the Social Security definition of disability. Age 60 to 64 had almost 16 people because disability does increase by age.  At the bottom of the page we have some data from the Council for Disability Awareness.  Three in ten workers entering the workforce today would be disabled before they retire.  One in seven of those people could expect to be disabled for five years or more before retirement.

Ninety percent – nearly everybody underestimates the chances of being disabled and 85 percent of Americans aren’t really concerned that they’ll be disabled for three months or more.  A, it’s a big problem.  B, people don’t know it.

Use of Disability Insurance and Benefits Today

There are some surveys done by the Consumer Federation of America and UNUM about employee knowledge and attitudes about employer provided disability.

Public Knowledge About Disability

This is another thing that says people underestimate the severity of disability.  Of the people employed, surveyed employees expected 25 percent of those who were disabled for three months to be unable to work for two years, but in reality it’s half.  People were really wrong about the issue of the causes of disability.  They thought accidents were the big cause, but 90 percent of long-term disability claims are for illnesses.

Another survey by the same groups focused on what people who have claimed disability and are covered by long-term disability programs say.  Eighty-five percent of them – almost all of them – cut back on saving for retirement. Furthermore, two thirds of them used some of their retirement savings and 17 percent said they didn’t have to use any of their savings because they were on disability.

These two top statistics really tell us that people that are disabled and are claimants and have disability coverage, two thirds are using retirement savings.  Nearly all of them are cutting back on savings.  This problem that we’re worried about – about disability defined contribution plans – it’s a real problem.

In contrast, just over one in five missed mortgage payments, but about half said they did not miss mortgage payments because they had long-term disability benefits.  About a third had to apply for food assistance.  Another third did not have to.  Fifty-eight percent said they had to delay some medical and dental care in their households, but 20 percent didn’t.  While disability insurance is very important to people, it doesn’t solve all their problems, by any means.

Today, we see gaps in coverage.  We need to remember that when someone gets disabled in their 40s or 50s or anytime, they lose income, lose new retirement savings, and may use up existing retirement savings.  There’s the possibility of added expense to their household depending on their medical coverage.  They may have a lot more medical expenses to pay.

They may also have to pay for care giving depending on the situation and there is stress on family members.  Severe disability is a big deal.  Of course, disabilities vary on how severe they are.

Only 31 percent of the civilian labor force currently has employer sponsored long-term disability benefits (this number comes from the Department of Labor).  I spent much of my consulting career working with larger employers and larger companies.  I assumed that most people that have long-term jobs would have long-term disability coverage, but there are a lot that don’t.  This is very disturbing.

Sources of Long-Term Disability Coverage

There are four potential sources of longer-term disability coverage.

  1. The first is through Social Security.  Everybody in the Social Security System gets this coverage provided they’ve worked long enough to qualify – homemakers don’t.  Employers pay the tax.  The Social Security Administration’s disability definition is extremely strict; the disability has to be total and permanent.
  2. Employers may provide long-term disability plans.  They sponsor the plan; they might pay for it and they might not.  While these plans are common in large companies, only 31 percent of the civilian labor force is covered.  The definition of disability could be based on your own occupation, it could be based on any occupation, or a blend – and there are variations on the definitions.  Sometimes it’s your “own occupation” for two years.
  3. Defined benefit pensions usually include some kind of benefit, but they cover the minority of people.  The benefits are taxable when they get paid.  Accrual of the benefits over time, of course, is not taxable until you actually receive the cash.  There’s no income recognition.
  4. There’s a small minority of the population that has individual disability insurance that you buy from an insurance company; employers normally do not have a role in that.  It’s for higher paid professionals and self-employed and it, again, can have very different definitions of disability.  You go to your insurance carrier and just buy a long-term disability plan; that’s in the insurance company’s purview against state insurance laws.  Then the benefits, generally, are not taxable.  You’d be paying for those benefits with after-tax dollars.

In addition, disability coverage may intersect with other benefits.  If you have a life insurance policy you may very likely – and you should have – a waiver of premium provision.  What does a waiver of premium provision say?  If you become long-term disabled – that’s special disability coverage and it pays your premium for you.

Some employers have provided for continued medical coverage for long-term disabled through their health benefits, but not so many today.

Medicare provides coverage after two years for long-term disability, and Social Security provides disability benefits for those who meet their strict definition of disability.

Advice to Employers

  1. As a general rule, make long-term disability insurance coverage available to your employees.  You don’t even have to pay for it.  Have the employees pay for it, but – and then get them to understand – to communicate to employees the disability risk and the value.  In other words, there is a lack of understanding of how important this benefit is, but if you make it available and you encourage them to participate that will be helpful.
  2. Consider auto-enrollment in long-term disability plans.  We know for a fact that many employers are uncomfortable with that.  You can consider in-plan options like long-term disability 401(k) insurance.
  3. Understand your long-term disability program.  The one thing that I think that we learned from the ERISA Advisory Council is not all employers even realize certain offsets were occurring because they just don’t understand the policy.  I think it just makes sense from a fiduciary standpoint to know your program.

Advice to Individuals and Advisors

  1. Think holistically and don’t forget about disability.
  2. When you’re buying individual policies and, for that matter, when you’re designing group coverage, there are many variations in coverage are available through riders.  Some of the riders are inflation protected and have more liberal definitions of disability to protect retirement savings.
  3. Watch out for different definitions of disability and what they mean and the offset provisions you’re not aware of.

We’ve got a problem that we’ve got to fix here.  Today, one of the goals of the session was to increase the awareness of the issues with the unintended consequences of going to a more defined contribution platform.  We’ve got to be vigilant with trying to help our clients and our employees and making sure they’ve got the coverage that they need.



Anna Rappaport, FSA, MAAA – Post-retirement Needs and Risks Thought Leader

Anna Rappaport, FSA, MAAA – Post-retirement Needs and Risks Thought Leader

About our content experts:

Anna Rappaport is an actuary, consultant, authorized speaker. She is also a nationally and internationally recognized expert on the impact of change on retirement systems in workforce issues.  Anna formed Anna Rappaport Consulting in 2005 after retiring from Mercer Human Resource Consulting at the end of 2004 after 28 years with the firm.  She served on the board of the Women’s Institute for Secure Retirement, otherwise known as WISER, and the advisory board of the Pension Retirement Council.  

She also was a member of the GAO’s Retirement Security Advisory Panel.  She is past president of the Society of Actuaries and chairs the Committee on Post Retirement Needs and Risks.  She served on the ERISA Advisory Council from 2010 to 2012 and participated in its project on disability risks in an increasingly defined contribution world.  She has written several articles on disability risk and retirement security.  

Retirement Speakers Bureau

Retirement Speakers Bureau

David Kaleda is a principal in the Fiduciary Responsible Practice Group of the Groom Law Group in Washington D.C.  David has extensive experience dealing with ERISA tax issues that impact employee benefit plans.  During his career he has written many articles and spoken at conferences about a variety of employee benefit related topics.  David and Anna served together on the ERISA Advisory Council where they worked on this disability presentation.