Compliance June 9, 2014

PSNC 2014: Washington Update

The Department of Labor (DOL) has increased full-scope audits of retirement plans, said Lisa Barton, a partner with Morgan, Lewis & Bockius.
Reported by

“Now it’s not a question of if you will get audited, but when,” Barton told attendees of the “Washington Update” panel at the PLANSPONSOR National Conference in Chicago.

In the event of an audit, be responsive, cooperative and ask questions to find out the exact reason why you are being audited, said David Levine, a principal with Groom Law Group. “Work more collaboratively,” he added. “Inquire about the purpose, rather than inundate them with information. Don’t send them every piece of paper. Also, call your lawyer before you respond to make sure [your reply] addresses what they want.”

Of particular concern to the DOL are fees, disclosures, fiduciary training of the investment and administrative committees, Barton added. “The DOL will get an independent expert to testify if fees are out of line. Make sure to train the committee to actually look at plans,” she warned.

Barton said her firm also is hearing a lot more from the DOL about revenue sharing. The Employee Retirement Income Security Act (ERISA) “requires plan assets paid to the plan sponsor to be reasonable,” Barton said. So, plan sponsors should be sure to ask themselves, “Are revenue sharing fees reasonable? As plan assets increase, revenue sharing increases. Did the service provider offer more services are a result?” Make sure to evaluate these fees, particularly since the 408(b)(2) regulation requiring full fee disclosure to plan sponsors now puts the onus to understand these fees squarely on the shoulders of plan sponsors, she recommended.

The DOL has also started “investigating plan sponsors, recordkeepers and other providers to ensure they are not conflicted on how they get paid,” Levine said. “It comes down to whether you went through a proper process” to ensure fees are reasonable and equitable.“There is no one right way to structure your plan’s fees,” he added. “Do you charge a flat fee and reimburse the revenue sharing back to the participants? Is it a large plan that does fee leveling through rebates? DOL hasn’t given guidance.” The key is to establish the practical reasons why you selected the fee structure you did to be fair to your participant base, Levine said. Additionally, “case law on fees has determined that they should line up with your investment policy statement and [service provider] contracts, and that you review them periodically.” If they aren’t in agreement, “amend the documents for the plan.”

According to Levine, the DOL and other agencies in Washington “have a lot of interest in lifetime income,” so plan sponsors should have this on their radar. “The DOL has put out guidance saying … they want to put out guidance” about how to calculate and display lifetime income on participant benefit statements, he said.  Other DOL concerns that are likely to be raised in 2015: a continued focus on target-date funds and disclosure as to whether its glidepath takes investors “to” or “through” retirement; guidance on buying longevity annuity contracts; an expansion of the definition of fiduciary duty; and self-directed brokerage accounts.

A general rule of thumb that can be helpful to plan sponsors when considering new investment vehicles or asset classes for their plan, Levine said, is to “ask if it is a product for product’s sake or something that can be useful to your participants.” In the coming years, for example, there may be many individuals without adequate savings who will “retire in place” and not leave their jobs, Levine said. To “incentivize these people to move on,” an annuity or lifetime income product might be very useful.

Barton and Levine turned next to enforcement and guidance from the Internal Revenue Services (IRS). The IRS has two levels of oversight, Levine said. The first is a voluntary compliance check program whereby the agency will send a sponsor a six- to 10-question survey. “Be sure to answer the questions,” he told attendees. “They could be ‘gotcha’s. If you don’t, you will be audited.” Again, as when dealing with DOL investigators, be both cooperative and proactive, Levine said. “If the questions are not relevant to your plan, call the agent.”

If a plan sponsor is unfortunate enough to face a formal audit, they should be prepared for the long haul, for these audits can last as long as 18 months, Levine added. “They move in. They want to see how you do things.” Ensure your documents are all accurate, he advised. “The recordkeeping industry has had its margins squeezed, and things move quickly. You are responsible, so make sure things are accurate.”

Barton added: “Be forthcoming.” If you are aware of issues or errors, it is often a good idea to “disclose things you know are wrong ahead of the audit.”

Data & Research June 6, 2014

Look Out, Retirement, the Boomers Are Coming

Is retirement the end of work? Not so fast, say the retirees and those contemplating retirement in a study by Merrill Lynch Bank of America.
Reported by

Nearly three out of four (72%) pre-retirees over the age of 50 say their ideal retirement will include work – often in new, more flexible and fulfilling ways, a study from Merrill Lynch finds.

The common thinking on retirement is that it’s a sedentary, fixed time of life, says Ken Dychtwald, CEO of Age Wave, which partnered with Merrill Lynch for the research, which asked people to describe their ideal retirement. “Work in Retirement: Myths and Motivations” had some surprising findings, with half (47%) of current retirees having worked or planning to work during their retirement years.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

“Incredibly, three-quarters of Boomers said that continued work would be extremely important in their ideal retirement,” Dychtwald says.

