When retirements were buoyed by employer-sponsored pensions and a robust Social Security, the most difficult challenge earlier generations of retirees had to face was how to fill their hours when they got tired of playing golf. Modern retirement is more precarious. As the responsibility for paying for retirement shifts off employers’ shoulders and on to employees’ — and to some degree, advisors’ — myriad challenges emerge.
Between political pressure, economic uncertainty, a decidedly insecure Social Security, investment products that make planning harder instead of easier and the risk of outliving their assets, investors and their advisors have to keep several different issues in view whether they’re still planning for retirement or already retired.
To help advisors bring clarity to their clients’ retirement plans, Investment Advisor, a Summit Business Media publication, talked to several of the main players on the retirement stage to get their thoughts on the big challenges of modern retirement.
1. Fiduciary and DOL
Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, has said that while she “appreciates continued feedback” from the industry regarding EBSA’s previous proposed rule to amend the definition of fiduciary under ERISA, she is “moving on to the publication of a new proposal, and there will be ample opportunity for public comment when it is published.”
Indeed, Borzi has gotten an earful since issuing her controversial fiduciary proposal last year, which she eventually pulled and has since been redrafting. That redraft is scheduled to be released in July, and there’s no guarantee that Borzi and her team will agree to make yet another proposal after the next round of comments flood in.
In an email exchange with Investment Advisor in early February, Borzi would only reiterate remarks she made in December that the new version of the fiduciary rule will prove EBSA has listened to industry concerns. “When people see the reproposal, reasonable people with open minds will say DOL listened, that DOL addressed the legitimate issues that were raised in the long comment process,” Borzi said again. “The reproposal will be better, clearer, more targeted and more reasonably balanced.”
Critics remain skeptical. For instance, Brad Campbell, former head of EBSA who’s now an attorney with the Financial Services ERISA Team at Drinker Biddle & Reath in Washington, said that the changes to the revised fiduciary rule would have to be “quite significant” to address the concerns raised by many service providers, including broker-dealers.
Campbell added that he believes the revised rule proposal will actually become “more controversial” with respect to IRAs.
John Carl, president of the Retirement Learning Center, argued that small plans would face a huge challenge under Borzi’s previous fiduciary proposal. While most firms are willing to have “some higher fiduciary standard for mid- and large-sized plans,” it’s the small plans that will face the biggest challenge. Small plans “are sold, and in order to sell something, there has to be compensation,” Carl said.
But Borzi told Investment Advisor in her email correspondence that EBSA has “never said that people shouldn’t be compensated. As for the effect on the small plan market, we have spoken with individuals in the financial services industry who say they can and do offer fiduciary-level service to small plans now.”
Ken Bentsen, executive vice president of public policy and advocacy for the Securities Industry and Financial Markets Association (SIFMA), stated in mid-January that DOL’s previous fiduciary proposal was “contrary to where Congress wanted the SEC to go in Section 913 of Dodd-Frank.” Section 913 of Dodd-Frank “makes it clear that you could have dual models under a uniform standard of care,” however, “the way the DOL is moving would eliminate the ability to have a commission-based model for ERISA accounts.”
The DOL fiduciary proposal would create “operational challenges” for brokers at the retail level if, for instance, they have a client who has multiple accounts with that broker, including retirement accounts. The broker “would have to operate under conflicting rules from two different agencies for one client,” Bentsen said. — Melanie Waddell
Photo by David Johnson
2. Complex Annuities
In the wake of the financial meltdown that left retirement and investment accounts critically depleted, investors have increasingly sought some way to ensure their so-called golden years won’t turn to tarnished brass. One way they’ve done this is to look increasingly to annuities in their various forms. However, consumer advocates have been ringing alarm bells about the more complex annuity products and their suitability as retirement funding.
Barbara Roper, director of investor protection at the Consumer Federation of America, said that the “annuitization of retirement plan assets [is] an idea many people find attractive. The [ability to] get retirement plan payouts as an income stream over years, instead of as a lump sum, has the potential to offer significant benefits to many individuals.” Gaining an income stream via the more complex annuities, however, could be another kettle of fish.
Although annuities offer the promise of a continuing income stream, their various features and riders can provide more limits than security, she said, and their complexity means customers will have a rough go in trying to find the best product. Roper pointed out a number of factors that advisors and their clients should be aware of in considering an annuity product.
