Wednesday, November 25, 2015

A Retirement Industry Thanksgiving List

Thanksgiving is a special time of year — and one on which it seems fitting to reflect on all for which we should be thankful. Here’s my 2015 list:
I’m thankful that so many employers voluntarily choose to offer a workplace retirement plan — and that so many workers, given an opportunity to participate, do.
I’m thankful that so many employers choose to match contributions or to make profit-sharing contributions (or both). Without those matching dollars, many workers would likely not participate or contribute at their current levels — and they would surely have far less set aside for retirement.
I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there — and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.
I’m thankful that trends that suggest that more plan sponsors are extending those mechanisms to their existing workers as well as new hires.
I’m thankful for qualified default investment alternatives that make it easy for participants to create well-diversified and regularly rebalanced investment portfolios — and for the thoughtful and on-going review of those options by prudent plan fiduciaries.
I’m thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty and competing economic interests, such as rising health care costs and college debt.
I’m thankful that the federal government remains willing to postpone taxing pay that Americans postpone taking (and spending) by saving for retirement.
I’m thankful that a growing number of policy makers are willing to admit that the “deferred” nature of 401(k) tax preferences are, in fact, different from the permanent forbearance of other tax “preferences” — even if governmental accountants and certain academics remain oblivious.
I’m thankful that the “plot” to kill the 401(k)… hasn’t. Yet.
I’m thankful that those who regulate our industry continue to seek the input of those in the industry — and that so many, particularly those among our membership, take the time and energy to provide that input. I’m hopeful, particularly in areas like the fiduciary proposal, that the final product will reflect that input.
I’m thankful for objective research that validates the positive impact that committed planning and preparation for retirement makes. I’m thankful for the ability to take to task here research that doesn’t live up to those objective standards.
I’m thankful for the warmth with which readers and members, both old and new, continue to embrace the work we do here. I’m thankful for all of you who have supported — and I hope benefited from — our various conferences, education programs and communications throughout the year. I’m thankful for the constant — and enthusiastic — support of our Firm Partners and advertisers.
I’m thankful for the team here at NAPA (and the American Retirement Association, generally), and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.
But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts — and for the ongoing support and appreciation of readers like you.
Here’s wishing you and yours a very happy Thanksgiving!
- Nevin E. Adams, JD

