FEELING SECURE? I know I am a little more with SECURE 2.0! Part 1

Greetings all!  Hopefully this new entry into the blog will be the start of a renewed interest in blogging AND, candidly in response to the overwhelmingly positive response I received from many of my clients and colleagues to "blog, blog, blog".  

For my first attempt, I thought I'd tackle the new SECURE 2.0 legislation that went to and came out of committee (House Ways & Means) this week as a multi part series. While there are more steps to this Act becoming a law, I feel pretty confident that this one has legs, and candidly, that's GREAT news for the retirement plan community and our clients.  I think this will get done in 2021 with implementation of many of the provisions in 2022. 

For a an amazing summary of all of the new provisions contained within the final mark-up, here's a link What's in SECURE 2.0?.

The What:

Committee Chairman Richard Neal (D-MA), along with the Committee’s ranking Republican, Rep. Kevin Brady (R-TX), first introduced the bill, Securing a Strong Retirement Act (SSRA), last October as a sequel to the 2019 SECURE Act. While that version of the bill included some 36 provisions, the new Securing a Strong Retirement Act of 2021 (H.R. 2954) now contains about 45 provisions, including new revenue offsets to pay for the bill. 

My Favorite Few Provisions:

As mentioned, while this has 45 provisions, I thought I'd cherry pick out a few of my favorites. These will be discussed one part at a time as part of a series of posts.

Student Loan Payments: In the original version submitted in October it contained a provision that would use the retirement plan ecosystem to encourage younger workers to pay off student loans, a novel and candidly, very good idea.  The original bill however didn't account for a potential negative impact on compliance testing (ADP test).  This new version addresses this problem, clearing the path for employers to adopt this provision effective for 2022. 

So what is this?  Simply, it's a matching program where the employer could create a formula where they would match some/all of what the employee pays off of their student loan. This allows employees with student loan debt to not have to fully choose between saving for retirement OR paying down debt, both important for their short and long term financial well being.  Personally, I love this idea.  Savings rate is by far the most important factor in a successful retirement (Quantifying the Drivers of Retirement Success), and the earlier years are the most important.  One big inhibitor to younger workers participating in plans is the skyrocketing costs of higher education that has occurred over the past few decades leaving many with a huge loan to deal with right at the beginning of their careers.  This new provision can allow many of these employees who are new to the workforce to pay down debt whilst simultaneously not missing out on the employer match and thus being able to get some money saved for retirement. 

The big question, which we'll learn the answer to soon, is whether employers will want to altruistically adopt this OR if they will take the position that participants personal finances are not 'their problem'.  Frankly, the more astute employers will grab this idea and tout it loudly because this is the exact type of benefit that breeds employee loyalty.  I'd be curious as to what others think about this.

Stay tuned for Part 2 of this Series.

- Jason Grantz, QPA, QKC, QKA, AIFA

      

 

Managed Accounts are More Effective

Recently, Plan Sponsor Magazine published their 2015 PLANSPONSOR Defined Contribution Survey and in it was some very interesting data regarding Managed Accounts and outcomes.  See the full survey here: PLANSPONSOR 2015 Defined Contribution Survey

After reviewing the data, one thing becomes very apparent, plans that use a Managed Account combined with an advisor acting in a fiduciary capacity have better results than plans not using these services.  The article below from planadviser magazine dives into the data a little deeper and focuses on average balances.

Managed Accounts - Plans with Managed Accounts have better outcomes

**WARNING: A little commercial below, apologies, but that stats are what they are.**

These results correlate to my personal experience.  At my firm, Unified Trust, approximately 9 out of every 10 plans we bring on board are choosing to adopt our full suite of recommendations, most of which are maternalistic.   We suggest clients utilize automatic enrollment (starting at 6%), automatic deferral escalators and the UnifiedPLan Managed Account Solution.  When looking at these plans, the results are astounding.

