What's in Store for 2011

Laying it all out on the table, PLANSPONSOR and PLANADVISER’s Editor-in-Chief, Nevin E. Adams, opened the first Virtual PLANADVISER National Conference (VPANC) by outlining the top 10 trends most likely to impact the retirement industry this year.  

The first trend to watch for in 2011 was dubbed “’Share Alikes?” referring to the expected proliferation of revenue-sharing lawsuits.  Adams said it’s not only large plans that need to worry about this anymore. The first wave of lawsuits came about in 2006, and so far, most plaintiffs have not been successful.  However, as more law firms are becoming “experts” in the Employee Retirement Income Security Act (ERISA), Adams predicted we can expect to see more lawsuits this year.

The biggest concern for plan sponsors, however, may not be fee-related litigation. Rather, lawsuits about employer stock and stock-drop cases will be more troubling, Adams said.

The second topic under the microscope was taxes, and the question was posed: “What if your taxes won’t be lower in the future?” Adams said there has been a long standing presumption that deferring taxes on retirement savings is the smart move, so you pay taxes at a lower level when you’re ready for the distribution; it is supposed to be a win/win situation. But what if taxes are higher in the future? In a “virtual” show of hands, Nevin questioned those listening to the webcast who thinks taxes will go down in the future. This is not likely–younger workers might be at the lowest tax rates of their lives today, Adams suggested. Yet the number of plans offering a Roth solution has been sluggish–18.8% of plans offered Roth in 2009, with a median usage rate of 5%.  The “accepted” understanding of the role tax savings may have to be reevaluated this year.

The avalanche of disclosures was the third trend Adams discussed.  He expects it will indeed feel like information will be “dumped” on plan sponsors, and in the beginning, it will lead to more questions than answers. Some of the disclosures sponsors will have to sort through are the 5500 Schedule C, 401(k) fair disclosure, and the Pension Security Act, the pending 408(b)(2) regulations, and then, they’ll have to figure out what participant disclosures they’ll have to provide.  As Adams said, “disclosure is not (necessarily) clarity, and more disclosure is not (necessartly) more clarity. However, it beats the alternative.”

“Missed” behaving–the reluctance about retirement income–was the fourth trend Adams discussed at the Virtual PLANADVISER National Conference.  As it stands now, Adams said there are four way to approach retirement income: 1) accumulate, then buy an annuity, 2) never stop accumulating (target date to infinity), 3) buy into annuities as part of your asset allocation strategy, or 4) buy an annuity while you accumulate.

The question about retirement income for plan sponsors is whether they see the issue as protection–or more of a liability? The 2008 PLANSPONSOR DC survey asked sponsors if they feel they have a responsibility to manage retirement income distributions for retired participants. Seventy-seven percent said they do not feel that responsibility. Seventy-seven percent also said they are not encouraging participants to keep assets in the plan once they retire.   

Adams said that product development will continue to be a key component of retirement income in 2011. He also mentioned that the industry is waiting to see how the Department of Labor (DoL) will influence the debate; there have been proposals to give participants a “preview” on what they can expect to have available to them in retirement. Adams left listeners with the thought that while many people are still attached to the idea of a pension; the same attraction has not been carried over to annuities. 

“Automatic transmission” was the fifth trend Adams talked about; the legacy of prospective perspectives, substandard defaults and (even more) disengaged participants. The 2010 PLANSPONSOR DC Survey found that the rate of plan sponsors adopting automatic enrollment has virtually flat-lined. From 2007 to 2008, the percentage of plans using auto-enrolment increased nearly 29%, going from 23% to 30% of plans with auto-features. But since 2008, approximately 30% of plans are using automatic features and the increases have been negligible.  

There are a few conclusions to draw from these auto-feature trends. For one thing, participants in auto-enrolled plans are being defaulted into the plan in a sub-optimal rate of deferral, and will most likely stay at that rate for a few years. Also, plan sponsors who are adopting auto-enrollment are typically still doing it on a prospective basis–for new hires–as opposed to implementing it retroactively.  The fact that the adoption rate of auto-plans has flat-lined in recent years should cause advisers to wonder if this is a temporary hiatus, or if we’ve reached a saturation point.  One positive sign that Adams highlighted was that studies have shown sponsors are interested in auto-feature plans based on a true desire to help their employees be better prepared for retirement.  

The ever-popular “to” versus “through” debate surrounding target-date funds (TDFs) was Adams' next topic. In the 2010 PLANSPONSOR DC survey, sponsors were asked if they would consider replacing a TDF with a target-risk fund (TRF) to eliminate the to-versus-through debate. Forty percent hadn’t considered it yet, 13.8% said they were not at all willing to do so, 6.2% said they were somewhat willing, 1.6% said they were very willing to make that switch and a substantial 38.4% of plan sponsors were not familiar with the “to” versus “through” dilemma.   

The “problem” first came to light in 2008, when some funds were not as affected as others due to the market downturn. Now that the market has recovered somewhat, it has taken the “edge” off the issue. Yet confusion surrounding TDFs persists, and advisers should help elucidate the issue for their plan sponsor clients.

The impact of Baby Boomers reaching retirement was the seventh trend of the discussion.  As if the recession wasn’t enough to strain the savings of Baby Boomers approaching retirement, several statistics show the added financial burden Boomers have of assisting grown children, and oftentimes, their children’s children.   

The slow strangulation of pensions was the eighth trend analyzed. Adams said funding challenges are not new, but are more “visible.” Accounting and regulatory changes have created some new issues, and there is added pressure to reduce benefits, at least for newer workers in the public sector. Whatever the future holds for pension plans, Adams predicts it will take a long time for them to fade away completely.

Rounding out the list of the top 10 trends to watch for in 2011 were two inter-related subjects–health care reform and the 2010 midterm elections.  As far as health care is concerned, Adams said there has been a “scramble to react, respond, and communicate” the changes with employees.  Some questions that will have to be addressed include if costs continuing to rise, will that cost be transferred to plan sponsors or employees and what will be the impact on dependent care? Plan sponsors will care about the answers to these questions because, according to Adams, people do make job decisions based on health care.

The impact of the midterm elections and action in Washington will have a huge impact on the retirement industry; Adams emphasized that our industry is in the midst of tremendous change. Direct impact of regulations will likely hit providers hardest (fee disclosure, fiduciary redefinition), but the change will have a ripple effect. And even though there is a tendency in the industry to wait for the dust to “settle” before taking action, plan sponsors are going to be looking for help as soon as possible, and advisers need to be ready to act.