Data & Research February 24, 2014

Stronger Economy, Weaker Savings

A joint survey from four retirement industry advocacy groups, released as part of America Saves Week, finds improving macroeconomic conditions haven’t reversed widespread savings challenges.
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The seventh annual national survey assessing household saving—released by Consumer Federation of America (CFA), America Saves, the American Savings Education Counsel, and the Employee Benefit Research Institute (EBRI)—finds most Americans continue to face significant personal savings challenges. When asked if they were making progress in meeting their savings needs, only about one-third (35%) of U.S. workers say they are making “good” or “excellent” progress. That compares with nearly two-thirds (63%) who report making either “fair” or “no” progress towards savings benchmarks.

Stephen Brobeck, executive director of CFA and a founder of America Saves, says the story of Americans’ retirement readiness is a story of thirds: Only about one-third of Americans are living within their means and think they are prepared for the long term financial future. Another one-third are living within their means but are not prepared for a long term future, the last one-third are struggling to cover expenses on a day-to-day basis. Brobeck adds that, while most Americas are meeting their immediate financial needs, many also say they are worse off than they were several years ago.

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Results from the survey are not all negative, though. While only about one-third of Americans feel prepared for their long term financial future, a much larger percentage say they are at least paying their bills and saving a little. About two-thirds (68%) reported they are spending less than their income and saving the difference. This figure is up from 65% in 2013, though much lower than the 73% observed in 2010. In a conference call with reporters, the study authors pointed to a number of familiar causes for the downturn in savings rates, such as the lingering effects of the financial crisis and tepid job and wage growth.

Another positive result in the report shows nearly two-thirds of respondents (64%) say they “have sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit,” and about three-quarters (76%) say they are reducing their consumer debt, or are consumer debt-free. These two numbers are about where they were last year, survey authors say, though they are lower than in 2010, when 71% said they had sufficient emergency savings and 79% said they were reducing consumer debt or were consumer debt-free.

The researchers say these numbers reveal the continuing struggles of the American middle class. While unemployment rates have come down, jobless and underemployment rates are still high compared with historic levels. More importantly, real wages have been stagnant for a long time, and fewer middle class families are building wealth successfully through home ownership. According to the survey, the proportion of workers who say they “are building equity in their home or other property” declined from about two-thirds (68%) in 2010 to little more than half (54%) this year. And the proportion of those homeowners who say they expect to pay off their mortgage debt before they retire fell from about four-fifths (78%) in 2010 to only about two-thirds (68%) today.

Dallas Salisbury, EBRI CEO and president, says another factor in this decline may be the decreasing percentages of workers who report having a written savings and spending plan in place. This year’s survey finds the proportion of workers with a “savings plan with specific goals” slipped to 51% in 2014, down from 55% in 2010 and 54% in 2013. In addition, the proportion of those with a spending plan which allows sufficient savings for adequate retirement income replacement declined from 46% 2010 to 40% in 2014. 

This year’s survey also finds sharp differences in retirement readiness and income replacement adequacy exist between middle class households with incomes above and below the $50,000 level. For those with more than $50,000 in annual income, 82% of workers say they are able to spend less than their income and save the difference, while just 69% of those making less than $50,000 report the same. Similar gaps exist with workers’ ability to reduce consumer debt or start an emergency savings fund this year.

“The group hit the hardest by the Great Recession and its aftereffects have been moderate income households,” Brobeck explains. “The rest of the middle class was not damaged as severely, and lower income households were protected somewhat by the social safety net.”

Researchers timed their survey release to fall during America Saves Week, an annual event that brings together nearly 2000 government, business, and non-profit organizations to promote good savings behavior. America Saves, managed by the Consumer Federation of America (CFA), and the American Savings Education Council (ASEC), managed by EBRI, coordinate the effort. 

More information about the survey and America Saves Week, is available at www.americasavesweek.org.

A free savings assessment tool developed alongside the study for America Saves Week is available here.

