In Practice January 5, 2015

Advisers Should Include Insurance in Retirement Planning

As individuals often lose employer-provided insurance benefits when they retire, it is important to consider what insurance is needed so they can retire comfortably and confidently.
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When planning for retirement, it is essential for individuals to evaluate their insurance needs. They should plan for how they will supplement savings and generate income for expenses such as health care, loss of life, and disability, as they often lose access to insurance for these situations when they stop working.

Some advisers and providers in the retirement industry recommend that individuals consider investing in health insurance, life insurance, and annuities. A Nationwide Financial survey found many Baby Boomers are “terrified” of what health care costs will do to their retirement plans. More than one-quarter (26%) now believe they will never retire. While many plan to work while in retirement, few people actually continue to work as health problems often arrive years sooner than expected and derail those plans.

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Nationwide estimates that by 2030, an individual can expect one year of nursing home care to cost $265,000, making it important for individuals to start planning for these expenses early and consider supplementing employer benefits with individual policies that offer flexibility and portability, explains Kevin McGarry, director of the Nationwide Retirement Institute. He adds that insurance needs are personal and vary from one person to the next.

A second investment, life insurance, may also be appropriate for an individual’s financial situation. Ellen Blumstein, assistant vice president for PlanSmart at MetLife describes life insurance as a means to help individuals protect the people who depend on them financially. It can provide a legacy for future generations and accumulate wealth.

According to Blumstein, depending on the kind of life insurance policy that an individual has purchased, they may also have several options for using it as a source of cash if funds run low in retirement. If the policy has a savings account feature—typically found in whole life, universal life, and variable universal life policies—the individual can make partial withdrawals from it, which can be tax-free depending on the amount of the withdrawal. Additionally, the individual may be able to take out a loan against the policy.

All of the options may have certain tax ramifications and impacts on the policy’s death benefit, so they should be weighed carefully. A qualified financial professional can help with the decision to use life insurance as a source of cash.

Blumstein adds that a third option—annuities—can help provide a stream of guaranteed pension-like income and allow individuals to grow their investments on a tax-deferred basis.

How does a financial adviser assess what insurance a person or would will need? Blumstein lists four key factors advisers should consider when assessing what insurance products may best meet an individual’s needs:

  • Income and cost of living both before and after retirement;
  • Financial goals;
  • Risk tolerance; and
  • Health.

 

Plan sponsors often offer a range of benefits that help employees save for retirement, cover health care costs, and provide income replacement should an employee die or become unable to work. The opportunity to help employees be more retirement ready “lies in educating employees on how those benefits work, what they provide, how much they cover, and how to transition from working to living in retirement,” according to McCarry.

 

He adds, “With more than 60 million Baby Boomers reaching retirement by 2030, there’s a lot of planning and education that is needed. Advisers and providers play a major role in education and guiding individuals to create a holistic retirement income plan that helps them achieve their financial goals, and live the retirement they’ve earned.”

Most retires value in-person educational seminars, especially discussions about all benefits a retiree should consider, how to assess their future needs, and how to assess the cost impacts from moving from employer-sponsored benefits to consumer-purchased products.

The basic function of insurance is protection and income replacement; however there are many different products on that market and each is designed to serve a specific purpose. “A product that may be helpful for someone who’s five years away from retirement, for example, may not be helpful for someone who’s 10 years away,” Blumstein says. “People’s lives change, and thus their needs change.”

Retirees value affordability and choice, explains Matthew Gallina, vice president for markets and growth strategies, group, voluntary and worksite benefits at MetLife. He advises plan sponsors to consider offering access to products that employees had been provided or offered when they were active. This would provide an additional choice, but also an option for retirees to access benefits that they liked and valued as employees.

For example, retirees may be able to continue with discounts on auto and homeowners insurance that they had as active employees or be eligible for new discounts. He adds that plan sponsors should also consider offering pre-paid legal services, programs that provide discounts for goods and services, and particularly dental insurance as it is a key benefit that retirees often cite as one they will lose when they retire but would like to continue.

Gallina stresses the need for sponsors to promote early retirement planning since many people retire before they planned on doing so. He adds that many employers are shifting benefit selection to exchanges.

“These exchanges, either set up with a single employer or open to all retirees, are intended to create administrative simplification through online marketplaces and increased consumer choice, and are growing in popularity,” Gallina explains.

