Data & Research November 28, 2018

Nationwide Emphasizes Dual Role of Saving and Debt Reduction

By talking about the power of compounding and emphasizing the importance of investing at the same time one is paying down debt, advisers can inspire younger clients to save more and save earlier.  

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Nationwide Retirement Institute has published a new analysis focused on instilling positive savings behaviors among younger workers, “Smart financial moves in your 20s and 30s.”

According to Nationwide, most people wish they had handled their money differently in the past year, including many who say they wish they had saved more for retirement. On average, the survey shows, employees start saving for retirement at age 31.5—meaning they have about 35 years of asset accumulation and potential investment earnings to rely on at retirement.

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However, Nationwide says, if workers started saving for retirement eight years sooner on average, they would have significantly more available for retirement income. The analysis steps through the example of a participant who is paid twice a month and contributes $50 per pay to an account that earns 6% annualized return on investment. If an employee starts this regimen at age 23, they can generate up to $88,572 more than if they started at age 31. At $100 per pay, Nationwide says, the difference would be $177,143.

“The difference is more than just added accumulation, of course,” the analysis says. “It represents the effect of compounding, the process in which an asset’s earnings are reinvested to generate additional earnings over time. All other things being equal, the more time a saver allows their assets to grow, the more compounded growth occurs. The growth can become exponential.”

According to the survey, workers are broadly aware of the power of compounding, and many say they are simply unable to save more and save earlier. More than half (61%) say debt has negatively impacted their retirement savings, from credit card debt to mortgage debt and student loans. Nationwide says workers also face higher costs for big-ticket items, which are rising faster than the overall inflation rate.

“For example, homes cost more,” the analysis says. “In the first quarter of 2018, the median sales price of existing homes was up 5.8% over the same period of the previous year. Rising interest rates and home prices have driven up mortgage rates and depressed affordability. Many potential buyers are also renting longer which is causing rents to rise at the fastest pace in two years.”

In addition, those who wish they could save more point to the rising costs of child care and health care.

Actions to take now

According to Nationwide, virtually all employees who are not already doing so, should start contributing to a retirement plan immediately. Those facing debt payments must also prioritize long-term savings, as difficult as this may seem.

“Employees may be able to reduce their student loan payments, accept a slightly later payoff and contribute the difference to their retirement savings account—allowing compounding more time to work,” the analysis says. “Individuals could reduce their monthly saving for a house down payment and contribute the difference to a retirement account. Doing so would delay reaching the down payment, but potentially only by several months rather than several years. Meanwhile, the saver would kick-start their retirement savings.”

Among other examples, the analysis considers a theoretical employee who is paying $500 a month on a 10-year, $35,000 student loan that charges 6% annualized interest. The terms of the loan require a minimum payment of $390.

“By repaying more than the minimum, she will save $10,594 in interest and cut the payoff period by 1.80 years,” the analysis says. “Or, she could contribute $55 per pay ($110 per month) to her retirement account by reducing her loan payment to the monthly minimum. In doing so, she would accumulate $16,267 for retirement over the 10-year period while paying $10,594 interest, a net savings of $5,673.”

The analysis also encourages younger workers to think about funding a health savings account (HSA), should their employer make one available.

“Let’s consider a hypothetical example of an employee capitalizing on the HSA triple tax advantage,” the analysis says. “Saving $20 per pay ($40 per month) into an HSA, he could have $26,920 after 30 years. If the employee increased his savings to $50 per pay ($100 per month), that amount could grow to $67,301. By increasing to $65 per pay, the employee could have an additional $40,000 of tax-free dollars—more than $100,000 total—to help pay out-of-pocket health care expenses that may arise in retirement.”

Compliance November 28, 2018

Association Sues New York DFS Over Best Interest Standard

Among other things, the National Association of Insurance and Financial Advisors for New York State alleges the Department of Financial Services (DFS) exceeded its permissible executive-branch authority by promulgating Regulation 187 without constitutional or statutory authority.

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The National Association of Insurance and Financial Advisors for New York State has filed a lawsuit in New York Supreme Court claiming the best interest regulation by the New York Department of Financial Services contradicts New York law and is unconstitutional.

The new best interest standard applies to all investment professionals licensed to sell life insurance and annuity products to state residents. It was specifically adopted by the State Department of Financial Services, which says it has issued the new rules intentionally in the wake of the failure of the Department of Labor’s own attempt to strengthen conflict of interest standards at the federal level.

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A statement summarizing the regulation says New York will henceforth require insurers to “establish standards and procedures to supervise recommendations by agents and brokers to consumers with respect to life insurance policies and annuity contracts issued in New York State so that any transaction with respect to those policies is in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.”

According to the complaint, New York State’s Constitution vests the power to make policy in the democratically elected Legislature. An administrative agency may promulgate regulations only if the Constitution allows it or the Legislature enacts a statute that does so. The lawsuit alleges that the Department of Financial Services (DFS) exceeded its permissible executive-branch authority by promulgating Regulation 187 without constitutional or statutory authority.

The Association says the court should invalidate Regulation 187 for any one of three reasons:

  • DFS did not have constitutional or regulatory authority to promulgate the regulation;
  • Even if the court were to interpret the statutes that DFS cites as authorizing Regulation 187, DFS has breached the New York State Constitution because the regulation violates the separation-of-powers doctrine, contains impermissibly vague and confusing terms, and violates due process because the statutes on which DFS relies for Regulation 187 contain no safeguards; and
  • Even if Regulation 187 were properly promulgated, the court should strike it as arbitrary and capricious because it will not further its stated purpose of protecting New Yorkers from conflicted advice, but would harm consumers by causing the market for and advice about life insurance policies and annuities to shrink.

The Association says Regulation 187 is arbitrary or capricious because the record does not contain a sufficient—or any—factual predicate for it; there is no rational basis for exempting direct-marketing transactions while imposing a fiduciary standard on all others; and there is no factual basis supporting the decision to conflate agents and brokers into a single group called “producers.”

“Ultimately, consumers will be hardest hit by reduced access and choice, forcing many independent insurance agents to exit the New York market. Consumers may also face higher prices because of reduced supply in the marketplace,” the Association states in its complaint.

The Association also contends the distinction between agents and brokers, “which has been a cornerstone of statutory and regulatory treatment of agents and brokers for decades,” is settled in the case law. Insurance agents act as agent of an insurance carrier and brokers appear as representative of the insured. Yet, the complaint says, Regulation 187 ignores this basic aspect of New York Insurance Law and places obligations on agents that are inconsistent with their statutory—as well as contractual—duties to insurers. “To be clear, if an agent must act solely ‘in the best interest of the consumer,’ then it cannot carry out its statutory duty ‘to act as agent of [an] authorized insurer,’” the complaint states.

Other states debating/implementing their own conflict of interest rules are Connecticut, New Jersey and Nevada.

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