As of the date of this writing, we see roughly 80% of participants stay in the defaulted managed account solution.  This solution provides the participants with the answers AT enrollment to most of their questions.  When can I afford to retire? Am I on track?  What will my monthly income be?  How much of that is from the plan, social security, outside assets and other sources of income?  What should my deferral rate be in order for me to get or stay on track?

Of the participants offered this managed account, we are seeing 71% of those participants on track for a fully funded benefit.  Most industry studies we've reviewed has the industry average at about 25% (lowest I've seen is 15%, highest is 40%).  The system of defaulting participants into a solution that delivers AND implements all of the answers is proven here to be nearly 3 times more effective than traditional methods in delivering the outcome that matters most, retirement readiness.

Whether it is outside studies like PLANSPONSOR's survey, or our first hand experience, I think the results speak for themselves.  The more that we as professionals take on ourselves and do for our clients, the better the results.

-Jason Grantz

Fear is a Lousy Investment Strategy

Co-Authored by Jason Grantz and Joseph Reese

As the markets close on St. Patrick’s Day, we find the Dow Jones Industrial Average up for the first time in 2016 after the fifth straight day in positive territory (and tack on a 6^th straight day as of the March 18^th market close). This is on the heels of a U.S. stock market that saw its worst January since 2009. 

Fear is a lousy investment strategy. According to a review of their 2.5 million recordkeeping participants by Aon Hewitt (Volatility Drives Stock Market Fears in 401k plans), January volatility made participants feel like they needed to do something…anything. Trading activity was up substantially in January – to levels not seen since January of 2009. Participants were fleeing to ‘safer ground.’

Interestingly, Aon Hewitt saw Target Date Funds (TDFs) with the biggest outflow at 39%.  This flies in the face of the basic premise of TDFs – a fully diversified, single decision asset allocation. What’s particularly interesting is that we typically would assume that inertia and procrastination rule the day when it comes to participant action or more pointedly inaction. However, it seems that myopia and loss aversion, aka extreme fear, combined with misguided focus is what is causing participants to take action when they shouldn’t.  By misguided focus, what we mean is that these TDF oriented plans are still focusing the participant on investment performance and not on what really matters, which is whether or not those participants are on track.  This is an enormous flaw and is being reinforced in the majority of 401(k) programs today.  This is exactly what our managed account service, The UnifiedPlan fights against.

In the UnifiedPlan, the focus of the enrollment and of the subsequent statements is on whether or not the participants are on track, not on short term returns or investment performance.  When contrasting the recent participant behavior in Target Date Funds highlighted above, participants with the UnifiedPlan managed accounts during the month of January didn’t react to the volatility.  In fact, we saw just 0.25% opt out. That’s a huge disparity; 39% reactive in TDFs vs. 0.25% for UnifiedPlan managed account participants.  Why is that? We believe that because the solution is personalized to the participant and the goal is illustrated as a percentage of monthly income replacement, it de-emphasizes short term performance and subsequently there is less fear in a volatile market. 

According to data offered by Aon Hewitt, “participant trading activity in January 2016 reached a three-year high, and 82 cents of every dollar traded moved from equity instruments to fixed-income funds.”

Just out of curiosity, we wonder how many of the participants trading out of equities in January are still on the sidelines as the market recovers?  If history is any guide, we think it is most, if not all.

For another take on the same topic, check out Justin Morgan’s post on the Unified Trust Blog linked here Managed Accounts Manage Behavior Better.

- Jason Grantz and Joe Reese

Generation Lost: Millenials and how to best serve them regarding Retirement

 A colleague of mine, Lee Topley, forwarded this to me with some interesting thoughts.  I felt it good a good idea to share those here.  Full Disclosure: this post references a service my firm, Unified Trust provides called The UnifiedPlan (UP), a managed account service engineered specifically for 401(k) plans.

A client of ours recently inquired with us about how to communicate to Millennials.  See this linked white paper that was done by BNY Mellon on this group.  Generation Lost: Millennials and Finance Several of their key findings are below, and some thoughts on how we can impact 3 of the 4 summary findings.

