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Retirement Income Journal editor and publisher Kerry Pechter was one of eleven retirement experts to sign a letter to Senators Cory Booker (D-NJ) and Todd Young (R-IN), offering support to the senators in their efforts to convene a Retirement Security Commission. The letter said:
Dear Senator Young and Senator Booker,
The undersigned are all retirement policy experts, each of whom has devoted our career to investigate the adequacy, efficiency, affordability, efficacy, and fairness of the current U.S. retirement system.
This bipartisan group of researchers, representing a broad spectrum of political affiliations, agrees that millions of Americans reaching retirement age in the coming decades will not have adequate retirement income. We recognize that one of the most effective solutions—working longer—will not be an option for every individual.
We also agree that the voluntary, employer-based retirement system has not worked for many of our citizens. And we agree that Social Security needs to be placed on more sound financial footing, although we recognize that this is not your first area for review.
Our bipartisan group of researchers hold a wide range of views, sometimes even opposing views, on what would constitute an ideal set of reforms to improve retirement security. However, we stand in firm agreement that our nation urgently needs a serious, holistic conversation and bold action to strengthen the foundations of retirement security in the U.S.
We applaud your efforts to review the system and your concern and care about American elders. We stand ready to assist you in your efforts to convene a Retirement Security Commission.
In addition to Pechter, the following individuals signed the letter: David Babbel, University of Pennsylvania; Zvi Bodie, Boston University; Jeffrey Brown, University of Illinois; Brett Hammond, Capital Group; Lori Lucas, Employee Benefit Research Institute; Alicia Munnell, Boston College, Robert Powell, Retirement Weekly; Anna Rappaport; Steven Sass, Boston College; and Jack VanDerhei, Employee Benefit Research Institute.
Senators Booker, Young, Tom Cotton (R-AR) and Heidi Heitkamp (D-ND), are introducing legislative proposals that would expand access to workplace retirement savings plans, particularly for workers employed by small businesses.
Different legislators are addressing the problem differently. These three bills (S.3218, S.3220, and S.3221) would also help Americans accumulate savings by: expanding the number of employers using automatic enrollment, automatic escalation, and other best practices; facilitating emergency savings to prevent retirement account leakage; and encouraging people to save (rather than spend) their tax refunds.
These reforms echo recommendations from the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings.
Legislative summaries
The Small Business Employees Retirement Enhancement Act, S.3219, would increase access to workplace retirement plans by making it easier for small business owners to offer plans. Specifically, the bill:
The Retirement Flexibility Act, S.3221, would help more Americans accumulate savings by expanding the prevalence of well-designed workplace retirement plans, both by inspiring new plans and bringing auto features to some of the nearly half of all plans that lack them today. Specifically, the bill:
The Strengthening Financial Security Through Short-Term Savings Act, S.3218, would reduce early withdrawals (“leakage”) from retirement accounts and facilitate short-term savings by allowing employers to automatically enroll their workers into emergency savings accounts in addition to retirement accounts.
The Refund to Rainy Day Savings Act, S.3220, would allow individuals to pre-commit to saving their tax refunds for later in the year.
© 2018 RIJ Publishing LLC. All rights reserved.
Yet another legislative proposal has been added to the growing pile of bills in both the House and Senate that are aimed at narrowing the “coverage gap”—the fact that about half of all full-time private-sector US workers have no 401(k)-type plan at work—and get more lower-income and minority Americans saving for retirement.
(Will any of them be enacted this year? With less than four months to go before the mid-term election, it doesn’t seem likely. On the other hand, retirement security—except the small matter of Social Security—appears to be one of the few issues that can still attract bipartisan support.)
To incentivize small employers to offer retirement savings plans to employees, Senators Susan Collins (R-ME) and Mark Warner (D-VA) have introduced the SIMPLE Plan Modernization Act (S.3197), which is also supported by AARP. The act is intended to help small business employees and their employers adopt SIMPLE Plans.
A SIMPLE (Savings Incentive Match Plan for Employees) IRA plan lets small-company employers contribute toward their employees’ and their individual retirement accounts. Employees may make salary reduction contributions to the IRA and the employer is required to make either matching or non-elective contributions.
There are relatively few employer-sponsored IRA plans in use. According to a January 2017 report from the Investment Company Institute, 42.5 million US households had an IRA in 2016. Of those, 7.2 million households (5.7% of US households) had a SIMPLE IRA, SEP IRA or SAR SEP IRA through an employer.
The proposed legislation would:
Congress established SIMPLE (Savings Incentive Match Plan for Employees) retirement plans in the Small Business Job Protection Act of 1996 to encourage small businesses to provide their employees with retirement plans.
Then, as now, retirement plans among small employers were, and continue to be, scarcer than among medium and large employers. While these smaller businesses had access to tax-favored retirement savings plans (including traditional 401(k)s), those plans are more expensive to administer.
Businesses with 100 or fewer employees may currently create SIMPLE retirement savings accounts for their employees, so long as the employers do not have another employer-sponsored retirement plan.
© 2018 RIJ Publishing LLC. All rights reserved.
As it has done every year since 2000, Vanguard has published a fact book on its retirement plans, How America Saves, which can be downloaded here. This year Vanguard has supplemented this document with a report on the mutual fund and 401(k) giant’s small plans. It can be downloaded here.
The 100 largest U.S. corporate pension plans experienced a $23 billion increase in funded status in June, as the deficit of the Milliman 100 PFI plans fell to $118 billion on June 30 from $141 billion at the end of May, according to Milliman’s latest Pension Funding Index (PFI).
The improvement stemmed from an increase in the benchmark corporate bond interest rates used to value pension liabilities, which saw discount rates increase by 13 basis points to 4.12% from 3.99% over the same time period, according to the global actuarial consulting firm. The funded ratio for the Milliman 100 PFI jumped to 92.8% from 87.6% in the first half of the year despite June’s poor investment returns of -0.09%.
“Six months into 2018 and corporate pensions are well ahead of where they started at the beginning of the year,” said Zorast Wadia, co-author of the Milliman 100 PFI. June saw the highest rate since January 2016.
June’s -0.09% investment return led the Milliman 100 PFI asset value to decline to $1.536 at the end of June from $1.531 trillion at the end of May. By comparison, the 2018 Milliman Pension Funding Study reported that the monthly median expected investment return during 2017 was 0.55% (6.8% annualized). The projected benefit obligation (PBO) decreased by $28 billion during June, lowering the Milliman 100 PFI value to $1.644 trillion.
Under an optimistic forecast, with interest rates reaching 4.42% by the end of 2018 and 5.02% by the end of 2019, and assets returning 10.8% per year, the funded ratio would climb to 100% by the end of 2018 and 116% by the end of 2019.
Under a pessimistic forecast, with a 3.82% discount rate at the end of 2018 and 3.22% by the end of 2019, and 2.8% annual returns, the funded ratio would decline to 89% by the end of 2018 and 83% by the end of 2019.
Click here to view the complete Pension Funding Index. Click here to see the 2018 Milliman Pension Funding Study.
Lincoln Financial Group has launched Lincoln WellnessPATH, a financial wellness tool for plan sponsors and participants, according to a release from Sharon Scanlon, head of Customer Experience, Retirement Plan Services, Lincoln Financial Group.
“Twenty percent of savers admit to putting off retirement saving because of competing priorities such as a mortgage, credit card debt, student and car loans,” the Lincoln release said.
Financial wellness programs, which have become a must-have offering for retirement plan providers, are intended to help employees manage short-term financial stress without sacrificing long-term security. It’s too early to say whether they will accomplish that goal.
According to Lincoln Financial’s 2017 Retirement Power Participant Study, 51% of employees want to learn how to budget more effectively, and more than 25% of plan participants have researched at least eight financial issues, including: prioritizing financial goals; being on track with savings; and expenses in retirement.
Likewise, 78% of employees “wish they had a better understanding of the elements of saving for retirement in their workplace retirement plans and six in ten cite their employer as a top source of information about financial topics,” the release said.
The program includes “actionable web content, on-site personal support and an interactive financial wellness tool,” said Scanlon.
Participants who want instant help with establishing budgets, goals and priorities can take a simple quiz, get a financial wellness score and learn actionable ways to improve their scores. The quiz is accessible from the employee’s online account.
