Data & Research July 12, 2016

Most Americans Haven't Done Much Retirement Planning

While most current retirees are managing finances well due to multiple sources of income, those not yet retired are worried about running out of money in retirement, FINRA finds.
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The majority of Americans do not appear to have done much retirement planning, according to the Financial Industry Regulatory Authority’s (FINRA’s) report, “Financial Capability in the United States 2016.”

Despite the study’s finding of overall improvement in Americans’ ability to make ends meet, the percentages of those who have planned for retirement or have a retirement account are little changed since 2009. In 2009 37% had tried to figure out their retirement savings needs, compared to 39% in 2015. Fifty-seven percent of Americans had employer-sponsored or individual retirement accounts in 2009, while 58% had them in 2015.

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Respondents with lower income levels are much less likely to be prepared for retirement than those with higher incomes. Only 19% of those with incomes less than $25,000 have tried to plan for retirement, compared to 60% of those with $75,000 or more in income. Similarly, the likelihood to have a retirement account increases dramatically with income, such that only a small minority of respondents with less than $25,000 in income have a retirement account (18%), while a strong majority of respondents with $75,000 or more income have one (87%).

Respondents who feel they are working towards long-term financial goals are much more likely than those who do not to have calculated retirement savings needs (53% vs. 17%) and to have a retirement account (67% vs. 42%). Among respondents who reported planning for time horizons of more than 10 years, more than half (57%) have tried to calculate their retirement needs, and nearly three-quarters (73%) have a retirement account.

NEXT: Those with retirement income report less difficulty making ends meet

The study finds that more than half of Americans (56%) are worried about running out of money in retirement. Women are somewhat more likely than men to be worried about running out of money in retirement (59% vs. 53%, respectively). Respondents ages 35 to 54 are the most likely to be worried (65%), followed by those 18 to 34 (57%). While those in the highest income group ($75,000 or more) are less likely than those with lower incomes to be worried about retirement, more than half of them are worried.

Among non-retired respondents, those who have tried to calculate retirement savings needs are slightly more likely than those who have not to be worried about having enough money in retirement (64% vs. 59%). Non-retired respondents with retirement accounts are just as worried as those without retirement accounts (62% vs. 60%).

Respondents who receive retirement income (pension plans, Social Security, or withdrawals from retirement accounts) are the most likely to have no difficulty making ends meet. This may be due in part to the higher likelihood of having multiple income sources among these respondents, the report says. For example, among those receiving pension payments, 95% have at least one other additional source of income (out of the seven listed in the survey). In contrast, among those receiving salaries or wages, only 55% have more than one source of income.

Nearly two-thirds (65%) of respondents receiving income from a traditional pension plan report no difficulty making ends meet. Fifty-seven percent of those receiving Social Security retirement benefits report no difficulty, as do 55% of those receiving withdrawals from retirement accounts (e.g., 401(k), IRA, Keogh).

NEXT: Risk tolerance and financial literacy

An important determinant of how people choose to invest their savings and retirement wealth is their attitude towards financial risk. Only about one in five Americans (21%) say they are willing to take financial risks. However, risk tolerance has increased considerably relative to 2009, when 12% of respondents reported being willing to take risks. Men are much more likely than women to say they are willing to take risks in financial investments (28% vs. 14%, respectively).

To evaluate financial knowledge, respondents were exposed to a series of questions covering fundamental concepts of economics and finance that may be encountered in everyday life, such as calculations involving interest rates and inflation, principles relating to risk and diversification, the relationship between bond prices and interest rates, and the impact that a shorter term can have on total interest payments over the life of a mortgage. The survey reveals relatively low levels of financial literacy among Americans as measured by these standard questions. While the correct response to some individual questions reaches 75%, only 14% of respondents were able to answer all five questions correctly, and 37% were able to answer at least four questions correctly.

Slightly less than one-third of respondents (31%) report having been offered financial education at a school, college, or workplace, and 21% say they participated. On the surface, exposure to financial education appears to be associated with better performance on the financial literacy quiz questions. Respondents who stated that they participated in financial education score higher than those who were offered but did not participate, who in turn score higher than those who were not offered financial education.

However, the report says it is important to note that these findings do not imply a causal relationship between financial education and financial literacy, and may be entirely attributable to differences in education, employment, and other demographic factors. It is also possible that those who are more interested in financial literacy might be more likely to seek out financial education.

A copy of the full report can be found at www.USFinancialCapability.org.
Compliance July 11, 2016

Technical Updates to Fiduciary Rule ‘BIC’ Published by DOL

The DOL published a pretty substantial list of technical corrections to the Best-Interest Contract Exemption—including mostly minor clarifications but also a few potentially substantial adjustments. 
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A big question coming out of the Department of Labor’s (DOL) publication of the final fiduciary rule earlier this year asked how workable would be the portion of the rulemaking known as the Best-Interest Contract Exemption, or “BIC” for short.