Findings:

1. Millennials have little understanding of just how big a task they face in providing for their retirement.  This lack of knowledge is not due to a lack of interest.  Rather they feel they have not been told the reality of their situation.  The UP tells them exactly where they are (they don’t have to ask, we automatically give it to them)…they are in the Green (on track) or in the Red (underfunded)…and how much they have to save to become green if they are red.  Plus, the UP provides all types of flexibility to customize their solution if they want to re-model different scenarios.
2. Most Millennials want financial services providers to be brutally honest with them about the bleak future they will face if they do nothing to build an adequate retirement income.  They want financial service providers to use more shocking messaging and to speak to them in language they understand.  The above response…Red versus Green is pretty frank on a participant's statement.  In addition if we use pointed communications focusing on the impact of greater savings, this would be the direct style that millennials are looking for. 
3. Social Finance has a very strong appeal to Millennials, yet they do not feel that adequate impact oriented investment are accessible.  This is the one area that we aren't totally in sync on.  I wonder about this part of their concern.  Socially Responsible funds could be added, but due to prudence, would not be part of the glide paths.  So we could help here, but will this really help them achieve an adequate benefit at retirement or just make them feel better about how their money is invested?  This is the one finding that I think the UP doesn’t automatically cover. 
4. Millennials feel today’s financial services products are not tailored to their needs.  They want new products to dovetail with the paths their lives are likely to take, not those of their parents.  Later in this paper the findings relate to the ability to access the money for buying a house, an illness, etc., so they may not be completely understanding the tax deferred aspect of their 401(k) money.  However, the plan can be set-up so they have access if the sponsor chooses to do so.

 Shortly after the summary on page 1 it states:

“These findings paint a picture of a generation that is ignorant of financial matters because it is being ignored. It is a generation that wants financial services providers to tell the truth”  A named Plan Fiduciary is bound by law to tell the truth and to always have their best interest as the #1 goal.

I found this dialogue interesting, and maybe gives the reader a little look under the hood at what professional fiduciaries are thinking about when discussing internally how to best serve clients.  

- Jason Grantz

What's a Plan to Do?

“Some sponsors are just starting to think about outcomes, since in the past they thought they needed a retirement plan because that’s part of what it takes to attract employees.  But they had never thought about, ‘Is the plan supposed to do something? And if it is supposed to do something, what is it supposed to do,” said Dr. Gregory Kasten founder and CEO of Unified Trust.

Dr. Kasten was among a few select experts in the field interviewed for the article Retirement Ready-or Not, recently published by NAPA.net.  The article stressed the critical role an advisor plays in helping plan sponsors answer the question, ‘what is a retirement plan supposed to do”? While that question seems simplistic in nature, surprisingly very few sponsors ever think about the true purpose or goal of their retirement plan as it relates to their employees success. Many in the industry measure success in terms of tracking participation and deferral rates, monitoring investment performance, and benchmarking fees all of which are important, but none of which independently provide a complete guide as to whether or not participants are succeeding. At Unified Trust, we believe that success is an employee being able to adequately replace their paycheck when they retire.

We also believe that success doesn’t happen by chance. That’s why Unified Trust developed the ‘benefit policy statement’ which is considered a sister document to the ‘investment policy statement.’  “If you want to manage outcomes, you are going to have to measure outcomes – and go a step further and define the outcomes you want,” said Kasten.

In these times of fee compression where it’s ever so critical to show added value, by helping a plan sponsor deliver improved outcomes for their participants, advisors can differentiate themselves in the marketplace.  As we move into the future, how successful—or unsuccessful— a retirement plan is in delivering retirement security may become a factor in determining whether or not a plan sponsor and other plan fiduciaries are meeting their fiduciary responsibilities.  Having a plan that doesn’t measure up to changing industry standards could leave the fiduciaries open to potential litigation.

 
- Jason

Mailbag: Q&A with The 401(k) Study Group

The 401(k) Study Group has created a new segment with their Blogtalk radio podcast called 'Mailbag' which is an 'Ask the Expert' style radio interview.  I was fortunate enough to be tapped by Chuck Hammond to be their first "Expert" tapped to answer questions.  Below is the link.  Enjoy!

