Employer actions need to catch up with financial wellness wishes
Originally posted December 12, 2013 by Andrea Davis on https://ebn.benefitnews.com
Employers are embracing the concept of financial wellness, with 81% of HR professionals saying they believe they are at least somewhat responsible for their employees’ financial wellness, according to a survey released this week by Bank of America Merrill Lynch.
Seventy percent of the 1,000 companies surveyed offer various forms of education related to retirement and, to a lesser extent, planning for health care costs (38%), as well as debt management and budgeting (15%).
And while employers say they’re interested in the concepts of financial wellness and retirement readiness, their actions may have some catching up to do. Less than half of large companies (48%) has a financial wellness strategy in place for employees or plan to add one in the next two years. Among medium-sized companies, the percentage drops to 43%. Among small companies, 26% have a financial wellness strategy in place or plan to add one in the next two years.
“It will be interesting to see how quickly do they then adopt practical, tangible programs to realize their aspirations of what they want to do with their employees,” says Kevin Crain, senior relationship executive for Bank of America Merrill Lynch. “It’s still early stage in their thinking.”
Perhaps not surprisingly given all the attention the Affordable Care Act is receiving, one-third (32%) of HR professionals say they’ve increased the time they spend educating employees about the role workplace benefits play in their financial security.
One area many employers agree needs greater focus and employee education is the rising cost of health care. Eighty-one percent of companies report an increase in health care costs during the last two years, and many admit to having had to pass these rising costs along to their employees. The study found that more than one-third (35%) of employers now provide employees with education about what health care could cost them during retirement, up from 21% in 2012. Among employers who provide at least some education about retiree health care costs, nearly half (45%) believe more needs to be done in this area.
“Employers now understand their employees need far more transparent and easier ways to understand what the cost of health care will be in the future,” says Crain. “The health care expense piece [of retirement] was always, in my mind, not as robust as it could have been.” With all the attention on the ACA, health care costs in retirement is an issue “that’s been brought to the forefront,” he says.
4 Retirement Mistakes 30-Somethings Make -- And How They Can Avoid Them in 2014
Originally posted by Nancy Anderson on https://www.forbes.com
Any wise financial planner knows to get a second opinion on her own retirement plan. So I wasn’t surprised when a 30-year-old colleague asked me to be her second look, and I gave her my opinion freely.
As you’d expect from a Certified Financial Planner ™ professional, she had her basics down. She had an emergency fund with six months of her net income, no credit card debt, and she was on track to replace her income in retirement. In fact, at the rate she is going, she will replace over 100% of her income in retirement. When I reflected on our meeting later, I wondered why more 30-year-olds aren’t as prepared as she is.
But then I realized that she is in the industry, and is not making a lot of false assumptions that other younger people make. Decisions based on the wrong information can lead to costly mistakes, and the results could be as serious as having to delay retirement or living on a reduced income later.
Here are four false assumptions that a lot of people in their 30s make—and ways to help them to stay on the right track for retirement.
1. They assume it will be easier to save in the future. The truth is that your 30s can be an expensive decade. Many people are establishing a household, having children and buying a home, along with all the furnishings that go in it. So it may actually be more difficult to save in your 30s than in your 20s. My colleague started saving the absolute maximum she could in her late 20s, knowing that she wanted a house and family someday. She figured, correctly, that even though her income might grow exponentially in her 30s, her expenses might surpass her income.
Tip for 30-somethings: Seriously consider maximizing retirement savings earlier in your career, knowing that you may have gaps in savings in the future.
2. They don’t verify that they are on track for their retirement goals. My colleague runs her own retirement calculations all the time. She wanted a second set of eyes to see what she might be missing, as well as some high-level strategies. According to recent research from BlackRock BLK +1%, more than 4 in 10 people surveyed weren’t saving because they hadn’t run retirement calculations and didn’t know how much they needed to save. But almost 8 in 10 said they would start saving or increase their contributions if they knew how much they needed to save. Since the new model of retirement planning consists of employees managing their own retirement with a defined contribution plan, it’s important to be proactive.
Tip for 30-somethings: At a minimum, run a retirement calculation. Some calculators to get you started and here and here. Meeting with a Certified Financial Planner ™ professional can be one way to get started on your financial plan. Some resources that can help include Let’s Make a Plan andLearnVest (use discount code Retire50).
