Compliance December 17, 2013

GAO Lobbies for Spend-Down Options

A new report urges U.S. retirement plan regulators to examine and emulate other countries’ efforts to improve employee spend-down options for post-retirement years.
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The report, “401(k) Plans: Other Countries’ Experiences Offer Lessons in Policies and Oversight of Spend-Down Options,” was released by the U.S. Government Accountability Office (GAO). It recommends that the Department of Labor (DOL) and the U.S. Treasury Department consider other countries’ approaches in helping 401(k) plan sponsors expand access to a mix of spend-down options for participants.

The GAO also recommends that the DOL consider these other approaches in providing information about options and regulating the selection of annuities within defined contribution (DC) retirement plans.

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U.S. employees are primarily saving for retirement through their 401(k) plans, report authors argue, but those employees need help in deciding how to “spend down” their money during retirement. The concern is that inadequate planning and growing costs, from factors such as health care, could leave employees with the very real possibility of outliving their retirement savings.

Six countries with established DC systems were reviewed for the report. These include Australia, Canada, Chile, Singapore, Switzerland and the United Kingdom. The GAO found that many have developed innovative spend-down policies with the potential to yield useful lessons for the United States. The GAO reviewed reports on DC plans and interviewed experts and government officials in the U.S. and the other countries.

Currently, most U.S. retirement plans only offer employees a lump sum distribution and are not required to provide employees with lifetime income projections about how long this lump sum will last. The other countries studied tend to offer spend-down options in addition to the lump sum approach, such as pre-programmed withdrawal of participants’ savings or an annuity.

The report also reveals that these countries make use of strategies such as communicating spend-down options in a timely and easy-to-understand way, as well as illustrating to employees how their savings may be spent during retirement via income projections on their benefit statements.

According to the GAO, the DOL generally agreed with the recommendations in the report and will evaluate these approaches. The DOL is, in fact, already in the midst of evaluating comments on proposed regulations that would require plan sponsors to provide participants with lifetime income projections as part of their benefit statements (see “Income Projections: Showing Participants a Better Way”).

More information about the report, including where to download the full text or highlights, can be found here.

Data & Research December 17, 2013

Married Women Less Engaged with Advisers

When compared with their spouses, married men are 58% more likely to be a couple’s primary contact with a financial adviser.
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Only 42% of couples who work with an adviser said they do so “jointly,” analysis of Fidelity Investment’s 2013 Couples Retirement Survey shows. Researchers argue the imbalance in financial engagement may put women in a difficult position later in life, as census data shows women will, on average, outlive their spouses.

“Men reported that they are afraid of leaving their partners financially unprepared should they need to manage the finances themselves,” says Jylanne Dunne, senior vice president of practice management and consulting for Fidelity Institutional Wealth Services. “What they may not realize is that by driving their households’ relationship with their financial adviser, they could be unintentionally turning this fear into a reality.”

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The good news, Dunne continues, is that there are simple steps couples can take to prepare for a smooth transition—and advisers can play an important role in the process. In fact, the study found couples were more comfortable talking to their advisers than one another about many topics, especially long-term planning conversations around death and inheritance.

“Women are not unwilling to step into the financial driver’s seat,” explains Brian Nelson, vice president of practice management for National Financial, Fidelity’s clearing division. “Women are interesting in working with their adviser, but they say they hand over the reins because they trust their partner. This may not only create instability for the family, but also for the adviser-client relationship.”

Nelson points out that, while the study found eight in 10 women do not have plans to change advisers upon their partner’s death, when reality hits and there is no solid relationship in place, many do.

“An adviser’s bond with both members can be key to bridging this gap between intent and reality,” Nelson says.

Younger Women Less Engaged

Overall, women measured over twice as likely as men to say their significant other was the primary contact in a couple’s advisory relationship (31% compared with 13% of men).

The gap was even wider for younger women, with 41% of Gen Y women reporting their significant other was the primary contact person. For Gen X women the number is 33%, and for Baby Boomers the figure falls to 28%.

The most widely cited reason for women to hand over control of the adviser relationship is trust in their partner (53%), followed by 33% of women who said their significant other had a personal relationship with the adviser.

Not surprisingly, the increased likelihood that women will allow their partner to manage an adviser relationship comes along with lower confidence in their own ability to assume full financial responsibility for retirement finances and strategies. Fewer than half of women surveyed (45%) said they are confident in this respect.

Adviser Considerations

Study authors also make a series of recommendations to advisers on helping women close the confidence and preparedness gap.

Some considerations for advisers to implement in their relationships with couples include the following:

 

  • Be frank with male clients. This includes acknowledging the fear that men have of leaving their partners unprepared should they die, and stressing the hard truth that this one-on-one relationship could be creating just that situation. Ask them to bring their partners to the next meeting and regular meetings thereafter.
  • Implement a new client policy requiring joint participation. To help maintain the client relationship after the death of a spouse, advisers may want to consider implementing a new client policy that requires married couples to include both spouses in the planning process.
  • Address the tough topics together with a conversation starter. One way to start to tackle serious planning conversations is with a conversation starter, such as running an online retirement needs calculator or having clients take a financial education quiz, such as Fidelity’s Financial Compatibility Quiz.

 

To read more about the full findings from the 2013 Fidelity Investments Couples Retirement Study, see this longer summary, or view Fidelity’s whitepaper, “Sudden Decision-Makers: Empowering Women in Transition.”

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