“A huge percentage of annuities,” she explained, “are actually held inside tax-advantaged retirement accounts, so you’re buying a product whose primary benefits are tax advantages inside a plan that already provides those tax advantages. The SEC has said in the past that these are questionable and not appropriate [for a retirement product]. There may be some isolated circumstances in which that might be an appropriate strategy—I wouldn’t say never,” but Roper was still doubtful.
Another caveat is their very complexity. “When you buy an investment, they say you shouldn’t buy it unless you understand what would have to happen for you to make money and lose money. I think too often annuities — at least the more complex exotic annuities […] fail that test. The investor can’t make an informed choice and tell which would be better for them.
“It’s really hard to compare these products,” she continued, “because they’re so complex in terms of the different features they have: minimum withdrawal benefits, guaranteed lifetime payouts. One product could offer a higher percentage gain, for example, and not allow for as large an accumulation because of different features.” There are other hazards hidden in complexity as well.
She cited, as an example, the disclosure about the maximum penalty for early withdrawal in an equity indexed annuity prospectus. “This is an annuity that may tie your money up for years,” she said. “Knowing what the downside is, is pretty important, but it’s an algebraic equation: i equals that and j equals that and m equals this. So they’ve disclosed the calculation that determines the withdrawal penalty, and there’s not one investor in a thousand who would look at that and have a clue what that penalty might actually be.
“The complexity, the less-than-transparent disclosures about key features, the very high costs that are often associated with these products make them highly suspect in our minds,” Roper continued. “Add to that, that they’re disproportionately sold by salespeople who don’t have to act in your best interests — [it makes us] skeptical.”
Roper warned, “Market forces are not operating here. If people who have expertise can’t compare the products and determine what’s best for a particular investor, it means the products don’t have to compete based on being best for the investor. They compete based on paying the salesperson. That to me is a market I want to avoid.” — Marlene Y. Satter
Photo by John Johnston
3. The Feds and the States
Prepare for “a lot of fighting between the industry and the Department of Labor” this year as Phyllis Borzi is “hell bent” on reproposing her rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), said John Carl, president of the Retirement Learning Center.
Borzi, assistant secretary of labor for DOL’s Employee Benefits Security Administration (EBSA), plans to repropose the fiduciary rule likely in July and issue an open comment period. Carl told Investment Advisor that while most firms are willing to have “some higher fiduciary standard for mid- and large-sized plans,” it’s the small plans that will face the biggest challenge. Small plans “are sold, and in order to sell something there has to be compensation,” Carl said.
The previous fiduciary draft stated that “any advice on a rollover would also be a fiduciary act,” Carl said. “That doesn’t work on many levels because IRAs are open architecture — you can buy bonds, stocks” and so on, and acting in a fiduciary capacity “would likely limit investment options and access to advice.”
“The same thing applies in the small plan market — if you make [employers] write a big check to start up a plan, they won’t do it, but if they can pay an advisor, [employers] will start one.”
Another retirement planning issue that will play out this year will be the “serious discussions” on Capitol Hill about including retirement incentives as part of any deficit reduction efforts. “I would say it makes more sense to look at the mortgage deduction.” However, Carl said, it’s too early to tell which way Congress will go.
As to solving the retirement deficit crisis, Carl said there is bipartisan support on Capitol Hill for Sen. Tom Harkin’s plan to provide universal access to pension plans through his Universal, Secure and Adaptable (USA) Retirement Funds.
Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, announced in late January that he would not seek re-election after his 2014 term ends. However, a spokesperson for Harkin told Investment Advisor that he would likely introduce legislation in February to advance his USA Retirement Funds effort.
Harkin’s plan will be two-pronged: USA Retirement Funds — which he described as innovative, privately run, hybrid pension plans that incorporate many of the benefits of traditional pensions while substantially reducing the burden on employers — as well as expanding Social Security benefits by $65 per month.
Similar types of retirement planning options are cropping up in California and Massachusetts. California has passed two bills, Senate Bills 923 and 1234, which establish a framework for a state-sponsored retirement plan for private-sector employees.
With the passage of Senate Bill 1234, California became the first state to create a statewide retirement savings plan for private workers who do not participate in any other type of employer-sponsored retirement savings plan. Also, legislation was passed in Massachusetts in 2012 that allows nonprofit organizations of fewer than 20 employees to set up a contributory retirement savings plan that will be overseen by the state treasurer’s office.