Data & Research July 5, 2022

The Biggest Risks Americans Face in Retirement

A new Center for Retirement Research analysis identifies five major retirement risks, with the top three being longevity, market and health risks.

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The Center for Retirement Research at Boston College has released a new analysis examining both the financial risks retirees face and how retirees perceive them.

According to the brief, titled “How Well Do Retirees Assess the Risks They Face in Retirement?,” recent studies have identified five major risks: the risk of outliving one’s money (longevity risk), the risk of investment losses (market risk), the risk of unexpected health expenses (health risk), the risk of unforeseen needs of family members (family risk) and the risk of retirement benefit cuts (policy risk).

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The analysis shows that these risks affect different cohorts of the working population differently. For example, for single men reaching retirement, the top three sources of risk are longevity, health and market risk. According to the CRR, the typical single man would be willing to give up as much as 27% of his initial wealth to fully eliminate longevity risk.

Health risk ranks second in this cohort due to the unpredictability of medical expenditures in late life, including the cost of long-term care, the brief says. Market risk ranks third due to retirees’ relatively long—about 20 years—investment horizon. The brief suggests that policy risk is small because Social Security reform is unlikely to have a significant impact on people who have already retired or who will do so soon.

The risk ranking for married couples was similar to the results for single people, though the relative value of the risk is larger overall for couples, the brief says. This means that a couple would be willing to give up 33% of their initial wealth to avoid longevity risk, compared with 27% for a single man.

The brief also shows the most serious subjective risks perceived by different groups tend to be different from their actual risks. For example, for single men, market risk tops the list of perceived risks, followed by longevity, health, family and policy risks. According to the CRR, single men and couples alike tend to significantly underestimate their medical expenses in old age.

Perceived longevity risk and health risk rank lower because retirees are pessimistic about their survival probabilities, the brief says. This implies that retirees do not have an accurate understanding of their true retirement risks.

Additionally, the analysis highlights the importance of longevity and market risk, which underscores the need for lifetime income either through Social Security or private sector annuities, the brief says. Long-term care is also a significant risk faced by retirees that they often underestimate. Better-designed public programs and private products, possibly integrated with life annuities, could help to protect retirees with limited financial resources from this potentially catastrophic risk, the brief concludes.

Compliance July 1, 2022

Kellogg Faces ERISA Managed Account Fee Complaint

The new complaint also suggests the company and its retirement plan fiduciaries permitted the payment of excessive recordkeeping fees.

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A new Employee Retirement Income Security Act lawsuit has been filed in the U.S. District Court for the Western District of Michigan, naming as defendants the Kellogg Company and various boards and administrative committees involved in the operation of the company’s defined contribution retirement plan.

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The main allegation leveled in the complaint is that the defendants breached their fiduciary duty of prudence by requiring the plan to pay excessive recordkeeping fees and managed account fees, and by failing to timely remove their allegedly high-cost recordkeepers. According to the complaint, the plan contracted with Transamerica Retirement Solutions between 2016 and 2020 before transitioning to Fidelity Investments in 2021. Neither recordkeeper is named as a defendant in the lawsuit.

The text of the lawsuit refers to a number of important precedent-setting cases to argue that under ERISA, a breach of fiduciary duty claim can survive a motion to dismiss without well-pleaded factual allegations relating directly to the methods employed by the ERISA fiduciary. According to the plaintiffs, this situation is acceptable so long as the complaint alleges facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.

“The unreasonable recordkeeping and managed account fees paid inferentially tells the plausible story that defendants breached their fiduciary duty of prudence under ERISA,” the complaint states.

A significant portion of the complaint also seeks to establish that all of the leading recordkeepers quote fees for the bundled recordkeeping and administration services on a per-participant basis. The complaint suggests these quotes are generated “without regard for any individual differences in services requested, which are treated by the recordkeepers as immaterial because they are inconsequential from a cost perspective to the delivery of the bundled services.”

“The vast majority of fees earned by recordkeepers typically come from the fee for providing the bundled services as opposed to the ad hoc services,” the complaint alleges. “Because dozens of recordkeepers can provide the complete suite of required services, plan fiduciaries can ensure that the services offered by each specific recordkeeper are apples-to-apples comparisons.”

The complaint alleges the Kellogg Plan had a standard level of bundled recordkeeping and administrative services, providing recordkeeping and administrative services of a “nearly identical level and quality” to other recordkeepers that also serviced mega plans during the proposed class period.

“There is nothing in the service and compensation codes disclosed by the plan fiduciaries in their Form 5500 filings during the Class Period, nor anything disclosed in the Participant section 404(a)(5) fee and service disclosure documents that suggests that the annual administrative fee charged to participants included any services that were unusual or above and beyond the standard recordkeeping and administrative services provided by all national recordkeepers to mega plans,” the complaint states.

Regarding the topic of managed accounts, the complaint brings similar allegations. The plaintiffs say the defendants caused plan participants to pay excessive fees for the managed account services it made available to plan participants by not periodically soliciting bids from other managed account service providers and/or not staying abreast of the market rates for managed account solutions, in order to renegotiate market rates.

The full text of the complaint is available here. Kellogg has not yet responded to a request for comment about the lawsuit.

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