Data & Research November 13, 2018

Wells Fargo’s Annual Retirement Study Portrays an Industry in Transition

Executives overseeing the survey report agreed that the U.S. is just beginning to see the real impact of decades of public policy decisions and private employer efforts to fundamentally reshape the retirement landscape.  

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Wells Fargo Institutional Retirement and Trust has published its ninth annual Retirement Study, finding once again that employees are being asked to shoulder more responsibility for directing their own retirement savings effort.

Lori Lucas, president and CEO of the Employee Benefit Research Institute, helped Wells Fargo leaders Joe Ready, head of Wells Fargo Institutional Retirement and Trust; and Fredrik Axsater, executive vice president and head of strategic business segments for Wells Fargo Asset Management, contextualize the findings. She added insight from EBRI’s own independent research, which harmonizes with many of the finding established by Wells Fargo’s analysis.

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According to Ready and Axsater, probably the most important overall finding in this year’s analysis is the strong positive impact on participant outcomes associated with having “a planning mindset.” This is to say that Wells Fargo uncovered four specific participant characteristics that correlate with a significantly better financial life—including lower levels of reported financial stress and greater reported financial outcomes. These characteristics include having set a specific money-related goal in the preceding six months; having previously set a specific long-term financial goal, such as a retirement age or savings level; feeling good about planning financial matters in general over the next one or two years; and preferring to save for retirement now rather than waiting until later.

“Employees just starting out in the workforce today face a retirement savings and spending journey of 60 to 70 years, and they are being made responsible for managing more of this effort on an individual basis,” Ready said. “Those closer to retirement still have a savings and investing horizon that is 25 or 30 years, or longer. Regardless of income, establishing a financial plan today and maintaining a focused set of financial goals can deliver many benefits.”  

Ready and Axsater observed how the planning mindset cuts across household income levels, with some evidence to suggest those with higher incomes are somewhat likelier to have a planning mindset. In particular, Wells Fargo finds 33% of workers with a planning mindset have household incomes below $75,000.

Across all workers surveyed, 84% of those with a planning mindset say they regularly contribute to retirement savings, versus 66% who do not report having this mindset. At the same time, fewer people with the planning mindset envision living to age 85 or longer as being likely to cause financial hardship.

Spending down of DC assets remains a big challenge

Ready and Axsater pointed to various findings showing employees are eager to receive more guidance and support when it comes to spending down DC plan assets.

Lucas here offered insight from EBRI’s research efforts, including a recent Issue Brief, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?”

As Lucas explained, the data shows retirees are actually not spending down their accumulated assets to fund their retirement needs—even when assets are plentiful or when there is guaranteed income available to ensure that retirees will not run out of money. EBRI’s analysis found that regardless of pre-retirement asset size, rates of decumulation are low. Over an 18-year period following retirement, median assets declined only 24% for the low asset group of retirees—from $31,740 immediately after retirement to $24,000 eighteen years later. Lucas said this is was surprising to learn, but also somewhat intuitive.

“It is not ‘irrational’ for lower-asset households to hold on to their assets as long as possible,” she said.

EBRI found similar patterns when assets are greater. For the moderate asset group, median non-housing assets declined 27% (from $333,940 immediately after retirement to $243,070 18 years later). For those with the most substantial assets—starting with a median of $857,450 immediately after retirement, the decumulation rate was less than 11% (to $763,900 18 years later).

Lucas pointed out how having guaranteed income for life, such as a pension, didn’t make retirees more likely to spend down their assets. The study found that of all the subgroups studied, pensioners had the lowest asset spend-down rates.

“This suggests that if the goal is to avoid spending down assets, pensioners are best suited to achieve it. In other words, if retirees seek to limit their spending to their regular flow of income, such as pension, Social Security income, or other annuity income, then pensioners are indeed best suited to avoid asset decumulation, as they have more regular income than others,” EBRI found.

Asked for her personal take on this situation, Lucas said it also shows that retirees, unlike on the accumulation side of things, lack a framework for guiding their retirement spending decisions. And so, many of them revert to cautious attitudes, “and there is the fact that saving and frugality are generally considered to be virtuous behavior.”

“I would also point out that most individuals say they are happy in retirement and do not need to spend a lot to be happy,” Lucas said. “They say that having their nest egg intact, as a form of independence and security, makes them happier than anything material or discretionary they may be able to buy with the money.”

Additional findings

Ready and Axsater observed that users of 401(k)s do not see them as strictly a means for accumulating lump-sum savings. Eighty-six percent of workers agree that it would be valuable if their plan provided a statement on how much they could spend each month in retirement, based on their current and projected savings.

According to the survey, younger workers would like to see their employer provide more help with their long-term retirement planning choices. Seventy-three percent of Millennial workers and 63% of Generation X workers say they would like more help from employers, compared with 50% of Baby Boomers.