New York Life announced today that John Y. Kim will retire as President at the end of the year. He joined the company in 2008 and was named President in 2015. “During his tenure, he led the investment management arm of the company, which experienced impressive growth in assets under management, expanded globally, and posted record profitability,” a New York Life release said.
With Mr. Kim’s pending retirement, the company also announced several organizational changes including:
© 2018 RIJ Publishing LLC. All rights reserved.
To certain policymakers in Washington, D.C., the fact that tens of millions of Americans working at tiny companies aren’t covered by a retirement plan at work—and might reach age 65 with only Social Security to live on—is a societal time bomb that needs defusing.
For big 401(k) recordkeepers and asset managers, that same “coverage gap” represents a opportunity that hasn’t existed before. In the past, the small company market was too fragmented for them to pursue. At the same, small employers have avoided sponsorship because they fear the costs, complexities and legal risks that go with it.
All that could change if the dysfunctional Congress passes any of a slew of retirement-related legislative proposals currently pending. If passed, the bills could do for 401(k) providers roughly what hydraulic fracking did for the oil industry: Allow it to aggregate a widely dispersed, hard-to-reach resource into economically viable quantities.
In the House, the Retirement Enhancement and Savings Act of 2018 (RESA), the Retirement Plan Simplification and Enhancement Act of 2017, and other bills (HR3902, HR3910, HR854) could turn the retirement business on its head by letting teams of retirement service providers create turnkey 401(k) plans—called Pooled Employer Plans or PEPs.
The providers would then invite dozens or even hundreds of companies to join these PEPs (sometimes called “open multiple employer plans” or open MEPs). Once the savings of those companies’ employees are gathered into large investment pools, big recordkeepers and asset managers can efficiently serve them.
Politicians and providers alike hope that thousands of small employers who currently don’t offer plans—and some who are unhappy with the plans they have—would join a PEP. As PEPs flourish, the industry assures legislators, more employers will adopt them. Then, in theory, the dreaded “coverage gap” would shrink.
“RESA would allow Prudential and other major recordkeepers to participate at the smaller end of the market in a more scalable and efficient way,” said Harry Dalessio, head of Full Service Solutions at Prudential Retirement. “It could flip the existing service model on its head and become the go-to market strategy at the small end.”
Recordkeepers that we’ve identified as having an interest in this emerging space include: Ameritas, Empower Retirement, Prudential, Securian and Transamerica. As an asset manager, State Street Global Advisor is especially active.
Companies playing professional rules, including payroll, consulting or outsourced fiduciary roles, include ADP, PayChex, Bukaty Companies, Convergent Retirement Plan Solutions, Fidelis Fiduciary Management, Mesirow Financial Investment Management, Pentegra, Plan Pilot, Sageview Advisory Group, Tag Resources, and The Platinum 401(k). (If we missed you, please let us know.)
State Street Global Advisors
State Street Global Advisors, the financial giant that sells its SPDR exchange-traded funds (ETFs) through defined contribution plans, has lobbied aggressively for the RESA bill. Already active in the multiple employer plan space, it serves as the investment manager for People’s Pension in the UK, a master trust arrangement in the US that resembles a PEP. It is an investment provider for OregonSaves, the state-sponsored auto-IRA in Oregon and it has put in a bid to manage assets for Vermont’s new state-sponsored multiple employer plan.
Melissa Kahn
Since Boston-based SSgA is both an ETF manufacturer and a wealth management firm, it could sponsor a PEP or provide services to one. “There are multiple roles we could play,” Melissa Kahn, SSgA’s managing director for Retirement Policy Strategy told RIJ recently. “We could be the investment manager of whatever products are offered through the PEP. We could play a consultative role. We’re also looking at other options, in terms of strategic partnerships.
“We are not a recordkeeper, so we can’t be a complete solution. But we could clearly have a strategic alliance to develop the structure for one. We could be in the construction phase of it, and then a separate fiduciary would oversee the whole plan. That could be a
3(38) or 3(21) fiduciary,” she said, referring to two types of investment oversight roles.
“The world is moving to a new benefit platform for retirement and for health, where the employer is the funder and facilitator and the liaison with the providers, but not the sponsor or fiduciary,” Kahn added. “I think given our litigious society, that’s where we will be going. It will start with smaller employers. Down the road it could reach mid-sized and larger employers who say, ‘I want this liability off my plate.’”
Transamerica Retirement Services
As a recordkeeper, Transamerica has long been active in the multiple employer plan (MEP). As far back as 2002, the firm supported “closed MEPs,” which are multiple employer plans that admit only certain affiliated employers and their employees, according to Deborah Rubin, the vice president and managing director who leads Transamerica’s distribution efforts for MEPs and third-party administrators.
In 2013, Transamerica created an “exchange” where unrelated employers could join an open MEP. In an open MEP, each employer must file its own plan document, called a Form 5500. That responsibility could go away in a PEP.
“Our ‘retirement exchange’ is a pooled investment vehicle that contains a collection of single-employer retirement plans,” Jim Kais, then a senior vice president at Transamerica Retirement Solutions (at Ameritas as of May 2018), told InsuranceNewsNet in 2013. Transamerica serves as the recordkeeper and manager of the plan/participant interface. Knoxville, TN-based Tag Resources provides fiduciary and other services.
“We have expertise in running MEPs,” said Jeanne De Cervens, vice president and director of federal government relations at Transamerica. “So we are well positioned if RESA passes.” Added Rubin, “Transamerica is in a good place no matter what, and our exchange would stay in business either way. This is what small employers are looking for. We really care about expanding coverage, and we care about the beauty of the exchange.”
Securian Financial
In June, Securian Financial launched MEPConnect, with Securian as the recordkeeper and subsidiary Minnesota Life as the provider of each plan’s group annuity. Two fiduciaries are part of the team: Clearwater, FL-based The Platinum 401k, Inc., as the plan administrator and Tampa-based Fidelis Fiduciary Management as the investment manager. Like Transamerica’s exchange, MEPConnect could grow into a PEP provider if the applicable laws change.
“For small to mid-sized plans, we’re using The Platinum 401k chassis and leveraging that with the strength of our plan administration and compliance services,” Ted Schmelzle, head of plan sponsor services at Securian. “Each one of the employers will have its own audit, its own Form 5500, its own ERISA bond. Because of the risk of civil litigation, my clients all have a concern about running plans.”
For the employers in the MEP, the plans are similar but not necessarily identical, said Terrance Power, CEO of The Platinum 401k. “Typically, they will all have the same plan investment lineups,” he told RIJ. “Eligibility and plan designs are flexible and are set by each adopting employer. If we have a large plan with special needs we can also customize the investment lineup for them.”
“If RESA passes,” said Schmelzle, “we would be in a good position to transition over [from open MEPs to PEPs]. We felt that we’re at an inflection point where it made sense to enter the market. MEPConnect prepares us for the future.”
Prudential Financial
Harry Dalessio
In 2017, Prudential Retirement published a whitepaper in praise of open MEPs and their potential to solve America’s retirement savings shortfall by helping small employers offer plans. In a recent interview, Prudential’s Harry Dalessio reiterated that message.
“We’ve been preparing for this for the last few years,” Dalessio told RIJ. “We’re thinking about product design, service models, investments and other products. We’re thinking much broader than just DC recordkeeping. Recordkeeping is a commodity. A lot of firms can provide defined contribution services.
“Our strategy is to expand the footprint about the broader issue of financial wellness. Our group businesses offer products and services to 20 million people. There’s an opportunity to bring the full power of Prudential into a market that goes beyond 401(k) administration. Given the type of feedback we get from [plan sponsors], we’re thinking about bolting on a variety of financial wellness capabilities.
“We can add capabilities like emergency savings accounts, healthcare savings accounts and 529 plans. Student loan debt counseling would be big. Budgeting would be big. That’s where we see an opportunity for leadership: in financial wellness. The market won’t change overnight. There’s a lot of complexity to providing these services. Depending on how the RESA language is written, it could open up more possibilities for income products to be part of the core offering of open MEPs.”
Losing the ‘main leg of the stool’
In sum, the coverage crisis is providing an opportunity for an historic shift in the role of plan sponsor from employers—who increasingly don’t want the risk of being sued for mismanaging a plan—to providers. The providers see a chance to do well and do good at the same time. There will be unforeseen losers as well as winners.
