Client Service December 7, 2016

Generating Lifetime Income Top Concern for Participants

A new survey finds that while a majority of retirement plan participants want lifetime income solutions, many are unaware if their plans offer one.
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Moving into 2017, retirement plan participants are going to face several challenges preventing them from properly saving for retirement; however, plan sponsors can take several steps to put these investors on the right path.

Recently, financial services firm TIAA conducted a series of surveys which revealed some of the biggest issues threatening Americans’ financial security, as well as strategies that plan sponsors can pursue to help them overcome these obstacles.

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As Americans seek lifetime income solutions, many are confused as to how they work, and whether their plans offer these options. TIAA finds that nearly half of respondents say their retirement plan’s No.1 objective is generating a reasonable, guaranteed monthly income in retirement. But, 41% are unsure whether their plans offer such a solution.

The firm notes, “Plan sponsors are in a unique position to ensure that employees have access to and understand their options for the provision of lifetime income.”  

But before participants evaluate lifetime income solutions, plan sponsors can help them be realistic about the percentage of current income they will need to fund a comfortable retirement. TIAA’s David Ray notes that the firm offers a plan outcome assessment strategy that analyzes clients’ plan populations to determine an average income replacement ratio (IRR).

“This allows plan sponsors to step back and decide whether to improve plan design, plan management, educational materials, or make changes in investment solutions to drive better outcomes,” Ray tells PLANSPONSOR.

The survey found that 63% of Americans who are not retired estimate they will need less than 75% of their current income to live comfortably, even though most experts recommend replacing 70% to 100% of current income in retirement.

To help individuals gauge the necessary IRR, Ray recommends offering customizable tools that participants can use to generate their IRRs based on individual situations such as age, budgeting and spending preferences. These tools can also help them determine what needs to be done to reach that IRR and what to do to close savings gaps.

“It is vital for employees to estimate how much money they’ll need in order to live comfortably in retirement and take advantage of the tools that help identify how they can secure a stream of income they can’t outlive,” says Ron Pressman, CEO of institutional financial services at TIAA. “Having a source of guaranteed income can help savers be better prepared to deal with ongoing retirement expenses, such as healthcare, as well as unexpected events.”

Ray adds, “When it comes to thinking about lifetime income, you have to think about the risk of outliving that income, and that’s why lifetime income products are so valuable, especially as employees are living longer today.”

TIAA notes that annuities are one lifetime income option that retirees can take advantage of, but its survey found that only one in ten Americans have annuities. Still, the firm found that 92% of annuity holders are satisfied with their investment decisions, highlighting a key opportunity for plan sponsors to educate participants about the benefits of this option, as well as other life-time income solutions that may be available to them.

NEXT: Advice Matters

 

Americans value professional financial advice, but they are unsure where to find it and whether they qualify for receiving it. TIAA’s survey finds that 35% of Americans who have not worked with a professional financial adviser say they don’t think they have enough money to justify paying for financial advice. Forty-nine percent believe they need more than $50,000 in savings to justify meeting with an adviser.

“People felt like they had to have a certain dollar threshold to get advice, which of course isn’t the case,” explains Ray. “We provide advice through every channel that a participant can interact with, whether it be in person, through the phone, or over the internet. It’s the same advice regardless of which channel is used. And we found that more than two-thirds of people who get this advice choose to save more and adjust their portfolio allocations, so we don’t believe there is a certain dollar threshold for advice.”

TIAA finds that 67% of those working with a financial adviser are satisfied with their decisions, compared to 37% who are not. Moreover, three in four respondents said they would be more likely to consider a job if it offered financial advice as an added benefit at no additional cost. For Generation Y, that preference increases to 87%.

In fact, the prospect of financial advice at no additional cost was the most popular among various free perks an employer could offer—even outranking on-site medical care or free lunch prepared by an on-site chef. This means employers are at a key position to raise awareness of financial wellness tools and resources available to their employees to help boost productivity, as well as retention.

“Regardless of where they are in their professional lives or retirement goals, there is a wide spectrum of support available to help employees with financial planning,” says Pressman. “In addition to resources in the workplace, plan sponsors can work with retirement providers to offer other means to access advice when and where it’s convenient, such as one-on-one meetings, webinars, podcasts, and online tools and calculators. Perhaps most importantly, plan sponsors can communicate frequently with employees to ensure they know what’s available—and retirement providers that can help.”

Finally, the best way to save for retirement perhaps is to start as soon as possible. TIAA notes that out of its current retirees, those who started saving before age 30 were most likely to retire before age 60, and 97% of those early planners reported feeling satisfied with retirement.

Ray notes that the importance of saving for retirement as early as possible, making the right contributions, and taking advantage of compound interest is especially important for younger participants to grasp.

Moreover, TIAA recommends strategies tailored to each age group in a plan. The firm recommends customizable tools designed to help the individual prepare at all stages of financial planning. TIAA adds that these tools should also help participants understand key factors that will affect their individual retirement strategies including personal risk tolerance and asset allocation, as well as the current status of Social Security and Medicare.

Beyond age, TIAA found that participants also approach retirement differently based on other factors such as gender. “We found differences in gender when it comes to preferences and methods for retirement saving; so, we dedicated seminars for women. They tend to look at financials in a different way than men do.”