Saturday, November 21, 2015

6 Things Boomers Need to Know About Saving for Retirement

Several weeks back, I wrote a column entitled, “5 Things Millennials Need to Know About Saving for Retirement.” But what about those at the brink of retirement?
Retirement seems close — perhaps too close for the comfort of Boomers, some of whom have already begun cycling into retirement. In fact, the youngest element of this cohort (born in 1964) is now already 51, and it’s said that 10,000 Boomers roll into retirement every day.
That said, whether you’ve been saving or not, or not saving enough — here are six things Boomers need to know about saving for retirement.
1. Social Security won’t be as much as you think it will be.
When you were your kids’ age(s), you too were likely disdainful about the long-term prospects for Social Security (and hey, your kids weren’t around for the real funding crisis back in the early 1980s!). That said, you’re not only close enough to collecting; many of you are probably in the age group where when politicians talk about making changes, they’re careful to assure you that yours won’t be changed.
However, even if one assumes that the program remains largely unchanged from what it pays today, if you retire at full retirement age in 2015, your maximum benefit would be $2,663 a month, according to the Social Security Administration. Those who retire at age 62 (and many of today’s workers do, not realizing that waiting can translate into larger benefits) in 2015, your maximum benefit would be $2,025; and if you retire at age 70 in 2015, it would be $3,501.
Now those amounts are based on earnings at the maximum taxable amount for every year after age 21. In other words, that’s probably more than most of us would get. In fact, the average monthly Social Security retirement benefit for January 2015 was $1,328. Note that the maximum benefit depends on the age a worker chooses to retire, among other things — and that assumes that the current questions regarding Social Security’s longer-term financial viability are addressed, and/or that current benefit levels aren’t reduced.
2. Not everyone has a pension, and you probably don’t. And if you do, it probably isn’t a full pension.
Now, by “pension” I mean the traditional defined benefit (DB) pension plan, one that, in the private sector anyway, was largely employer funded. According to the nonpartisan Employee Benefit Research Institute (EBRI), in 2011, just 3% of all private-sector workers participated only in a DB plan, and 11% had both a defined contribution (DC) plan and a DB plan. So, only something like 14% of workers in the private sector still have a traditional pension plan (even then, it doesn’t mean there’s no reason for concern; see “3 Pervasive Retirement Industry Myths”).
That said, you’ve been in the workforce long enough (and during the right time) that you might actually have a pension, or at least a piece of one. Here’s the thing: People talk like the Millennials invented rapid job turnover, but the reality is that job tenure statistics have been relatively consistent going all the way back to the 1950s. What that means is that lots of workers who were “covered” by a pension plan didn’t work at those employers long enough to vest in that pension, or at least not long enough to vest fully. So, look back through your work history, check and see if those employers offered a pension. And you might want to check out thismissing pension tool from the Pension Benefit Guaranty Corporation (PBGC).
3. You won’t be able to work as long as you think.
I’m sure there are days when you would love nothing more than to be able to stay in bed (or at least not go to work). But industry surveys continue to suggest that not only do people expect to work longer, their retirement savings calculations seem to depend on it.
You hear people talk about 65 as the “normal” retirement age, even though it’s no longer that, even for Social Security benefits (aside from the reality that many still start collecting at age 62, unless you were born before 1943, your normal retirement age is 66 or older — you can check yours out here.)
Meanwhile, EBRI’s Retirement Confidence Survey (RCS) has consistently found that a large percentage of retirees leave the workforce earlier than planned — 49% of them in 2014, for example. Many who retire earlier than they had planned often do so for negative reasons, such as a health problem or disability (61%), though some state that they retired early because they could afford to do so (26%).
The bottom line: You probably shouldn’t count on being able to work as long as your finances may require. And that may require cutting back in the here-and-now in the interests of the there-and-then.
4. You could be missing out on ‘free’ money.
When you started working, if your employer offered a DC plan, you had to fill out a form in order to participate (you probably even had to wait a year), make investment choices, etc. These days a growing number of employers automatically enroll eligible workers in these plans, direct their savings into a default investment alternative, and even automatically increase that initial deferral rate each year. But even among those employers, most only automatically enroll new hires, not existing hires. And that could mean that even if you work for one of those employers, you might have been overlooked by these “auto” enrollment programs — and you might still need to go get one of those enrollment forms (or visit the plan’s website).
Your savings may well be matched by your employer (see “6 Things 401(k) Participants Need to Know”), so even if you’ve missed out on years of the opportunity to save and have those savings matched, there’s no time like the present to start — and start as aggressively as you can. After all, time is — literally — money.
5. You can use catch-up contributions to catch up.
Thanks to a provision in the tax code, individuals who are age 50 or older at the end of the calendar year can make annual catch-up contributions; up to $6,000 in 2015 and 2016 may be permitted by 401(k)s, 403(b)s, governmental 457s, and SARSEPs (you can do this with IRAs, as well, but the limits are much smaller). The bottom line: If you haven’t saved enough, these catch-up provisions can help. You can find out more here.
6. It’s not too late to start.
The reality is, without a sense of where you stand, what resources you have available, what your needs are and how long you have to prepare, it’s impossible to figure out the best way forward. But it starts with figuring out how much you’ll need. And for that, you might check out EBRI’s Ballpark E$timate — it’s free and easy to use. Then gather up those 401(k) statements, those IRA accounts, check for missing pension balances, and start saving!
- Nevin E. Adams, JD

Saturday, November 14, 2015

7 Things You May Not Know About the Saver’s Credit (and 4 You Should)

Beyond the tax advantages to saving for retirement on a pre-tax basis, the ability to watch those savings grow without paying taxes until they are actually withdrawn, there is another savings incentive with which many are not as familiar.

