Retirement investments such as 401(k)s and individual retirement accounts (IRA)s as well as home equity account for nearly half of all assets American families depend on for retirement outside of Social Security benefits, according to new research by the Employee Benefit Research Institute (EBRI).
Moreover, families without such accounts typically have low asset levels, EBRI reports. According to the research, among working heads of families between the ages of 25 and 64 who don’t have a retirement account, 79.6% have financial assets less than $10,000. Only 13.1% of those with one have these kinds of asset levels.
These accounts are also more popular among older workers. EBRI finds that the percentage of heads of households between the ages of 25 and 34 that have retirement accounts is 50.4%. That figure grows to 71.4% for those families with a head ages 55 to 64.
Debt levels are sharply lower for those with individual accounts: For all families with working heads ages 25 to 64, the median debt-to-asset ratio is 33.4%. However, for families with working heads ages 55 to 64, the median debt-to-asset ratio is 13.4% for families with “individual account” (IA) assets compared with 34.2% for families without IA assets.
One-half of all of all families that have IA assets plus home equity rely on these for more than 78.2% of their retirement savings outside Social Security.
“The data show that it is overwhelmingly the case that individual account retirement plan assets plus home equity represent almost all of what families have to use for retirement expenses outside of Social Security and traditional pensions,” says Craig Copeland, senior research associate at EBRI and author of the report. “Those families without IA assets typically have very low overall assets, so they have almost nothing to draw from for retirement expenses (outside of Social Security).”
The data comes from the Federal Reserve’s Survey of Consumer Finances (SCF). The full report, “Importance of Individual Account Retirement Plans and Home Equity in Family Total Wealth,” is published in the May 16, 2017, EBRI Notes, available online at www.ebri.org
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ERISA Class Action Targets Principal Over Crediting Rate
The complaint describes in detail guaranteed investment contracts offered by the Principal to retirement plans, which plaintiffs suggest permitted conflicts of interest and prohibited transaction.
Principal Life Insurance Company and Principal Financial
Group are both named in a newly certified class action Employee Retirement
Income Security Act (ERISA) lawsuit, filed in the U.S. District Court for the
Southern District of Iowa.
At the heart of the complaint are guaranteed investment
contracts (GICs), a type of group annuity contract sold to retirement plans. According to the complaint, Principal operates the Principal
Fixed Income Guaranteed Option, also known as the Principal Fixed Income Option.
Retirement plans in which the certified class are participants and beneficiaries invest
in the Fixed Income Option pursuant to a GIC that governs the relationship
between the plans and Principal.
Plaintiffs suggest the contract is inappropriately
structured and has enabled Principal to “exercise its
discretionary authority to retain unreasonably large and/or excessive profits
rather than crediting the participants and beneficiaries of the plans with
appropriate returns.”
The complaint suggests participants in plans that invested
in the Fixed Income Option are “credited at an interest rate which Principal
can set and change in its sole discretion. The rate is applied to all participants
in all plans that invest in the Fixed Income Option.” The contract itself does
not specify the rate, “nor does it promise that the rate will not go below a
certain level. Nor does it promise that the rate will remain in effect
throughout the life of the contract.”
“Throughout the relevant time period, Principal invested the
assets it received pursuant to the contract as it chose, and retained for
itself the difference between the investment earnings of those assets and the
interest it chose to credit to the plans, otherwise known as the spread,”
plaintiffs argue. “As stated in a Principal Annual Meeting 10K Report, ‘assets
invested in GICs and funding agreements generate a spread between the
investment income earned by us and the amount credited to the customer.’ Even
while its earnings on the money paid by the plans were in the hundreds of
millions of dollars, Principal reduced the amount credited to the Plans and their
participants.”
Plaintiffs say Principal also “retained the spread in
addition to an already high disclosed fee for providing administrative and/or
recordkeeping services to plans. In other words, the contract allowed Principal
to set its own compensation as a service provider to the plans, and to collect unreasonable
and/or excessive fees from participants.”
Given this situation, ERISA breaches are alleged along the
lines that “the contract is a plan asset of the plans holding it. Because
Principal exercised discretionary authority over the administration of the contract,
including setting the credited rate, it owed fiduciary duties to plan
participants with respect to the contract.” Thus, according to plaintiffs, Principal
breached its fiduciary duties “by unilaterally setting its own compensation and
by charging unreasonable and excessive fees incident to administering the contract.”
As a result of Principal’s actions, plaintiffs argue the plans’
assets were “diminished,” and they seek “damages and equitable relief on behalf
of the class.”
NEXT: Digging into
the complaint
The text of the lawsuit goes into considerable detail regarding
the GIC entered into between the plans and Principal: “Principal offers plans that
invest in the Fixed Income Option a so-called Guaranteed Interest Rate defined
as the rate, which when credited and compounded daily, will produce the
effective annual interest rate we announce to you for the Guaranteed Interest Fund
to which the Applicable Schedule relates.” According to plaintiffs, the contract
“does not specify the Guaranteed Interest Rate or set forth a methodology for
determining the rate, or set a floor below which the Guaranteed Interest Rate
cannot go.”
The contract also provides for a “Composite Crediting Rate,”
which is declared for each deposit period, or the period of time within which
deposits to a guaranteed interest fund can be made, itself set forth in a
schedule to the contract. Plaintiffs observe the Composite Crediting Rate is calculated
using a methodology set forth in the contract, which is based on the aggregate
value and expected value of Guaranteed Interest Funds. “Expected values are
determined by Principal based on net cash flows accumulated with interest at
the Guaranteed Interest Rate,” they explain. “The contract does not set a floor
below which the Composite Crediting Rate cannot go.”
The main argument that emerges from these details is that,
under such a contract, “Principal appears to have discretionary authority to
change the Guaranteed Interest Rate at any time,” thereby triggering fiduciary
duties.
The complaint continues: “The contract provides for a delay
of 12 months or payment of a surrender charge if a plan withdraws its interest
in the Fixed Income Option. There are also limitations on participants’
abilities to transfer funds to competing investments in their Plans.
Specifically, participants are subject to an ‘Equity Wash,’ meaning they must
first transfer funds to a noncompeting investment option for a stated period of
time. Essentially all fixed-income and cash equivalent investments are defined
as competing investment options, so if they no longer wish to invest in the
Fixed Income Option, participants are forced to switch to a higher-risk
investment first.”
Plaintiffs say this leaves participants in the plans “highly
vulnerable to Principal’s decision to change the credited rate.” They further claim
Principal, through this arrangement, has permitted and engaged in ERSIA prohibited
transactions.
“Meanwhile, Principal reduced the credited rate to plans
continuously and precipitously between 2008 and 2014,” participants allege. “In
June 2008 the net crediting rate (crediting rate less fees for administrative
and recordkeeping services) was 3.95%; by June 2010 it had dropped to 2.55%,
and by June 2013 it had dropped to 1.35%. Thus, while Principal’s net
investment income from its general account declined by about 10.5% from 2010 to
2013, Principal unreasonably reduced the net crediting rate and plan
participant earnings by about 47% over the same period.”