Data & Research June 3, 2016

Coverage Questions Loom Large Where Small Business Reigns

Areas with low DC plan access tend to be those with more small businesses, according to a new analysis from the Pew Charitable Trusts.
Reported by

More than 40% of full-time private sector workers say they still lack access to either a pension or an employer-based retirement savings plan such as a 401(k), new research from the Pew Charitable Trusts shows.

At the same time, just under half (49%) of U.S. workers say they participate in an employer-sponsored plan, highlighting the even more troubling fact that not everyone who is offered a plan chooses to take advantage. 

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

These findings are based on the Pew research report, “A Look at Access to Employer-Based Retirement Plans in the Nation’s Metropolitan Areas,” which analyzes how well the retirement planning system functions across different regions of the U.S. The report suggests upwards of 51 million full-time, full-year private sector workers live in “metropolitan statistical areas” (MSAs) in the United States, “close to three-fourths of all such workers.”

Troublingly, the research finds clear statistical evidence that industries and workers that tend to have lower access rates to retirement plans at work are heavily clustered in certain metropolitan areas. At the same time, Pew researchers find retirement plan access “varies more among the nation’s metropolitan areas than across states as a whole.” For example, the access rate among workers in the metropolitan areas ranges from 71% in Grand Rapids, Michigan, to 23% in McAllen, Texas. Nationwide, Pew finds 58% of those living/working in a metropolitan statistical area have access to a plan.

Pew researchers further find metropolitan areas with low retirement plan access rates are heavily concentrated in certain large states: “Nearly three-fourths of the MSAs in the bottom 25% are in Florida, Texas, or California.”

As such, employer and worker characteristics appear to play a large part in the disparate levels of access to plans across different MSAs. Notably, “metropolitan areas with relatively low rates of access generally have more people working for small employers.” Simultaneously, many areas with higher percentages of Hispanic or low-income workers also tend to have lower access rates, Pew finds.

NEXT: Other key takeaways 

One positive finding from the report is that the “concentrated nature of these underperforming localities” means that government efforts can reach larger numbers of people through smaller numbers of efficient programs. Recognizing this situation, Pew says New York City and other local government entities are hard at work considering their own focused proposals to expand retirement plan coverage for private sector workers.

Pew researchers stress that looking at MSAs rather than at states gives a much clearer picture of the disparities present in the U.S. retirement system: “Access to workplace retirement plans varies by nearly 50% across the metropolitan areas analyzed. This range is more than double what appears when looking at the states as a whole.”

Other ways of cutting the data are also informative, Pew says. “Nationwide, in about 90% of the metropolitan areas, at least half of workers had access to a plan,” researchers explain. “Among those employed part-time throughout the year living in metropolitan areas with a population of at least 1 million, the percentage of workers with access to a retirement plan ranged from 19% to 48%.”

According to Pew, metropolitan areas with higher shares of workers at small employers generally have lower access rates. “Previous analyses suggest that smaller businesses can face substantial obstacles to offering retirement plans, including general financial uncertainties and the administrative costs of setting up and running plans,” researchers note. “Across the 50 states, 22% of workers at companies with fewer than 10 employees report having access to a workplace retirement plan, compared with 74% of workers at businesses with at least 500 employees.” 

The clear result is that the metropolitan areas with the largest shares of workers at small employers are also those where access rates are generally the lowest.

The full report is online here.

Compliance June 3, 2016

A Second DOL Fiduciary Rule Court Challenge Emerges

The National Association for Fixed Annuities filed a complaint in district court to “challenge and vacate the Department of Labor’s final fiduciary regulations.”
Reported by

A second federal lawsuit has been filed just a few days after a coalition of financial trade groups entered their own complaint seeking to halt the DOL fiduciary rule—both asking the courts to strike down the Labor Department’s new regulations that will require most brokers and investment consultants to act as fiduciaries.

The second complaint was filed in the U.S. District Court for the District of Columbia by the National Association for Fixed Annuities (NAFA), asking the court for “declaratory, injunctive, and other appropriate relief.” Whereas the suit filed June 1 seeks relief under the Administrative Procedure Act (APA) and the First Amendment to the U.S. Constitution, this one also suggests the Department of Labor (DOL) is violating the Regulatory Flexibility Act (RFA) with its sweeping advice regulation.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

“Specifically, in promulgating the Rule and the Exemptions, the Department exceeded the authority granted to it by Congress under ERISA, the Code, and Reorganization Plan No. 4 of 1978,” the suit contends. “In addition, the Rule and the Exemptions are arbitrary and capricious, not in accordance with law, impermissibly vague, and otherwise promulgated in violation of federal law.”

