Data & Research December 10, 2013

Retirement Crisis Worse for People of Color

Every racial group faces a retirement crisis, but people of color face particularly severe challenges in preparing for retirement.
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Only 54% of black and Asian employees and 38% of Latino employees ages 25 to 64 work for an employer that sponsors a retirement plan, compared to 62% of white employees, according to “Race and Retirement Insecurity in the United States,” a paper from the National Institute on Retirement Security (NIRS). A large majority of black and Latino working-age households—62% and 69%, respectively—do not own assets in a retirement account, compared to 37% of white households.

“I’m alarmed by the severity of the retirement racial divide,” says Nari Rhee, Ph.D., report author and NIRS manager of research. “It’s well documented that regardless of race, the typical working-age American household is far off-track toward accumulating sufficient savings to meet their basic needs in retirement. As we dig deeper into the data, we find an even worse situation for blacks, Latinos and Asians.

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“To further illustrate the extent of the racial divide, a typical white household near retirement has nearly $30,000 saved in retirement accounts, clearly an insufficient amount. A typical black or Latino household near retirement fares even worse, with zero dedicated retirement savings in a 401(k) or IRA. For working-age households, the average retirement savings is only about $20,000 among blacks and $18,000 for Latinos – a small fraction of the $112,000 average among white households.”

She adds, “With little else to depend on besides Social Security when they retire, people of color are especially vulnerable to reliance on public assistance and economic hardship in old age. Our research makes it clear that placing a special focus on improving the retirement readiness for Americans of color is absolutely essential to solve the national retirement crisis.”

The racial disparities are much more pronounced in the private sector than in the public sector, research for the report found. Blacks, Asians, and Latinos are respectively 15%, 13% and 42% less likely than whites to have access to a job-based retirement plan in the private sector, compared to 10%, 9% and 12% less likely in the public sector.

During a webinar about the findings, Rhee noted that black, Asian and Latino workers are less likely to be employed in industries that offer retirement plans, and are more likely to be in lower-wage jobs, which discourages participation in retirement plans.

Households of color lag behind white households in coverage by pensions that guarantee lifetime retirement income. While 24% of white households have a pension through a current job, only 16% of households of color do. This disparity is primarily due to the fact that just 12% of Latino households are covered by a pension plan—half the rate of white and black households.

Households with pensions through a current job are more likely to have dedicated retirement savings in a 401(k)- or IRA-type account than households without pensions: 74% versus 66%, respectively, among white households, and 52% versus 40% among households of color.

According to the report, the racial gap in retirement account ownership persists across age groups. Three out of four black households and four out of five Latino households ages 25 to 64 have less than $10,000 in retirement savings, compared to one out of two white households. Among those near retirement, the per-household average retirement savings balance among households of color ($30,000) is one-fourth that of white households ($120,000).

Across age groups, households of color with at least one earner are half as likely as white households to have retirement savings equal to or greater than their annual income. For instance, only 19% of households of color near retirement have this much retirement savings, compared to 41% of white households of the same age.

During the webinar, Diane Oakley, executive director, NIRS, said these findings show the importance of strengthening Social Security and putting that on a sound basis so it remains a viable safety net for retirees. She also contended lawmakers could expand the Saver’s Credit at a pretty modest cost to cover more lower-income people. Finally, NIRS recommends regulators look into ways to expand access to retirement plans.

The report serves as a companion to NIRS’ July 2013 study, “The Retirement Savings Crisis: Is It Worse Than We Think?,” which documents a significant retirement savings gap among working-age households in the U.S. (see “NIRS: The Retirement Crisis Is Worse Than We Think”). The research is based on an analysis of data from the Bureau of Labor Statistics and the Federal Reserve.

“Race and Retirement Insecurity in the United States” is available here.

View Points December 10, 2013

DOL Clarifies the QPAM Exemption’s Anti-Criminal Rule

When a plan subject to the Employee Retirement Income Security Act (ERISA) appoints an investment manager to manage a portion of the plan’s portfolio, the plan will frequently insist that the manager qualify as a “qualified professional asset manager” or “QPAM.”
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This status assures the plan’s fiduciary that the manager will meet the conditions of a U.S. Department of Labor (DOL) prohibited transaction class exemption, PTCE 84-14. The so-called QPAM Exemption allows the manager to engage in transactions with parties in interest with respect to the plan without running afoul of the prohibited transaction restrictions of ERISA or the Internal Revenue Code.

