Client Service December 15, 2017

Divorce and Failing Health Amid Overlooked Retirement Roadblocks

Clients and advisers alike often overlook the possibility of divorce or losing a spouse in their financial planning, according to TD Ameritrade’s latest survey.

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TD Ameritrade’s Financial Challenges of Divorce and Widowhood survey of 2,000 adults ages 37 and older gives insight into the financial lives of the 25 million divorced and 14.5 million widows/widowers in the U.S.

The analysis is stark in some respects, but also includes points of optimism. Overall, according to survey results, the “unfortunate reality is that approximately four in 10 marriages eventually end in divorce and about a quarter of Americans age 65 and older are widowed.” And so these issues of are paramount importance for all advisers and clients to consider.

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Naturally this may be a challenging conversation for some advisers or clients, but researchers argue it does not have to be: “Considering divorce or the loss of a spouse is a smart addition to any long-term financial plan. It’s no different than planning for things like a major illness, disability or potential long-term care needs.”

As it stands today, married couples are not sufficiently addressing this topic with their advisers. Fully two-thirds of married individuals say they don’t have a financial plan in place in the event of a divorce or becoming widowed. Despite the lack of planning, seven in 10 men and six in 10 women also say they are confident in their abilities to manage their own financial situation in the event of a divorce or a spouse passing away.

TD Ameritrade researchers warn this task often proves far more difficult and damaging than couples anticipate: “Married individuals report an annual personal income of $61,700. That is $13,100 more than widows/widowers and $9,800 more than those who are divorced.”

David Lynch, managing director and head of branches for TD Ameritrade, says advance planning could provide a much needed boost in financial security for those who “unexpectedly end up alone at any phase of their lives. Compared to the 43% of married Americans who currently feel financially secure, just a quarter of divorced people say the same. In an average month, nearly half of divorced individuals are not saving or investing any of their take-home pay, versus 32% for their married peers.”

The financial implications of losing a spouse

The survey data shows only two in five divorced individuals expect to “fully retire,” compared with 47% for married couples. At the same time, just three in 10 divorced Americans expect to be “very financially secure” in retirement, versus 52% for married respondents.

“On average, women may outlive their husbands by five years or more. And though the average age for becoming widowed is 59, it can happen at any time in your married life,” Lynch warns. “Married people of all ages should take steps now to ensure they are involved in both big and small family financial matters. They should understand their household assets and liabilities and, ideally, consider establishing multiple income streams that would help them better control their financial futures.”

Additional survey findings show about half of divorced individuals are worried about running out of money in retirement. Nearly four in 10 widows feel financially secure currently and slightly more expect to be very financially secure in retirement—both sharp increases compared to their divorced counterparts.

Widowed Americans, on average, expect that 46% of their retirement income will come from Social Security, while their married peers expect only 29% of their retirement income would come from Social Security.

The full report is available for download here.

Data & Research December 15, 2017

Average Couple Will Pay More Than $150K in 401(k) Fees

Higher-income workers, making $90,000 a year, will pay $277,000, according to America’s Best 401k.

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While industry studies have shown that 401(k) fees have declined in recent years—the Investment Company Institute recently issued a report saying they averaged 0.49% in 2016, down from 0.51% in 2015—America’s Best 401k says that data is only part of the story.

As America’s Best 401k researchers note, fee data in the retirement industry is often based on the data that plan sponsors include on the Form 5500 that they file annually with regulators. However, in its white paper, “Fees Run High for Small Business 401(k) Plans,” the company points out that 89.9% of 401(k) plans, those with 100 or less participants, file a “short” version of Form 5500, which contains very little data and excludes pertinent information such as the name of the plan provider, compensation paid to brokers and advisers, compensation paid to recordkeepers and third-party administrators, and the mutual funds in the plan along with their corresponding expenses.

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“By omitting nearly 90% of all 401(k) plans from comprehensive analysis, one might draw false conclusions about broader industry trends, such as the lowering of fees or greater access to low-cost index funds,” America’s Best 401k says. Of course, due to their far larger stature compared with the smallest plans, the relatively small number of large- and mega-sized retirement plans represent a majority of all retirement plan participants/assets in the U.S. 

To generate a more complete picture of the fees paid by all participants, America’s Best 401k reviewed the thousands of participant 404(a)(5) and plan sponsor 408(b)(2) fee disclosure forms that it has received from small businesses. The company focused on the asset-based fees withdrawn from participant accounts, finding that the average couple making $30,000 a year between them and contributing 5% each to their 401(k)s would pay $154,794 in 401(k) fees over their working careers. For a couple making $90,000 a year, that would be $277,000 in fees.

“It’s simple math that a reduction in fees, whenever possible, is important for the financial future of plan participants,” the company says.

Analyzing data from the top 11 providers to the small plan market, America’s Best 401k found that they charge an average of between 1.19% and 1.95% to participants.

“It’s worth pointing out that most of the plans had limited or no access to low-cost index funds,” the company says. “Certain plans, typically those with under $1 million in assets, are told they do not yet qualify for low-cost index funds until the asset size reaches a minimum level. Most plans in the analysis had exclusively or a substantial majority of actively managed funds. These are significantly more expensive than index funds and may also deliver a portion of their revenue to the providers or brokers in a practice known as revenue sharing.”

Citing data from BrightScope and the Investment Company Institute, the company notes that plans with assets exceeding $10 million pay an average of 0.27% in fees.

America’s Best 401k predicts that new providers will enter the market and offer low-cost index funds and actively managed funds without revenue sharing—“giving participants access to the same institutional share classes that much larger plans enjoy.” The company expects these fees to range between 0.55% and 0.75%.

The white paper can be downloaded here.

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