Data & Research March 21, 2018

Nearly Three-Quarters of Americans Value Guaranteed Income

Seventy percent believe their advisers have a responsibility to discuss guaranteed lifetime income products with them.

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Seventy-three percent of people surveyed for the Guaranteed Lifetime Income Study from Greenwald & Associates and CANNEX said they view guaranteed income as a valuable addition to Social Security, up from 61% a year ago. The survey was conducted among 1,003 pre-retirees and retirees between the ages of 55 and 75 with more than $100,000 in household assets in February.

The survey found that two primary reasons why people value guaranteed income are to cover health care costs (cited by 54%) and to prevent running out of money (46%). Fifty-two percent said they view guaranteed income as a hedge against a market downturn.

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“The perceived need for guaranteed lifetime income products continues to rise with fewer retirees being able to count on pension plans,” says Doug Kincaid of Greenwald & Associates, who oversaw the survey. “In this year’s data, we found many respondents confident they’ll be able to maintain their lifestyle through their own projection of their life expectancy, but the less affluent and women, in particular, are concerned about their ability to meet their needs if they live beyond this. Other research has shown that more than half will wind up living longer than they expect.”

While only 17% of those with more than $1 million in assets are highly concerned about meeting their financial needs in retirement, for those with assets between $100,000 and $249,000, 43% share this concern. While 25% of those with a pension are concerned about outliving their retirement savings, this can be said of 38% of those without a pension. Greenwald & Associates said this is a key finding, as pension plans continue to be a thing of the past.

Additionally, 37% of women are highly concerned about outliving their savings, while only 22% of men share this concern. On average, people expect to live to age 85, and roughly 80% of people are confident they will have enough money to reach that point. In fact, 53% are highly confident they will have enough money until age 85. However, for those with assets between $100,000 and $249,000, only 43% have this high level of confidence, but for those with more than $1 million in assets, this rises to 74%.

Should they live five years beyond their expected longevity, only 38% are confident they will be able to maintain their lifestyle, and should they live an additional 10 years, this drops to 31%. The respondents indicated they expect a substantial drop in income when they retire, but that it will remain steady afterward. Roughly 40% of pre-retirees said they expect annual income of less than $50,000. Twenty-three percent expect income of $50,000 to $75,000, and 16% expect to receive $75,000 to $99,000. Less than 20% expect to receive more than $100,000 in retirement income.

While 25% expect their expenses will be higher in early retirement, 38% expect they will increase in later retirement. Fifty-three percent of respondents between the ages of 65 and 69 believe the value of their assets will grow in 10 years, as do 48% of those between the ages of 70 and 75. Only 19% and 13%, respectively, think their assets will be lower in value.

“Respondents are optimistic that market growth in their savings, along with a lower level of expenses, will enable them to maintain their quality of life in retirement,” says Gary Baker, president of CANNEX USA. “Given limited savings and rising costs, drawing down assets will be a necessity for most retirees, making the risk of running out of funds a question of time without lifetime income strategies.”

Evaluating guaranteed lifetime income products

Asked about the main benefits of guaranteed lifetime income products, 66% said it is the protection against longevity risk, peace of mind and making it easier to budget. As for the negatives, respondents said ease of understanding, and excessive terms and conditions of the contract.

Thirty-nine percent of respondents said they had heard about annuities from an adviser, while 23% pointed to financial institutions. Seventy-percent think their adviser has a responsibility to discuss guaranteed lifetime income products with them. If they don’t, the respondents would consider switching to another adviser. Among those with an adviser, 66% are highly satisfied with the advice, and when retirement income strategies are discussed, the level of satisfaction rises. Nonetheless, only 50% of those with an adviser have had a conversation about retirement income strategies.

Sixty-two percent said their adviser had said positive things about guaranteed lifetime income products and annuities, but 37% said their adviser’s assessment was either neutral or negative. They also said that media coverage of annuities and lifetime income products is largely negative.

“There are significant operational challenges the financial services industry still needs to overcome to broaden access to annuities, in addition to addressing negative perceptions around them,” Baker says. “The study shows that the conversation really starts and ends with adviser discussions.”

Among those who own a guaranteed lifetime income product, 63% said they are highly satisfied, and 73% said the product is highly important to their financial security.

Kincaid says that advisers need to consider each individual’s risk tolerance when working with them on selecting a guaranteed income product.



Compliance March 20, 2018

Circuit Court Fiduciary Rule Decisions Raise Important Process Questions

While the Fifth U.S. Circuit Court of Appeals has vacated the DOL fiduciary rule expansion, one attorney warns the rule is still technically in effect, at the very least until the court issues a “mandate” opening a limited period during which the Department of Labor can choose to contest the decision; he also questions whether the circuit courts are in fact split on the matter, as some are suggesting.

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Steven Rabitz is a compensation and benefits partner with Stroock in New York; his firm provides transactional and litigation guidance to investment advisory corporations, banks and venture capital firms.

Like many other attorneys whose work regularly touches on the Employee Retirement Income Security Act (ERISA), Rabitz has been hard at work this week fielding questions about the fate of the Department of Labor (DOL) fiduciary rule expansion. As readers likely already know, the decision that emerged this week out of the Fifth U.S. Circuit Court of Appeals threw a dramatic new element of confusion into the epic regulatory saga that has been the rollout of the Department of Labor fiduciary rule. The Fifth Circuit’s two-to-one majority ruling wholly rebukes the long-running fiduciary rule expansion as an abusive overreach of the DOL’s authority—this after numerous district courts have strongly upheld the DOL’s rulemaking process.