“There is more opportunity for disruption in the retirement space today than ever before,” one retirement executive told RIJ, on condition of anonymity. “The converging forces of demographics, labor trends, technology, and politics have placed a 30-year-old model in the cross hairs.
“Every rung of the value chain is under siege by these forces. The perennial assumption that the employer is the main leg of the stool is about to be cut off. The trend toward the ‘big eating the small’ will continue. The winners will be big recordkeepers.”
Next week: Will Pooled Employer Plans really close the ‘coverage gap’?
© 2018 RIJ Publishing LLC. All rights reserved.
The economic expansion just celebrated its ninth birthday and is far healthier today than it has been in some time. It has shrugged off two years of stagnation and is chugging along at nearly a 3.0% clip. At this time next year, it will enter the history books as the longest U.S. expansion on record.
But the naysayers continue to see a dark side. They believe that the recent stimulus from tax cuts and deregulation will prove to be temporary. Furthermore, there is a widespread consensus that the next recession will occur in 2020.
Not so fast. As we see it, good policy and rapid technological advancements can keep the economy humming for some time to come. While it will eventually end, the end is not yet in sight.
It does not always feel like it, but policy makers have gotten better at extending periods of growth. Between 1850 and 1900 a typical business cycle lasted four years to two years of expansion followed by two years of recession. But in the eleven business cycles since the end of World War II the average expansion now lasts six years followed by a one-year recession. Expansions have gotten far longer, and recessions do not last nearly as long. That was not an accident. Why? Good policy.
In the past 50 years economists’ understanding of macroeconomic policy has gotten better. Policy makers at the Fed have gotten smarter. They seem better able to determine the level of interest rates required to keep the economy on track. Fiscal policy has also improved, and economists better understand the impact of government spending, tax, and trade policies on the economy. Good policy can extend the life expectancy of an expansion.
For example, not long ago the unemployment rate was 5.0%. Most economists thought that the labor market had reached full employment and worried that wage pressures and inflation would soon rise. But Janet Yellen and her colleagues at the Fed argued that there were still many “underemployed” workers who wanted full time jobs but could only get part-time employment. Hence, the Fed concluded that the economy was not yet at full employment and it elected to raise rates very cautiously for the next 15 months. The Fed got it right. Smart implementation of monetary policy prevented the Fed from prematurely raising rates and inadvertently choking off growth.
In 2015 and 2016 the economy grew at rates of 2.0% and 1.8%, respectively. Business leaders were frustrated by the political gridlock in Washington. They lacked confidence and chose not to deploy their vast cash holdings on new technology or to refurbish the assembly line.
Recognizing the lack of investment, Trump campaigned on a promise to lower taxes and significantly reduce the then stifling regulatory burden. He has done both and suddenly investment spending has picked up to a double-digit pace and GDP growth accelerated to a 2.6% pace last year and is expected to reach 3.0% this year which would be the fastest annual growth rate since 2005. Thus, good fiscal policy has provided a welcome boost to the pace of economic activity.
However, most economists believe the recent stimulus will prove to be temporary and within a year or two, growth will revert to its old 2.0% potential growth path. But why should that be the case? A lower corporate tax rate and the ability to repatriate money from overseas should stimulate investment for many more years.
Businesses should be further encouraged to spend if Trump continues to eliminate unnecessary, overlapping, and confusing Federal regulations. And rapid technological advancements in artificial intelligence, autonomous vehicles, personal robots, 3-D printing, nanotechnology, and genome research will keep businesses spending for the foreseeable future, and that type of investment will boost productivity growth.
Thus, we believe that potential growth will pick up from 1.8% in the 2000’s to 2.8% by the end of this decade. There is no reason that today’s surge in investment spending should be regarded as a short-lived event.
Furthermore, what is magic about this expansion reaching the 10-year old mark and becoming the longest recession on record? The 120-month long expansion during the 1990’s surpassed the previous record (of the 1960’s) by 14 months. Why can’t the current expansion do the same? Expansions do not die from “old age.” They end because of policy mistakes.
Many think that a 10-year is expansion is a big deal. Certainly by U.S. standards that is the case. But the Australian economy just completed a world record 27th year of expansion. Why can’t the U.S. duplicate that astonishing achievement? Suddenly a 10-year expansion seems modest.
© 2018 Numbernomics.com.
Government programs to support retirees are in trouble in every country, owing to increasing life expectancy and the rising ratio of retirees to taxpayers. The problem will worsen in the years ahead as the adverse demographic trend increases the fiscal burden of funding pensions and health care.
The problem is uniquely different in the United States, because America’s “trust fund” system of financing Social Security will create a crisis when the fund is exhausted. Though the options at that time will be different from the choices facing other governments, policies to avoid the US crisis are relevant to other countries that confront population aging.
Here’s how the US system works: by law, a payroll tax is dedicated exclusively to financing retiree benefits. Employers and employees each pay 6.2% of cash earnings up to an individual maximum of $128,000, an amount that increases annually with average wages. These tax funds are deposited into the Social Security Trust Fund and invested in government bonds.
Individuals are entitled to benefits at age 67 based on their lifetime payroll tax payments, with the option to take actuarially reduced benefits as early as age 62 or to wait until age 70 with an actuarial increase. The annual benefits rise with an individual’s average lifetime earnings, according to a schedule that causes the ratio of benefits to past earnings to decline as those earnings rise.
Because of the aging of the population, the total level of benefits is increasing more rapidly than tax collections. In 2010, total Social Security tax revenue was $545 billion and benefit payments totaled $577 billion. Because the interest on the previously accumulated bonds was $108 billion, the total size of the trust fund increased by $76 billion.
Six years later, in 2016, the tax revenue was up to $679 billion and the benefits were up to $769 billion. The resulting cash deficit was $90 billion, almost exactly equal to the interest that year, leaving the size of the trust fund relatively unchanged.
Since 2016, the benefit payments have exceeded the combination of the tax funds and the interest, causing the trust fund balance to decline. Looking ahead, the Social Security Administration’s actuaries estimate that the annual decline in the trust fund will continue, until the balance is zero in 2034.
At that point, the trust fund will no longer have any interest income. Because benefits can be paid only from the trust fund, the benefits will have to be decreased to the amount of the taxes being received that year.
If Congress does not change the law, the actuaries predict that benefits would have to be reduced immediately in 2034 by 21%. Alternatively, to avoid that 21% reduction, the tax would have to rise by 26.5%, from a combined 12.4% to nearly 16%.
While it is hard to predict what a future Congress will do, I find it hard to believe that a majority would vote to reduce the level of benefits by 21% or to increase the level of the payroll tax paid by all employers and all employees by 26%.
The most likely alternative would be to use general income tax revenue to maintain the level of benefits. That would require an increase in personal tax rates of about 10%. That strategy would shift the burden of the Social Security program to higher- income households, which pay the bulk of personal income taxes. That may explain why left-of-center politicians are not trying to avoid the future Social Security crisis.
The crisis in 2034 could be prevented by increasing the standard Social Security retirement age, as the US did in 1983. Back then, with Social Security’s finances in trouble, Congress agreed on a bipartisan basis to raise gradually the standard retirement age from 65 to 67. Since then, life expectancy for someone at that age has increased by three years.
Congress could now vote to increase gradually the standard Social Security retirement age by another three years, from 67 to 70. Because life expectancy at 67 is about 17 years, a three-year increase in the age for full benefits would be a 17% reduction in lifetime benefits, almost enough to offset the shortfall that results from the reduced revenue. It would be even better to adjust the annual retirement age each year for the actuarial increase in life expectancy.
An alternative strategy for dealing with the increasing cost of retiree benefits would be to move away from a pure pay-as-you-go (PAYG) system by adding an investment-based component. Instead of investing the revenue from the 12.4% payroll tax in government bonds, a significant portion could be invested in a portfolio of equities, as corporate pension systems do. The trust fund would then grow more rapidly, and the crisis would be avoided.
Although the trust fund system in the US creates the prospect of a crisis when the fund is exhausted, the remedies to avoid that outcome would help other countries that now have a PAYG system—increasing the age for full benefits or combining the existing system with equity funding. The sooner these changes are made, the more viable the fiscal situation—and the more reliable future benefits—will be.
News coverage of the anguish on the US southern border, where families fleeing domestic terrorism in Central America face a North America worried about a possible invasion by international terrorists, doesn’t focus much on the link between US immigration policy and Social Security. But maybe it should.
