Data & Research January 24, 2022

Policy Proposals Could Help Tackle Retirement Savings Shortfalls

EBRI examines the potential effects several legislative motions would have on projected retirement savings.   

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Implementing a package of legislative proposals and industry innovations would significantly help reduce retirement deficits and enhance participants’ retirement security, according to new issue brief from the Employee Benefit Research Institute (EBRI).

EBRI Director of Research Jack VanDerhei, using the EBRI Retirement Security Projection Model (RSPM), examined the effects of five policies in the brief, titled “Impact of Various Legislative Proposals and Industry Innovations on Retirement Income Adequacy.”

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The five solutions EBRI analyzed were 1) implementing the Automatic Contribution Plan/Arrangement (ACPA) proposal, which would generally require employers with more than five employees to maintain an automatic contribution plan/arrangement, typically an automatic individual retirement account (IRA); 2) enhancing the Saver’s Credit, which would replace the current Saver’s Credit with a 50% government match on contributions of up to $1,000 per year; 3) instituting a student loan debt match, where individuals could receive an employer match to their retirement plans for any payments they make to a student loan; 4) assuming a “skinny” 401(k) plan, a deferral-only 401(k) plan allowing annual contributions up to $6,000, with annual catch-up contributions of $1,000, after age 50; and 5) creating full automatic portability in plans allowing participant accounts from a former employer to automatically be combined with a new employer’s plan.

VanDerhei’s analysis found that for households that are projected to have a retirement deficit, combining two proposals—the ACPA provisions and enhanced Saver’s Credit—would reduce retirement savings shortfalls by 17% to 26%, depending on race.

According to the Society of Actuaries (SOA) Research Institute, the COVID-19 pandemic has had an uneven effect on participants preparing for retirement in different racial and ethnic groups. Previous research has found that Hispanic workers in particular have lagged other groups in retirement savings.

The EBRI report found that implementing the proposed measures to reduce retirement savings deficits would have impacts across demographics but would be particularly effective for certain cohorts. 

Families in the youngest cohort studied (ages 35 to 39) with white, non-Hispanic heads would require an average of an additional $31,084 in retirement savings at age 65 in order to avoid running short of money in retirement, whereas families with Black heads of household would require an average of $47,781 and families with Hispanic heads would require an average of $42,860, according to the new EBRI issue brief. Families with “other” heads would require an average of $42,704.

“The combination of ACPA provisions and an enhanced Saver’s Credit program have the greatest positive impact on the retirement savings shortfalls of families headed by white and Hispanic workers ages 35 to 39,” the report states.

The retirement savings surpluses of families headed by Black workers these ages are most positively impacted by the same modifications, EBRI research shows.

For families headed by Black workers, the retirement savings surplus increase is 57.9% under the two proposals; for Hispanic families, the surplus increase is 49.3%; for white families. the surplus increase is 43.9%; and the surplus increase for families headed by “other” households is 39.9%.

The EBRI study then examined impacts to retirement savings shortfalls if, in addition to benefitting from ACPA and the Saver’s Credit, all workers ages 35 to 39 eligible to participate in a 401(k) were to also receive an employer matching contribution to their plans in exchange for paying down a student loan.

The results for implementing a student loan match were that retirement savings shortfalls were projected to be reduced by 22% for families with Black heads ages 35 to 39, a 2.9% incremental improvement vs. the projection that considered just the ACPA and Saver’s Credit scenario. Savings shortfalls were reduced by 2.8% for families headed by White heads, and .7% for  families headed by Hispanic heads age 35–39 when student loan matching was added. The additional reduction for families with “other” heads falls in between, at 1.4%. 

The study repeated the analysis by considering the impacts from the remaining two provisions, “skinny” 401(k)s and auto-portability.

Retirement savings shortfalls with these proposals were projected to be reduced by 3.9% for families with Hispanic heads in the 35 to 39 age range; 3.8% for families with white heads; 3.1% for families with Black heads; and 2.6% for families with “other” heads.

Adding auto-portability results in a 14.3% reduction for families with white heads; for families with Hispanic heads this age, the further reduction would be 13.9%; families with Black heads would have a further 13.5% decrease; and families with “other” heads would have 10.8% further decrease.

EBRI previously estimated that auto-portability provisions would significantly boost retirement savings over time.

House Ways and Means Committee Chairman Richard Neal, D-Massachusetts, has proposed implementing a student loan debt match, a “skinny” 401(k) and full auto-portability. In September, the Ways and Means Committee approved similar ACPA changes. Meanwhile, the Saver’s Credit proposal was included in retirement provisions of early versions of the Build Back Better Act to help close the coverage gap and bolster the existing retirement savings system but was later dropped from the bill before reaching the full House of Representatives for consideration.