In recent years, the financial services industry has witnessed substantial corporate mergers, joint ventures and other forms of consolidation. With this growing consolidation among financial institutions, a technical issue arises under the QPAM exemption more frequently than plan sponsors might expect that can have significant financial consequences both for the plan and the manager. In this regard, the QPAM exemption contains an anti-criminal rule that requires that neither the QPAM nor any of its affiliates may have been convicted of a variety of crimes within 10 years immediately prior to the transaction.  This provision, section I(g), specifically provides the following:

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“Neither the QPAM nor any affiliate thereof (as defined in section V(d)), nor any owner, direct or indirect, of a 5 percent or more interest in the QPAM is a person who within the 10 years immediately preceding the transaction has been either convicted or released from imprisonment, whichever is later, as a result of: any felony involving abuse or misuse of such person’s employee benefit plan position or employment, or position or employment with a labor organization; any felony arising out of the conduct of the business of a broker, dealer, investment adviser, bank, insurance company or fiduciary; income tax evasion; any felony involving the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities; conspiracy or attempt to commit any such crimes or a crime in which any of the foregoing crimes is an element; or any other crime described in section 411 of ERISA.  For purposes of this section (g), a person shall be deemed to have been “convicted” from the date of the judgment of the trial court, regardless of whether that judgment remains under appeal.”

The issue of whether section I(g) of the QPAM exemption is satisfied comes up frequently for financial institutions when they are in the process of acquiring or merging with other entities in a corporate transaction. In the course of due diligence on a potential acquisition, a company may discover that a target company, or one of its employees, officer or directors, may have been under investigation, indicted or convicted of a crime.  As a result, as soon as the corporate acquisition is finalized, the QPAM’s legal status as a QPAM could be jeopardized. Failing to meet section I(g), and as a result failing to qualify as a QPAM, has a number of significant legal consequences both for the manager and for the plan whose assets are under the QPAM’s management. Importantly, the QPAM could potentially be liable for a breach of its contracts with ERISA clients to the extent that it made a representation that it qualifies as a QPAM. Moreover, the QPAM could be personally liable for a fiduciary breach and for excise taxes in connection with any transactions that the QPAM executed with a party in interest with respect to the plan.

The plan’s fiduciary could potentially have its own liability in connection with the manager’s transactions under ERISA’s co-fiduciary liability rules.  At a minimum, the plan’s fiduciary would want to ensure that the plan has an alternative legal strategy for avoiding prohibited transactions in connection with the manager’s activities, whether through reliance on a different prohibited transaction exemption or by seeking a new QPAM services provider.        

The DOL has issued a number of individual prohibited transaction exemptions for managers of ERISA assets where the manager could not satisfy the requirements of section I(g) of the QPAM Exemption.  Similarly, DOL has granted these kinds of exemptions under its expedited process, or EXPRO, under PTCE 96-62. In our experience, ambiguities arise particularly when there are investigations of foreign affiliates in foreign jurisdictions, because foreign laws may not be enforced in the same way they are enforced under U.S. laws, and certain acts that may be “criminal” or “felonies” in this country may not be treated similarly in other jurisdictions.

The DOL recently issued a helpful advisory opinion http://www.dol.gov/ebsa/regs/AOs/ao2013-05a.html that makes clear that the sole judicial action that triggers a violation of section I(g) of PTE 84-14 is a criminal conviction. At issue specifically was whether a “deferred prosecution agreement” entered by an affiliate of a QPAM jeopardized the QPAM’s ability to serve as a QPAM (and rely on the QPAM Exemption) for its ERISA clients. The deferred prosecution agreement was entered in connection with investigations by the New York Attorney General’s Office, the U.S. Department of Justice, and the U.S. Office of Foreign Assets Control (OFAC) into allegations that the affiliate had falsified payment records involving countries sanctioned by OFAC over a period of years.

According to the DOL’s letter, under a deferred prosecution agreement, the government files a charging document with a court, but requests that the prosecution be deferred to allow the defendant to demonstrate its good conduct over a period of time. If the defendant successfully completes the deferred prosecution agreement (DPA), the charges may be dismissed and the dismissal is not treated as a conviction.  Under these facts, the DOL concluded that DPAs do not constitute criminal convictions such that the QPAM status of affiliates would be jeopardized. This was good news.

Because of the significance of losing QPAM status, we recommend that companies that provide QPAM services have procedures in place to identify when criminal investigations, indictments, or proceedings are initiated in connection with all affiliates. At a minimum, those procedures should call for a legal review to determine whether QPAM status may be called into question, and, if so, an identification of alternative prohibited transaction strategies or approaching the DOL as quickly as possible to explore applying for a formal prohibited transaction exemption. 

 

Ellen M. Goodwin and Stephen M. Saxon, Groom Law Group

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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