3. They assume the 401(k) is the “be all, end all.” There are major benefits to investing in an employer’s retirement plan. First of all, you can never underestimate the value of automatically deducting funds from a checking account. When funds are invested before ever hitting your bank account, you simply can’t spend that money. And company-matching contributions are obviously a significant benefit. Employees who receive a company match should invest at least up to the matching contributions in their 401(k).
But don’t ignore the Roth IRA. The tax-free retirement benefit of the Roth is well known, but many folks may not realize how much flexibility the Roth has. The principal amount can be withdrawn for any reason and at any time, without a tax penalty. This serves as a back-up emergency fund, but also gives an investor flexibility to reinvest the principal into something else, such as a down payment on a primary residence or on an investment property. For someone in his or her 30s, a Roth IRA can be the best of both worlds: Investing for retirement and having some flexibility to withdraw the principal without hefty taxes. (A Roth investment is post-tax; meanwhile, a 401(k) carries a 10% early withdrawal penalty.)
Tip for 30-somethings: It can be wise to invest in the 401(k) up to the amount matched by your company. Over and above the company match, consider investing in a Roth IRA.
4. They assume all funds are created equal. Albert Einstein is rumored to have said that compound interest is the most powerful force in the universe. Compounding fees, on the other hand, are another story. When you pay high annual fees on the funds in your retirement accounts, the compounding works against you. For example, an investor with a $50,000 balance who pays 1.5% in annual investment fees on an account that earns 7% annually would pay about $138,000 in total expenses over 30 years, including opportunity costs. Everything else being equal, that same investment with fees at 0.5% would only incur about $53,000 in total expenses and opportunity costs. Something as seemingly insignificant as a 1% difference in annual fees can add up to an $85,000 difference over time.
Tip for 30-somethings: Think about investing in low-fee mutual funds or index funds in your 401(k). See your fund’s prospectus for full disclosure on fees. Click here to see how expenses impact mutual fund returns, as calculated by calcxml.com.
Albert Einstein also said that anyone who has never made a mistake has never tried anything new. But frankly, in terms of retirement planning, it’s better to start off strong by not making mistakes in the first place. If you really want to try something new, there’s always hang gliding.
Workers stressed over finances
Originally posted November 15, 2013 by Maria Wood on www.lifehealthpro.com
Employees are more aware of their financial shortcomings, but with that increased awareness comes greater strain on their psyches. That was the major takeaway of a recent survey by Financial Finesse, a provider of fiscal education.
The third-quarter “Trends in Employee Financial Issues” survey revealed that 19 percent of employees report “high or overwhelming” levels of financial stress, up from 13 percent in the same quarter of last year. Similarly, 41 percent expressed uncertainty regarding their ability to achieve future financial goals, a significant jump from 34 percent in the third quarter of last year and 33 percent in Q3 2011.
What has them so worried? The U.S. economy and stock market were cited by 43 percent of employees as the major stumbling blocks to a secure financial future. That’s an increase from 42 percent Q3 2012 and 40 percent in 2011’s third quarter.
Employees in the upper age range – 45 and older – were the most anxious. According to the survey, 84 percent of those 45 or older admitted to some level of financial stress, up from 80 percent a year ago and 74 percent in the third quarter of 2011. Financial Finesse researchers attributed that escalation to the immediate and conflicting pressure those in that age group may be facing, such as paying for college for their children and caring for aging parents while at the same time trying to save for retirement and confronting higher health-care costs.
Awareness and action
The overall employee financial wellness score dipped below five (4.9) for the first time since the first quarter of 2012. Yet that decline, emphasized the Financial Finesse researchers, is not due to worsening cash and debt management – areas where employees are maintaining good habits. (For example, 88 percent said they pay their bills on time each month, the same percentage as the previous quarter.) Instead, the researchers conclude it is due to employees heightened awareness of their financial challenges.
Consequently, they are taking steps to address their concerns, at least at the older age bands. Forty-eight percent of employees who took a financial wellness assessment were 45 or older in the latest survey, an upward arc from 44 percent in the same quarter of last year and 43 percent in Q3 2011.
It’s also translating into improved retirement planning. When queried if they were on target to replace at least 80 percent of their income, or goal, in retirement, 19 percent answered yes compared to 18 percent a year ago and 12 percent in the third quarter of 2011. The older one gets the more they have made that calculation, with the highest percentages seen at 55-64 (23 percent) and 65 and older (33 percent).
