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Jack van der Hei, director of research at the Employee Benefits Research Institute awoke at 4 a.m. Thursday to find this headline on page one of The Wall Street Journal: “401(k) Law Suppresses Saving for Retirement.”

Van der Hei was chagrinned, to say the least. His EBRI research had been the basis for the story, but the Journal reporter cherry-picked the most ironic nugget from his data and sensationalized it. Van der Hei quickly typed out a retort, which he posted online and summarized in a subsequent e-mail blast.

The Journal, as far as I can tell, overreached in its determination to publish a man-bites-dog story.   

The lead sentence read, “A 2006 law designed to boost employees’ retirement-savings is having the opposite effect for some people.” It argued that the practice of auto-enrolling new employees into 401(k) plans with a default contribution rate of just 3%—a practice enabled by the Pension Protection Act of 2006—has driven down the average contribution rate among 401(k) participants.

Auto-enrollees apparently tend to get “stuck” at their initial default contribution rate of 3%, which is less than half the average contribution rate of people who enroll voluntarily.

Now, simple arithmetic would tell you that an influx of participants with low contribution rates would drive down the average contribution rate. But, in the Journal’s view, this dilution of the overall contribution rates was an undesired and unintended consequence of the PPA and therefore ironic enough to deserve page-one play on a publication that was, before its purchase by Rupert Murdoch, almost above reproach.       

There was some substance at the heart of the Journal’s story, I suppose. Among people who are auto-enrolled, some—40%, according to the Journal, which cited the EBRI as a source—would probably have enrolled on their own and would have started contributing more than 3%. But to say that those people are “stuck” at 3% for any reason other than their own inertia would seem to be a stretch.  

My takeaway: a law can’t do everything for everyone. Auto-enrollment at 3% was always considered the most moderate way—neither too aggressive or too timid—to address the problem of low enrollment and savings rates among new hires. 

The Journal’s takeaway: yet another well-intended government initiative backfires. I’d call it “gotcha” journalism. Which is how Jack van der Hei felt when he saw the headline. Here’s a quote from the e-mail blast he sent last Thursday:

The WSJ article reported only the most pessimistic set of assumptions from EBRI research and did not cite any of the other 15 combinations of assumptions in the study, notes EBRI Research Director Jack VanDerhei. The WSJ also chose not to report any of the positive impacts of auto-enrollment 401(k)-type plans in the simulations that were done by EBRI.
 
“The headline of the article reports that auto-enrollment is reducing savings for some people. What it failed to mention is that it’s increasing savings for many more—especially the lowest-income 401(k) participants, VanDerhei said.

I wonder: If the default contribution rate were 7% under PPA and auto-enrollees balked at that level of garnishment and opted out of their plans, would the Journal have written the opposite story with an equal amount of indignation? Undoubtedly.

Not that auto-enrollment isn’t fair game for criticism. On the one hand it’s probably true that factors like altruism, paternalism, the desire to achieve economies of scale within the plan, and an interest in giving older employees the confidence to retire in a timely manner (the original purpose of corporate pensions) all foster corporate interest in auto-enrollment.

But, as I understand it, auto-enrollment is also driven by the need (among plan sponsors) to satisfy ERISA’s non-discrimination requirements and the desire (among asset managers) to maximize the flow of money into mutual funds. Rank-and-file employees tend to be cynical, and some of them probably ignore or avoid their 401(k) plans because they sense these unspoken motives and mistrust them.  

© 2011 RIJ Publishing LLC. All rights reserved.

They’re a not uncommon American couple in their late 50s. He pictures retirement in a rustic Colorado cabin, within casting distance of a trout stream. She envisions retirement in a low-maintenance condo in New Jersey, within walking distance of her grandchildren.

That’s part of the scenario conjured up by the 2011 Fidelity Investments Couples Retirement Study, which polled 648 married couples, ages 46 to 75 last May.  It found that one in three couples “either don’t agree or don’t know where they plan to live in retirement.” The survey also found that:

• Less than one half of couples (41%) report making investment decisions for retirement jointly, emphasizing several areas in need of improvement.
• Only 17% of couples are completely confident that either spouse is prepared to assume responsibility of their joint retirement finances, if necessary.
• 33% of couples either don’t agree, or don’t know where they plan to live in retirement.
• 62% of couples approaching retirement don’t agree on their expected retirement ages.
• 73% of couples disagree on whether or not they have completed a detailed retirement income plan.
• Nearly half (47%) of couples approaching retirement don’t agree on whether they will continue to work in retirement.
• Just 35% of wives say they are confident in their ability to assume responsibility for household finances if required to do so (vs. 72% of husbands).
• While 37% of husbands indicate that they are the primary retirement financial decision maker for the household, just 8% of women say the same.
• Fewer wives (15%) than men (40%) consider themselves the “primary contact” for their investment professional.
• Wives demonstrate less familiarity with aspects of retirement income-related topics than husbands. One example: 32% of wives say they do not know how much money they expect their income sources to generate monthly in retirement compared to just 15% of husbands.
• Wives demonstrate lower risk tolerance and invest less aggressively than husbands. One in five (21%) wives are most interested in preserving wealth at the expense of lower returns vs. 16% of husbands.
• Only 5% of wives describe themselves as investors (vs. 20% of husbands), rather characterizing themselves as a spender or saver.

