Category Archives: Retirement

Employee Benefits—It’s Time to Start Talking About Annuities in 401(k) Plans

Source: Mark E. Bokert and Alan Hahn, Employee Relations Law Journal, Vol. 45, No. 2, Autumn 2019
(subscription required)

From the abstract:
When an employee retires, he or she typically has three sources of income to draw upon: personal savings, Social Security, and a retirement plan (typically a 401(k) plan). These income sources are subject to certain risks. There is “longevity risk,” i.e., the risk that the retiree will outlive his or her savings. There is also “inflation risk,” i.e., the risk that the retiree’s purchasing power will erode over time. There is also an “incapacity risk,” i.e., the risk that the retiree will have a diminishing capacity to oversee his or her investments as he or she ages.

Annuities can help solve several of these issues because they provide benefits over a retiree’s lifetime. As a result, some employers are adding annuities to their 401(k) plan. Congress is also encouraging 401(k) plan sponsors to offer in-plan annuities. Proposed bipartisan legislation alleviates many concerns that 401(k) plan sponsors have about offering annuities within their plans. This legislation is expected to be enacted into law later this year. As in-plan annuities solve important retirement issues and are far less expensive to participants than those available in the retail market, plan sponsors may wish to consider making in-plan annuities available to their 401(k) plan participants.

The Evolution of Private Sector Retirement Income From Defined-Benefit Pensions to Target-Date 401(k) Plans

Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, Published July 19, 2019

From the https://doi.org/10.1177/0886368719864480:
Traditional employer-sponsored defined-benefit pension plans in the private sector that provided lifetime benefits have declined precipitously since 1985. They have been largely replaced by Section 401(k) plans in which investment control, market risk and longevity risk have been transferred from the employer to the participant. Most participants opted for the low-yielding money market plan default option, which proved inadequate for providing viable retirement income. The Pension Reform Act of 2006 made two important changes to 401(k) plans: (1) allowed automatic enrollment and (2) allowed target-date funds as a “qualified default investment alternative.” This article examines the evolution from defined-benefit pensions to target-date funds and the closely related collective investment trusts.

Alternative Realities: The Impact of Extreme Changes in Defined Contribution Plans on Retirement Income Adequacy in America

Source: Jack VanDerhei, EBRI Issue Brief, June 13, 2019
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From the summary:
In recent years there have been a number of policy proposals that call into question the value of existing defined contribution plans. However, the suggested alternatives do not provide a detailed analysis of the impact of terminating defined contribution plans on retirement income adequacy for American households. Previous research by the Employee Benefit Research Institute (EBRI) has provided some tangential evidence with respect to the potential impact. In 2014 EBRI provided simulation analysis of the serious error introduced by models that ignored future contribution activity from defined contribution plans. In 2017 EBRI produced simulation results showing that, if there were no employer-sponsored retirement plans (defined benefit as well as defined contribution) and individuals were assumed to behave in the manner observed for those with no access to such plans, the aggregate retirement deficits would jump from $4.13 trillion to $7.05 trillion (an increase of 71 percent).

Pensions and retiree healthcare challenge some of the largest mass transit enterprises

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector In-Depth, April 11, 2019
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Pensions and retiree healthcare pose a credit risk for some of the largest mass transit enterprises. Transit enterprises with material unfunded liabilities face budget challenges that can limit capital reinvestment, contribute to rising debt loads and/or lead to lower service levels.

Cities make slow progress in addressing retiree healthcare liabilities

Source: Sunny Zhu, Thomas Aaron, Eric Hoffmann, Leonard Jones, Moody’s, Sector In-Depth, Local government – California, March 18, 2019
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Similar to pensions, other post-employment benefits (OPEB) — principally retiree healthcare — are liabilities that pose credit risks for some local governments. With rising healthcare costs, longer life spans and aging workforces, OPEB costs are escalating rapidly in some casesand unfunded liabilities are becoming a material source of balance sheet leverage. Positively,numerous California (Aa3 positive) cities, including San Jose (Aa1 stable), San Francisco (Aaa stable) and San Diego (Aa2 stable), have taken proactive steps to curb OPEB costs. Few cities have meaningfully reduced these liabilities to date because most cost-containment strategies will take years to provide substantial savings. If unaddressed, rising OPEB expenses threaten to curtail other local government spending priorities.