Rising participation in work-based retirement plans was also charted, with the percentage climbing from 87 percent in Q3 2012 to 90 percent in the latest survey. More employees said they have used a retirement calculator: 39 percent in Q3 compared to 34 percent in the prior year.
Tools to Better Understand Your 401(k)
Originally posted September 11, 2013 by Philip Moeller on https://money.usnews.com
The Lifetime Income Disclosure Act proposed in May seems to have a reasonable objective: help people determine how much retirement income would be produced by their 401(k). For years, financial experts have touted the benefits of helping consumers understand their retirement trajectories. Otherwise, how will they know if they're on the right track to a successful retirement?
Reasonable or not, the legislation has become a perennial in the garden of consumer finance proposals. It gets introduced. Consumer groups applaud it. Investment firms say the goal has merit. Then they raise a host of operational problems in implementing such a law. Leading the list is their opposition to pretty much any government mandate. They prefer voluntary compliance.
[Read: How to Take Control of Your 401(k).]
Fidelity, the biggest provider of retirement accounts, responded last month to U.S. Department of Labor proposals to implement lifetime income disclosure rules: "Information provided in a static format does not promote participant engagement," Fidelity wrote in a letter to the labor department. "As an equally important consideration, the disclosures that would need to accompany the projections and illustrations would greatly add to both the length and complexity of participant statements, increasing the risk of reader disengagement from any of the information provided on the statement."
Please raise your hand along with me if you aren't really sure what this means. In Fidelity's defense, adding any additional required materials to customer statements may produce diminishing returns. Consumers have greeted recent expansions in 401(k) statements – aimed to provide more transparency to account fees and performance – with disinterest.
Many other investment firms also weighed in with their own objections. More fundamentally, exactly what assumptions about future investment returns and rates of inflation should be used in calculating lifetime income projections? What is the ideal or "right" rate of withdrawing assets from a plan during retirement? Even Nobel Prize winners wouldn't agree on such numbers.
What does Washington say? Here is the description provided by the Congressional Research Service of the current version of the proposed law:
"[The Lifetime Income Disclosure Act] requires such lifetime income disclosure to set forth the lifetime income stream equivalent of the participant's or beneficiary's total benefits accrued. Defines a lifetime income stream equivalent of the total benefits accrued as the monthly annuity payment the participant or beneficiary would receive if those total accrued benefits were used to provide lifetime income streams to a qualified joint and survivor annuitant.
"Directs the Secretary of Labor to: (1) issue a model lifetime income disclosure, written in a manner which can be understood by the average plan participant; and (2) prescribe assumptions that plan administrators may use in converting total accrued benefits into lifetime income stream equivalents."
[Read: 3 Highly Personal Threats to Your Retirement.]
Are we all clear on this?
In the interest of plain language – whether driven by government mandate or voluntary industry compliance – employees and retirees with 401(k)s and individual retirement accounts would be better off with clear answers to practical questions. Here are 10 basic retirement plan questions that merit clear and helpful answers, and some tips about trends and where to find answers.
1. Based on your current 401(k) contribution level and investment results, what kind of retirement is in store for you?
The Employment Benefit Research Institute does an annual retirement confidence survey that contains troubling conclusions about the state of retirement prospects for many Americans. The 2013 survey results can be found at https://www.ebri.org/surveys/rcs/2013/.
2. Do you know what your Social Security benefits would be for different claiming ages?
The Social Security Administration has a tool to provide you access to your earnings history and projected benefits at www.ssa.gov/myaccount.
3. Are you saving enough?
Most people should be saving 10 to 15 percent of their salaries, with higher levels needed for those who wait until their 40s to get serious about retirement savings. Yet most people are saving far less.
4. How much money do you have?
Make a date with yourself to spend an hour with your latest plan statement. It may be time very well spent.
5. What are you paying in fees?
Investment management companies have been steadily lowering retirement plan fees in response to sustained criticism and competition from Vanguard and other low-fee investment firms. The Department of Labor has a primer on retirement plan fees at www.dol.gov/ebsa/publications/undrstndgrtrmnt.html.
6. How has your account performed?
See the advice for question #4.