 

Compliance January 24, 2022

Supreme Court Rules Against Northwestern University in Fee Case

The high court’s ruling states that the 7th U.S. Circuit Court of Appeals erred in relying on the fact that plaintiff-participants had the ‘ultimate choice’ over their investments to excuse allegedly imprudent decisions by the plan sponsor.

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The U.S. Supreme Court has issued a highly anticipated ruling in an Employee Retirement Income Security Act (ERISA) lawsuit known as Hughes v. Northwestern University.

The question before the high court was whether participants in a defined contribution (DC) ERISA plan stated a plausible claim for relief against plan fiduciaries for breach of the duty of prudence by alleging that the plan sponsor fiduciaries caused the participants to pay investment management and administrative fees higher than those available for other materially identical investment products or services.

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Specifically, the plaintiffs in the case sued the defendants for allegedly breaching ERISA’s duty of prudence in the following three ways: failing to monitor and control recordkeeping fees, resulting in unreasonably high costs to plan participants; offering mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by otherwise identical share classes of the same investments; and offering options that were likely to confuse investors.

Initially, the district court hearing the case granted the respondents’ motion to dismiss—a ruling which the 7th U.S. Circuit Court of Appeals affirmed, concluding that the petitioners’ allegations failed as a matter of law. But following its review of the case and the parties’ oral arguments, the Supreme Court has unanimously determined that the 7th Circuit in fact “erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by [the defendants].”

In its new ruling, the Supreme Court explains that the act of determining whether petitioners state plausible claims against plan fiduciaries for violations of ERISA’s duty of prudence requires “a context-specific inquiry of the fiduciaries’ continuing duty to monitor investments and to remove imprudent ones, as articulated in Tibble v. Edison International.” The Tibble case, which the Supreme Court ruled on in 2015, similarly involved allegations that plan fiduciaries had offered higher priced retail-class mutual funds as plan investments when materially identical lower priced institutional-class mutual funds were available.

As summarized in the new ruling, the Tibble order concluded that the plaintiffs in that instance had identified a potential violation with respect to certain funds because “a fiduciary is required to conduct a regular review of its investment.” The new ruling states that Tibble’s discussion of the continuing duty to monitor plan investments applies in the Northwestern case.

As the Supreme Court states in a summary syllabus attached to its new ruling, the plaintiffs in the case against Northwestern University allege that the defendants’ failure to monitor investments prudently—by retaining recordkeepers that charged excessive fees, offering options likely to confuse investors, and neglecting to provide cheaper and otherwise-identical alternative investments—resulted in the defendants failing to remove imprudent investments from the menu of investment offerings.

“In rejecting [the plaintiffs’] allegations, the 7th Circuit did not apply Tibble’s guidance but instead erroneously focused on another component of the duty of prudence: a fiduciary’s obligation to assemble a diverse menu of options,” the summary states. “But [the defendants’] provision of an adequate array of investment choices, including the lower-cost investments plaintiffs wanted, does not excuse their allegedly imprudent decisions. Even in a defined contribution plan, where participants choose their investments, Tibble instructs that plan fiduciaries must conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.”

The new ruling concludes that, if the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they indeed breach their fiduciary duty.

“The 7th Circuit’s exclusive focus on investor choice elided this aspect of the duty of prudence,” the ruling states. “The court maintained the same mistaken focus in rejecting [the plaintiffs’] claims with respect to recordkeeping fees on the grounds that plan participants could have chosen investment options with lower expenses.”

Technically, the Supreme Court has vacated the appealed judgment “so that the 7th Circuit may re-evaluate the allegations as a whole, considering whether [the plaintiffs] have plausibly alleged a violation of the duty of prudence as articulated in Tibble under applicable pleading standards.” The ruling instructs the 7th Circuit to remember that “the content of the duty of prudence turns on the circumstances prevailing at the time the fiduciary acts, so the appropriate inquiry will be context specific.”

One attorney offering some early interpretation of the ruling is Andrew Oringer, partner in Dechert’s ERISA and executive compensation group. He says that the Supreme Court, in this unanimous decision, did not take the opportunity to act as traffic cop in giving the rules of the road for the establishment of investment menus under 401(k) plans. Rather, the ruling seems to have determined that having a broad menu is not in and of itself enough to prevent potential fiduciary liability or litigation—which he says is not surprising. As such, the high court remanded the case for further factual consideration, given the range of reasonable judgments a fiduciary may make based on the fiduciary’s experience and expertise. 

“For those hoping for an early dismissal that would have made the cases much harder, that did not happen,” he adds. “For those hoping that the case would expressly criticize aspects of the fiduciaries’ conduct in this particular case, that did not happen either.”

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