But they didn’t intend to continue in the same career path. They redefined work altogether, Dychtwald tells PLANADVISER. Even before actually reaching retirement, they were envisioning new careers. It’s not surprising, he points out. After all, Baby Boomers famously have reinvented themselves, changing college majors with some frequency, changing spouses and religions. “They are far more likely to reinvent themselves again and again than previous generations,” Dychtwald observes.

More than half surveyed (60%) said they wanted to try something new, Dychtwald says, describing this as “absolutely stunning.” When his grandparents reached retirement age, they were not thinking of a new career, he says, but these days, “a bookkeeper somewhere is dreaming of opening a coffee shop. Someone else is thinking of being a teacher. A financial adviser might like to write a novel.” People no longer see retirement as the end of work, nor do they desire a leisured life.

Next surprise, Dychtwald said, is the career intermission. About half of working retirees (52%) said they wanted a break when they stopped working, for periods lasting anywhere from a few months to a few years. But it’s clear they are looking for a temporary respite. One respondent, he recalls, said her bucket list was empty after three years, and she was bored and wanted to get back in the game.

Interestingly, Dychtwald says, people over the age of 55 are more likely to be starting business and pursuing entrepreneur than younger people. They don’t simply want to set their own schedules. They have ideas. Retirement seems to be giving them the breathing room to launch new enterprises. 

Risk Takers

A possible reason is that when people reach this stage and their families are grown, they are more capable of taking on risk, says Cyndi Hutchins, director of financial gerontology for Bank of America Merrill Lynch.

Dychtwald acknowledges that people over the age of 55, who are not in the workforce, find that it can take twice as long to get hired. Those trying to create a new model may have a hard time, but there will be millions of people doing this. Millions of people are going to be treating retirement this way, he feels.

Hutchins agrees that Baby Boomers will help set this trend as trailblazers for a new way of living through retirement, and predicts a shift in mindset when employers start to see the value these employees can bring to the table in experience and new ideas, as well as what they can teach to younger generations in the workplace. “Employers will be more open to hiring these older workers,” she tells PLANADVISER. “You’re going to see this become more of a reality.”

The definition of success has changed, Dychtwald points out. Some years ago, retirement itself was the goal, and achieving it meant success. “But now the most successful people want to work longer,” he says, “and that is going to create change, too, as other people follow. It’s not because you need the money. The wealthier people are, the more they want to work in retirement.”

 One disturbing point emerged when people were asked if they were talking about these plans with a financial adviser, and a majority (85%) said they had not discussed a retirement career with an adviser. “That’s a mistake,” Dychtwald says. “How can you create a financial plan if you assume that they don’t want to work, but inside their mind they are dreaming up next career? This must become part of the conversation.”

Advisers must be able to help an individual put these pieces together holistically, Dychtwald says, drawing on the Merrill Lynch Clear program, for example, which addresses the interconnections of an individual’s priorities, such as health, home, family and finances. (See “Merrill Lynch Unveils Holistic Wellness Program.”) 

More Flavors

Citing the old “Saturday Night Live” comedy sketch where every customer’s order was translated into a cheeseburger, no matter the original request, Dychtwald says that era is over. “A just-the-numbers approach to financial services might have worked fine for previous generations in an earlier model of retirement that was plain vanilla,” he explains.

Financial professionals must be much more fluid to understand how to educate people and meet their needs, and they will have to take a wide view, holding conversations about the things that matter to clients, Dychtwald points out: “Boomers have diverse interests, challenges and goals.”

Hutchins agrees that the number is no longer the main point. “As a former financial adviser, we used to talk about retirement with clients, about accumulating as much money as you can,” she says. “Then at the end of the game, you put on a withdrawal rate and 4% would buy you 30 years of income in retirement.” But now the focus is on how you want your life to look in retirement, creating lifestyle goals, making sure the financial pieces are in place. The conversation is based on goals, not numbers.

The philosophy of work changes for people later in life, Dychtwald says, and can take on a different purpose. Work doesn’t have to be full-time, and most retirees did not want high-pressure work, five-day-a-week positions.

Education is the cement that can hold these new career plans together, Dychtwald says, and many retirees plan to continue learning. In fact, when the working retirees in the study were asked what advice they would give to people contemplating work in retirement, they said, “Be willing to try something new. Be willing to earn a little less, to do something you really enjoy.”

“Work in Retirement: Myths and Motivations Career Reinventions and The New Retirement Workscape,” which was completed in March 2014, was conducted in partnership with Age Wave and executed online by TNS. The survey included 7,078 respondents over the age of 25, broken down by generation: 720 Silent Generation (age 69 to 89), 1,781 Boomers (age 50 to 68), 517 Generation Xers (age 38 to 49), and 485 Millennials (age 25 to 37).

“Work in Retirement: Myths and Motivations” can be accessed here.

«