The middle class is “under siege” from unemployment, mounting debt and home values that have yet to recover, Marcia Wagner, managing director of the Wagner Law Group, said Monday at the IMCA conference.
The Obama administration has recognized its need to “buttress” the middle class to protect their retirement and is making efforts to incentivize savings and improve returns, she said.
“Given the power of inertia, policymakers are betting big,” she said. Some strategies like automatic enrollment are already in place, but while utilization is growing, deferral rates are holding tight around 3%. Furthermore, those policies are usually used for new hires. Sponsors should examine adopting re-enrollment and reallocation strategies to include older employees who have old election rates, she said.
There’s also a “heavy emphasis on automatic IRAs,” Wagner said. These would rely on “R-bonds,” which Wagner described as “a new type of government debt just for automatic IRAs.” These types of plans typically have a 3% default contribution rate and use a Roth structure, and default investments are designated by the government.
Republicans and Democrats alike are unhappy with some aspects of automatic IRAs, Wagner said. Broadly speaking, many Republicans find the mandate unconstitutional, while Democrats dislike how much money would be funneled to Wall Street, Wagner said.
Whatever plans end up looking like, Wagner said “automation is the nomenclature of the day.”
Both the Bush and Obama administrations have put an emphasis on returns by focusing on transparency and fees, Wagner said. Fiduciary “means philosophically to make participants educated consumers,” she said. Recent disclosure rules like 408(b)2 and 404(a)5 do just that. Wagner joked that most advisors might think disclosures go straight to the “circular file,” but she said that “there is a minority of participants and sponsors who read disclosures.” Competitors are reading them too, and even if that results in only minor changes to fees, they can have a big impact on participants later on.
Wagner added that fiduciary proposals are “evolving and harmonizing between and amongst the DOL, SEC and FINRA.”
One example of the ways government is trying to “buttress” retirement outcomes is in focusing on decumulation as much as accumulation. “The government is trying to get people to think in terms of annuities,” Wagner said. “They’re eliminating the regulatory underbrush inhibiting getting annuities on the lineup” of ways to take distributions.
A proposal from the IRS calls for use of a longevity annuity, which is really just a deferred annuity, Wagner said. It begins paying after the expiration of the owner’s mortality table, so it provides income for later in life. It would provide an exception to required minimum distribution rules for longevity annuity investment.
Wagner noted that target-date funds didn’t take off until they became the preferred qualified default investment alternative. If annuities became the default of choice, though, she said it would “kill the QDIA market.” Doing so would require a change to the Department of Labor’s Interpretive Bulletin 96-1, which lays out the difference between education and guidance. “People aren’t going to want to become fiduciaries to talk about annuities,” Wagner said.
Wagner also talked about the DOL’s proposal for lifetime income disclosures. The proposal requires a quarterly statement of projected monthly income assuming a 7% return and 3% annual contribution increase, and using a 3% discount rate to convert future dollars into current dollars.
Under those assumptions, a 50-year-old plan participant with $125,000 in 2014 would end up with $500,000 in 2029, but that would fall to $321,000 after the discount rate. That leaves the participant with an estimated $1,800 per month.
It could be the “beginning of massive lawsuits if this becomes law,” Wagner said.
The “real crux of change” is what we want for retirement and what we can afford, she said. There are two kinds of debate to that end: tax reform and pension system reform.
Wagner reminded attendees that plan limitations can increase or decrease based on societal need, and have done so in the past as with the Tax Reform Act of 1986. That act increased revenue, but Wagner said it “took a solid decade for the 401(k) industry to recover.”E. Thomas Foster, national retirement spokesperson for MassMutual’s Retirement Services Division, spoke as well. “To be successful, you have to be a student of the game,” he told attendees, encouraging them to “take advantage of what the law allows now” in retirement planning.
He said he encourages advisors to “be more holistic in growing your practice and look at accumulation and decumulation as a whole.” He said the common differentiators — being good at plan design, well-versed on fiduciary requirements or fee disclosure — are no longer good enough. They’re all part of the “sea of sameness” and advisors have to redefine their value proposition.
To do that, advisors need to be able to describe what they do and how they do it, but also why they do it, he said.
The single biggest risk for advisors, Wagner said in response to an attendee’s question, is that “plan documentation is old and cold. Make sure you have a plan document.”
Another attendee asked about the probability of Social Security moving to a means-tested formula. Foster said such a move would be a “bait and switch.” Wagner agreed, adding, “Desperate times call for desperate measures, and that’s a function of desperate we are.” Social Security benefits may not be enough to live on by themselves, but Wagner said “some people actually do rely on” those benefits. If they were means-tested, it could “drag back to middle-class people who have clawed their way into the lower wealthy.”