Participants in the FMC Corporation
Savings and Investment Plan have sued the firm and the plan over the
plan’s offering of the Sequoia Fund.
According to the complaint,
the Sequoia Fund is a high-cost mutual fund run by adviser Ruane,
Cunniff & Goldfarb and its portfolio managers, Robert D. Goldfarb
and David M. Poppe. The lawsuit claims the plan’s fiduciaries breached
their Employee Retirement Income Security Act (ERISA) duties by
continuing to offer the fund, because it was not diversified. The
complaint says the fiduciaries should have known that throughout 2015—in
violation of the plan’s investment policies regarding concentration and
in spite of the concerns of fund shareholders—the Sequoia Fund’s assets
were concentrated in a single stock: Valeant Pharmaceuticals, Inc.
The
fund was the largest shareholder in Valeant in 2015, owning nearly 10%
of Valeant, and Valeant represented more than 30% of the fund’s total
assets, according to the lawsuit.
The lawsuit seeks losses to the
plan on behalf of all participants and beneficiaries of the plan during
the proposed class period.
In another lawsuit questioning
Disney’s offering of the Sequoia Fund as an investment in its retirement
plan, a federal court in California dismissed the charges,
finding that participants had not plausibly alleged that the plan’s
fiduciaries were responsible for monitoring the underlying investments
in the mutual fund.
By using this site you agree to our network wide Privacy Policy.
Health care costs can take a bite out of retirement nest eggs
in ways investors haven’t anticipated. Recently, the Centers for
Medicare & Medicaid Services (CMS) announced hikes in Medicare Part B
premiums and deductibles for 2017.
The deductible will climb to
$183, a 10% increase from 2016. About 30% of people not protected by
Medicare Part B’s “hold harmless” provision would be looking at premium
increases ranging from $134 to $428.60, depending on their income in
2015. These include new enrollees, those not receiving Social Security,
and higher-income beneficiaries. Because the 2017 Social Security
cost-of-living adjustment is 0.3%, all other beneficiaries will see
premiums rise to $109 in 2017, compared to $104.90 in 2016.
And
many experts agree that heath care prices won’t be reversed any time
soon, making it even more important for people to plan ahead. “Next
year, we expect to see an increase of a little over 22% for Medicare
Part B,” says Ron Mastrogiovanni, president of Health View Services
(HVS), a provider of software that projects health care costs.
The
firm’s research indicates that health care inflation including Medicare
Part B is expected to grow 6% annually for the next 10 years. These
rising expenses highlight the need for plan sponsors and their advisers
to relay to participants the importance of anticipating health care
expenses in retirement.
In an interview with PLANADVISER,
Mastrogiovanni outlined some strategies that plan providers and advisers
can pursue to raise awareness and encourage participants to take
action. First, he notes that it’s important to communicate to investors
that Medicare costs vary immensely depending on income.
NEXT: Determining what Medicare will cost
“How do you prepare? Make sure that
the investments that you’re going to be generating income from in
retirement do not fall under MAGI [Modified Adjusted Gross Income],”
Mastrogiovanni suggests. “That’s how Medicare determines the income
bracket you’re in and what you’ll be paying.”
He notes that
someone retiring with income of $85,000 or less can expect to pay
$183,360 for health care in retirement; meanwhile, someone with an
income of between $85,001 and $107,000 can expect to pay $250,407—a 37%
increase. Those making more than $214,000 can expect to pay a 204%
increase at $557,066.
Medicare surcharges also apply to beneficiaries with retirement incomes exceeding $85,000.
According
to HVS research, “a 55-year-old who plans to retire at age 65, has a
life expectancy of 86 and generates over $85,000 per year in retirement
income will exceed MAGI thresholds and can expect to pay up to $373,706
in lifetime premium surcharges (in real dollars) in retirement.”
NEXT: The Right Product Mix Can Lower Medicare Costs
To navigate these regulatory
burdens, Matrogiovanni suggests plan sponsors and advisers should
educate participants about different investment vehicles that can
potentially reduce tax burdens, and move participants into a lower
income bracket once retired or eligible for Medicare. These include Roth
401(k) plans, health savings accounts (HSAs), and lifetime insurance
policies.
Generally speaking, these products offer various tax
advantages. For example, Roth 401(k) drawdowns won’t be considered
taxable income. So it won’t affect an investor’s MAGI or push the
individual into a larger income bracket as far as CMS is concerned. HSAs
offer a “triple-tax” advantage.
“If
you take advantage of a universal life insurance policy and you utilize
the assets that are invested in that policy in retirement as a portion
of your income, it doesn’t get means tested; so, you don’t pay a
surcharge,” Mastrogiovanni explains. “Those are three major products
that most advisers in the country can advise their clients on. Today,
we’re not just talking asset allocation, but the right product mix.”
While
not all investors have access to an employer-sponsored Roth 401(k) or
an HSA, some vehicles such as Roth IRAs may offer similar benefits.
“People
need to look at not only savings, but how they save,” says
Mastrogiovanni. “It can significantly change what they are paying for
health care.”
Cathy Weatherford, CEO of the Insured Retirement
Institute (IRI), echoes this view. When asked about what plan sponsors
and advisers can do to help participants address rising health care
costs, she tells PLANADVISER that raising awareness and helping them
develop a strategy should be the top priorities.
She also says
participants can benefit from “shopping smart” for the right products
with the help of plan sponsors and advisers.
This is increasingly
important as Weatherford points out that IRI research suggests an
alarming number of people under save for health care expenses in
retirement.
NEXT: Projecting Health Care Expenses
Weatherford notes that there are several tools such as retirement
income calculators, which can help determine future health care expenses
based on factors such as age, life expectancy, health conditions and
even demographics.
However, it’s important to note that this
technology is only as useful as the information being fed into it. One
widely-used strategy when it comes to retirement saving is aiming for
the right income-replacement ratio (IRR). In a report, HVS points out
that this number can be misleading since it doesn’t always factor in
figures such as life expectancy, unexpected out-of-pocket costs, and
income-based surcharges. Moreover, Medicare income thresholds are not
expected to be adjusted for inflation.
Another thing to relay to
investors is the fact that health care costs vary greatly from what is
spent during working years compared to what will be spent during
retirement. “On average, 75% of your premium is paid by your employer in
its plan,” Mastrogiovanni notes. “So, we don’t see this as a big hit.
But when we retire, we’re going to be paying 100% of that, and we need
to be prepared for that.”
Considering all these factors, plan
sponsors and advisers can benefit from helping participants analyze
their individual situations to gauge future health care expenses, invest
in the right product mix, and navigate the complexities of how MAGI
determines Medicare costs.
“One of things we find is that every person underestimates the amount
they are going to need,” Weatherford says. “I think an adviser can help
people start saving or to calculate what their income would look like
in retirement. We have to do more of that and we have to do it earlier.
The older you are, the harder it is to play catch up. The sooner people
can begin that process and get knowledge, the better. Every ounce of
knowledge we can give supports better behavior.”