Data & Research January 29, 2016

Only 20% Plan to Convert Savings to Guaranteed Income

Ongoing withdrawals from savings could jeopardize people’s future, LIMRA says.
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Fifty-six percent of Americans do not have a retirement income strategy, and among those that do, the most sophisticated plan is simply withdrawing money from savings accounts, a tactic that LIMRA does not recommend.

Among the 44% who do have a plan, 60% plan to withdraw from their savings only occasionally or when needed, and 32% intend to make regular withdrawals from their savings, according to LIMRA research. This could increase their risk and reduce the number of years their money will last, LIMRA says. Only 20% plan to convert their savings to guaranteed income.

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Earlier research from the LIMRA Secure Retirement Institute found that people might withdraw too much each year. Even if they apply the widely recommended 4% withdrawal every year, their portfolio is still subject to market swings. As LIMRA puts it: “History has shown us that a truly safe maximum withdrawal rate is an elusive figure.”

People are also living longer. LIMRA has found that there is a 50% chance that at least one member of a 65-year-old couple will live beyond age 88, and a 25% chance one of them will reach age 97. “The couple in this example would need an income source that lasts 30 years or longer,” LIMRA says. “If they pursue only a withdrawal strategy, they risk not having enough financial resources for the last years of their lives.”

In addition to volatility and longevity risks, the Defined Contribution Institutional Investment Association points to inflation and consumption risks. Then there is the issue of rising health care costs for retirees.

While retirement plan sponsors are beginning to consider offering guaranteed retirement income options, the majority are waiting for safe harbor regulations from the Department of Labor.

Compliance January 29, 2016

OMB Confirms Receipt of Fiduciary Rule Language

After years of speculation and an intense, ongoing retirement plan industry debate, the Department of Labor has advanced its conflict of interest regulations to the Office of Management and Budget for final review. 
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The Office of Management and Budget (OMB) confirmed receipt of the Department of Labor’s (DOL) hard-fought fiduciary regulation, which now stands in final form.

To be clear, investment and retirement plan industry professionals will have to wait a little longer to actually see the final fiduciary rule, and compare it to the proposed regulation language published last year. There could be substantial changes included in the rule language currently being looked at by OMB, but given the fact that comment periods on the regulations ended fairly recently, it is unclear whether major changes could or would have been made in that time. 

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Interestingly, the news that OMB is reviewing a final fiduciary rule comes despite Labor Secretary Thomas Perez’s comments just this week that implied reports that the conflict of interest rule would be sent to OMB soon were incorrect. Perez had said the DOL was still “neck deep” in the process of reviewing the significant number of comments submitted in last fall’s comment period and “hopes to reach a conclusion in the coming months,” which would indicate some changes to the rulemaking language are certainly  possible.

In any case, the news that a final fiduciary rule has been formed and submitted to OMB is certain to irk many in the investment and retirement plan industries. In just the last few weeks several groups again voiced concerned with where the proposal is heading, what’s in it and how fast it’s moving. One group wants to defund the DOL initiative via Congress, while another group is suggesting the DOL be required to re-propose the rule with another short comment period next year. That move would significantly change the timing of the issuance and effective date of the rule and give interested parties an opportunity to see how the DOL may be resolving concerns raised during the first comment period.

Traditionally the OMB has 60 to 90 days to review regulations of this nature and to make public the final rule language, but given the limited time the current administration has in office and the high-profile nature of the rule, OMB may also use its discretion for an expedited review.

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