On the DOL’s own explanation, the BIC Exemption “allows certain persons that are fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) or the Internal Revenue Code (the Code), or both, by reason of providing investment advice, to receive compensation that may otherwise be prohibited.”

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The newly published corrections mainly fix typographical errors and make minor clarifications to provisions that “might otherwise be confusing.” Other changes could prove to be a little more substantial, though. For example, DOL says the technical update also “confirms insurers’ broad eligibility to rely on the exemption, consistent with the exemption’s clearly intended scope and the analysis and data relied upon in the Department’s final regulatory impact analysis.”

The update form DOL further “adds an identifier, Prohibited Transaction Exemption 2016-01, to the heading of the Best Interest Contract Exemption.” DOL expects this will help industry practitioners view and understand the final version of the BIC Exemption that will begin taking effect in the next two years.  

A brief summary of the changes goes as follows, pulled directly from the Federal Register:

1. In the preamble discussion of the negative consent procedure for entering into the contract with existing contract holders, page 21023, the Best Interest Contract Exemption stated that “If the Retirement Investor does terminate the contract within that 30-day period, this exemption will provide relief for 14 days after the date on which the termination is received by the Financial Institution.” However, Section II(a)(1)(ii) of the exemption text regarding the negative consent procedure, page 21077, inadvertently failed to include that sentence. Section II(a)(1)(ii) is corrected to insert that sentence as the second sentence of the section. This correction will provide certainty to parties relying on the exemption as to the period of relief following termination of the contract by any Retirement Investor.

2. Section II(a)(1)(ii) of the exemption defines an existing contract as “an investment advisory agreement, investment program agreement, account opening agreement, insurance contract, annuity contract, or similar agreement or contract that was executed before January 1, 2018, and remains in effect.” There is an error in the quotation of that language on page 21023 of the preamble, which, rather than using the date “January 1, 2018,” referred to the “Applicability Date.” For avoidance of doubt, the Department confirms that January 1, 2018, is the correct date of reference for existing contracts.

3. Section II(h) of the exemption, page 21079, lacked a comma between “(g)” and “III.” 

NEXT: Additional changes revealed by DOL

Further technical updates to the BIC Exemption published by DOL in the Federal Register go as follows:

4. Section VI of the exemption, page 21082, is entitled “Exemption for Purchases and Sales, Including Insurance and Annuity Contracts.” However, the text of Section VI(b) referred only to a “purchase” and inadvertently omitted reference to a “sale.” Section VI(b) is corrected to insert “or sale” immediately following “purchase,” and, on line 9 to replace “from” with “with,” to conform to the section heading and accurately describe the transactions covered by the exemption.

5. Section VII(b)(3), page 20182, included an unmatched close parenthesis. Section VII(b)(3) is corrected to delete ”)” after the word “contract.”

6. The definition of “Adviser” in Section VIII(a) of the exemption provided, in relevant part, that an Adviser “means an individual who: (1) Is a fiduciary of the Plan or IRA solely by reason of the provision of investment advice described in ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B), or both, and the applicable regulations, with respect to the assets of the Plan or IRA involved in the recommended transaction (emphasis added).” In contrast, Section I(c)(4) of the exemption provided an exclusion for an Adviser that “has or exercises any discretionary authority or discretionary control with respect to the recommended transaction.” Section I(c)(4) reflects the Department's intent that the exemption not apply if the Adviser has or exercises discretion regarding the recommended transaction. The Department did not intend to prevent Advisers from using the exemption if they have discretionary authority over other assets of the Plan or IRA that are not subject to the investment advice or if they previously had, or subsequently gain, discretionary authority over assets of the Plan or IRA. To avoid any doubt as to the availability of the exemption under these circumstances, Section VIII(a)(1) is corrected to delete the word “solely.”

7. Under Section VIII(e)(3)(iii), insurance companies relying on the exemption must be “domiciled in a state whose law requires that actuarial review of reserves be conducted annually by an Independent firm of actuaries and reported to the appropriate regulatory authority.” This condition inadvertently limited the availability of the exemption with respect to insurance companies because, while state laws generally require annual actuarial reviews of insurance company reserves to be conducted by a qualified actuary appointed by the board of directors, they do not generally require that such reviews be performed by an “independent firm of actuaries.” The Department clearly intended to make the exemption broadly available to insurance companies. To ensure that the exemption is available to insurance companies as the Department clearly intended in its original rulemaking, Section VIII(e)(3)(iii) is corrected to delete the phrase “by an Independent firm of actuaries.”

8. Section VIII(j) of the exemption defines the term “Plan” to mean “any employee benefit plan described in section 3(3) of the Act and any plan described in section 4975(e)(1)(A) of the Code.” The word “Act” refers to the Employee Retirement Income Security Act of 1974, which is defined in the exemption as “ERISA.” To avoid uncertainty as to the meaning of the word “Act,” Section VIII(j) is corrected to replace the words “the Act” with the word “ERISA.”

The full Federal Register entry is here. 

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