A 2017 study by Bipartisan Policy Center showed that, while the impact of immigration on the US economy is complex and varied, an open-door policy toward working-age immigrants could help offset the fiscal problems associated with the aging of the Boomer generation and the nation’s declining fertility rate.
Immigrants add to the workforce, pay taxes, and create demand, the BPC study showed. An influx of working-age immigrants could offset America’s rising dependency ratio. Thanks to the retirement of the Boomer generation and a falling fertility rate, the US has only about two workers paying federal taxes for every individual dependent on federal programs like Social Security and Medicare.
Events in Italy this week showed, however, that there’s not much room in the current political environment for dispassionate debate over immigration and economics. The chairman of Italy’s social security agency was criticized for saying that his country needs a steady influx of immigrants to restore the balance between contributions and payouts within its pay-as-you-go first-pillar pension system, the equivalent of our Social Security.
The comments, by Tito Boeri of the Istituto Nazionale della Previdenza Sociale (INPS), were instantly “scorned” by the Italian government, according to a report in IPE.com. The government has closed ports to NGO (non-government organization) vessels that rescue immigrants crossing the Mediterranean Sea from Africa.
“By closing our borders, we risk destroying our social protection system,” Boeri told Italy’s lower house of parliament. “A ruling class that lives up to its name must have the courage to tell Italians the truth: we need immigrants to keep our social protection system on its feet.
“Immigrants provide a very important contribution to the financing of our social protection system and their function is destined to grow in the next decades, while the generations of indigenous workers that enter the labor market will become smaller,” he added.
Matteo Salvini, deputy prime minister and interior minister, who has worked to keep migrants from entering Italy, tweeted, “The chairman of INPS continues to be political, ignoring the will to work of so many Italians.” In a Facebook video, he added, “Much will have to be changed in” the INPS and other public bodies.
Agency models €38bn financing gap
The INPS annual report that showed that a reduced inflow of foreign, non-European Union workers in the country would have a negative impact on its social protection system.
As part of the annual report, the organization modeled the evolution of welfare expenditure until 2040 if the inflow of foreign non-EU workers would be stopped completely.
The report showed that, in the three years before Italy’s economic crisis, 150,000 foreign non-EU workers would join the system each year. At the same time, 5% of the stock of foreign workers, which amounted to around 100,000 people, would leave the labor force.
Assuming that the stock of foreign workers contributing to the system falls by an average of 80,000 each year until 2040, the INPS would lose €73bn in contributions from immigrant workers each year and gain €35bn in welfare expenditure directed at foreign workers, the report said, for a net inflow of €38bn in INPS coffers each year.
“The inflows of migrant workers compensate the falling birth rate in our country, which is the gravest threat to the sustainability of our pension system,” Boeri said. While the system is prepared for rising longevity, further reductions in the numbers of contributors would likely put it at risk.
Former labor and welfare minister Elsa Fornero, who designed a major reform of Italy’s pension system in 2011, told IPE: “We need immigrants, because our ratio of young workers in the labor force is shrinking. [But] immigrants alone can’t solve Italy’s pension problems.”
© 2018 RIJ Publishing LLC. All rights reserved.
Charles Schwab’s ETF OneSource platform has added 11 additional ETFs to its offerings, effective July 3. The commission-free online ETF exchange, which has no enrollment requirements or early redemption fees, now offers 265 ETFs from 15 providers across 70 Morningstar Categories.
“Our 2018 ETF Investor Study showed that 64% of investors say that the ability to trade ETFs without commissions is important to them, and 54% of Millennial investors agree,” said Heather Fischer, vice president of ETF and mutual fund platforms at Schwab, in a release.
The 11 new ETFs cover domestic equities, fixed income and international equities. Six of the additions fall into the taxable bond category. The funds added to Schwab ETF OneSource on July 3 include:
A new survey from Empower Institute, the thought-leadership arm of Empower Retirement, suggests that the savings levels of Millennials show that they are benefiting from specific innovations in retirement plan design over the last decade.
(The tripling of the value of the stock market since 2009, itself a by-product of Federal Reserve largesse in response to the Great Recession, may also have helped Millennials’ accumulation levels relative to earlier cohorts. Time will tell.)
Americans born after 1981, aka Millennials, are on track to replace 75% of their current income in retirement, according to the survey of 4,000 working Americans ages 18 to 65 who are saving for retirement in any defined contribution workplace plan.
Generation X workers are on track to replace only 61% and Baby Boomers are on track to replace a mere 58%, the survey showed. “Millennials are the first generation to fully benefit from improvements made to retirement plans over the last decade and it shows now in their retirement savings habits and attitudes,” an Empower release said.
Empower attributed the improvements in retirement readiness to innovations made possible by the Pension Protection Act of 2006: Automatic enrollment, automatic escalation of contributions and acknowledgement of the significance of employer matches to employee accounts.
Of Millennials responding to the Empower Institute survey, 41% are automatically enrolled in a DC plan, compared to 38% percent of Gen Xers and 33% percent of Baby Boomers. Additionally, 38% of Millennials are enrolled in a plan with auto escalation features.
The survey results include a Retirement Progress Score (RPS), which is a numeric estimation of the percentage of working income that American households are on track to replace in retirement. The median replacement rate among survey participants is 64%, meaning that half of respondents are on track to replace more than 64% of their current income and half are on track to replace less than 64%.
Some key findings:
The Empower Institute survey findings are available in a white paper called “Scoring the Progress of Retirement Savers.” The research was conducted by Brightwork Partners LLC for the Empower Institute.
Hueler Analytics has launched Stable Value Compass, a new online due diligence tool designed for discerning fiduciary advisors. The new tool combines Hueler’s stable value data with technology for analysis and client ready reporting.
Stable Value Compass will allow fiduciaries, advisors, and consultants the capability to compare multiple pooled funds and insurance company sponsored products across key standardized data elements, a Hueler release said.
Hueler Analytics provides broad market coverage of stable value alternatives including stable value pooled funds, insurance company separate accounts, and general account products.
MassMutual will offer a series of Select T. Rowe Price Target Date Funds target date to its retirement plan customers, according to a release from the mutual insurer. The TDF series features active management and dynamic tactical asset allocation. The funds are available only in plans where MassMutual is the recordkeeper.
The “MassMutual Select T. Rowe Price Retirement Funds” are designed to address certain risks, including inflation, longevity, and market risks, which retirement savers face during their accumulation years and through retirement, a MassMutual release said.
Recent research by MassMutual indicates that many retirees and pre-retirees continue to favor active management as an investment strategy. Nearly half (47% of pre-retirees; 49% of retirees) say they have assets invested in actively managed mutual funds, according to the MassMutual Retirement Savings Risk Study. In addition, 80% of pre-retirees and 71% of retirees find active management appealing as an investment strategy.
However, some retirees and pre-retirees may be taking too much risk with their retirement savings. Eighty-eight percent of retirees and 73% of pre-retirees who rely on a financial advisor report that their advisor has recommended they invest more or somewhat more conservatively than they currently do, the MassMutual study reports.
Uncertain about Social Security and their own financial preparedness, more than half of future retirees expect to work during retirement, according to a new study from PGIM Investments, which manufactures and distributes funds for PGIM, Inc., Prudential Financial’s global investment management business.
The study, the 2018 Retirement Preparedness Study: A Generational Challenge, conducted by The Harris Poll for PGIM Investments, found that while only 6% of today’s retirees work, 52% of pre-retiree Baby Boomers, 58% of pre-retiree Gen Xers, and 43% of pre-retiree Millennials expect to work full- or part-time in retirement.
These expectations may be linked to pre-retirees’ decreased confidence about Social Security. Only 51% of Millennials expect to receive these benefits at all.
According to the study:
To address growing consumer need for retirement income planning, Prudential Financial, along with 23 other leading financial services organizations, established the Alliance for Lifetime Income to help educate Americans about the value of having protected income in retirement.
In the U.S., the average age for consumers to start saving for retirement is 35 and Americans on average expect to retire at 66. But in Asia, saving starts at age 40 on average and the expected retirement age is 60, according to a new report from the LIMRA Secure Retirement Institute.
Despite the shortened time to save for retirement, more consumers in Asia are confident they will be able to live the retirement lifestyle they want.
Consumers in Asia are more likely to be confident about maintaining their desired lifestyle in retirement than consumers in the US, according to the report. While only half of Americans expressed confidence about retirement, 69% of Asians did.
