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Advisers will have trouble dabbling in retirement

Increasingly complex market trends will make it impossible for financial professionals to dabble in the retirement space, a new report says. The report, “Retirement Market in Focus,” released by RG Wuelfing and Associates and Retirement Research Inc., says that growing regulatory complexity, fiduciary requirements, adviser compensation transparency, the move to a fee-based compensation model, open architecture, and provider consolidation have conspired to favor the retirement plan specialist, or “the ‘heavy’ adviser whose business model may hardly be distinguishable from that of the traditional fee-based vendor selection consultant.”

The changing role of advisers also will drive a simultaneous change in the wholesale channel. The report says, “We think the combination of changing adviser needs and serious pressure on provider margins will conspire to generate major changes in distribution strategy, structure, and resources in the years immediately ahead.”

Changing 403(b) Landscape

Labeling the 403(b) space “arguably the most dynamic retirement market sector,” the report predicts the pace of transition and turnover of 403(b) providers is likely to pick up in coming months.

The report notes that “marginal providers” already have exited from the 403(b) custody business, or at least the multivendor 403(b) space, and anticipates that will increase. In the next year or two, more providers likely will get out, outsource, or stay and acquire 403(b) competitors, the report asserts.

The size of the roster of 403(b) providers also is being driven by plan sponsor moves to cut back their vendor lists or move to a single provider, as a result of new 403(b) rules, according to the report.

Get Ready for Fee Disclosure

Finally, the report says retirement service providers are mindful of the rapidly changing rulemaking/legislative landscape regarding fee disclosure.

While the competitive drama in Washington between the Department of Labor and Congressional interests continues to play out, plan sponsors and their advisers increasingly are treating full fee disclosure as a given—certainly in the mid-size through large plan markets and increasingly in the smaller plan market as well, the report states. “Naturally enough, service providers are accommodating those needs, though being careful about making systems investments pending the legislative/regulatory dictate.” —Fred Schneyer

Falling Behind

Americans fear retirement savings setback

One in two Americans polled by The Hartford Financial Services Group, Inc., say they are concerned about losing ground in their efforts to save for retirement.

More than half (56%) of survey respondents worry they will be unable to maintain their current level of contributions to their employer’s 401(k), or other defined contribution retirement plan. Further, 34% were “extremely” or “very” worried about sliding back on how much they save.

Nearly one in three survey respondents (32%) said they are likely to postpone making additional contributions to their retirement plan and one in four (24%) said they are likely to postpone retiring altogether. In addition, more than half (53%) said they are concerned that their employer will reduce or eliminate matching contributions on their retirement savings—with 30% “extremely” or “very” worried.

Those numbers could pose problems for employer-sponsored retirement plans, as declining participation rates and reduced contributions can have a negative impact on the viability of the plan, according to Tom Foster Jr., The Hartford’s national retirement spokesperson. If the gap between what highly compensated and non-highly compensated employees contribute to a company’s retirement plan exceeds Internal Revenue Service (IRS) guidelines, then many highly compensated employees may be forced to take back a portion of their contributions and pay additional income taxes.

Foster encouraged financial advisers to reach out to plan participants and help them navigate the uncertain market environment and suggested employers encourage employees to contribute to their retirement plan in low-cost ways, such as by sponsoring educational meetings, promoting the new Saver’s Credit, or adopting automatic enrollment. The survey of 1,019 U.S. adults, ages 18 to 64, was conducted online by Opinauri in April 2009. —Rebecca Moore

Confusion Reigns?

Workers might have wrong idea about target-date funds

It is no secret that target-date funds were created for those that did not want to understand investing. However, a recent study by Envestnet suggests that workers might have large misunderstandings about target-date funds—such as that target-date funds’ returns are guaranteed.

Only 16% of participants surveyed by Envestnet said they had heard of target-date funds prior to reading the description of the funds, and 63% of that group incorrectly described them, according to the study. A couple of definitions included: “funds that will be made available for release for use on a specified date”; and “a [financial] instrument that is due for maturity at a set date in the future, by which date the amounts invested in the instrument are planned to have accumulated a certain amount of gain.”

About half of the respondents said they are neither likely nor unlikely to invest in target-date funds, and 21% said they are likely to.

Target-Date Promises

About 40% of respondents somewhat or strongly agree that investing in target-date funds means that they will earn a guaranteed return. Furthermore, 23% of respondents agree somewhat or strongly that there is little or no chance of losing money before the target date. About the same number feel the same about losing money after the target date.

Almost half agreed that investing in a target-date fund means they “can stop worrying about investment and savings decisions and leave everything up to an investment professional,” and almost 30% agree target-date funds mean they can save less money and still meet their retirement goals.

When it comes to the risk of investing in target-date funds, respondents tended not to see a huge difference among fund companies. Respondents said the risk levels of funds with the same target date are slightly similar (46%) or very similar (38%). When compared with investing in stock mutual funds, more than half (52%) of respondents said they are equally likely to lose money in target-date funds in a one-year period; 28% feel they are less likely.

When asked what task is most important when investing in target-date funds, about 28% say it is “picking the right retirement date.” The second largest percentage chose asset allcation as a priority (26.7%), followed by choosing funds with the best historical returns (22.3%), and picking the fund with the lowest expenses (15.1%). The last on the list—cited by only 8% of people as a first priority—was “selecting a savings rate.”

Envestnet surveyed 251 individuals ages 25 to 70 and employed now or in the past year. —Ellie Behling

The Fine Print

Court finds 401(k) loan not a “necessary expense”

The repayment of a 401(k) loan may be a real debt obligation, but it is not a “necessary expense” for bankruptcy purposes, according to a recent court decision.