The text of the complaint shows NAFA member firms are clearly worried about potential unintended consequences of the DOL rulemaking, and while they have not traditionally considered themselves as trusted fiduciary advisers for their clients, they feel the new rulemaking will treat them that way: “NAFA’s members have been adversely affected by the Department’s actions in that the Rule and Exemptions will, in many cases, threaten the very existence of their business, result in immediate and unrecoverable losses of market share, and result in unrecoverable economic losses for which no adequate relief can later be granted.”

As such, the complaint argues for injunctive relief that would effectively halt the rulemaking in its tracks until the court rendered a decision—an outcome that has already been deemed unlikely by many Employee Retirement Income Security Act (ERISA) industry experts.

NEXT: Annuities and the new fiduciary rule 

NAFA’s complaint spells out for the court the key differences between the two main types of annuities its members sell, ultimately arguing its members are entitled to injunctive relief because they are being inappropriately lumped into to the DOL’s effort to stamp out conflicts of interest between relationship-based financial advisers and their clients.

“Insurance agents who sell fixed annuities are bound by common-law requirements of agency and must pass tests of both competency and character before being granted a state license,” the complaint explains. “Insurance agents need to be licensed in each state in which they operate. Only state-licensed life insurance agents may sell fixed annuity contracts.”

Once fully qualified, NAFA explains, an agent is subject to comprehensive state regulations related to the sale of fixed annuities, and insurance companies have implemented policies to ensure compliance with such regulations.

“Accordingly, state insurance departments oversee all aspects of the transaction, from the development and approval of each fixed annuity product sold in the state, to the licensure and sales activities of the individual agents, to the operations and compliance protocols of the insurance companies,” NAFA says. “In each instance, the objective is to protect the interests of the fixed annuity purchaser.”

On NAFA’s reading, DOL’s new fiduciary rulemaking will adversely impact this already-effective system for preventing conflicts—leading to more liability, mountains of new paperwork, confused client and potentially driving an unwarranted cooldown in the annuity market.

“In 2014, for example, consumer complaints involving securities and advisers represented over 97% of combined annuity and securities complaints—but only .03% of total complaints were lodged by owners of fixed annuities,” NAFA says. “Congress has determined that fixed annuities, including fixed index annuities (FIAs), should be regulated by the states as insurance products, rather than under federal securities laws. Following an attempt by the SEC to regulate FIAs under the securities laws, Congress made its intentions clear in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.”

NEXT: Should insurance agents be fiduciaries? 

NAFA suggests to the court that the DOL “has created fiduciary obligations for relationships not appropriately regarded as fiduciary in nature and that [even] the Department does not believe Congress intended to cover as fiduciary relationships. Accordingly, under the new test, the average insurance agent is now an ERISA fiduciary if the agent sells a single fixed annuity contract to an IRA owner.”

This is one area where the DOL’s amendments to the proposed version of the rulemaking actually got tougher, from NAFA's perspective: “Prior to these amendments, the sale of all annuity products fell with the purview of the prohibited transaction exemption (PTE) under section 84-24. In its Notice of Proposed Rulemaking, the Department proposed that variable annuities be removed from PTE 84-24, leaving only fixed annuities and fixed index annuities (FIAs) subject to this exemption. In the final PTE 84-24, only fixed annuities remain for the exemption, i.e., both variable annuities and FIAs were removed from coverage under 84-24.”

In conclusion, NAFA warns that “without adequate notice as required under the APA, in the final rule the DOL moved FIAs out of PTE 84-24 and into the best-interest contract exemption (BICE) ... All fixed annuities—including FIAs—have heretofore been treated as insurance products, exempt from federal securities laws and regulated under state insurance laws. Yet the Department lumped FIAs in with securities products like variable annuities when it promulgated the rule and the exemptions.  Because FIAs are an insurance product, the FIA sellers represented by NAFA—including carriers, IMOs, and agents—are ill-equipped to suddenly be subjected to the onerous compliance obligations required by the BICE, which more closely resemble the types of requirements imposed on the securities industry.”

The full text of the complaint is available here. 

«