When a registered investment advisor or broker-dealer uses an asset allocation model to guide the investments of retirement plan participants, is that model a “designated investment alternative,” and must it meet Department of Labor disclosure requirements?

That’s a question that ERISA attorney Fred Reish posed in a recent e-mail broadcast.

Reish’s answer: “Based on informal discussions with the DOL, it appears that they are leaning toward the conclusion that models are designated investment alternatives. If so, the disclosure requirements would include, among other things, reports from recordkeepers about the performance history of the models.

“However, we believe that most recordkeepers have not been, and may not be able to (on a reasonable basis), calculate and report those returns. (Similar difficulties may exist for asset allocation models for other disclosures required by the regulations.) This could result in the inability to continue to use those models.

“However, if the model is ‘managed’ by a discretionary fiduciary, it appears that the DOL may conclude that is not a model, but instead an investment management service–which apparently would not be considered a DIA.”

© 2011 RIJ Publishing LLC. All rights reserved.

The General Accounting Office reported last week that it would be more cost-effective for people to delay Social Security and get a larger benefit than to take Social Security early and buy an income annuity to make up the difference. 

In its report, “Retirement Income: Ensuring Income Throughout Retirement Requires Difficult Choices,” the GAO took a broad look at retirement issues facing Americans and reviewed the various possible policy responses to those problems. 

In what was otherwise a recitation of facts already well known to those in the retirement industry, the GAO authors also produced a chart comparing two ways for a male Social Security beneficiary to generate a $16,000 lifetime income starting at age 66.

The beneficiary could start taking $12,000 at age 62 and then pay $71,000 at age 66 for an annuity that would pay out $4,000 a year and bring his income up to $16,000. Or he could wait until age 66 to claim Social Security and receive $16,000 a year for life (replacing the foregone Social Security income with $48,000 in private savings in the meantime).

The net savings for claiming later would be $23,000. Unfortunately, most Americans discount the value of their future income and choose to take Social Security benefits as soon as they can. According to the GAO report, 43.1% of eligible participants took their benefits right away between 1997 and 2005. About 14.1% waited until full retirement age and just 2.8% took benefits after their 66^th birthdays. 

Women are more likely than men to face poverty in old age, the report showed. About 13.5% of women aged 75 and older lived in poverty during the years 2005 to 2009, while only 7.7% of elderly men were living in poverty. In 2009, an estimated 3.4 million Americans over age 65 lived in poverty.

Among the proposed public policy changes reviewed in the report:

• Revise the safe harbor provisions for plan sponsors when selecting an annuity provider
• Require plan sponsors to offer an annuity
• Encourage plan sponsors to offer a default annuity
• Modify tax laws on required minimum distributions to remove obstacles to deferred income annuities
• Modify spousal protection provisions in defined contribution plans
• Improve financial literacy regarding retirement income sufficiency

The GAO report was produced at the request of the Senate Select Committee on Aging.

© 2011 RIJ Publishing LLC. All rights reserved.

Total U.S. retirement assets reached $18.084 trillion in the first quarter of 2011, according to the Investment Company Institute’s Retirement Industry Report. In nominal terms, that figure almost matched the all-time high of $18.124 trillion set in 3Q 2007.

That number represented the market value of assets held in IRAs, defined contribution plans, defined benefit plans, government plans at the federal, state and local levels, and annuities. Retirement assets had slumped to just $13.279 trillion in 1Q 2009.

Variable annuity mutual fund assets totaled $1.41 trillion in the 1Q 2011, the highest level since 3Q 2007. Only about 18% of VA mutual fund assets is in defined contribution plans, such as TIAA-CREF, and just seven percent is in VAs in IRAs. Three-quarters, or about $1.06 trillion, is in VAs held outside retirement accounts.

The percentage of non-retirement VA assets held in domestic equity funds has dropped from a high of 69% in 2000 to just 50% in 2010. As recently as 2006, domestic equity funds held a 62% share. In 2010, 24% of non-retirement VA assets were invested in bonds. In 2000, bonds held just a six percent share.

The amount of mutual fund assets in non-retirement VAs ($1.06 trillion) is about 20% as large as the total amount of the mutual fund assets in U.S. retirement accounts ($4.89 trillion).  The value of all mutual fund assets in the U.S. at the end of 2010 was $11.8 trillion—representing a rebound from $9.6 trillion in crisis-stricken 2008 but still shy of the record $12 trillion at the end of 2007.  

The growth curve of retirement assets since 1974 follows the growth curve of the major equity market indexes and the growth of the financial services industry. In 1974, retirement assets totaled just $368 billion ($1.745 trillion in current dollars).

The ICI data showed that annuity assets have consistently been less than 10% of retirement assets since the early 1980s, with a brief exception in the first quarter of 2009. The value of annuity assets held outside retirement plans was $1.637 trillion in 1Q 2011, its highest point since the third quarter of 2007. 