Applying the “means test” from the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the United States Court of Appeals for the 9th Circuit held that the 401(k) plan loan was not a “secured debt” or a “necessary expense” of the debtor. Accordingly, the court upheld a bankruptcy court’s determination that the debtor’s Chapter 7 bankruptcy petition was “presumptively abusive” under the BAPCPA’s “means test.”

The Case

Scott Lee Egebjerg filed a voluntary Chapter 7 bankruptcy petition on December 31, 2006. At the time, Egebjerg, who had been employed by Ralph’s grocery store for 27 years and earned a gross income of $6,115.56 per month, was single with no assets other than a timeshare and an automobile. The 9th Circuit noted that he also had unsecured consumer debt of about $31,000.

Approximately two years before he filed for bankruptcy, Egebjerg had taken a loan from his 401(k) plan. The plan subsequently deducted $733.90 from his paycheck each month to repay this loan, which was scheduled to be fully repaid by September 2008. The court noted that, according to Ege­bjerg’s amended schedule of necessary expenses—in which he included the 401(k) repayment—he was left with a monthly disposable income of $15.31.

The Bankruptcy Court

The bankruptcy trustee objected to Egebjerg’s bankruptcy petition, arguing that he had improperly included the Section 401(k) loan repayment as a “necessary” expense. The U.S. Bankruptcy Court for the Central District of California rejected that argument, concluding that the 401(k) loan was, in fact, a “secured debt” and one that therefore could be deducted from Egebjerg’s monthly income for purposes of the means test.

However, despite that finding, the 9th Circuit said that the bankruptcy court incorrectly applied the same “totality of the circumstances” test that the bankruptcy trustee had relied on, even though it ultimately dismissed Egebjerg’s Chapter 7 petition. The 9th Circuit noted that the lower court made its determination after concluding that the 401(k) plan loan would be repaid within a year and, after the loan was repaid, Egebjerg would have sufficient monthly income to meet his obligations. The bankruptcy court concluded that Egebjerg therefore could “pay a significant amount of his debts in a Chapter 13 proceeding and that, because of his ability to pay, it would be an abuse to permit the case to continue as a Chapter 7 proceeding.” Egebjerg appealed that decision.

The 9th Circuit’s Decision

Prior to enactment of the BAPCPA, there was a presumption in favor of granting bankruptcy relief to Chapter 7 debtors. However, according to the 9th Circuit, the BAPCPA “produced a sea change” with “an emphasis on repaying creditors as much as possible” and introduced a “means test” to evaluate whether a debtor’s financial circumstances create a presumption against granting relief under Chapter 7. The court noted that that presumption can be rebutted if the debtor demonstrates “special circumstances.”

“Egebjerg’s obligation is essentially a debt to himself—he has borrowed his own money,” Judge Michael Daly Hawkins said in writing for the court. “[S]hould he fail to repay himself, the administrator has no personal recourse against him. Instead, the plan will deem the outstanding loan balance to be a distribution of funds, thereby reducing the amount available to Egebjerg from his account in the future.” The court acknowledged the “deemed distribution will have tax consequences to Egebjerg, but it does not create a debtor-creditor relationship.”

The 9th Circuit also noted that, “in BAPCPA, Congress expressly gave Chapter 13 debtors the ability to deduct 401(k) payments from their disposable income calculation, § 1322(f), but did not include any similar exemption for Chapter 7 debtors….In light of the amendments sprinkled throughout the Code [addressing 401(k) loans]—especially section 1322(f)—the lack of a 401(k) provision in section 707 is a glaring indication that Congress did not intend 401(k) loan repayments to be deducted in Chapter 7.”

The court noted that Egebjerg had claimed that “the replenishment of his 401(k) plan is necessary to his long-term ‘health and welfare,’ because he is approaching retirement and his 401(k) plan is his only significant asset.” However, the 9th Circuit said that IRS guidelines, “which Congress expressly incorporated into § 707(b)(2)(A)(ii), state specifically that ‘[c]ontributions to voluntary retirement plans are not a necessary expense.’” The court then observed that, “[i]n short, Egebjerg’s monthly 401(k) repayments are the functional equivalent of voluntary contributions to a retirement plan.

“When it introduced the means test, Congress provided, by reference to the IRS guidelines, specific guidance as to what qualifies as a necessary expense for the purposes of applying that test. For purposes of the new means test, voluntary retirement contributions are, per se, not a necessary expense and will remain so unless the IRS changes its guidelines,” the appeals court said. —Nevin E. Adams

Self-Direction

Participants may be overconfident about their investments

Most participants are pretty confident about their investment diversification—but a new survey suggests that confidence may be misplaced.

A national survey by Wells Fargo & Company’s employee benefits consulting group, Bryan, Pendleton, Swats & McAllister, LLC (BPS&M), indicates that four out of five participants (80%) believe their investments are well-diversified, but Wells Fargo’s analysis of the actual investments of 401(k) participants shows that only about half that level (42%) actually meet a minimum level of diversification. Of course, that confidence may be a bit dented at the moment—the survey was conducted last August.

As for how participants evaluate that performance, the survey’s authors say that the most common selection for how participants evaluate their investment performance: “If I make money, it’s good. If I lose money, it’s bad.”

The 2008 Individual Retirement Planning Behaviors and Attitudes Survey from BPS&M focuses on the three behaviors required to prepare for retirement: plan participation, adequate contributions, and investment diversification. —Nevin E. Adams

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