Similarly, 31% of consumers in Asia are not concerned about outliving their retirement assets, compared to 24% of US consumers, according to LIMRA SRI. But a larger fraction of US consumers has determined their expected health care costs in retirement (40% vs. 34%).
According to the study, 47% of consumers in Asia and 43% in the US have calculated the assets they will have in retirement, and 39% of Asian consumers have estimated how long those assets will last, versus 34% of Asian. More than half of consumers in both regions have not done basic retirement planning.
© 2018 RIJ Publishing LLC. All rights reserved.
The Retirement Enhancement and Savings Act of 2018 (RESA), the subject of an ongoing series in RIJ, could enable a type of 401(k) plan where many unrelated employers could join a single “open multiple employer plan” or “pooled employer plan.”
In these “open MEPs” or PEPs, employers would cede direct plan sponsorship to teams of recordkeepers, investment advisors, asset managers and professional fiduciaries. Such a shift, it has been argued, could reduce the burden of costs, chores, complexities, and legal liabilities that employers shoulder when sponsoring tax-deferred workplace savings plans under the Employee Retirement Income Security Act of 1974 (ERISA).
If that burden were lighter or lifted entirely, some argue, more employers would offer plans and more Americans could save for retirement. Tens of millions of workers at small companies—including many minority and low-income workers—don’t currently have access to a retirement savings plan at work. If there is a retirement “crisis” in America today, it is concentrated among these workers (and single women).
Others see danger in excusing employers from the role of primary watchdog over employee savings. Still others see a switch in sponsorship roles from employers to large financial services companies as a potential driver of consolidation of 401(k) industry, with unforeseen winners and losers. The situation is complex, murky and still evolving.
For many large employers and plan providers, the transfer of the sponsorship role away from employers through multi-employer arrangements is a dream long deferred. “MEPs [multiple employer plans] have been around since before ERISA,” Jack Towarnicky, executive director of the Plan Sponsor Council of America, told RIJ recently.
In 2007, for instance, the ERISA Industry Committee (ERIC), a group representing the employee benefit plans of America’s biggest employers, published a bold proposal for a “New Benefits Platform” that would reduce inefficiencies due to fragmentation, relieve employers of benefits burdens, and bless all employers, regardless of size, with economies of scale.
ERIC envisioned a new class of private plan sponsors, called Benefits Administrators. These all-in-one administrators would deliver “Life Security Plans” (LSPs) consisting of health, retirement and other pooled benefits or insurance products, directly to employers or individuals.
A Benefits Administrator would be, according to ERIC:
“A trusted intermediary with significant expertise in designing, delivering, and managing retirement and short-term savings benefits, and health plans. Benefit Administrators could be direct providers or assemblers of affiliated providers. The Benefit Administrator would be the individual’s point of entry to access the retirement and health care benefits system, and the entity through which any purchaser (individual or employer) could purchase benefits.”
Further, the “core structure” of Life Security Plans would contain these elements:
That specific proposal, like so many other initiatives (and companies), more or less disappeared under the rubble of the Great Recession. When these ideas were raised again a few years later, they ran into resistance from the Obama administration’s Department of Labor, which believed that employers should bear direct fiduciary responsibility for plans because profit-seeking providers were potentially too conflicted.
But the spirit of ERIC’s proposal lived on among those who believe that a) getting more small employers to offer 401(k) plans will solve much of America’s retirement savings shortfall problem, and b) reducing small employers’ financial, administrative and legal burdens will make that happen.
Next week: The financial service companies, including Prudential, State Street Global Advisors, and Transamerica, that are leading the campaign for provider-sponsored 401(k) plans.
© 2018 RIJ Publishing LLC. All rights reserved.
A recent Wall Street Journal article noted how a generation of Americans is entering old age the least prepared in decades. The basic assumption is that baby boomers want to retire at age 65, but soon discover they do not have the financial resources to do so. Fair enough. But let’s ask a more basic question, why do they want to retire at 65 anyway? What is magic about that number? To that group of Americans, I have a suggestion. Work longer.
When Social Security was first passed in 1935 retirement age was 65; life expectancy was 67. You retired, received your gold watch, and died a couple of years later. But over the years retirement age has not changed. It is still about 65 but we are likely to live until 85. Living 20 years on greatly reduced income consisting of Social Security and a pension plan or 401(k) is challenging. The math simply does not work.
But let’s revisit the basic question of why do people want to retire at age 65? It has become a given that we are “supposed to” retire at age 65. But our parents and grandparents chose to work until much closer to their end of their lifetime.
What gives baby boomers the audacity to think that they can spend one-quarter of their lifetime sitting on their butts in front of the TV? Is that truly how they envision their retirement? That strikes us as sad, but many people seem obsessed with retiring at 65.
Our guess is that, over time, that perception will change, in some cases by the financial reality that it is not going to happen. But many of these older Americans may wake up to the reality that their retirement dream is not as satisfying as they expected it to be. It is boring.
Most retirees worked 40 years at something. They identified with what they did. They were accountants, attorneys, firemen, teachers, or economists. But upon retirement they are not that anymore. So who exactly will they be for the next 20 years? That is a difficult question to answer. While some may have given thought to that while still working, most have no idea what their retirement years will look like until they get there.
Some may have a burning desire to become an artist, take up the guitar, travel extensively. Or “give back” to their community by volunteering at a local nonprofit. Those are all perfectly worthwhile choices, but they will not pay the bills.
Why not consider working a bit longer? The health of a 65-year-old today is far superior to the health of a 65-year-old in 1935. We have the ability to work far longer if we choose to do so.
A primary benefit is that working will keep these older Americans mentally engaged. Equally important it will reduce the monthly drain on their savings.
At a national level there is a chronic shortage of skilled workers. Employers can benefit substantially from keeping older workers around to impart their knowledge and skills to younger workers. Even if not actually on the payroll they can keep working as consultants.
There can be little doubt that retiring baby boomers have been a contributing factor to the recent dropoff in productivity growth. We cannot take a skilled worker with 40 years’ experience, replace them with a 35-year-old, and not expect productivity growth to slow.
Finally, if older workers begin to work past age 65 it will reduce the drain on the Social Security Trust Fund and extend the date when its assets will be depleted. It will also slow the upward trajectory of the budget deficit. The driving force behind those higher deficits is demographics. As more and more Americans reach age 65, they start to draw Social Security and become eligible for Medicare benefits. If Americans choose to work longer, the deterioration will be less dramatic.
A couple of other points are worth noting. First, the article in the Wall Street Journal looks only at the likelihood of reduced income in retirement. Second, given the increase in net worth, consumers do not feel the need to save as much from their income as in the past. The savings rate today is 2.8%, which is well below its long-term average of 5.5%. Consumers do not need to save as much today as in the past because their net worth is providing a comfortable cushion.
Finally, baby boomers were born between 1946 and 1964. If they choose to retire at age 65 they will retire between 2011 and 2029. That means that they have been retiring for the past seven years and will continue to retire another decade. But, thus far, there have not been the dire consequences predicted by the WSJ. Our guess is that retirement will prove to be less of a challenge for the baby boomers than many expect for two reasons. First, many of them will choose—either from desire or economic necessity—to work longer. Second, many of them have a net worth cushion to supplement their retirement income.
We are not going to suggest that working past age 65 is an option for all, particularly those with health issues, but it is a very rational and desirable choice for many. Keep working, you may actually enjoy it.
© 2018 RIJ Publishing LLC. All rights reserved.
Fidelity Investments has added a Fidelity Sustainability Bond Index Fund to its lineup of sustainability-focused index funds. Alongside the existing U.S. Sustainability Index Fund and International Sustainability Index Fund, Fidelity now offers environmental, social and governance (ESG) index mutual funds in every major asset class.
The new sustainability bond index fund is available directly to individual investors, third-party financial advisors and workplace retirement plans. The share classes are offered at total net expense ratios of 20 basis points a year for the Investor Class, 13 basis points for the Premium Class and 10 basis points for the Institutional Class.
In addition to those three sustainability index funds, Fidelity’s ESG investment offerings include an actively managed mutual fund (Fidelity Select Environment & Alternative Energy Portfolio) and Fidelity’s FundsNetwork program, which provides access to more than 100 ESG funds.