“Plan sponsors should also consider the emotional aspect of the retirement process,” says Gallina. “Employees are facing the loss of daily structure, social connections and sometimes sense of identity. Employee assistance programs that are focused on retiree issues would help prepare retirees for the transitional issues.”

“If advisers use the tools and expertise available to them, they can help plan sponsors offer a robust benefits package, and help employees achieve lifelong financial security,” says McGarry. According to a survey conducted by Nationwide, 98% of consumers who are married, partnered, or have dependents, lack enough life insurance coverage to replace their income. The average consumer surveyed will earn approximately $1.5 million before they retire and currently holds about $300,000 in life insurance coverage, leaving them about $1.2 million short of replacing their income with life insurance, he says.

Advisers should ask their firms about what products they can offer, and they should have a team of specialists they can depend on to assist them. McGarry also encourages advisers to utilize websites to find tools, training opportunities, and articles from industry experts. The more breadth and knowledge financial advisers can offer their clients, the more valuable they are in helping clients prepare for and live in retirement.

 

Compliance January 5, 2015

Court Finds Advocate Health Retirement Plan Not a Church Plan

A federal district court has found the defined benefit (DB) retirement plan of Advocate Health Care Network and its subsidiaries is not a “church plan” under the Employee Retirement Income Security Act (ERISA).
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United States District Judge Edmond E. Chang of the U.S. District Court for the Northern District of Illinois concluded a statutory analysis reveals that the Advocate plan does not qualify as a church plan and is instead fully subject to ERISA’s requirements. Chang denied Advocate’s motion to dismiss the case.

According to the court opinion, although it is affiliated with the United Church of Christ and the Evangelical Lutheran Church in America, Advocate is not owned or financially supported by either church. The plaintiffs allege that by unlawfully operating the plan outside the scope of ERISA, Advocate breached its fiduciary duties and harmed the plan’s participants by requiring an improperly long period of five years of service to become fully vested in accrued benefits; failing to file reports and notices related to benefits and funding; funding the plan at insufficient levels; neglecting to provide written procedures in connection with the plan; placing the plan’s assets in a trust that do not meet statutory requirements; and failing to clarify participants’ rights to future benefits.

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Alternatively, even if Advocate can evade liability on these counts under ERISA’s church plan exemption, the plaintiffs allege that this provision of ERISA is void as an unconstitutional violation of the First Amendment’s prohibition on state establishment of religion.

Chang found that ERISA Section 33(A) defines a church plan as a “plan established and maintained” by a church, and Section 33(C)(i)’s provision that a church plan includes a plan maintained by an organization established for the purpose of administering the plan does not override the fact that the plan must be established by a church. He quoted the case of Rollins v. Dignity Health in which a federal court in California made a similar finding and said if “all that is required for a plan to qualify as a church plan is that it meet section [33(C)’s] requirement that it be maintained by a church-associated organization, then there would be no purpose for section A.”

Chang contended that contrary findings by other courts incorrectly look at Section 33(C) in isolation. He said neither Medina v. Catholic Health Initiatives or Overall v. Ascension Health Alliance explain why “established and maintained” should be read as a singular term when those two words have separate, ordinary meanings. 

Looking at the legislative history of ERISA Section 33(C), Chang said the takeaway is that it was added to ERISA in response to very specific concerns about existing church plans and the fact that pension boards were set up to maintain their pension plans. 

Chang also concluded the Internal Revenue Service (IRS) opinion given to Advocate saying its plan is not entitled to deference and its contents do not change the outcome of the court’s decision. He cited other court cases which established that agency opinions expressed in letters are not owed the type of deference that is owed when an administrative agency interprets a statute through formal adjudication or rulemaking with a notice-and-comment process. “[T]he IRS letter, which reflects merely an advisory opinion and not the product of formal adjudication or rulemaking, should be deferred to only if its interpretation of the statute is convincing,” Chang wrote. He found that because the IRS opinion relied on the same reasoning used by the court decisions he rejected, it is not persuasive and is owed no deference. 

Because he found the Advocate plan is not a church plan, Chang said, “the constitutional question raised here, whether Congress may permissibly create within ERISA a religious-based exemption for certain employers, must await another day for resolution…” 

The opinion in Stapleton v. Advocate Health Care Network and Subsidiaries is here.

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