OPEB Brief: The Credit Impacts Of OPEB Obligation Bonds

Source: S&P Global Ratings, March 11, 2019
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Other postemployment benefit (OPEB) underfunding of obligations is pervasive across U.S. state and local governments, and costs are likely to continue to rise rapidly. Although, compared with pensions, these obligations may have some more flexibility in how they’re provided, we recognize that funded levels are almost universally lower than those of pensions and could quickly become a challenge to budgets if not addressed. With the implementation of Governmental Accounting Standards Board (GASB) Statements Nos. 74 and 75, many governments are seeing large new OPEB liabilities on their balance sheets that are growing due to insufficient contributions (see “Credit FAQ: New GASB Statements 74 And 75 Provide Transparency For Assessing Budgetary Stress On U.S. State & Local Government OPEBs,” published March 14, 2018, on RatingsDirect). In response, governments are looking to OPEB obligation bonds (OOBs) as a way to address funding concerns. Depending on the circumstances surrounding the OOB, issuance could have rating implications.

Retirement Insecurity 2019: Americans’ Views of the Retirement Crisis

Source: Diane Oakley, Kelly Kenneally, National Institute on Retirement Security, February 2019

From the summary:
New public opinion research finds that Americans are united in their concern about retirement. In overwhelming numbers, Americans say the nation faces a retirement crisis, with Democrats at 80 percent, Republicans at 75 percent, and Independents at 75 percent.

These findings are contained in a new research, Retirement Insecurity 2019: Americans’ Views of the Retirement Crisis, published by the National Institute on Retirement and based on research conducted by Greenwald & Associates.

The key research findings are as follows:
– In overwhelming numbers, Americans are worried about their ability to attain and sustain financial security in their older years.

– Even as the nation remains deeply politically polarized, Americans are united in their sentiment about retirement issues.

– Americans see government playing an important role in helping workers prepare for retirement, but lawmakers in Washington, D.C. just don’t get it. And the new tax law has not helped.

– In contrast to the sentiment about Washington, D.C., efforts by state lawmakers to expand access to retirement accounts for all workers is widely supported by Americans.

– Americans are highly positive on the role of pensions in providing retirement security and see these retirement plans as better than 401(k) plans.

– There is strong support for pension plans for state and local workers, and Americans see these retirement plans as a tool to recruit and retain public workers.

– Millennials are the most concerned about financial security in retirement, and are more willing than other generations to save more.

Related:
Press Release

State and local government – US: Retiree benefits drive growth in fixed costs, posing greater challenges than debt

Source: Benjamin J VanMetre, Grayson Nichols, Thomas Aaron, Rachel Cortez, Alexandra S. Parker, Moody’s, Sector In-Depth, February 5, 2019
(subscription required)

Fixed costs — the combination of debt service, pension contributions and retiree healthcare— continue to rise for many US state and local governments. While retiree benefits (pensions and healthcare) will continue to drive this trend, the growth level is heavily dependent on unpredictable factors such as pension investment performance and workforce demographics. Debt service costs, on the other hand, are largely stable and unlikely to increase materially,continuing the trend of the last decade. Still, total fixed costs create budgetary challenges for some governments, potentially affecting their ability to deliver core services, a dynamic also known as “crowd-out” risk…..

ReDefined Contribution Plans: 2018 Defined Contribution Language Study

Source: Invesco, 2019
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From the executive summary:
Despite the great strides plan sponsors have made over the past 30 years in providing participants with in-depth education, guidance and tools, many are still challenged in their ability to engage, inform and motivate employees to save for retirement. Participant communications continues to be named a top-three “area of focus” in 2018,1 as plan sponsors of all sizes continually seek to refine their existing programs.

Based on more than 10 years of in-depth research, focused on the language used when communicating with investors, we believe a disconnect remains between what plan sponsors say and what participants hear. To that end, our 2018 ReDefined Contribution Plans defined contribution (DC) language study focused exclusively on the language of DC plans, specifically testing how participants reacted to various language as it related to their understanding of, and interest in, key aspects of DC plan design and investments.

Together with Maslansky + Partners, we conducted a national survey of more than 800 large-plan participants of various genders, income levels and ages (broken out by millennials, Generation X, and boomers).

We then reviewed our key findings within the construct of our four key principles of credible communication, designed to help plan sponsors communicate more effectively and build trust with participants.

Retirement Security: Alternate Price Indexes for Cost-of-Living Adjustments Present Tradeoffs

Source: U.S. Government Accountability Office (GAO), GAO-19-218R: Published: Jan 28, 2019. Publicly Released: Jan 28, 2019.

From the summary:
Cost-of-living adjustments can help ensure that federal benefits keep pace with inflation. Using a consumer price index to adjust benefits can help ensure that recipients have enough purchasing power to get what they need.

Social Security and other federal retirement programs generally use one of the four consumer price indexes maintained by the Bureau of Labor Statistics.

We looked at what switching indexes would mean for people’s benefits and federal spending. For example, people who retire earlier or have lower incomes would feel the largest effects of any change.