Of the more than $285 billion invested in ESG mutual funds and ETFs1 in the US, approximately $25 billion are under administration on Fidelity’s platform. Eighty-six percent of Millennials express interest in sustainable investing and 90% say they would choose a sustainable investment as a 401(k) plan option, Fidelity said in a release.
In addition to launching the Fidelity U.S. Sustainability Index Fund and Fidelity International Sustainability Index Fund in 2017, Fidelity also became a signatory of the United Nations-supported Principles for Responsible Investment (PRI) and created an ESG Office in its Asset Management division to further the integration of ESG considerations into investing practices.
© 2018 RIJ Publishing LLC. All rights reserved.
Asset managers have responded to accelerating fee compression by offering technology platforms and asset allocation advice, according to Cerulli Associates, a global research and consulting firm.
“There are multiple causes of fee compression in asset management, which compound upon each other to prompt industry change,” said Bing Waldert, director at Cerulli, in a press release. “For example, greater regulation has formalized the buying process and created demand for low-cost passive products.
“Under the influence of professional buyers, eliminating the highest-priced products is often the first screen, creating a race to the bottom as managers try to avoid having above-average fees,” he added.
Fueling the decline in asset management fees: the increasing importance of asset allocation advice.
“In some cases, asset managers are dropping fees on asset management products to near zero, instead choosing to charge for asset allocation, a task traditionally performed by the wealth manager,” Waldert said.
“The growth of asset allocation advice demonstrates how asset and wealth managers are using these industry trends to enter each other’s value chains and attempt to capture a greater share of a shrinking fee pool.”
Cerulli expects that automation will continue to compress overall fees in wealth management. “Automation will lower the cost of transactions, bringing down fees in wealth management,” said Waldert. “In addition, digital advice platforms emphasize asset allocation, which pressures fees in individual asset manager products and benefits exchange-traded funds (ETFs).”
These findings and more are from the July 2018 issue of The Cerulli Edge–U.S. Asset and Wealth Management Edition, which provides insight into the drivers of fee compression, analyzes evolving advisor pricing models, and explores saturation in the ETF market.
© 2018 Cerulli Associates.
Ascensus, the 401(k) recordkeeper and benefits administrator that handles Vanguard’s small-plan 401(k) business, has agreed to buy INTAC Actuarial Services, Inc., a third-party administration (TPA) firm. Based in Ridgewood, NJ, INTAC will become part of Ascensus’ TPA Solutions division.
INTAC administers employer-sponsored retirement plans for about 3,000 small to mid-sized companies, their owners, key executives and employees. INTAC also provides ongoing education to their clients and the professionals in the communities they service to ensure that they remain abreast of industry changes and issues.
“The tri-state [New Jersey, New York and Pennsylvania] and greater Delaware areas are important market expansion opportunities for our TPA Solutions division,” says Raghav Nandagopal, Ascensus’ executive vice president of corporate development and M&A. “With its strong historical growth, successful long-term track record, and associate-focused culture, INTAC is an ideal business to help Ascensus achieve its immediate and long-term growth plans.”
Ascensus, based in Dresher, PA, supports more than 60,000 retirement plans, more than four million 529 education savings accounts, and a growing number of ABLE savings accounts. It also administers more than 1.6 million IRAs and health savings accounts. As of March 31, 2018, Ascensus had over $187 billion in total assets under administration.
© 2018 RIJ Publishing LLC. All rights reserved.
The other night I pondered a familiar puzzle: Why aren’t advisors more receptive to annuities and annuity wholesalers, especially at a time when so many of their older clients are transitioning into the “risk-off” side of their financial lives?
This question troubles annuity issuers. At a conference this past spring, one national sales manager broached this topic during a closed-door breakout session. His audience laughed several times—at themselves—as he warned them about words not to use with advisers.
“Never talk about your product,” he said. “Advisors don’t think of themselves being in the product business. They offer advice, not products. And never, ever refer to a product’s death benefit. Your typical advisor doesn’t see any ‘benefit’ in ‘death.’”
A cat’s paw of chagrined laughter rippled over the surface of the small audience in the carpeted hotel meeting room at the center of our conflicted capitol city.
Here’s my take: Advisors are essentially risk buyers. Taking on market risk, everyone knows, is how you capture reward (potentially) in the investing game. To maximize rewards, risk-buyers like to pay as little as possible for risk (hence index funds and exchange-traded funds or ETFs). If they want to moderate their clients’ risk, they use diversification.
Enter the annuity wholesaler on his appointed rounds. The wholesaler’s company, like the advisor, is a risk buyer. (Or, if you prefer, a seller of protection.) Like the adviser, the company wants to pay as little as possible for risk (i.e., wants to promise as small a benefit as he or she can get away with).
And, like the advisor, he’s selling a form of advice; all but the simplest annuities have a strategy baked into them that makes the advisor’s role a bit redundant. (Hence the debate over whether advisors should extend their wrap fees to include clients’ annuity assets.)
Is it a mystery that when two risk-buyers and advice-sellers get together, they don’t have much to trade? This is a case of ram-meets-ram, not ram-meets-ewe. It’s a scenario for polite head butting.
In response, annuity issuers and wholesalers have positioned themselves, at least in part, as risk sellers. They’ve included equity options and mutual funds in their products to offer risk exposure in tandem with the products’ risk-reducing guarantees.
To put it another way, they’ve added an element of greed to their accustomed fear-story. But the mixture has a way of confusing the advisor. An insurance product’s costs inevitably seem too high and its upside potential too low to appeal to risk-buyer. Rather than coming across a “the best of both worlds,” an insurance product can easily look like the “worst of both worlds” to a risk-pursuing advisor.
The advisors most likely to be receptive to this pitch are those who at one time sold insurance. In May, I was invited to give a 50-minute talk about annuities at the New Jersey Financial Planning Association’s spring conference. Going into it, I was nervous. I’m no Michael Kitces when it comes to public speaking. And I assumed that the advisors would be averse to annuities.
So, expecting a small, hostile audience for the breakout session, I prepared a presentation that was somewhat defensive—in the apologetic rather than antagonistic sense of that word. But I assumed wrong.
First of all, the repurposed banquet room at the APA Hotel, nestled amid the concrete cloverleafs of eastern New Jersey, became quite crowded. And, to my surprise, when I asked for a show of hands from people who regularly sold annuities, dozens of palms appeared.
How many of you have sold single premium immediate annuities? I asked. Just a couple of hands went up. I then asked who sold variable annuities. A few more hands went up. When I asked who sold indexed annuities, the response felt almost unanimously to be yea.
It turned out that many of these FPA member were, aside from being CFPs (Certified Financial Planners), were also registered investment advisers and licensed insurance agents. They could give any kind of advice and sell almost anything to anybody, and apparently they do.
Although I have no proof of this, it seems self-evident that advisors who have insurance somewhere in their DNA—who sold insurance early in their careers—will be much more receptive to selling annuities later in life, as they mature and evolve into dually-licensed fee-based advisors, than advisors who never sold insurance.
As a rule, I suppose that people who came up through the pure securities brokerage or the wirehouse world and have been regulated only by the SEC would be much lower-percentage prospects for annuities, unless one of their clients needed a variable annuity for extra tax-deferral.
That is not to say that advisors who like annuities are any less opportunistic about exploiting market inefficiencies than their insurance-shunning brethren. At the NJFPA meeting, I told them something that advisors had said to me at a group dinner one night during a conference.
“What do you think will be the next big product idea in annuities?” one advisor at the table asked me. While I was trying to formulate an answer, another advisor said, “Just tell me what product an actuary will get fired for three years from now.” I had a good laugh from that comment. So did the advisors I shared it with in New Jersey.
© 2018 RIJ Publishing LLC. All rights reserved.
Skopos Labs, a Manhattan-based machine-learning firm, gives the Retirement Enhancement and Savings Act (RESA) a 24% shot at approval by the U.S. House of Representatives and an 18% chance of becoming law. The firm also assigns RESA a “significance score” of 7 out of 10: it could shake up the retirement industry.
Eighteen percent is far from a guarantee, especially in these distracted times. But that’s 4.5 times as likely to be enacted as the average bill. RESA has Republican sponsors (a big plus) in both the Senate (where it originated) and the House. The Senate Finance Committee approved it with a 26-0 bipartisan vote in 2016. It was reintroduced in both houses this year.