It’s the so-called Saver’s Credit, and it’s available to low- to moderate-income workers who are saving for retirement. For those who qualify, in addition to the customary benefits of workplace retirement savings, it could mean a $1,000 break on your taxes — twice that if you are married and file a joint return!

That said, just 24% of American workers with annual household incomes of less than $50,000 are aware of the credit, according to the 15th Annual Transamerica Retirement Survey. However, that’s twice as many as found by the 11th Annual Transamerica Retirement Survey.

Here are some things you may not know about the Saver’s Credit:

The official name for the Saver’s Credit is actually the Retirement Savings Contributions Credit.

A wide variety of retirement savings contributions qualify.

The Saver’s Credit can be taken for contributions to a traditional or Roth IRA (including MyRA), a 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan, as well as voluntary after-tax employee contributions to qualified retirement and 403(b) plans.

There are two deadlines for contributions.

To qualify for the Saver’s Credit, contributions must be made to 401(k)s, 403(b)s, 457s or the federal government’s Thrift Savings Plan by the end of the calendar year. However, retirement savers have until April 15, 2016, to make an IRA contribution that could qualify them for the Saver’s Credit for tax year 2015.

The Saver’s Credit is (still) not available via the 1040 EZ form (though there have been legislative attempts to remedy that situation.

Rollover contributions aren’t eligible for the Saver’s Credit.

Eligible contributions may be reduced by any recent distributions (for 2015, distributions received after 2012, and before the due date of the 2015 return, including extensions) from a retirement plan or IRA (a list of these distributions is available here.)

The adjusted gross income limits for eligibility are higher for 2016.

While most contribution and benefits limits were not adjusted for 2016, the income limits for the Savers Credit were adjusted higher (a table outlining those changes, as well as the limits for 2015 is available here).

And some things you may know (but are worth repeating)…

The amount of the credit is 50%, 20% or 10% of retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (reported on your Form 1040 or 1040A).

It is a credit — a dollar-for-dollar reduction of tax liability. If the standard or itemized deductions or personal exemptions eliminate tax liability, you can’t claim the Saver’s Credit. Moreover, it can’t be carried forward to the next year. Nor can you get a tax refund based only on the amount of the Saver’s Credit.

In order to claim the credit, individuals must be 18 years or older, must not be a full-time student, and cannot be claimed as a dependent on another person’s return.

You only get the credit if you file for it. It’s not too late to save and get “credit” for doing so — make sure the participants you work with, and plan sponsors you work for — are aware.

Additional information about the Savers Credit is available here:,-Employee/Retirement-Savings-Contributions-Savers-Credit

