Compliance April 15, 2015

Fiduciary Wording Invokes Storm of Comments

The DOL’s release on Tuesday of the reworded fiduciary proposal was a critical event for the industry—so there was no shortage of either positive or negative commentary following the proposed rule's release.
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It’s safe to put Congresswoman Ann Wagner (R-Missouri) in the camp that deeply disfavors the proposal: “Today’s proposed rule from the Department of Labor potentially harms the very people that it claims to protect: low- and moderate-income Americans seeking advice for investing for their retirement,” said Rep. Wagner, a member of the House Financial Services Committee.

“[The proposal] would greatly expand the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA) and fails to take into account the vast regulatory structure already in place,” she added. Wagner also cited the length (or shortness) of time of the Office of Management and Budget (OMB) review as a potential red flag.

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The Securities and Exchange Commission (SEC) should go first in regulating this space, Wagner believes. “We hope that Democrats who have supported that position previously continue to do so,” she said. (Wagner in February introduced a bill that was passed by the House Financial Services Committee to counter the proposed rule.)

Wagner came out in a full-on attack on President Barack Obama and Senator Elizabeth Warren (D-Massachusetts), calling the proposal an “ill-advised, top-down assault on local financial advisers and broker/dealers” that is typical of the president and the senator. “Instead of allowing hard-working Americans access to affordable, sound financial advice to prepare for the future, they have created a solution in search of a problem to further hurt the middle class,” she contended.

The National Association of Plan Advisors (NAPA) holds steady on its position. The DOL’s long-awaited fiduciary re-proposal will add cost and complexity to the rollover process, the group said in a statement, citing written contracts with multiple signatures, along with potentially burdensome initial and annual disclosures.

“Requiring so many layers of duplicative disclosures could be counterproductive and cost-prohibitive to offering this critical level of support to 401(k) participants at a crucial point in their retirement planning,” Brian Graff, executive director NAPA, cautioned in a statement.

NAPA Remains Concerned

Graff acknowledged what he called the department’s “dedicated staff” and their diligent work in trying to balance concerns about protecting the interests of consumers with the ability of those same consumers to work with the advisers they choose. “We remain concerned that the compliance costs may outweigh the benefits, but look forward to continuing to work with the DOL to further streamline and enhance this new proposal,” Graff said.

Some are taking the watchful view: The proposal deserves close study, believes Paul Schott Stevens, president and chief executive of the Investment Company Institute (ICI). “We will carefully review the hundreds of pages of the rule and the proposed exemptions to ensure that America’s retirement savers can still receive the information, guidance, and choices they need to make sound investment decisions,” Stevens said in a statement.

Stevens pointed to the support and information that the mutual fund industry offers retirement savers, including disclosure on the cost of investing, and states that mutual fund fees in retirement plans have been dropping for the last two decades. At the same time, he says, “the services provided to employers and plan participants have increased. The new rule must ensure that employers and savers still have access to that support and service.”

The National Association of Insurance and Financial Advisors (NAIFA) is also waiting.

“According to the DOL’s summary of the proposed regulations, fiduciaries must provide impartial advice in their clients’ best interests and cannot accept payments creating a conflict of interest, unless they satisfy one of two, possibly three, exemptions,” noted Juli Y. McNeely, president of NAIFA.

“Generally, the adviser and the client would be required to enter into a written contract that has specific provisions, including that all advice be in the best interests of the client, that conflicts be clearly disclosed, and that procedures be in place to encourage advisers to make recommendations in the clients' best interests,” McNeely pointed out.

Time to read and analyze the regulation is needed, she said, before being able to determine the impact on NAIFA members and those they help prepare for retirement. Additional PLANADVISER coverage of the structure of the new rule proposal is here.

Data & Research April 15, 2015

Gen Y Money Woes Persist Despite Growth

The economy is improving, but American workers are still worried about their financial well-being, both for the short term and as they contemplate their future retirement, according to PwC. 
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Financial anxiety can shoot tentacles into the workplace, according to PwC US’s 2015 Employee Financial Wellness Survey, with one in five respondents admitting that issues with personal finances are a distraction at work. Fewer than half think they will be able to retire when they desire, and employees’ top financial concerns are having enough emergency savings and being able to retire when they want.

One interesting statistic, says Kent Allison, partner and national practice leader of PwC’s employee financial education and wellness practice, is that Generation Y (often called Millennials) was lagging even more in the previous survey. This year, through some belt tightening they are showing some improvements in their spending and savings habits. The numbers are still somewhat gloomy, Allison tells PLANADVISER. “I’d be more concerned if this were the first year of survey,” he says, but there is definitely a slow trend in improvement. “Fewer people are living paycheck to paycheck or carrying a balance on credit cards.”

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Allison warns that the numbers are still concerning. “Forty-seven percent are still carrying balances on credit cards,” he says, “and 30% of Gen Y find it difficult to meet minimum payments.” The numbers show that one in three people are having persistent cash flow issues, so while these figures are better, they’re still high, relative to the issue. 

Gen Y is particularly intriguing. “They are the most at risk,” Allison says. Where Baby Boomers and Generation X had assets stored away, which helped fuel their turnaround, Allison says that Gen Y does not have these assets. “Their recovery has been a result of belt tightening and dropping some credit card debt.” The number of foreclosures has dipped, but home ownership among Gen Y members is also down.

Headwinds for Gen Y

Gen Y financial stress is a matter of job stability, cash flow and stagnant wages, Allison says, coupled with a relatively high debt load from credit cards and student loans. They lack cash reserves, making this generation more sensitive to income and cash flow issues.

“The two fast-growing demographics for bankruptcy are seniors and Gen Y,” he notes. “Gen Y’s spending habits are clearly more focused on the here-and-now than they are on the future. But they are all recognizing that they are the ones responsible for funding their retirement.”

While retirement confidence has increased over the past few years (up 16 percentage points to 43% since 2012), most employees still are not confident in their ability to retire when they want. One in five (21%) aren’t saving for retirement at all. 

Intentions are good, but the follow-through is shaky. Not being able to access retirement plan assets before retirement would deter just 21% of respondents from contributing, but the survey found that more than one-third (35%) of working adults are likely to withdraw money from their retirement accounts to pay for non-retirement expenses.

Employees have largely accepted that responsibility for funding retirement is up to them, and 70% say they should be primarily responsible as opposed to their employer or the government.

“As pension plans fast become outdated, employees are realizing that they face the burden of funding their retirement,” Allison observes. “Still, employers need to help ensure that their workforce understands how to assemble enough savings to live comfortably in retirement. We’re seeing a rise in the promotion of health savings accounts [HSAs] as one solution.”

Just one-third of employees contribute to an HSA, Allison says, and far fewer of those contributing, 16%, plan to use the funds for future health care costs in retirement. His recommendation is that employers should begin to emphasize the need for employees to educate themselves about long-term health planning.

The survey perceived improvements across all generational demographics. Financial stress for Millennials, though still significant, slipped a bit, from 60% in 2014, to 52%. Future planning is also more difficult for Millennials. One reason is that nearly 80% think Social Security benefits either won’t be available or will be reduced significantly by the time they retire. This generation appears to be most in need of retirement planning assistance. Although employees have accepted that retirement is in their own hands, many don’t possess the knowledge or confidence to grasp control of their retirement and future finances. For instance, among the 53% of Baby Boomers planning to retire within the next five years, just half know how much income they will need in retirement.

PwC’s Employee Financial Wellness Survey tracks the financial and retirement well-being of employed U.S. adults, incorporating the views of more than 1,700 full-time employees. The survey can be downloaded here. 

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