PSCA Disagrees with Lifetime Income Approach

In a letter to the U.S. Department of Labor (DOL), the Plan Sponsor Council of America (PSCA) expressed some disagreement with the DOL's proposal for including lifetime income illustrations on participant statements.

While Edward Ferrigno, PSCA’s vice president, Washington Affairs, said the PSCA is “pleased that the DOL recognizes the importance of educating participants about this important issue,” the PSCA disagrees with the approach outlined in the DOL proposal.

The Council does not support a mandate for lifetime income illustrations, but rather directing participants to retirement income calculators instead. It is worried that the safe harbor in the intended regulation will result in a major reduction in the availability of other retirement income calculators, which will be to the detriment of participants.

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In addition, the letter said:

  • The DOL should elaborate on its authority to mandate such income illustrations;
  • The DOL proposal should be product neutral, not singling out annuities but also offer other products, be they insured or non-insured ones;
  • The DOL should specify that Field Assistance Bulletin 2006-03 applies to this intended illustrations rule. The bulletin in question provides that disclosures required under ERISA Section 105 may be provided by delivering a notice that the disclosure is available at a secure website and that a free written disclosure will be provided upon request; and
  • While projections are critical to any lifetime income illustrations, such estimates need to consider future behavior.

“There are other ways for the DOL to encourage retirement savings,” said Ferrigno. “The PSCA recommends that the DOL maintain the practice of including retirement calculators on [their] website and make changes to highlight their existence on the site.” The letter also recommended that the DOL issue guidance that clarifies that such calculators take “future contributions and investment returns into account, and provide estimates that are expressed in current dollars,” as well as a disclaimer that such figures are estimates and not definitive.

“Any illustration should describe the assumptions on which it is based and should state that the illustration is merely an estimate,” added Ferrigno.

The letter can be downloaded from here.

Cracks in the Nest Eggs of Displaced Workers

Displaced workers have suffered setbacks in their retirement savings, a survey shows.

 

According to the survey report, “Repairing the Damaged Retirement Nest Egg: How to Improve the Retirement Outlook of the Unemployed and Underemployed,” part of the 14th Annual Transamerica Retirement Survey, 62% of displaced workers are “not too” or “not at all” confident about their retirement prospects.

The ultimate objective of the study was to shine a light on the tens of millions of Americans who are still looking to regain their financial footing, said Catherine Collinson, president of the Transamerica Center for Retirement Studies. The economic downturn resulted in unemployment or underemployment for many, she noted. Transamerica also wanted the study to help highlight opportunities to help displaced workers get back on track with their savings.

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The findings present a sobering reality of the challenges that the unemployed and underemployed face, Collinson told PLANSPONSOR. Collinson uses the word “displaced” to refer to both groups of workers. Even amid signs of economic recovery and an unemployment rate that has been showing signs of improvement, millions of Americans are still unemployed or underemployed, Collinson pointed out.

“Many displaced workers have raided their retirement accounts to make ends meet, and many may be overlooking the importance of retirement benefits as they seek meaningful employment. It’s critical that we raise awareness of the issues and identify opportunities to help them rebuild their long-term financial futures,” she said.

Fifty-nine percent of displaced workers report having a retirement savings account of any kind, the study found. But, despite a widespread recognition of the taxes and penalties that may apply, more than one-third (36%) of displaced workers who have retirement accounts have made withdrawals because of their financial predicament. 

Collinson said plan sponsors should consider including some guidance about how to handle retirement accounts, with a strong educational message about the risks of taking loans. “Further underscore the consequences of taking early withdrawals to employees,” she said. It may not be the most cheerful news, she added, but having more knowledge could lead to better decisions on the part of plan participants.

“Some leakage comes from participants who had outstanding plan loans at the time of separation,” Collinson observed. Plan loans, typically on a five-year repayment plan, might be a wolf in sheep’s clothing, she said, since statistically people change jobs more often than five years. If the employment is ended, the repayment period is much shorter, and if the employee can’t repay the loan, it turns into taxable distributions. “Statistically speaking, a significant number of plan sponsors offer multiple loans,” she said. “But are multiple loans really necessary?”

A simple thing plan sponsors can do for all employees is promote awareness of the saver’s credit for low- to moderate-income workers to save for retirement, Collinson said. “The second thing employers should do is to keep the faith in offering competitive retirement benefits. Make the plans as efficient as possible with auto features so that people who are displaced can begin saving again as soon as possible, as soon as they regain employment.

“The passage of time out of work, especially the one-year mark, can have a detrimental effect on retirement accounts,” Collinson said. “Forty-two percent of those displaced for a year or more took a withdrawal compared with only 23% of those displaced for less than a year.”

Of those who participated in a 401(k) plan at their most recent employer where they were fully employed, 43% indicate they have taken a withdrawal from their accounts, including 53% of the unemployed and 38% of the underemployed. “While being underemployed is certainly not ideal, statistically it is better because people are not as forced to tap into retirement accounts to make ends meet,” Collinson said.

Another sobering figure, Collinson noted, is that median savings of all displaced workers, both with and without a retirement account, is $7,500. “Those in their 40s have been especially hard hit,” she said. People in their 40s showed median savings of $1,900, and also showed the highest level of withdrawal activity.

Collinson, who described herself as someone who obsesses over numbers, said she was really astonished at the difference in estimated median household savings between those with college degrees versus those with high school diplomas. The difference in estimated median savings is “huge,” she said: Displaced workers with a  college degree have saved an estimated median of $60,300, versus those with a high school diploma or some college, who have saved $3,300. “So there is an even higher cost associated with not having a degree,” Collinson said.

The underemployed report higher levels of retirement savings at an estimated median of $8,600 compared with the unemployed at $6,500. The study also found that the underemployed are faring better than the unemployed in terms of income, health care benefits and general outlook. 

“Many displaced workers may be overlooking the importance of retirement benefits when seeking employment opportunities, which could put them at a greater disadvantage in terms of rebuilding their retirement savings,” Collinson said. Only 17% of displaced workers cite generous retirement benefits as one of their top three most important characteristics of a future employer. The majority (56%) say competitive pay, followed by company stability (33%) and a convenient commute (31%) are most important to them.

Fifty-five percent of respondents prefer a job with higher pay but poor retirement benefits. In making this trade-off, they are placing a higher priority on immediate financial goals but may be overlooking retirement benefits, which can be a meaningful part of their compensation package to build a more secure long-term financial future.

“From a public policy perspective, our current retirement system is largely predicated on the assumption that workers have access to meaningful employment so that they can self-fund a substantial portion of their retirement,” Collinson said. “If displaced workers fail to overcome retirement savings setbacks due to unemployment or underemployment, society may ultimately bear the cost when future generations of senior citizens run out of savings.”

A 10-minute online survey was conducted by Harris Interactive on behalf of the Transamerica Center for Retirement Studies between March 5 and  March 19 among a nationally representative sample of 610 unemployed  or underemployed U.S. residents, age 18 or older. Survey respondents were previously fully employed in a for-profit company employing 10 or more people and were unemployed or underemployed at the time of the survey.

The full report can be viewed online.

 

Jill Cornfield

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