Saturday, November 07, 2015

5 Reasons Why More Plans Don’t Offer Retirement Income Options

A frequent commentary on today’s plan designs is that they are more focused on accumulation than the eventual spend-down of those savings.
It’s said that defined contribution plans too often not only facilitate lump-sum distributions, but, in design at least, encourage them. And yet, despite a growing awareness of the importance of retirement income planning,PLANSPONSOR’s 2014 DC Survey finds that nearly half of plan sponsors offer no income-oriented products to their participants.
Here’s five reasons plan sponsors give for not offering retirement income options.
1. There is no legal requirement to provide a lifetime income option.
Let’s face it, it’s a full-time job just keeping up with the plan provisions, standards, participant notices and nondiscrimination tests that are required by law. The notion that a plan sponsor would, in the absence of a compelling motivation take on extra work, and work that carries with it additional financial and fiduciary responsibility as well, doesn’t seem very realistic.
That said, plan sponsors — particularly larger plan sponsors — take on plenty of other plan design changes that aren’t forced on them, most notably the automatic enrollment designs outlined in the Pension Protection Act of 2006.
However, with no obligation to provide this offering, and an underlying concern that providing the option does involve taking on additional liability.
2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”
I’ve never met a plan sponsor who felt that the guidance on offering in-plan retirement income options was “enough.”
I’m not saying they’re not out there – clearly there are in-plan options available in the marketplace now, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. That said, industry surveys indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s following the 2008 safe harbor regulation from the Labor Department regarding the selection of annuity providers under defined contribution plans.
That said, earlier this year, the Labor Department in Field Assistance Bulletin (FAB) 2015-02, acknowledged that they had heard those concerns, and offered some insights on how to “reconcile the ‘time of selection’ standard in the safe harbor Rule — which embodies the general principle that the prudence of a fiduciary decision is evaluated under ERISA based on the information available at the time the decision was made — with ERISA’s duty to monitor and review certain fiduciary decisions.”
Part of this additional clarity was the point that the plan fiduciary among other things appropriately concludes that, at the time of the selection [emphasis added in the DOL’s FAB], the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided. “At the time of the selection” is further defined as the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary; or the time that the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates.
I’m not saying that is “enough” — but clearly the Labor Department is listening, and trying to close that comfort gap. And if you haven’t yet read FAB 2015-02, you should.
3. Operational and cost concerns linger.
While several industry providers have offered what seem to be workable, effective solutions to the “portability problem,” plan sponsors remain concerned that the cost and complexity of transitioning these offerings — either by individual plan participants, or the plan itself — would be daunting, at best.
4. Participants don’t take advantage of the option when offered.
The so-called “take up” rates among participants can be sliced in different ways — by provider (the options are varied, after all), by participant age, even by the involvement of the employer in positioning in the option — but however you parse it, the word I’ve generally heard to describe participant adoption rates is… ”disappointing.”
Now, that kind of response hasn’t stopped plans from putting in options like self-directed brokerage accounts (SBDAs) over the years (on the other hand, the participants who were embracing SDBAs tended to be fairly influential voices).
And there is evidence that even defined benefit plan participants, given the choice between taking a lump sum or an annuity, often go for the former. That said, a study by the non-partisan Employee Benefit Research Institute (EBRI) also supports the notion that plan design matters, and matters to a large extent, a large extent, drives annuitization decisions.
5. Participants aren’t asking for it.
Once you’ve walked through all the objections to in-plan retirement income options, it all seems to come down to this. Despite industry surveys that suggest worker interest in the concept (if not the reality) of retirement income solutions, it never seems to get to the level of expressing that interest to those who actually make retirement plan design decisions.
Plan design can surely help steer participants toward these options, but most advisors I’ve spoken with say that, for a variety of reasons (cost, complexity) these retirement income options are still sold, and not bought.
Sure, most plan sponsors acknowledge that participants (certainly older, longer-tenured participants) could use the kind of help that a retirement income structure could provide, and yes, plan sponsors are looking for a more secure safe harbor, and they’d certainly welcome a PPA-ish “nudge” in that direction.
But until it becomes an articulated concern for the workers they hope to attract, retain and eventually retire from their workforce, it’s likely that the adoption rate — by plans and plan participants — will be slower than might be hoped.
- Nevin E. Adams, JD

Saturday, October 31, 2015

15 Retirement Plan Points to Ponder

Working with retirement plans is a complicated, challenging, and constantly changing process. That said, there are certain constants — and things that bear repeating and/or reconsidering from time to time.

Here are a few points to ponder from my list of “constants”:

1. The key to successful retirement savings is not how you invest, but how much you save.

 2. The vast majority (more than 90%) of participants defaulted in at a 6% deferral do nothing to change that default. Of those who do, about half actually increase that deferral rate.

 3. Plan fiduciaries are responsible for every participant investment decision in plans that don’t comply with ERISA 404(c). Most plans don’t comply with ERISA 404(c).
4. Hiring a co-fiduciary doesn’t make you an ex-fiduciary.