Ask the Expert' with Chuck Hammond

- Jason

Curbing Enthusiasm for 401(k) Plan Loans

Here are some friendly tips for employers when considering the loan provisions available in the 401(k) Plan they offer to their employees.  Enjoy!

 

SITUATION:

We allow our employees to borrow against their 401(k) plan account balances. We understand that the ability to take out a loan can reassure employees that they have access to their account assets if they need them and can increase plan participation and contribution rates. However, we have to spend time and money administering the loans. And we’re concerned our employees may be hurting their chances for a comfortable retirement by borrowing too much and too often.

 

QUESTION:

Other than not offering loans, what can we do to discourage employees from taking unnecessary plan loans?

 

ANSWER:

You can take a number of actions to limit plan loans, including educating employees about the pitfalls of plan loans and placing restrictions on loans.

 

DISCUSSION:

Eliminating plan loans entirely might hurt plan participation.  Instead, to discourage employees from taking plan loans they may not really need, provide information about both the advantages

and disadvantages of borrowing from a 401(k) plan account. While employees may already know about the ease and convenience of plan loans, they might not be aware that:

 

• Loan repayments are made with after-tax money.

• Taxes will be paid again when the money is distributed from the plan.

• It can be difficult to continue to save for retirement and pay back a loan.

• If they leave employment, loans generally must be repaid at that time.

• If a loan isn’t repaid, the outstanding balance would be treated as a taxable withdrawal subject to both income tax and a possible 10% early withdrawal penalty.

Before processing a loan request, provide employees with a summary of the potential disadvantages of a plan loan.  Other actions you can take to discourage excessive loans include:

 

• Limiting the number of outstanding loans an employee can have at one time.

• Limiting the number of loans an employee can take in a 12-month period.

• Restricting borrowing to only money that the employee has contributed.

• Increasing the loan origination fee.

To potentially reduce the number of loan defaults, arrange for repayment to be made through payroll deductions or automatic checking account deductions.

Participants Still Need Basic Retirement Plan Education

In a June 12, 2014, PLANSPONSOR.com article – They write that 401(k) plan participants still do not understand some of the basics about saving and investing in their plans as suggested by an recent survey.  The survey is authored by MFS Investment Management.  Complete article linked here.

 

http://www.plansponsor.com/NewsStory.aspx?id=6442498306

 According to MFS Investment Management’s (MFS) 2014 DC Pulse survey, nearly three-quarters (74%) of participants say having a little bit invested in each option of a 401(k) plan is the best way to diversify.  More than 20% say they have no idea how best to diversify a retirement account.  

More than half (52%) of 401(k) participants are not aware of the tax impact on take-home pay from a contribution of $100, and nearly half (46%) say they believe the money saved in their retirement plans is a good source of funding for other financial needs, like paying off debt or saving for college.

The survey finds participants often contribute just enough to receive the maximum employer match, and nearly one-quarter (23%) of plan participants surveyed indicate they believe there is no additional benefit to contributing more than is necessary to receive the employer matching contribution. The number jumps to 37% among Generation Y respondents (younger than age 34).

More than one-third (37%) of survey respondents say a major drop in the stock market poses the greatest risk to their retirement savings—not contribution amounts or behaviors. Only 8% base plan contributions on projected retirement needs and goals, while 46% contribute what they feel they can currently afford. Only 17% believe the amount of time they are invested has the greatest favorable impact on their retirement account balance, and just one in four know early withdrawals may lead to tax penalties.

65% of survey respondents incorrectly believe index funds are safer than the overall stock market, and nearly half (49%) believe index funds have better returns than the stock market.

These statistics are startling, albeit not surprising to many industry practitioners.  I believe this makes a clear case for an option within the system engineered to do everything for the participant (not target date funds).  Automate an appropriate savings rate, escalate that rate over time, professionally asset allocate and asset select for the participant, adjust as needed and define an endpoint retirement age that will be the target.  This system should be the prevailing system, just a thought.