7. How does your 401(k) performance compare with other investment choices you can make within your plan?
This will require more work on your part, but your plan statement and usually your plan's website will include tools to let you look at investment returns of the various funds and other investment choices offered by the plan.
[See: 10 Things to Watch When Interest Rates Go Up.]
8. How does your performance compare with investment results in the plans of other companies?
Check out BrightScope at www.brightscope.com or Morningstar at www.morningstar.com/Cover/Funds.aspx.
9. What is your employer's match policy, how does it compare with industry standards and are you taking full advantage of the match?
Smart401k provides a helpful discussion of employer matches at https://www.smart401k.com/Content/retail/resource-center/retirement-investing-basics/company-match.
10. If you change jobs, what are you going to do with your current employer's 401(k)?
Many people cash in their retirement plans when they change jobs instead of rolling them over into new plans or IRAs. Most of them are making a mistake.
How to Take Control of Your 401(k)
Originally posted August 27, 2013 by Scott Holsopple on https://money.usnews.com
A recent survey by Charles Schwab of 1,000 401(k) participants said that 52 percent of those polled find their 401(k) plan more confusing than their health insurance benefits. That's pretty impressive, given that I don't think I know anyone who claims to understand their medical coverage. Fifty-seven percent desired an easier way to choose their 401(k) investments.
Despite the bad press the 401(k) plan sometimes receives for its complexity and for requiring plan participants to become investors whether they want to or not, the fact remains that it is a great way to save for retirement. For many people, it's their only retirement savings vehicle. Sure, if you don't have much interest in investing and finance, you might find it confusing to manage your account — but it's up to you to do something about it.
Being a 401(k) plan participant requires you to take charge of your retirement saving and investing, so don't let confusion or uncertainties leave you on the sideline. Instead, here are five things you can do to step up:
- Embrace the power and control you have, and think hard about how to use it. Spend some time seriously thinking about your retirement saving and investing needs. Jump on some educational websites and do some reading to familiarize yourself with basic investing terminology and the types of investments to which you have access.
- Take action by creating a retirement saving and investing plan. Outline the amount you plan to contribute now and in the future in order to reach your retirement goals.
- Take advantage of your 401(k) plan's features. Many plans offer ways to maximize your participation such as an employer match, educational resources and advisory services that can help you pick the right funds to support your retirement goals.
- Check to see if your plan offers an auto-increase contribution feature, which automatically increases your contribution rate by a small amount each year (or more frequently, if you like). If your plan doesn't offer auto-increase set up calendar reminders and increase your contributions yourself. Either way, you need to save as much as you can and regular contribution increases can help you get there.
- Once you've established your strategy, stick to it. Paying too much attention to market fluctuations can cause some investors to run scared. A long-term view is what's needed, rather than concentrating on your account balance on any one day.
The 401(k) plan might not be perfect, but you stand to gain a lot when you take advantage of being in the driver's seat — just a little know-how can make a big difference when it comes to your 401(k) and financial future.
ERISA Bonding - Not as Easy as it Looks
Separating ERISA bonds from fiduciary liability insurance
Source: https://roughnotes.com
By Michael J. Moody, MBA, ARM
The Employee Retirement Income Security Act (ERISA) has been the law of the land since 1974, with regard to employee benefits. Its specific purpose is to protect the assets of millions of American workers so that funds are available when they retire. It's a federal law that, in essence, sets minimum standards for private company pension plans. Most of its requirements took effect on January 1, 1975. While it does not require corporations to create pension plans, it does establish minimum standards for those that do start pension plans.
For the most part, the key sections of the law have remained as they were in 1975. One section (Section 412) has been a source of concern for employers and their insurance agents because it deals directly with the Act's bonding requirements. In response to numerous requests, the Department of Labor, which oversees ERISA, published a Field Assistance Bulletin (#2008-04) that addresses a number of issues surrounding the bonding requirements. While the Bulletin is helpful in understanding the requirements, it was not meant to change any existing parts of Section 412. The Bulletin provides a set of 42 questions and answers that address many of the areas where employers have requested further clarification.
ERISA Bonding 101
At the most basic level, the bonding requirements are pretty straightforward. The Act, for example, requires that "every fiduciary of an ERISA-covered employee benefit plan and every person who handles funds or other property of such plans must be covered by a bond." There are, however, a number of exceptions to this requirement, as there are with most of the other specific requirements and, as such, are beyond the scope of this article. What follows, however, are a number of requirements that generally apply in all situations.