Compliance February 24, 2014

No Harm Required to Seek Plan Reformation

A federal appeals court has found a retirement plan participant need not show “harm” to pursue a remedy of plan reformation for failing to disclose information.
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The 2nd U.S. Circuit Court of Appeals agreed to take up the case on appeal from plaintiff Geoffrey Osberg who claimed his employer, Foot Locker, issued false and misleading summary plan descriptions (SPDs) in violation of the Employee Retirement Income Security Act’s (ERISA) disclosure requirements, especially ERISA section 102(a) and 29 U.S.C. 1104(a), when it converted from a traditional defined benefit plan to a cash balance plan. Osberg also appealed the summary dismissal of his claim that Foot Locker failed to provide plan participants with notice, as required by ERISA section 204(h) and 29 U.S.C. 1054(h), that the cash balance arrangement could potentially reduce future benefit accruals.

As to his disclosure claims, Osberg contended on appeal that a district court erred in holding his 102(a) claim time-barred, and in finding that he failed to raise a genuine issue of material fact entitling him to surcharge and contract reformation on either 102(a) or 404(a) claims. The 2nd Circuit agreed with Osberg that the district court erroneously applied an “actual harm” requirement. Foot Locker argued that, as a former employee, Osberg lacks standing to pursue contract reformation and cannot show fraud or mutual mistake entitling him to reformation.

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The appellate court noted that in CIGNA Corp. v. Amara (see “Court Makes Repeat Decision in Amara v. Cigna”), the Supreme Court held that, with respect to the equitable remedies under § 502(a)(3), “any requirement of harm must come from the law of equity.”  To obtain contract reformation, equity does not demand a showing of actual harm.

“We disagree. Foot Locker construes Amara to hold that monetary relief is only available in ERISA cases via surcharge; therefore, absent a viable surcharge claim, the only beneficiaries with standing to pursue reformation are those that can prospectively benefit from a modification of plan terms, which does not include former employees. This interpretation is supported by neither Amara,… nor equity,” the court says in its opinion, remanding the case back to the district court for further review.

The court also concluded that because reformation of the plan would afford Osberg the total relief sought, there is no need for it to decide whether he would also be entitled to recovery under surcharge.

On this point the Circuit court disagreed with Foot Locker and the lower court, and proceeded to remand the determination of whether Osberg can satisfy the true requirements for obtaining contract reformation back to the district court for further consideration in light of the fact that he need not prove actual harm to obtain relief through reformation or surcharge.

The U.S. District Court for the Southern District of New York had issued a summary judgment of all charges in favor of Foot Locker Inc. and the Foot Locker Retirement Plan.

The case alleged that Foot Locker management proffered misleading explanations of the plan’s conversion from a traditional pension formula to a cash balance formula, which more closely resembles a defined contribution (DC) arrangement by defining a future benefit in terms of a stated account balance, rather than a particular level of lifetime benefit. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5% of compensation from the employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year Treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants, so like in DB plans, the investment risks are borne by the employer.

Additionally, plan participants claimed that Foot Locker was required to inform employees about the possible period of “wear-away” after the traditional DB plan was converted to a cash balance plan (see “ERIC Supports Dismissal of SPD-Related Case”). The participants also claimed that the plan sponsor’s alleged failure to do so was a breach of the fiduciary duty rules for SPDs and that the plan should be reformed or the sponsor surcharged for a monetary reward, effectively granting damages to participants over lost benefits.

On Osberg’s claim that Foot Locker violated ERISA section 204(h) by summarizing only part of the new formula for calculating benefits—and therefore that it did not properly inform participants that it effectively reduced the rate of future benefit accruals—the 2nd Circuit agreed with the defendant that the version of ERISA in effect at the time of the challenged notice did not require such disclosures, and that any deficiency was remedied by subsequent SPDs.

The 2nd Circuit also found Osberg’s reliance on 204(h) is inappropriate for the remedy he seeks, because insufficient notice in violation of 204(h) does not, as he contends, invalidate only the undisclosed portion of the plan amendment, but rather voids the entire amendment. Because Osberg does not seek to void the entire amendment, the 2nd Circuit affirmed the district court’s dismissal of his 204(h) claim.

A full copy of the 2nd Circuit decision is available here.

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