But while several lifetime income options and financial wellness resources may be available to participants, many don’t know they have access to these benefits. This puts plan sponsors at a key position to work with employers and providers to make sure everything on the table is made clear to participants, so they can utilize what works best to put themselves on the right track to retirement.

“Encouraging employees to explore and leverage the full range of benefits their plan offers while they are working can help lead to better outcomes when it’s time to retire,” says Pressman. “Year-end is the perfect time to help employees get reacquainted with plan features and make sure they are using them to their advantage in the New Year.” 

Compliance December 7, 2016

Groups Say Form 5500 Proposed Updates Too Burdensome

Retirement industry groups ask agencies to scale down reporting requirements for investments, fees and compliance.
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The American Benefits Council, the Committee on Investment of Employee Benefit Assets (CIEBA), the Society for Human Resource Management (SHRM) and the ERISA Industry Committee (ERIC) have asked regulators to lighten up on some of the requirements that would be imposed on plan sponsors by proposed modifications to Form 5500.

Last July, the U.S. Department of Labor’s (DOL) Employee Benefit Security Administration (EBSA), along with the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) published a notice of proposed changes to its annual reporting regulations under Title I of the Employee Retirement Income Security Act (ERISA).

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The proposal included improvement on reporting regarding alternative investments, hard-to-value assets, and investments through collective investment vehicles. “The proposed changes are designed to foster ongoing monitoring of employee benefit plans by employers, plan fiduciaries, and participants and beneficiaries, and improve the ability of the Agencies to fulfill their statutory oversight roles,” the agencies said in a fact sheet. 

In their letter, CIEBA, SHRM and ERIC suggested the agencies should make investment disclosures consistent with other reporting requirements. They noted that in Accounting Standards Update 2015-12, the Financial Accounting Standards Board (FASB) changed its reporting requirements so that employee benefit plans only have to report their investment holdings by their general type, not by other, hard-to-measure information such as the nature of the investments and their risks. “The Agencies are now proposing to create a new, more burdensome system for investment-related disclosures. As a result, employers will have to expend resources to report the same assets in two separate ways. Not only is that costly and confusing, but it is also redundant to what is already being disclosed in the plan financial statements under the FASB requirements,” the groups argue.

NEXT: Schedule C reporting of fees

The agencies’ proposal would harmonize reporting on Form 5500 Schedule C with the now final disclosure requirements in DOL’s service provider disclosure regulation. “The proposed updates are intended to provide a powerful tool for improved evaluation of service arrangements involving investments, recordkeeping, and other administrative services. The Schedule C reporting requirements for employee benefit plans would also more closely track the information that plan service providers are required to disclose to plan fiduciaries,” the agencies said.

In their letter, the groups say they agree that this will help decrease the burden of having to report on a large number of entities. However, the large amount of information about the service providers that’s being required in Schedule C and in other parts of the revised form is still far too extensive, and it will only add to the high reporting burden, they say. Employers do not currently collect much of the data required to answer the new questions. They will have to develop new systems not only to collect information but also to process and verify it. Employers will also have to spend considerably more time soliciting information from dozens or even hundreds of vendors. Moreover, since many of the new questions are ambiguous or confusing, employers will need to engage legal counsel, which will increase costs. The organizations are concerned that employers will be forced to pass that increase in cost on to plan participants and that participants may actually see their fees increase.

Likewise, the American Benefits Council says the proposed revisions significantly increase the amount of information necessary to complete the forms, as well as the number of plans required to report and the way in which such plans must report. “Virtually all of the Council’s members would face substantial implementation costs and administrative burdens to meet the requirements of the proposed revisions,” it says.

NEXT: Compliance questions and health plan reporting

The proposal would also enhance reporting about plan compliance to improve plan operations, protect participants and beneficiaries and their retirement benefits, and educate and provide annual discipline for plan fiduciaries. The proposal would add selected new questions regarding plan operations, service provider relationships, and financial management of plans. These questions are intended to compel fiduciaries to evaluate plan compliance with important requirements under ERISA and the Internal Revenue Code and to provide the agencies with improved tools to focus oversight and enforcement resources.  

CIEBA, SHRM and ERIC respond that the questions focus heavily on costs and agency enforcement efforts rather than on providing stakeholders with a picture of the value that is being provided. “Given the one-sidedness of this focus, more frivolous litigation will inevitably follow, and this threatens to further undermine the retirement system,” they say.

The agencies’ proposal would increase data collection for a large sector of the health plan market made up of ERISA group health plans.  This includes eliminating for group health plans the current exemption from Form 5500 reporting for small insured and self-insured welfare benefit plans. In a separate letter, ERIC suggests the proposed amendments be withdrawn at this time. ERIC asked for the current proposal to be withdrawn, to wait for more certainty until the new Administration is in place, and if there must be changes, to take a less burdensome approach, including removing questions that would reveal confidential information.

“It is inappropriate to rush through such significant changes to reporting requirements while a new Administration is preparing to take over,” says James Gelfand, senior vice president of Health Policy, ERIC. “And, with much of the proposed Schedule J reporting being reliant upon provisions of the ACA, it would be prudent to delay making changes, since there is anticipation that the law may be drastically changed.”

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