Looking at the IRA market, the data from 1975 through today shows that most IRA assets were originally held at banks and thrifts. In the 1980s, mutual funds and brokerage accounts gradually began capturing IRA assets. In 1990, mutual funds held 22% of iRA assets, banks held 42%, and brokerages held 30%.

After that, banks fell back, mutual funds surged forward and brokerages held fairly steady. Today, IRAs hold $4.861 trillion, with 47% in mutual funds, 36% in brokerage accounts (except mutual funds), 10% in banks and 7% in life insurance companies. 

Defined contribution plans hold $4.696 trillion today, with 401(k) plans accounting for $3,175 trillion of that. So, 401(k) plans represent the single largest pool of retirement assets, followed by mutual funds ($2.3 trillion) and brokerage accounts ($1.745 trillion).  

Since the passage of ERISA in 1974, retirement assets have come to represent an increasing share of U.S. household assets. In 1974, the share was 11%. By 2000, it reached 35%; since then it has climbed to 37%. Total U.S. financial assets peaked at $50.662 trillion in the second quarter of 2007. At the end of 1Q 2011, they were $48.847 trillion.

The ICI data doesn’t show the distribution of retirement assets across different segments of the U.S. population. For instance, according to Spectrem, about half of the $2.3 trillion in 401(k) plans is in plans with 5,000 or more participants. In 2006, the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project showed that just over half of all 401(k) accounts were worth less than $20,000.

The GAO has estimated that only about 53% of private sector U.S. workers have access to employer-sponsored retirement plans. The data suggests that $18 trillion in retirement assets is more or less concentrated in the largest accounts among long-tenured, high-income employees in large employer-sponsored plans. 

© 2011 RIJ Publishing LLC. All rights reserved.

It’s tough to describe the variable annuity market because it is many different markets in one. Among VA makers, for instance, you have the leaders, the niche-nursers and the opt-out-ers. (Or, to borrow a description of retirees: the go-gos, slow-gos and no-gos.) 

The distribution world is just as fragmented. Among independent advisors, there’s a small core of heavy users who want insurance for their equity plays or simply love the commission. There are a few who use VAs primarily for tax deferral. Many of the rest skeptics. 

At the same time, end-users vary widely in their wants and needs. You have individuals who warm to the combination of guarantees and control. You have people who like the 10%-of-principal-for-life-after-a-10-year-deferral proposition. Potentially, you have the 50-to-65-year-old DC participants with big balances. And you always have your 1035-exchange prospects. 

What you don’t have, even after five years of innovation and marketing and pep-rally conferences (and a financial crisis and three years of zero interest rates and the arrival of the first Boomer at age 65), is much growth in the relative size of the annuity market.   

For years, the amount of assets in individual annuities of any kind has remained at less than 10% of the retirement market. According to the Investment Company Institute’s recent Retirement Industry Report, the annuity share was 8% in 1996 and 9% in 2010. 

The value of all total U.S. retirement savings, including public and private plans and individual assets, is $18.1 trillion, as of March 31, 2011, according to the ICI. The value in annuities of all kinds was $1.64 trillion (most of it in variable annuities). In 2000, $951 billion of the 11.7 trillion in retirement assets was in annuities.

This is not to say that VA issuers been complacent. On the contrary, their product developers and actuaries and financial engineers have been working as fast as they can just to stay in the same place.  Unfortunately, they face at least three big problems.   

Problem one: the low interest rate environment. Low interest rates have been a two-edged sword. Had they not fallen to historic lows after 2008, the equity market (along with insurance company stocks) would not have reinflated. Consequently, those living benefit guarantees would still be under water. So there’s a positive side to low interest rates when most of your underlying assets are in equities.

But low interest rates means high hedging costs, which have to be passed along to the customer in terms of weaker benefits or higher prices. Luckily, the customer has tolerated price hikes fairly well. And the fees, to the extent that they reduce account value growth, will ultimately be felt by the beneficiary, not the contract owner. 

Problem two:  If you’re not one of the top five or six manufacturers, your problem is that the top five or six issuers are grabbing more than half of all sales. According to Cerulli’s survey of insurers (see accompanying article in today’s issue of RIJ), the “concentration of sales with a few carriers” is among the top three industry problems cited by life insurers. 

That’s not just sour grapes on the part of those who are losing market share. Bing Waldert, Cerulli’s director of research, says that industry concentration hinders the development of broader consumer acceptance of VAs. Even executives at the market leaders have said they’d rather have a smaller piece of a bigger pie than vice-versa. see more balanced growth. 

Problem three: the small number of advisors who are selling VAs. Even after the financial crisis showcased the value of the living benefit guarantee, and even after VA issuers developed low-cost shares for the fee-based advisor community, only a small segment of advisors sell more than a handful of VAs each year.  (For much more on this, see Cerulli article.)

Over the next several weeks, we’ll be examining these problems, as well as their potential resolutions.

© 2011 RIJ Publishing LLC. All rights reserved.