RESA contains a bunch of provisions intended to promote retirement savings in the US. Topping its wish list is a revision of current pension law to allow a large number of unrelated employers to join a single “pooled employer plan” run by a “pooled plan provider” (PPP).
Depending on how you interpret RESA and America’s other pension laws and regulations (embodied by the Employer Retirement Income Security Act of 1974), RESA might allow plan service providers to, in effect, sponsor 401(k) plans and then recruit many small and mid-sized employers to join in what would be a single plan.
Current law doesn’t allow this. To be sure, plan advisors and third-party administrators routinely sell packaged 401(k) plans to small employers. Similarly, firms like Ascensus Betterment offer near-identical plans to many small employers. But, in those cases, each employer sponsors its own plan. RESA could, for the first time, let providers create single plans for multiple employers and their employees.
Would RESA do that? The language of the bill doesn’t explicitly say so. Such vagueness is confusing to 401(k) experts. On its face, the bill encourages small employers to band together to create multiple employer plans and then hire service providers to handle the chores. But there’s no evidence that small employers have lobbied for that.
Indeed, the reverse is more likely. RIJ’s interviews with retirement experts indicate that, if enacted, the bill might allow 401(k) service providers to set up plans and invite small employers to join. This would create economies of scale for both small employers and large providers that are currently absent in the market place–and perhaps lead to broader 401(k) availability in small companies. But, again, the bill doesn’t explicitly enable provider-driven plans.
A close look at RESA
What does RESA say, exactly? Among other things, RESA explicitly:
¶ Creates a new class of defined 401(k) contribution plans or a collection of IRAs called pooled employer plans (PEPs) that uses a pooled plan provider (PPP). “A PEP is to be treated as a single plan where ERISA Section 210(a) applies – a multiple employer plan,” said Jack Towarnicky, executive director of the Plan Sponsor Council of America in an email to RIJ.
¶ Removes the existing “commonality” requirement. In a PEP, the employers could be unrelated. That’s new. “Pooled employer plan does not include a plan with respect to which all the participating employers have both a common interest other than having adopted the plan and control of the plan,” said an official report on RESA in 2016.
¶ Removes the “one bad apple” rule. The acts of one negligent employer couldn’t ruin the PEP for the other participating employers. That too is new. “The provision provides relief from disqualification (or other loss of tax-favored status) of the entire plan merely because one or more participating employers fail to take actions required with respect to the plan,” said the same report.
¶ Allows for simplified reporting and audit relief by employers. A provider could file a single Form 5500 on behalf of all the participating employers. A PEP with fewer than 1,000 participants where no employer had 100 or more participants wouldn’t be subject to DOL audit.
Who can be a plan sponsor?
Does RESA as currently written open the door to industry-sponsored workplace retirement plans–plans in which the employer’s fiduciary role would be limited to choosing and monitoring the providers? The answer seems to be either no or maybe. On the other hand, 401(k) plans, like annuities, are typical sold, not bought. So the question might be semantic or legally moot.
Pete Swisher, national sales manager at Pentegra Retirement Services and author of “401(k) Fiduciary Governance: An Advisor’s Guide,” grapples with this issue in an open letter to clients last month. He wrote:
“There is no evidence [that service providers will be able to sponsor their own PEPs–perhaps this will end up being true, but there is no evidence of it in the Bill. The Bill could have, for example, amended ERISA Sections 3(5) and/or 3(16)(B), the definitions of “employer” and “plan sponsor,” but does not do so.”
In an interview this week, Swisher told RIJ, “If the question is, ‘Can a provider sponsor its own MEP and provide a variety of services to employers?, that’s a difficult construction. There’s nothing in current law and nothing in RESA to permit it,” he said.
“But there is a path there. A service provider could be the provider and the sponsor if an outside party were hired as the independent fiduciary. There’s history there. Someone unrelated to the service provider and drawing no more than 2% to 5% of his income from that business, maybe a law firm, could hire somebody to do that,” Swisher added.
“Then a Vanguard or a Fidelity could be appointed [to run the plan]. But it’s difficult to come up with that construction, and it wouldn’t succeed at the beginning.”
Jack Towarnicky, executive director of the Plan Sponsor Council of America, told RIJ that the RESA removes the “lack of commonality” obstacle that caused the DOL to disapprove of provider-sponsored multiple employer plans—which Towarnicky calls “sponsored MEPs”—in 2012. But it doesn’t eliminate every obstacle.
“A sponsored MEPs is not possible today,” Towarnicky told RIJ in a recent email. “However, I believe the [regulatory] agencies might favorably receive proposals to create a ‘sponsored MEP’ as consistent with DOL interpretive bulletin guidance regarding state-sponsored MEPs.
That bulletin, published in the Federal Register in late 2015, acknowledged the benefits of PEPs that state legislatures might sponsor (as Vermont has done). But the bulletin, written by Phyllis Borzi, head of the DOL’s Employee Benefit Security Administration under President Obama, specifies that state sponsorship fits within current law in a way that provider sponsorship doesn’t.
“In the Department’s view, a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees, such that the state should be considered to act indirectly in the interest of the participating employers.
“Having this unique nexus distinguishes the state MEP from other business enterprises that underwrite benefits or provide administrative services to several unrelated employers.” But that was then. Borzi’s successor in the Trump DOL is Preston Rutledge, the Senate Finance Committee lawyer who is widely credited with having drafted RESA in 2016 for its initial sponsor, Sen. Orrin Hatch.
Next in our series: The companies that are leading the RESA campaign.
© 2018 RIJ Publishing LLC. All rights reserved.
Tens of millions of Britons aren’t saving enough for retirement while millions more mistakenly assume that auto-enrollment assures them of a comfortable retirement, the UK Pensions and Lifetime Savings Association (PLSA) has warned. The news was reported by IPE.com.
The PLSA issued a report this week revealing that 80% of people are not sure they are saving enough for retirement. The report was based on opinions gathered from policy makers, product providers and the general public gathered over a three-month period.
Under the terms of the current auto-enrollment system, the employee pays in a minimum of 3% of their salary, while the employer pitches in 2%. That is set to rise to a total of 8% in April 2019, of which at least 3% must be covered by the employer.
More than half (51%) of those surveyed told the PLSA they thought this arrangement would furnish them with the UK government’s “recommended amount” of retirement savings.
Since auto-enrollment was introduced in the UK, almost 10 million new savers have entered the pensions market, according to the Office for National Statistics.
However, the PLSA said a simple increase in participation was not enough. In its report – Hitting the Target: A Vision For Retirement Income – the organization made five key recommendations:
In terms of the proposal to increase the level of overall saving, the PLSA proposed increasing the minimum contribution level for auto-enrolment from 8% to 12% of overall salary between 2025 and 2030.
“Millions of savers are confused about whether they’re on track for the lifestyle they want in retirement,” said Nigel Peaple, director of policy and research at the PLSA.
“We believe that a simple and widely promoted system of retirement income targets would make it much easier for savers to know whether they are saving the right amount.”
The PLSA’s proposals were widely approved by the pensions industry.
“While auto-enrolment has been a real game changer for millions of people across the UK, most people still aren’t saving enough to live comfortably in retirement,” said Andy Tarrant, head of policy at The People’s Pension.
“The PLSA’s saving targets will help people to judge more accurately how much they need to save…and [the organization’s] roadmap is an important contribution as to how the can most effectively be done.”
Tarrant’s comments were echoed by Simon Chinnery, head of defined contribution (DC) client solutions at Legal & General Investment Management.
“Introducing new retirement income targets are an excellent start and moves us away from terms such as ‘good outcomes’ to providing members with the tools to know that this aspiration can be achieved,” he said.
However, NOW: Pensions noted that UK employers bore less of the pensions burden than in other countries that have nationwide auto-enrollment or DC schemes.
According to a survey conducted by the Pensions Policy Institute, commissioned by NOW: Pensions, UK employers will be responsible for 37.5% of the contribution burden, compared with 84.8% in Italy, 66.7% in Denmark and at least 50% in Japan.
“As auto-enrollment minimum contributions increase, employees will find themselves bearing more of the burden than their employer and this inequality doesn’t feel right,” said Troy Clutterbuck, CEO of NOW.
“The employer contribution is the main selling point for workplace pensions over the long term. Rebalancing contributions would almost certainly help minimize opt-outs.”
© 2018 IPE.com.
