Data & Research August 1, 2017

Income Disruptions Common During One’s Working Career

Health crises, job losses and other life transitions can reduce workers’ earnings and cause them to stop saving for retirement.
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Ninety-six percent of Americans experience four or more income disruptions—a reduction of 10% or more of their income due to health crises, job losses or other life transitions such as divorce—by the time they are 70, according to new research from The New School, commissioned by the National Endowment for Financial Education (NEFE).

This is one of the reasons why Americans are not saving enough for retirement, according to The New School. In fact, Americans on average are only saving about one-third of the amount they will need to maintain their living standards in retirement, according to NEFE.

“The story is more nuanced than simply saying Americans are failing at retirement savings,” says Ted Beck, president and CEO of the National Endowment for Financial Education. “No one likes to believe that income shocks will happen to them. Yet this research shows that it is not a matter of if something will disrupt earnings, but when and how severe the effects of such shocks will be.”

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The study also found that men between the ages of 55 and 61 have $11,000 to $47,334 more in retirement savings than their younger counterparts. The range depends on their income level. The study also found that African-American workers have, on average, $16,977 less saved than their white counterparts, while Asians have $11,743 to $41,979 less saved and Hispanics have $8,280 to $24,278 less.

Those in the middle- and lower-income groups are more likely to experience economic shocks from job loss or poor health, and they are more negatively affected by these earnings losses.

The most negative impacts on income disruption are due to a decline in health, including long-term illness and a disability that impedes a worker’s ability to perform their job. When workers face such challenges, The New School says, they often withdraw money from their retirement accounts and/or stop contributing to the accounts. As the report’s executive summary notes, “Retirement plans often are treated as liquid savings during times of hardship. In fact, economic shocks explain at least 32% of withdrawals by workers in low-income households, and possibly considerably more.”

The National Endowment for Financial Education recommends that employers encourage workers to build an emergency savings account. The executive summary of the report, “Income Shocks and Life Events: Why Retirement Savings Fall Short,” can be downloaded here.

Compliance August 1, 2017

American Century Ordered to Produce Fund Reports for Self-Dealing Suit

A federal court judge found American Century defendants have not shown producing the profitability, expense and performance reports would be unduly burdensome or disproportional to the needs of the case.
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In a case accusing American Century Services of loading its retirement plan with its own funds and using share classes of those funds that generated higher fees, a federal district court judge has approved a motion to compel the fund provider to produce profitability, expense and performance reports created under provisions of the Investment Company Act, 15 U.S.C. Section 80a-15(c) (15(c) reports) for funds used in the plan.

American Century opposed this motion, stating the reports sought are not relevant, producing the reports would be unduly burdensome, and the request is disproportional to the needs of the case.

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However, Chief U.S. District Court Judge Greg Kays, rejected American Century’s arguments, saying plaintiffs have met their burden by making a threshold showing that the 15(c) reports are relevant to their claims and to the calculation of damages in this case. “The plaintiffs have described with a reasonable degree of specificity the information they hope to obtain from the 15(c) reports and their importance in supporting their claims of breach of fiduciary duty and calculation of damages,” Kays wrote.

Kays also found American Century defendants have not shown producing the 15(c) reports would be unduly burdensome or disproportional to the needs of the case. He notes that the factors outlined in Federal Rule of Civil Procedure 26, which permits discovery of anything “relevant to any party’s claim or defense” in the case, lean in favor of finding the 15(c) reports within the scope of discovery, specifically, the importance these reports have to plaintiffs’ case, the amount in controversy in this case, and that the defendants are the only source of the 15(c) reports. The defendants explanation of the effort to comply with the discovery request, did not persuade the judge that this represents an undue burden.

Kays also noted that plaintiffs’ original request encompassed “all reports” however, in their motion, they limit their request to only “performance, expense, and profitability reports” and only for those mutual funds within the plan. He granted the motion with those limitations.

Former employees of American Century filed the lawsuit in July 2016, and earlier this year, the judge rejected American Century’s argument that all of the plaintiffs’ claims are either barred by the three-year statute of limitations or fail entirely to state a claim for relief, allowing the lawsuit to proceed.

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