Data & Research June 22, 2017

Older Americans in Urgent Need of Retirement Income Education

Most older Americans know very little about annuities, but the majority believe a source of guaranteed lifetime income in retirement is important, according to a study by the American College.
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Unlike their younger counterparts, individuals nearing or in retirement don’t have the luxury of long time horizons in which to grow their nest eggs. They are at a point where developing a strategy to sustain their assets and draw retirement income is critical. However, many lack the knowledge to do so effectively.

According to a survey by the American College of Financial Services, 74% of respondents failed a 12-question retirement income quiz. Of those who passed, only 5% scored a “B” (80%) or higher.

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In particular, several respondents failed to correctly answer questions around preserving assets and sustaining income in retirement. The survey found only 38% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, and only 34% know that a substantial negative investment return at retirement age is more damaging to portfolio sustainability than the same negative return a number of years before or after retirement. 

The study also indicates most respondents lack knowledge of best practices to execute near retirement. Only 33% understand the benefits of working two years longer or deferring Social Security for two years as opposed to increasing contributions by 3% for five years just prior to retirement. Moreover, fewer than half know that using a portion of their portfolios to purchase a life annuity can protect against longevity risk.

In fact, the lack of knowledge behind annuities was of particular concern to researchers. Rating scores on sections from best to worst, “annuity products in retirement” took the top followed by “company retirement plans” and “paying for long-term care expenses.”

According to the survey, only 29% know that buying an annuity product will be less expensive for an older person than a younger one; only 17% know the lifetime income payout rate for a 65-year-old male is roughly in the 6% to 7% range; and only 14% know a deferred annuity with a guaranteed lifetime withdrawal benefit can pay income even if the investment drops to zero.

However, 74% say having a source of guaranteed lifetime income in retirement is important.

Furthermore, the research highlighted several areas for which older Americans scored very well. Subjects marked by high proficiency include housing finances, Medicare issues, the principle of inflation, the role taxes play in retirement, and life insurance concepts.

Next: Demographics Play Key Roles in Literacy

The survey found major gaps in score levels along the lines of gender, asset amounts, and education levels.

More men (35%) passed the quiz than women (18%). More than half (82%) of women failed the quiz, suggesting the need for targeted communication and education based on particular concerns that may be more common among females.

Not surprisingly, higher passing levels seemed to correlate more closely with those who had substantial assets. For example, 49% of those with at least $1 million in assets passed the quiz, as opposed to 20% who passed with less than $1 million in assets. Of those who passed, 40% had at most a graduate degree, 32% had at most a college degree, and only 9% never graduated college.

Surprisingly, the study found that more people who weren’t working with financial advisers passed than those who were working with advisers. Thirty-four percent of people without advisers passed, and only 22% of those working with advisers did as well.

However, the study also shed light on what people value in advisers. Of respondents with an adviser, 52% stated it was extremely important for their adviser to act as a fiduciary. Moreover, 76% of respondents with advisers found it extremely important that their adviser educate them on retirement risks.

Moving forward, it’s imperative that advisers educate clients about these risks, focus on areas of low proficiency, and re-enhance dimensions of high proficiency. A thorough evaluation of a client’s financial literacy can also help, as 61% of respondents reported they were very or extremely knowledgeable about retirement income planning; however, only 33% of them passed the literacy quiz—with a mean score of 51.87%.

The 2017 RICP Retirement Income Literacy Survey Report can be found at Retirement.TheAmericanCollege.edu. 

Compliance June 22, 2017

Voya Wins Dismissal of Suit Over Advice Service Agreement

The lawsuit challenged fees Voya Retirement Advisors received when using Financial Engines to provide investment advice to retirement plan participants.
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A federal judge has dismissed a lawsuit claiming Voya Financial and Voya Retirement Advisors (VRA) engaged in prohibited transactions in violation of the Employee Retirement Income Security Act (ERISA) through a service arrangement with Financial Engines.

Plaintiff Lisa Patrico filed the lawsuit on behalf of all participants and beneficiaries of the Nestle 401(k) Savings Plan and all other similarly situated individual account plans. According to the complaint, the plan offers participants access to investment advice through VRA.

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Pursuant to the Nestle-VRA Agreement, VRA offers two investment advice programs—a self-service, online program called “Personal Online Advisor” and a managed account service called “Professional Account Manager.” Nestle pays VRA fees in association with the services. However, Financial Engines actually provides the advice under an agreement with VRA. Patrico alleges that VRA “provides no material services in connection with the advice program, and the only reason for structuring the advice service as being provided by [VRA] with sub advisory services by Financial Engines is to allow [VRA] to collect a fee to which it is not entitled.” She claims that, by structuring the investment advice program this way, VRA and the other Defendants breached their fiduciary duties and engaged in prohibited transactions in violation of ERISA.

U.S. District Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York, dismissed the breach of fiduciary duty claim under ERISA Section 404 because the complaint fails to allege facts showing the defendants were ERISA fiduciaries with respect to their fees. She noted in her decision that the 2nd U.S. Circuit Court of Appeals has held that when a service provider that has no relationship to an ERISA plan is negotiating a contract with that plan, the service provider “is not an ERISA fiduciary with respect to the terms of the agreement for [its] compensation.” According to Schofield, the rationale for this rule is that a service provider in such a situation “has no authority over or responsibility to the plan and presumably is unable to exercise any control over the trustees’ decision whether or not, and on what terms, to enter into an agreement.” She noted that Nestle was free to select a different investment advice service provider or none at all.

Schofield found the complaint also fails adequately to allege that defendants became ERISA fiduciaries with respect to their compensation after the Nestle-VRA Agreement was executed. Under the Nestle-VRA Agreement, VRA’s compensation for the program is a function of two factors—the number of participants with a balance in the plan and the total plan assets of participants in the program. “Neither VRA nor any other Defendant can control those factors; they depend solely on the Plan participants’ investment decisions,” she wrote in her decision.

Schofield also rejected the argument that the defendants controlled their compensation by controlling the proportion of the fee that went to Financial Engines, and in that regard were ERISA fiduciaries, saying Nestle exercised final authority over this arrangement and was free to reject it or seek better terms.

NEXT: Prohibited transaction and other claims dismissed

Schofield dismissed the prohibited transaction claim under ERISA Section 406(a) because the complaint fails to allege that any ERISA fiduciary had actual or constructive knowledge that the defendants were receiving allegedly excessive compensation for the investment advice program. She found the complaint fails to allege that any ERISA fiduciary caused the plan to pay VRA the fees prescribed by the Nestle-VRA Agreement with actual or constructive knowledge that the fees were excessive.

She reiterated that the defendants are not ERISA fiduciaries with respect to the fees, and said Financial Engines is not an ERISA fiduciary with respect to the fees for the same reasons—namely that it does not have the requisite control over the amount of compensation it receives. Schofield pointed out that Nestle is a named fiduciary under the plan, but the complaint does not allege that Nestle knew the compensation under the Nestle-VRA Agreement was excessive, either overall or as to the portion retained by VRA.

The judge dismissed claims against defendants Voya Financial, Inc., Voya Institutional Plan Services, LLC and Voya Investment Management, LLC because the complaint fails to make specific allegations against them.

Schofield did give Patrico 21 days to file any motion to replead.

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