In closing the presentation, the trio of speakers voiced optimism about the prospects for continued progress on solving retirement issues here in the U.S.—both from a public policy and private industry perspective. Ready said providers and plan sponsors can be proud of the fact that employees generally perceive their retirement plan offerings as being high quality and as having a strong positive impact on their financial lives. As the survey shows, 92% of workers say they feel more secure about retirement because they have contributed to a 401(k), and 82% of those with access to a 401(k) say they would not have saved as much for retirement at this stage if not for the 401(k).

Compliance November 13, 2018

Fiduciary Duties for Auto-Portability Solution Spelled Out by DOL

The DOL has issued an advisory opinion letter in response to a request by Retirement Clearinghouse (RCH), for the Department’s opinion on the status of certain parties as “fiduciaries” as a result of actions undertaken as part of RCH’s Auto-Portability Program.

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The Department of Labor (DOL) has issued an advisory opinion letter in response to a request by J. Spencer Williams, founder, president and CEO of Retirement Clearinghouse (RCH), for the Department’s opinion on the status of certain parties as “fiduciaries” within the meaning of Section 3(21)(A) of the Employee Retirement Income Security Act (ERISA) and Section 4975(e)(3) of the Internal Revenue Code (Code) as a result of actions undertaken as part of RCH’s Auto-Portability Program.

The letter provides details of the program, but basically, the RCH Program portability services related to the request involve automatic rollovers of mandatory distributions and account balances from terminated defined contribution plans into default IRAs and the subsequent automatic roll-in of funds in the default IRAs to an individual account plan maintained by a new employer when the IRA owner changes jobs.

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Plan sponsor responsibilities

According to the DOL, when plan sponsors or other responsible fiduciaries choose to have a plan participate in the RCH Program, they are acting in a fiduciary capacity, and would be subject to the general fiduciary standards and prohibited transaction provisions of ERISA in selecting and monitoring the RCH Program. “Fiduciaries must act prudently and solely in the interest of the plan’s participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable plan administration expenses, and must comply with the documents and instruments governing the plan to the extent consistent with the provisions of Titles I and IV of ERISA,” the letter says.

In addition, the DOL says, plan fiduciaries considering the RCH Program are responsible for ensuring that the RCH Program is a necessary service, a reasonable arrangement, and the compensation received is no more than reasonable within the meaning of ERISA Section 408(b)(2) and Code section 4975(d)(2) (including the Department’s implementing regulations). “Thus, the responsible plan fiduciaries must evaluate the package of services and separate service providers that are part of the RCH Program and conclude that the services, including the portability services, are appropriate and helpful to carrying out the purposes of the plan, and that the compensation paid or received by the service providers is no more than reasonable taking into account the services provided and available alternatives,” according to the letter.

The Department adds that the responsible plan fiduciaries must also monitor the arrangement and periodically ensure that the plan’s continued participation in the program is consistent with ERISA’s standards.

However, the DOL notes that a plan sponsor that may be a fiduciary with respect to certain activities regarding the RCH program are not necessarily fiduciaries with respect to all aspects of the program.

With the RCH program, once the assets are transferred to the default IRA, the plan sponsor of the former employer’s plan has no discretion or authority over the decisions of the IRA owner or RCH related to any future transfer of the default IRA assets. “It is the view of the Department that the plan sponsors of the former and new plans would not be acting as a fiduciary with respect to the decision to transfer the individual’s default IRA into the new employer’s plan. Once a plan fiduciary properly distributes the entire benefit to which a plan participant is entitled, the distribution ends the individual’s status as a participant covered under the plan and the distributed assets are no longer plan assets under ERISA,” the letter says.

RCH’s fiduciary responsibilities

Under the Auto-Portability Program, before RCH transfers default IRA funds to a new employer’s plan, the new employer’s plan must adopt the RCH Program under which it will acknowledge that the transfer of IRA funds is consistent with the plan’s terms and that it will accept the roll-in. RCH will notify the participant and seek affirmative consent to the transfer. But, if the participant does not affirmatively consent after receiving the notices, RCH will assume responsibility to direct the roll-in from the default IRA or RCH IRA acting as a conduit into the individual’s current employer plan.

The DOL says that absent affirmative consent of the IRA owner/participant, RCH acts as a fiduciary within the meaning of Section 4975(e)(3) of the Code in deciding to transfer the individual’s RCH default IRA to the individual’s new employer plan. The individual’s failure to respond to the RCH Program communications about default transfers is not tantamount to affirmative consent by the participant/IRA owner to default transfers to the new employer’s plan, and does not relieve RCH from fiduciary status and responsibilities.

The DOL notes that unlike regulations with respect to the default transfer of a participant’s account into an IRA, no similar statutory or regulatory provision provides relief from fiduciary responsibility for “default” transfers of the IRA funds to the new employer’s plan.

The letter does not address the prohibited transaction implications of RCH receiving additional fees as a result of exercising fiduciary discretion in the transfers. It has applied for an individual exemption under ERISA Section 408(a) and Code section 4975(c)(2) for certain transactions involved in its program, and the DOL has requested comments about the proposed exemption.

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