Imagine a future where employees from many different companies belong to a tax-deferred, auto-enrolled defined contribution savings plan at work whose sponsor is not an employer or an employees’ union but by a plan recordkeeper or asset manager or retirement plan consultant.
We’re talking here about “open MEPs” (open multiple employer plans) or “PEPs” (pooled employer plans). These would be omnibus DC plans that many small employers (or even many mid-size or large employers) without any “commonality,” such as a shared union, could join.
In a series of stories in coming weeks, we’ll explore this topic. There’s some suspense and uncertainty surrounding these plans. That’s partly because new federal legislation that would enable has stalled, despite lobbying by asset managers, as represented by the Defined Contribution Institutional Investors Association (DCIIA).
There’s also a fair amount of conflicting information about MEPS. For instance, the Retirement Enhancement and Savings Act of 2018 (RESA), which would remove existing legal obstacles to these plans, states that “multiple employer plans (MEPS) provide an opportunity for small employers to band together to obtain more favorable pension investment results and more efficient and less expensive management services.”
But, as you’ll hear below, that’s not how plans would work. The law would enable DC plan service providers to sponsor 401(k) plans and then invite employers to join. Importantly, employers would have fewer administrative chores, expenses and legal liabilities than they do when they sponsor a 401(k) plan themselves.
There’s also some confusion over the acronyms used to describe these plans. In RESA (there are House and Senate versions), these plans are called MEPS. But the same acronym is also used to describe union-sponsored defined benefit (DB) plans, a dying concept. Many of those plans are currently underfunded and may eventually need a federal bailout.
To distinguish between the two acronyms, defined benefit MEPS are referred to as “closed multiemployer plans.” Closed, in this context, means that only employers with
“commonality”—like being in the candy industry and employing members of a confectionary workers union—can join. The new MEPS are “open multiple employer plans.” Almost any employer could join one.
In addition, there’s some uncertainty about what these new provider-sponsored plans would accomplish. The Defined Contribution Investment Industry Association positions them as a partial remedy for the fact that tens of millions of small company employees don’t have access to a savings plan at work, a problem known as the “coverage gap.”
Currently, big asset managers say that the balances in small plans are too low and too widely dispersed to be financially attractive to manage. But that might change, it’s often said, if they could pool the assets of tens or hundreds of small or mid-sized companies.
RIJ will look more closely into all of these issues, including the success of a similar concept, call master trusts, in Britain. In this initial installment, we’ll clarify the source of the push for open multiple employer plans.
Industry-driven
Open MEPS are almost uniformly described as a path for small employers, with or without 401(k) plans at present, to collaborate and purchase retirement plan services more cheaply in bulk—the way 100 unaffiliated grocers in New York and Connecticut banded together in 1926 to create the Independent Grocers Association (IGA) to buy groceries in bulk.
“The question is, ‘Will [open MEPS] be employer-driven or will it be provider driven?’ and I think that it’s clearly going to be the latter,” said Seth Harris, a former Deputy and Acting Secretary of Labor in the Obama Administration, speaking at a recent Insured Retirement Industry conference.
“Smart third-party providers will come together and market plans to small and mid-sized companies to convince them to participate in their plans,” Harris told RIJ. “If we were going to see the first model, the employer-driven model, we would have already seen it. That’s not what’s happening now.”
Brad Campbell, a former head of the Department of Labor’s Employee Benefit Security Administration, agreed with Harris. “It will be provider driven,” he told RIJ. “I also think that open MEPs are a far better solution to the coverage problem than the state-based programs, which offer smaller opportunities for savers and which are prone to abuse by the states.” But Campbell said he doubted that getting RESA passed will be easy.
Steve Saxon, a pensions expert at the Groom Law Group in Washington, D.C., told RIJ, “I agree that the open MEP phenomenon will be service provider driven. And I think that within two years after this thing passes you’ll see enforcement initiatives at the Department of Labor.”
Expanding on that point, he added, “There will be abuses in this space by conniving service providers who take advantage of small employers. The potential abuses are that (1) nobody is monitoring the plan administrator and (2) the fees paid for administration are too high. Both of these can be addressed by making sure the employers that participate in the MEP are made responsible for paying attention to these two things.”
The precise amount of responsibility that employers would have in an open MEP is one of the issues we’ll address in future installments of this series.
Next installment: The federal legislation that would make open MEPS possible.
© 2018 RIJ Publishing LLC. All rights reserved.
Watching the Fed raise interest rates a little bit at a time reminds me of the classic family game of Jenga, where players remove a block at a time from a tower of 54 wooden blocks. A similar kind of suspense is involved, I guess.
Back in 2005 and 2006, I remember watching Alan Greenspan raise rates a quarter point at a time and thinking, ‘If this guy can get us back to a normal yield curve without crashing the stock market, he’ll deserve the Nobel Prize.’ (Or maybe I didn’t think that; maybe I’m suffering from hindsight bias.)
We know how that ended. And we know from handwringing press reports this week that Fed tightening and flat yield curves (defined as a narrow spread between 2-year and 10-year rates) are very often harbingers of recessions.
When a highly leveraged system encounters rising rates, bad things can happen. The more leveraged you are, the less you can afford an increase in your financing costs or a decline in the value of your collateral. Leverage in the system can be like high blood pressure: You don’t know how high it is until you have a stroke.
Peaks in margin debt sometimes presage a stock market crash. According to Yardeni Research, margin debt reached at all time high this week of about $650 billion. That sounds bad. Before the financial crisis of 2008, it peaked between $400 and $450 billion.
But as a percentage of the value of the Wilshire 5000 equity index, margin debt is lower today than ten years ago: about 2.4% (down from a spike of more than 2.8%). And it’s moving sideways, not spiking. That doesn’t sound as ominous.
To understand all this, you have to grasp fixed income at a deep level. Sometimes, when contemplating bonds, I feel like I’m walking in a mental Möbius strip. Joan, a former co-worker of mine at Vanguard, used to say that you’re either born with the “bond gene” or not. Difficulty with bonds, she believed, isn’t density. It’s destiny.
As a consumer, I’ve benefited from low rates over the past 10 years. A few years ago, a mortgage refinance helped us replace our old kitchen’s turquoise appliances and mock-Tudor cabinets with pale wood and stainless steel. But, inconsistently, I’ve also hoped that long-term rates would rise, helping savers and annuity issuers.
Ten-year rates have been rising, but not as fast as short-term rates. Exactly two years ago, the 10-year Treasury yielded 1.46%. Yesterday, that number was 2.84%. But in the last two years, the one-month yield has risen to 1.79% from just 0.25%. So we have a flattening yield curve.
A flat yield curve can become an inverted yield, where long-term bonds are paying lower yields than short-term bonds, despite their higher interest-rate risk. That’s considered a possible leading indicator of recession. But we’re nowhere near the kind of inverted yield curve that occurred before the 2008 recession.
Scrolling through the Treasury Department’s pre-crash interest rate data, I found some very strange numbers this week. On January 22, 2005, the one-month government yield was 1.89%, the two-year yield was 3.21% and the 10-year yield was 4.20%. That sounds healthy, right? But by February 1, 2006, when Ben Bernanke succeeded Alan Greenspan as Fed chairman, the one-month rate was 4.33%, the two-year rate was 4.59% and the 10-year rate was 4.57%. Talk about inversion.
It got worse. A year later, on February 21, 2007, the one-month rate was 5.27%, the 2-year was 4.82% and the 10-year was 4.69%. (That sounds bizarre. On the other hand, the yield curve was similarly shaped during the middle of the dot.com boom ten years earlier.) Bernanke must have been worried about inflation in 2007: the Consumer Price Index spiked at just above 4%.
Back to the present: The Fed could presumably push up longer-term rates and steepen the yield curve by selling some of the dodgy fixed income instruments it bought during its Quantitative Easing period, when ended in 2016. But there has been no indication of that. In January 2015, the Fed’s assets totaled $4.516 trillion. Last week, that number was $4.316 trillion, a drop of just 4.4%.
Putting a lot of long-term assets on the market could also kick off an undesirable chain reaction. By increasing the supply of long-term assets relative to demand, it would reduce the prices of existing bonds. That could create the equivalent of margin calls on bonds used as collateral and raise the payments of borrowers who planned to roll over their debts or refinance. A vicious cycle could lead to further sell-offs and then to you-know-what.
Jenga!
© 2018 RIJ Publishing LLC. All rights reserved.