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To help ease the immediate concerns and confusion of clients, Rabitz and his firm have published a helpful guide that dissects the latest fiduciary rule developments. On his assessment, it actually is not that likely that the U.S. Supreme Court will get involved.

“While there has been some discussion that other recent decisions in other circuits addressing the fiduciary rule may now result in a ‘split,’ no decision appears more sweeping or broad concerning the underlying legality of the fiduciary rule than the decision from the Fifth Circuit,” Rabitz explains. “Moreover, because of the Constitutional nature of the decision, future administrations—regardless of party—may have difficulty resurrecting the fiduciary rule or similar sweeping changes to the original fiduciary rule, absent Congressional action.”

But don’t get the wrong idea. As Rabitz sees it, this week’s Fifth Circuit action is “not necessarily the end of the story—at least not yet.”

“There are a number of additional considerations that clients and friends will continue to need to pay attention to. The Department of Labor could challenge the decision, and there are other actions that could be taken that at a minimum would prolong the process of finality,” Rabitz observes. “With any such delay, already taxed financial services institutions trying to change business models and compliance approaches to meet the changes occasioned by the fiduciary rule may feel even more under the gun.”

Based on his interactions with clients, Rabitz points out that some institutions doing business in jurisdictions where other circuit courts have weighed in on prior challenges to the fiduciary rule—for example in the Tenth Circuit—may feel compelled to approach the Fifth Circuit decision with caution. He notes that caution is a reasonable response here, but he also says firms can and should take the Fifth Circuit decision seriously. The court has strongly rebuked the DOL and cast the whole future of the rulemaking process in serious doubt.

“What Happens Next? While the Fifth Circuit has vacated the fiduciary rule, the rule is still technically in effect as the case continues to be under the jurisdiction of the Fifth Circuit until it issues a ‘mandate’ opening a limited period during which the Department of Labor can choose to contest the decision under applicable rules of procedure,” Rabitz says. “The mandate would generally be expected to be issued several days following the decision, which opens a window for any such challenge that is expected to close by May 7, 2018, or 45 days from the Fifth Circuit’s decision.”

As Rabitz lays out, during that period, the decision may be appealed by the Department of Labor—either en banc, meaning the Fifth Circuit would be called on to rehear the case, or potentially to the Supreme Court—during which time the Fifth Circuit’s decision may be stayed.

“Of course, should the Department of Labor in fact seek review by the Supreme Court, additional delays would be likely,” Rabitz says. “In addition, there is a pending appeal in the District of Columbia Court of Appeals that has been on hold pending the outcome of this Fifth Circuit case. While other circuits have upheld challenges concerning aspects of the Fiduciary Rule, most recently in the Tenth Circuit, given the sweeping nature of the decision of the Fifth Circuit, those cases can be distinguished and likely do not create a split.”

According to Rabtiz, the earlier cases should be regarded as having a more narrow focus than the issues addressed by the Fifth Circuit case—weighing against the likelihood of a Supreme Court decision here.

“Nevertheless, there are some competing views that may cause institutions doing business in circuits that have previously upheld challenges to aspects of the fiduciary rule to proceed with greater caution pending additional clarity,” Rabitz continues. “Rightly or wrongly—and at this stage, we believe more wrongly—these institutions may be concerned that the fiduciary rule will continue to be in effect in these jurisdictions, notwithstanding the Fifth Circuit’s decision. Assuming that the fiduciary rule is in fact extinguished on or about May 7, the original rule’s ‘five part’ test would be reinstated.”

Of course, Rabitz warns, returning to status quo ante may not be as simple as it first appears—at least in the short term.

“While many may point to President Trump’s pre-election rhetoric criticizing the fiduciary rule, and his February 3, 2017, directive to the Department of Labor to reconsider the fiduciary rule as an indication of what is to happen next, it is not preordained that the Department of Labor will not seek a rehearing, or perhaps even a challenge to the United States Supreme Court in light of the several other circuits that have upheld challenges related to the fiduciary rule,” Rabitz notes.

Still far from a certain outcome, Rabitz hedges that the Department of Labor’s acquiescence to the Fifth Circuit decision, should it occur, would clear the way for the Securities and Exchange Commission (SEC) to “adopt a more fulsome rule that would likely have the advantage of applying more broadly across retail accounts.”

“Such acquiescence would likely be more in line with the President’s previously stated objectives about regulatory overreach generally, and the fiduciary rule specifically,” he explains. “Nevertheless, were the Department of Labor to challenge the decision in defending a regulation of the predecessor Democratic administration, it would likely need to consider that a majority of the judges on the Fifth Circuit were Republican appointees. Another case pending before the District of Columbia U.S. Court of Appeals brought by the National Association of Fixed Annuities [NAFA] has been on temporary pause pending the outcome of this case in the Fifth Circuit. It would be interesting to see what happens if NAFA simply dropped its appeal given the Fifth Circuit’s broad ruling.”

Until these questions are addressed, the picture for the short term is likely to remain unclear, Rabitz concludes.

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