A provision in the SECURE 2.0 legislation would cap the variable premiums paid by plan sponsors to the Pension Benefit Guaranty Corporation at 5.2% and end the policy of indexing them to inflation.
The PBGC insurance premium calculation has two parts, confirmed Bruce Cadenhead, partner and global chief actuary in wealth at Mercer.
The premium that would be changed by SECURE 2.0 is the variable-rate premium, which is calculated as a percent of a plan’s unfunded vested benefits (the difference between the present value of what a plan owes to participants and what it actually has the funds to cover). This is the amount the PBGC is “on the hook for” if a plan fails.
The percent of unfunded liabilities has historically been indexed to inflation. This means that the percent of unfunded liabilities owed as insurance would increase in perpetuity if left unchanged. Section 349 of the SECURE 2.0 bill would cap it at the 2023 level, which is 5.2% of unfunded liabilities, up from 4.8% in 2022.
The other part of the calculation is a flat rate (charged per person in the plan, which is indexed to inflation and changes each year. This premium would not be changed by SECURE 2.0.
Cadenhead notes that the PBGC has a budget surplus that is projected to grow and could well afford to drop premiums. However, it is difficult to cut insurance premiums, because the revenue they generate counts as general federal revenue for the purposes of Congressional budget scoring, even though the money is not, in fact, general revenue and is set aside for the PBGC. Congress, according to Cadenhead, has used premiums to offset spending for things such as highways for accounting purposes, even though the funds are not actually used for that purpose. This scoring rule has not changed.
Since charging higher premiums to struggling plans can cause those plans to struggle even more, the PBGC caps the variable rate at $652 per participant in 2023. This cap helps plans that are poorly funded to not pay high fees to PBGC that otherwise could be used to fund the plan.
Cadenhead notes, however, that the proposed cap comes with perverse incentives. Plan sponsors could decide to remove participants from their plans through lump sum payments or other pension risk transfers and therefore change the number of participants on whom they calculate their PBGC fees, thereby lowering their premiums without actually changing the underlying structure and risk of the plan.
SECURE 2.0 provides for no changes to this element either.
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Online brokerage Robinhood’s head of investment management left a 21-year career at J.P. Morgan to reach a wider population of American investors. She’s getting the chance with an IRA aimed at the gig economy.
Robinhood Financial became the poster child for the democratization of retail investing during the pandemic, with housebound traders able to buy and sell stocks on their phones.
This year, the trend toward retail investing has been tapering amid market volatility, inflation and recession fears. In the third quarter of 2022, 31% of U.S. retail investors said they reduced the amount of money going to investments, according to a survey by online brokerage eToro.
Robinhood has also seen a drop in monthly active users through November, falling by 1.8 million users to 12.2 million, and well below its year-on-year Q3 base of 18.9 million, according to the company. During a Q3 earnings call, the company also announced a new investment market: retirement savings.
On that earnings call, CEO Vlad Tenev, also a co-founder, said Robinhood’s five-year plan includes customers using the platform for all of their spending and saving needs, including the investing they offer now, “but also long-term retirement and passive,” he said. “We want Robinhood to be the highest value and best user experience tool for you to manage all of your money.”
The Menlo Park, California-based firm is entering a crowded world of startups, with online 401(k) small plan providers, lifetime income outsourcers and providers highlighting alternative investment options such as cryptocurrency. But the company made a splash in a December 6 blog post announcing a wait list for what it dubbed, “the only IRA with a match,” with availability starting in January.
PLANADVISER spoke with Stephanie Guild, Robinhood’s senior director of investment strategy, to discuss what prompted the brokerage to enter the retirement space and its goals for the future.
PLANADVISER: You had a long and successful career with J.P. Morgan before coming to Robinhood. What prompted you to make the move?
Guild: I joined Robinhood a little over a year ago after 21 years at J.P. Morgan, where I was on the asset management side of the business in U.S. Equities and then moved over to the private bank working primarily in private banking with ultra-high-net-worth individuals. One of the reasons I made the move was because I really did see the contrast of the access to investing for a subset of our population, and wanted to bring my skills to that different set of people.
The median age of our customers is 32, meaning many of them are very early in their retirement journey. Robinhood created access [to the markets] to democratize finance. But just simply creating access is not the only thing we want to do. We want to bring solutions to some of the problems we see … that includes only about 43% of part-time employees having access to a 401(k).
PLANADVISER: Retirement saving is a long-term game that by most measures isn’t considered as interesting or exciting as retail investing. What made Robinhood get into this sleepier part of the industry?
Guild: We kind of always knew that we would be getting into retirement savings, and were focused on how to take it to customers. We really started to get into implementation last year. Everyone was saying that inflation was transitory, but the longer it went on the less transitory it seemed, and we really needed a way to get customers to think about long-term saving.
Also, we saw from the Bureau of Labor Statistics and other sources that the part-time and gig economy that started during the pandemic had really taken hold. There are surveys showing that the gig economy will grow by 17% next year, meaning there will be more people doing independent, flexible work who do not have access to a 401(k) workplace plan. This seemed like the moment to provide our offering.
PLANADVISER: Robinhood’s 1% match may not be a lot for an individual saver, but it would certainly add up if you have a lot of takers. Why did the company decide this outlay was worth it?
Guild: We know from the research that if a company implements a match they get a lot more participation—though if they increase a match you don’t necessarily see a huge jump. Having a match was a way to build an incentive for people to pay attention and see the benefit, along with no minimum fee, no commissions, a huge array of ETFs and stocks … of a 1% match for every dollar they put in. For many of these investors, they may not have had a company match or even know what it means. That’s why education is such a big part of this, letting people know the benefits of a match, to tax advantages, to compound interest.
How we are making this a business for ourselves is not much different than we do in our non-qualified accounts. We took the long view and are in these relationships for the long term. We think both sides will benefit over a long period.
PLANADVISER: Are you considering working with retirement advisers on offering your IRA? What about small businesses who don’t yet offer plans?
Guild: For now, we’re fully focused on the individual and those that don’t have access. We’re looking to serve the people who have multiple part-time jobs without any benefits or retirement plan, which is not the area advisers are usually focused.
In terms of small businesses, there have been regulatory retirement mandates in different states, and we’re always open to expanding our impact on the everyday individual investor. But for now we are focused on the individual retirement saver.
PLANADVISER: Robinhood was known for giving people leeway to invest how they’d like, but the site also providesrecommendations and educational tools. It’s early days, but what has been the initial response to self-selection versus recommended advice in the IRA product?
Guild: [Beyond the company match] the other aspect to our retirement product we built, and my team was responsible for, was a menu of retirement options, including TDFs, that seemed right for the investor. While you can invest on our own, we wanted to give people retirement recommendations if you answer a series of questions about goals, risk tolerance, timing of your retirement, and those types of questions. We then recommend a portfolio that is diversified and based on where you came out in your risk profile calculation. There’s no fee for this, and we had a pretty detailed due diligence for each of the asset classes for the portfolios … The average weighted fees within the funds is never more than four to five basis points. So far, we have seen good take-up of the recommendation service and expect that to continue.
My advice is that people save as much as they can … if you are maxing out your 401(k) income you can still give to an IRA, either a Roth or regular IRA, to have additional savings for the long-term. But if you don’t have a 401(k), you may be missing out on the tax benefits of a retirement plan altogether, which is something that has always seemed very unfair to me … We hope this offering with the match will motivate people to change that. As much as people can rely on themselves and not assume that a safety net will be there, they’ll be better off in the future.
Robinhood Financial became the poster child for the