Compliance July 1, 2008

Bill Aims To Protect Senior Investors

The Senate last week introduced a bill to protect seniors from investment fraud.
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U.S. Senators Bob Casey (D-Pennsylvania) and Herb Kohl (D-Wisconsin), chairman of the Senate Special Committee on Aging, introduced a bill to help protect seniors from investment fraud.

According to a joint statement on Casey’s Web site, the Senior Investor Protections Enhancement Act would increase penalties for those who commit securities violations against people who are at least 62 years old. Under the Act, penalties for existing securities violations could include an additional $50,000 civil fine for each violation that is primarily directed toward, specifically targets, or is committed against a senior.

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The bill would increase penalties for those who commit securities violations against seniors, including selling them products that are unsuitable for their age, failing to disclose fees, lock-ups of cash or large penalty charges, switching investments sold with the one marketed, or other material aspects of the investment. The statement said Americans older than 65 control an estimated $15 trillion in assets, a large portion of which are investable.

“Many seniors are discovering that their life savings may not be enough to last them throughout their retirement. As they turn to investments to bridge the gap, seniors need to know that they can trust the people who handle their money,” said Kohl, in the statement. “This bill will ramp up the punishment for those who advantage of older Americans’ well-earned retirement savings.”

The bill comes amid discussion from federal regulators about the threat of investment fraud to seniors. Last week the Securities and Exchange Commission (SEC) proposed a rule that would extend its jurisdiction to equity-indexed annuities, where many investment frauds toward seniors occur (see SEC Proposes Rule to Protect Senior Investors). In conjunction with the SEC, the Financial Industry Regulation Authority (FINRA) has long been working toward resolving the issue (see FINRA Offers Education on Early Retirement Scams and FINRA to Check Securities Firms’ Sales Practices with Seniors), and today released an online resource for employers and employees (see Online Resources Educate About Retirement Scams).

Data & Research July 1, 2008

Participants at Large Companies Fall Short in Savings

Research from Hewitt Associates found that on average, employees are projected to replace 85% of their income in retirement when they need much more.
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The research found that less than one in five 401(k) participants at large companies will be able to meet 100% of their estimated needs in retirement, the company said in a release.

When factoring in inflation and increases in medical costs, Hewitt predicts that employees will need to replace, on average, 126% of their final pay at retirement. That percentage is significantly more than the traditional expert estimates of 70% to 90% pay replacement, the company said.

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The study, which examined the projected retirement levels of nearly 2 million employees at 72 large U.S. companies using actual employee balances and behaviors, found that more than 1.2 million employees (67%) are expected to have less than 80% of their projected needs at retirement, the release said.

According to research results, the situation is more serious for employees who do not contribute to their 401(k) plans. Employees who contribute an average of 8% of pay to their plan can replace 96% of their pre-retirement income at age 65, but that number drops to 54% for those employees who do not contribute. Employees who have a pension plan may expect to replace just 62% of their income at retirement if they do not contribute to their 401(k) plan, Hewitt said.

Hewitt’s study found that employer-subsidized retiree medical coverage can help employees achieve adequate retirement savings levels. Employees who are offered a high level of employer subsidy—typically covering half of total costs not covered by Medicare—could have their retirement income shortage reduced to only 12% of final pay, rather than the average 15%, if they are saving in their 401(k) plan.

On the other hand, the fact that people are living longer is making the retirement savings picture worse. Hewitt said assuming employees need to prepare for a longer life span—approximately 10 years beyond the expected lifetime of 84 years old for someone age 65—increases the average shortfall by 80%.

The report, Total Retirement Income at Large Companies: The Real Deal, can be purchased by contacting the Hewitt Information Desk at 847.295.5000 or dianareace@hewitt.com.

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