5. “Because it’s the one my record keeper offers” is not a good reason to choose a target-date fund.
6. Given a chance to save via a workplace retirement plan, most people do. Without a workplace retirement plan, most people don’t.

7. Isaac Newton’s First Law: An object that is at rest will stay at rest unless an external force acts upon it. Ditto plan participants.
8. Nobody (except perhaps the lawyers who wrote them, the regulators that mandate them and, eventually, the plaintiffs’ bar) is actually reading all those participant notices.

9. You want to have an investment policy in place before you need to have an investment policy in place.
10. Disclosure isn’t the same thing as clarity.

11. “Stay the course” is only a viable strategy if you’re already on the right course.
12. If you can’t remember the last time you did a provider search, you’re probably overdue.

13. A prudent process helps you win in court; a good result keeps you out of court in the first place.
14. Despite litigation concerns, most plan sponsors still have a better chance of being struck by a meteor than being sued by a plan participant.

15. It’s not what you’re doing wrong; it’s what you’re not doing that’s wrong.

- Nevin E. Adams, JD

Saturday, October 24, 2015

4 Reasons Why Plan Sponsors Should Care About the Fiduciary Proposal

As I talk to retirement plan advisors and plan sponsors around the country, there seem to be three camps of thought on the Labor Department’s fiduciary reproposal:
  • those who think it will be a big deal;
  • those who think it will be a big deal but manageable (once certain key issues are addressed); and
  • those who are nearly completely oblivious as to the proposal, its potential impact or its current status.
Unfortunately for advisors in the first and second category, nearly all plan sponsors seem to be in the third group.

Here’s why plan sponsors should care about the proposal.

You might have to change your plan education materials.

Remember back when your plan education materials only had generic fund references, and your participants struggled to figure out which of the specific funds on their plan menu were supposed to match up with those colored pie chart pieces? Remember how frustrated they were when you couldn’t tell them? And how poor the results were? Perhaps not, because you’ve been able to show sample asset allocations including actual fund names for well over a decade now as participant education.

However, as currently proposed, the Labor Department’s fiduciary proposal would consider any specific fund references to be advice, not education. And that would make the folks who provide such materials fiduciaries. And that would likely mean a return to education materials that aren’t nearly as educational.

You might have to change advisors.

The rules about how advisors work with retirement plans and retirement plan participants are getting ready to change, arguably in ways as significant as at any time since the passage of ERISA. For some advisors, that may mean that they will want to focus on different areas, some may choose to focus on different size plans, or to forgo working with plan participants altogether.

And while this could also bring a whole new generation of advisors to choose to work with these plans, this is a big change. And though we don’t yet know what the ultimate result will be, things will likely not be the same, particularly for smaller employers, who may very well find that the advisors they work with now will not be willing (or able) to serve their plans under the new regimens.

Your advisor might be more expensive.

There are doubtless advisors and advisor practices out there who won’t have to change a thing in order to comply with the new regulations, and whose fee structure won’t be affected. But others will, and those who do have to make changes could have to make a lotof changes – and that could affect how, and how much, they charge. And that could, of course, have an effect on others.

These changes might not be effective immediately, and how – and how much – will obviously depend on exactly what form the final regulations take. There will almost certainly, at least at the outset, be fewer advisors working with retirement plans. As for what that may mean to their costs, only time – and the final regulations – will tell.

Your advisor may not be able/want to help participants with their rollover decisions.

Today many retirement plan advisors only work with plans, or with participants in those plans. However, a growing number either work with participants as they consider a rollover decision, or have others in their firm who do. Participants who have developed a relationship with a plan advisor while they are accumulating retirement funds often have an interest in extending that relationship to the time when they are trying to figure out what to do with a rollover, or how to create a reliable stream of retirement income that won’t end before their retirement (particularly since a significant percentage of plans don’t offer a systematic withdrawal option). Similarly, plan sponsors, who have undertaken a review and monitoring of those advisors while they work with plan participants have generally prefer to see those discussions taking place with that trusted advisor than with some random advisor off the street.

