Compliance July 28, 2016

New Fiduciary Appointed to $2 Million Retirement Plan

The plan sponsor ceased operations in 2004 and never properly terminated the plan.
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The U.S. Department of Labor (DOL) has obtained a consent judgment and order to remove a fiduciary from a $2.2 million employee savings plan and trust in Ashland, Kentucky.

According to a lawsuit filed by the DOL, involved in the coal mining industry, Horizon NR LLC ceased operations on September 28, 2004, but the fiduciary to the plan never terminated the plan.

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As of September 2015, the plan had 144 participants and $2,296,818 in plan assets being held by Fidelity Management Trust Co. The fiduciary’s failure to administer the plan caused the plan’s assets not to be properly distributed to participants or their beneficiaries. Some plan beneficiaries have been unable to collect money from their account.

The U.S. District Court for the Eastern District of Kentucky issued a consent order and judgment removing the fiduciary as an authorized signer for the plan and appointing Lefoldt & Co., P.A. as an independent fiduciary. Lefoldt & Co., P.A will administer the plan, distribute the assets to participants and beneficiaries and have the responsibility to terminate the plan.

The court’s order is here.
Data & Research July 28, 2016

Spending Rates in Retirement Are Modest

Since retirees are spending less than they withdraw from financial accounts, they are accumulating money in checking accounts and may need to reinvest those assets, says Steve Utkus with Vanguard Center for Retirement Research.
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Retirees’ withdrawal rates from financial accounts are modest, and their spending is even lower, research from Vanguard finds. 

Among affluent retirees owning financial accounts, the median withdrawal rate was 3%, and the median spending rate was 1%. Vanguard focused on ten types of financial accounts in the study: individual retirement accounts (IRAs), employer-sponsored defined contribution (DC) plan accounts, annuities with a balance, cash-value life insurance, mutual fund accounts, brokerage accounts, money market accounts, certificates of deposit (CDs), and bank savings and checking accounts.                    

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“What we showed is that even though people are getting these withdrawals, they are not spending them all. People are not spending down from financial accounts in retirement, they are saving them to grow,” Steve Utkus, principal and director of Vanguard Center for Retirement Research, in Malvern, Pennsylvania, tells PLANADVISER.

Utkus says when Vanguard first started its research, it assumed, as many financial planners do, that retirees look at all assets in all accounts and make a plan to draw down from all accounts. However, the research found four cornerstone accounts—DC plans, IRAs, mutual funds and brokerage accounts—are core financial accounts retirees consider as long-term holdings. Most liquid accounts—bank checking and savings accounts as well as money market accounts—have higher spending rates compared with the other types of financial accounts.

NEXT: What is a sustainable withdrawal rate?

Utkus says there’s much debate about what is a sustainable withdrawal rate in retirement. “Some say it’s the classic 4% rule, but others, like Vanguard, say retirees can start that way but adjust the percentage based on market performance,” he notes. However, the research suggests that the discussion needs to shift to spending rather than withdrawal rates from financial accounts, in order to effectively measure the sustainability of savings in retirement.  

According to Utkus, the reason Vanguard specifically analyzed affluent retirees is it wanted to look at people trying to create a regular income stream. However, it would seem that lower income investors for whom Social Security would provide a higher income replacement rate in retirement would also not likely draw down regularly from financial accounts to spend. “But, we can’t say that for certain, since we didn’t focus on that group,” he notes.

Retirement plan sponsors that worry about participants cashing out and spending all their savings should know that’s not happening, Utkus suggests. He also notes that the era of spending from DC accounts and IRAs hasn’t yet happened. “The need to draw down from DC plans and IRAs will not happen in five years; it will be a gradual move to a total DC system,” Utkus says. 

Plan sponsors can refer participants to adviser services that will help them develop a draw down strategy, Utkus recommends. He also points out that advisers helping people set up income streams should realize that retirees are actually accumulating money in checking accounts, and they may need to reinvest those assets.

The Vanugard research report may be downloaded here.

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