Products April 5, 2023

Wilmington Trust Focused on CIT Education Push

Retirement services head Rob Barnett say advisers, plan sponsors and Congress all need a better understanding of the DC investment option.

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Collective investment trusts are slated to become the most popular target-date investment vehicle in coming years, according to research. Even so, many advisers and plan sponsors still don’t know what they are, according to Wilmington Trust’s CIT division, which manages about $115 billion in CIT assets for 550 funds.

“Clearly, CIT education needs to evolve, and we need think about the conversation the adviser should have with the plan sponsor about CITs so they can understand them as well,” Rob Barnett, head of retirement services at Wilmington Trust, said on the sidelines of the National Association of Plan Advisors conference on Tuesday.

CITs, which are only available for qualified retirement plans, have been growing in popularity due to the lower fees brought to participants by the pooled investment design. The investment vehicles made up 47% of target-date strategy assets by the end of 2022, according to Morningstar, as led by providers such as Vanguard, Fidelity Investment, T. Rowe Price, BlackRock and American Funds.

Wilmington Trust is approaching the business with new life after a deal was announced in December for Wilmington Trust’s CIT business to be sold  by parent M&T Bank Corp. to private equity firm Madison Dearborn Partners LLC. That deal is slated to be complete in mid-2023, with Barnett becoming CEO of the independent company with a new brand name owned by funds affiliated with MDP.

Barnett and his team have been working on the sale of CITs into investment menus through Wilmington Trust’s digital onboarding platform, BoardingPass, designed to help plan advisers and sponsors select CITs for investment menus. By giving an easier, automated process to CITs and adjusting it to user needs over time, the firm believes it can help boost the use of CITs.

Bet on Low Fees

But in going to market with the digital tool, what the retirement head and team have found is that many people still do not understand the potential of choosing it over mutual-fund-driven TDFs.

“You can’t bet on performance,” Barnett said of investing, “but you can bet on fees and the savings you get if they’re lower.”

In creating BoardingPass, Barnett said his team interviewed more than 200 advisers and plan sponsors with the goal of getting as much unvarnished feedback as possible. He said they will continue to hone the product as feedback comes in, and he wants to get the most honest feedback possible to make understanding and selecting CITs as simple as possible.

“I want honest and direct feedback,” he said. “I can take those bullets.”

There are marketing challenges to selling CITs. Because they are only available to qualified plans and not retail investors—as mutual funds and exchange-traded funds are—they can only be marketed to eligible plan fiduciaries.

Wilmington Trust has been working to increase transparency within those barriers, in 2019 announcing a partnership with the Nasdaq Fund Network to show searchable tickers for CITs—giving them six letters instead of the five usually used for mutual funds.

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Getting to 403(b)

When the SECURE 2.0 Act of 2022 was in negotiation, many industry actors were pushing for regulators to allow CITs to be used in not-for-profit 403(b) plans. That change, however, did not happen, and they are still only available for 401(k) plans.

Barnett says Wilmintgon Trust is working on an education tour for Congress that will include not-for-profit plan sponsors advocating for availability in 403(b) plans. They will not be alone, as the push for CITs in 403(b) plans is also on the agenda for the lobby association NAPA, leaders said at their national conference on Sunday. Barnett noted that his firm will be looking to have universities and hospitals advocate for the inclusion of CITs for their participants.

“It’s so important for these organizations to have access, because their workforces tends to have lower compensation,” he said.

Compliance April 5, 2023

Recent Proposals to Reform Social Security

The options to reform Social Security will have to become more dramatic the longer Congress waits.

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With the report last week that the Social Security Administration’s Old-Age and Survivors Insurance Trust Fund will become insolvent in 2033, a year earlier than projected last year, a few notable reforms to the social insurance program have been proposed this Congress to try to address the problem.

The Social Security Expansion Act, sponsored by Senators Bernie Sanders, I-Vermont, and Elizabeth Warren, D-Massachusetts, would create a special investment tax of 12.4% for individuals with $200,000 or more in income and tie Social Security to the Consumer Price Index -E, a measure of inflation that is weighted for the spending habits of the elderly. Lastly, it would increase the Special Minimum Benefit to 125% of the poverty line. The chief actuary for the trust fund estimates this would keep Social Security solvent until 2096.

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A second bill, proposed by Senators Susan Collins, R-Maine, and Sherrod Brown, D-Ohio, called the Social Security Fairness Act, would repeal the Government Pension Offset and the Windfall Elimination Provision, provisions passed in 1979 and 1983, respectively, which reduce Social Security benefits for some workers receiving a public sector pension.

Social Security solvency decreased last year primarily due to inflation, which was higher than expected, and caused an 8.7% CPI adjustment to benefits, when only a 3.8% adjustment had been projected.

Andrew Biggs, a senior fellow at the American Enterprise Institute, remarked that the reforms made to Social Security in 1983 are minor compared to the ones that would need to be made today and also said many of the “easier options” have already been taken, when speaking at a panel hosted by the Committee for a Responsible Federal Budget on Tuesday.

The 1983 reforms included the windfall provision (which the Social Security Fairness Act would repeal), making some Social Security benefits taxable income and increasing the full retirement age from 65 to its present level of 67 over a 22-year period.

Going beyond the proposed bills, Biggs recommends capping the maximum benefit, now approximately $43,000. He says this is not “a real fix” but would help plug the gap without compromising retirement security.

Biggs also cautioned against various means-testing fixes, like removing the cap on income subject to Social Security payroll taxes, without also increasing program benefits to high earners. He said that because those changes could cause Social Security to be perceived as unfairly favoring people with fewer resources, or as a “welfare” program, which could reduce political support for it.

The CRFB offers an online calculator that allows people to plug in various possible Social Security reforms to try to fix the program. Some of these reforms include more common proposals such as raising taxes, reducing benefits on high earners and increasing the retirement age. It also includes some more esoteric ones, such as indexing the retirement age to longevity and reducing CPI calculations.

As things currently stand, after the OASI becomes insolvent, benefits will be paid out on a cash-flow basis and would be reduced to approximately 77% of what they would be if the fund were solvent. Those who are currently 57 would be at full retirement age just as this happens, and this would significantly decrease the retirement security and complicate the retirement planning for many.

Additionally, since Social Security benefit payments would be directly tied to cash inflows, a recession or other increase in unemployment could trigger a sudden further decrease in payments. This could have the effect of further reducing consumer spending by Social Security recipients as their income drops, which could deepen and prolong a recession occurring after Social Security became insolvent.

The Social Security Trust Fund Report strongly recommended that any reforms to Social Security be made sooner rather than later. The report noted that any large changes would take time for the trustees to implement and for recipients to learn about and adjust to. It also explained that increases to taxes and/or reductions in benefits would be less painful if done quickly, because those revenue-balance changes would be in place for longer. Put another way, changes made closer to the insolvency date would have to be more dramatic than any changes that can be made today.

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