Bond limits must be issued for at least 10% of the amount of the funds handled, subject to a minimum limit of $1,000 per plan and a maximum of $500,000 per plan.
Several other points to keep in mind regarding the bonding requirements:
• Bonds cannot be obtained from just any bonding or insurance company. They must be placed with a surety company or reinsurer that is listed by name on the IRS's Listing of Approved Sureties as noted in IRS Department Circular 570.
• No plan or party-in-interest may have any control or significant financial interest in the surety or reinsurer, or in an agent or broker who arranges for the bond.
• Bonds must be written for a minimum of one year. Additionally, the bond must also have a one-year period after termination to discover losses that occurred during the original term of the bond.
• Coverage from the bond must be from the first dollar of loss; thus, the bond cannot have a deductible feature.
• An employee benefit plan can be insured on its own bond, or it can be added as a named insured to an existing employer bond as long as it satisfies ERISA's minimum requirements.
Other than the requirements noted above, the DOL allows quite a bit of flexibility with the bond. For example, a plan may be covered under a single bond or one bond that covers multiple plans. Permissible bond forms can range from individual, named schedule, position schedule or even a blanket bond.
Potential trouble spots
One area of considerable confusion that has continued to exist since the original Act was passed is the difference between an ERISA bond and fiduciary liability insurance. ERISA bonds are in fact fidelity bonds that protect the plan against fraud or dishonesty by individuals who handle plan assets. These bonds are a specific requirement of the ERISA legislation. On the other hand, fiduciary liability insurance generally protects the employer and/or fiduciaries from losses due to a breach of fiduciary duty. While fiduciary liability insurance is not a requirement under ERISA, many employers have chosen to provide this important coverage in their corporate insurance portfolio. To complicate the situation further, the insurance industry offers both the bond and fiduciary liability coverage under a single policy. While this type of comprehensive protection is very useful, it needs to be remembered that only the bond is required under ERISA. Additional coverages are available at the discretion of the employer.
Due in large part to the types of risks involved, there are few risk mitigation strategies that can be employed to lower the risk of loss. However, one method of risk mitigation that is being used and suggested by some consultants revolves around "credentialing" of all internal personnel and outside service providers. Typically this approach will require an approval and adoption of a written policy statement. The key element would be conducting criminal background checks and other prudent investigations to reconfirm the suitability of individuals serving in fiduciary positions or otherwise acting in a capacity covered by ERISA's bonding requirements. Care should be taken to comply with the applicable notice and consent requirements for conducting third-party background checks under the Fair Credit Reporting Act and other applicable laws.
While this may initially appear to be overkill, it should be remembered that ERISA generally prohibits individuals convicted of certain crimes from serving as plan fiduciaries. Further, it also prohibits plan sponsors, fiduciaries or others from knowingly hiring, retaining, employing or otherwise allowing these convicted individuals to handle plan assets for the 13-year period after the later of their conviction or the end of their imprisonment.
Additionally, the credentialing process should also include a review that verifies the sufficiency and adequacy of the bonding that is in effect for both internal personnel as well as outside service providers. Unless a service provider can provide a legal opinion that adequately demonstrates that an ERISA bonding exemption applies, plan sponsors and fiduciaries should require the third-party service provider to provide proof of appropriate bonding that is in compliance with ERISA and other appropriate laws.
Conclusion
While there are some exceptions to ERISA's bonding requirements, the fact remains that a bond is required for every pension plan. The bond must extend coverage to those persons whose position requires them to come in direct contact with or exercise discretion over plan assets. Further, the bonds must be in amounts and form acceptable to the DOL. They must comply with all the provisions as outlined in Section 412 of the ERISA legislation.
Fiduciary liability insurance is not required by ERISA, but it can provide agents and brokers with an excellent opportunity to broach the subject with an employer. Losses following the recent financial crisis have increased, and today's fiduciary liability policies offer a variety of coverage enhancements and can provide an employer with a number of advantages, while covering many gaps in their corporate insurance programs. Becoming a key knowledge source for employers in a narrow area such as this can be a real door opener for any agency.