And for those plan sponsors who want to encourage ex-employees to roll those balances over to another account, the current plan advisor can be a valuable help in facilitating that decision.

However, the Labor Department’s current proposal would, at best, greatly complicate this relationship. The services provided to a participant among many in a workplace retirement plan are quite different from that for an individual in a rollover situation, or one who would be rolling those savings into an individual retirement account (IRA), with the broader array of choices and decisions that would entail. However, the DOL’s current proposal would restrict even a level-fee plan advisor from working with an individual participant circumstance if he or she charged more, even if the level of service was significantly different and more complicated, even if he or she charged a flat fee for those highly individualized services.

That’s why the American Retirement Association and NAPA have advocated for a “level-to-level” compensation exemption that would address this issue.

Of course, at this point, these potential issues are just that – potential issues. The Labor Department has taken great pains to assure legislators, industry professionals and the public at large that they have listened, and are making a serious effort to address the major concerns expressed regarding the proposal (our concerns are outlined here and here).

Still, the devil is (always) in the details, the “proof” in the pudding. But as we wait to see how the Labor Department has chosen to address the concerns expressed, plan sponsors – and advisors – who haven’t yet given consideration to the potential new landscape for retirement plan education and advice would be well advised to do so.

- Nevin E. Adams, JD

Saturday, October 17, 2015

4 Reasons Why Plan Sponsors Should Care About Outcomes

It’s obvious why participants have a vested interest (literally) in the retirement income — the outcome, really — of their retirement savings plans. Here are four reasons why plan sponsors should care about outcomes.

You want your employees to appreciate your benefit plan(s).

If you’re responsible for benefit plans in your organization, you have a very real interest in how your workforce (and management team) view those benefits. Plan sponsors have long used participation rate as the plan success metric — after all, what better measure of success in plan design, education and communication than the objective data as to how many employees have chosen to participate.

But in a time when a growing number of plans have adopted automatic enrollment — well, while credit is certainly due plan sponsors who have taken that step, the resulting bump in participation rates owe more to the inertia of human behavior than innovative plan design.

There is, however, little question that the better your plan performs on an individual basis — positive growth in account balances, a resulting more robust projection of retirement income — the better workers will feel about the benefit plans that helped provide that result.

You don’t want your employees worrying about their finances at work.

Any number of workplace surveys bear out the impact that external concerns — particularly external financial concerns — have on morale and productivity at work (see “Finance Distractions Take Toll on Productivity, Benefit Satisfaction”) and “Study Finds Link Between Financial and Physical Wellness.”) Those concerns don’t even touch on the vulnerability to theft and/or misuse of organizational resources that can tempt financially vulnerable workers.

A robust retirement savings balance at work isn’t a cure for all financial ills, of course, but it can be a source of solace, as well as a resource in time of true financial need.

You want your employees to retire on time.

Workers who think they can’t afford to retire are likely to try and extend their working career — potentially complicating succession planning and your ability to attract (and/or retain) new talent. Data from benefits consultant Mercer notes that each delay in retirement can block 5+ jobs, and that if 4% of your population is retirement eligible and half of those people choose to delay retirement, 10% of your employee population would experience promotion blockage.

As an employer, those trends can also result in higher labor costs, and safety and productive concerns (see “Plan Sponsors Waking up to Costs of Older Workers who Can’t Retire.”)

You want your plan to ‘work.’

There are employers who only offer a workplace retirement plan because everybody else does, who are willing to just “set it and forget it,” who, hearing that workers aren’t taking advantage of the benefit they worked so hard to set up, shrug and say “it’s up to them.”

But that’s not you. Is it?

- Nevin E. Adams, JD

Note: You can find some interesting perspectives on various aspects of plan and participant outcomes at our Participant Outcomes resource page.