Want to engage in retirement planning? Watch your words
Source: https://eba.benefitnews.com
By Margarida Correia
If you want to engage investors in the retirement planning process, avoid talking about “financial planning” or worse, “retirement income.” Both elicit very negative responses from investors, Timothy Noonan, managing director of Capital Market Insights at Russell Investments, said at a media roundtable this month.
When investors hear “retirement income,” they think they’re about to be sold an insurance product and are reminded of their private retirement “sins,” such as not saving enough or robbing their 401(k)s, he said. And the mention of financial planning is likely to make most investors yawn. The topic is boring and technical, according to a two-year study of major markets in the United States, Canada and the U.K, commissioned by Russell.
HR/benefits professionals should talk instead about “lifestyle design,” a concept that appeals to investors. “If you want a get a disengaged person to re-engage, maybe you should try talking to them about what you can do to help them design a lifestyle that’s sustainable,” Noonan said.
Russell Investments has taken the research to heart, naming its recently launched retirement planning tool the Retirement Lifestyle Solution and the tool’s main software component Retirement Lifestyle Planner. The new tool is based on the concept of adaptive investing, a style of investing that investors are responsive to, according to the two-year study.
Investors see adaptive investing as a middle ground between the investing style extremes of changing asset allocations frequently and not changing them at all. More importantly, it incorporates “asset-liability matching,” which is central in getting “individual investors to engage meaningfully on preparing for their retirement and getting income from their retirement portfolios,” Noonan says.
“Fundamentally, adaptive investing is managing your portfolio and building an asset allocation that is connected to the spending it has to support,” says Rod Greenshields, consulting director of Russell Investments’ private client consulting group.
One of the major roadblocks to getting investors to think about and plan for retirement is their inability to visualize themselves in the future. By matching their assets to their liabilities in the future, the tool helps investors overcome this visualization difficulty, according to Noonan.
Retirement reform a likely target for Obama's second term
Source: https://www.benefitspro.com
By Andy Stonehouse
If you think that the retirement industry suddenly fell off the radar with the end of the first round of fiscal cliff fixes, think again - substantial reform, courtesy of the second-term Obama administration, is likely on the way.
That's the belief of Marcia Wagner, a prominent ERISA attorney serving as keynote at this year's sixth annual Profit-Driven Strategies in the DCIO Market, organized by Financial Research Associates - held this week in Wagner's base of operations, Boston.
Wagner contends that the allure of taxes deferred by America's retirement plans continues to be too strong to politicians - some $70 billion a year, and as much as $361 million over a four-year period - meaning that tangible reform efforts are certainly a possibility.
And with today's news of the retirement of Sen. Tom Harkin, chairman of the Senate pensions and education committee, Wagner says she suspects a harder push on his part to gain support for his own proposal creating a nationalized retirement system, an Americanized rendition of plans found in Western European nations.
Wagner says that in an era where "the power of inertia" helps guide an otherwise shell-shocked and financially confused participant public, the most likely change will probably be an Obama-led move to mandatory, automatic IRAs for most American workers.
Under that slightly revolutionary plan, companies with at least 10 employees would be required to establish a deferral rate of 3 percent into IRA plans (a post-tax Roth IRA would be the default but pre-tax traditional IRAs would be available as a second choice). Workers as young as 18 would be included in the plan.
"People tend to associate this idea with a left-wing, Democratic policy, but it's actually a joint product from think tanks that goes back to John McCain's run for president," Wagner noted.
She also concedes that the changes would not only be burdensome and present a challenge to the private sector, but could also be deemed unconstitutional - as well as a further intrusion by government, in the eyes of many Americans.
In the meantime, as U.S. workers continue to look for ways to more simply and safely invest for their retirement, Wagner says that a recent spate of class-action suits have also opened up the floodgates for the possibility of participants litigating their way into other retirement world changes - requiring plan sponsors to be especially cautious when considering how to protect and grow their investments.
Plan sponsors, she admits, are caught between a rock and a hard place: they want to render useful advice to participants, but their advisors who receive variable fees also want to avoid being caught up in prohibited transactions. A move to computerized planning models, she suggests, could offer a slight level of fiduciary safety.
Wagner says the industry also needs to begin to deal with the growing requirements for decumulation planning, with changes including the use of deferred annuities, better methods of rollover to DB plans and even some relief of RMD rules as likely topics in the coming years.