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Updated: 4 hours 39 min ago

Retirement Industry People Moves

Fri, 2019-09-06 12:12

Art by Subin Yang

Economic Group Pension Services Acquires Actuarial Firm

Economic Group Pension Services (EGPS), Inc., has acquired actuarial consulting and pension administration firm, Professional Pension Planners, Inc. based in Ardsley, New York, as of April 1.   

“As we continue to move forward with our projected growth, we are excited to bring on an organization that has the same values in which we stand by. Their qualities and expertise connect with what EGPS represents in having a strong and personal relationship with our clients,” explains Daniel Liss, chief executive officer.

Fred Harrison, previously president of Professional Pension Planners, Inc. is now regional vice president for the Ardsley, New York regional office for EGPS. Mark Sadoff, previously vice president, is now a consulting actuary for EGPS.

Parametric Names Director of Liability-Driven Investment Strategies

Parametric Portfolio Associates LLC, an affiliate of Eaton Vance Corporation, appointed David Phillips, CFA, as director, Liability Driven Investment Strategies. Working closely with the Overlay Solutions and Fixed Income teams, this new role supports the recently announced strategic initiative to strengthen its leadership positions in rules-based, systematic investment strategies, customized separately managed accounts and wealth management solutions.

Phillips focuses on helping clients with modeling pension liabilities, provides expertise on liability-driven investment (LDI) management, and builds and manages relevant fixed income models. Based in Seattle, Phillips joined Parametric on July 29, and reports to Justin Henne, CFA, managing director of Investment Strategy.

“As Parametric deepens and expands its institutional relationships and fixed income offerings, David brings extensive background in designing LDI strategies, providing risk analytics and creating related thought leadership,” says Henne. “He will be instrumental in providing greater insights to our LDI clients and their consultants.”

Phillips was previously director, Client Strategy and Research/Risk Analytics at Russell Investments, where he was responsible for research, development and analysis of investment strategies for defined benefit (DB) plans and evaluating risk for plan sponsors. His prior experience includes serving as manager, Client Services at NISA Investment Advisors, where he provided pension liability expertise for the firm’s clients, and director, Asset Management for Celanese Corporation, where he led global pension investment activity.

He holds a bachelor’s degree in mathematics from the University of Wyoming and a master’s in mathematics from Oregon State University. He has an actuarial background and holds enrolled actuary (EA) and associate of the society of actuaries (ASA) designations.

Large and Mega Market Regional Directors Join Transamerica

Transamerica announced that Stefanie Signorello and Matt Hummel have joined the company as regional directors for mega/large market retirement plans.

In their roles, both Signorello and Hummel will manage relationships with retirement plan clients in large and mega markets and will drive market-facing and customer service strategy, while developing and maintaining strategic relationships with financial intermediary partners.

Signorello holds a bachelor’s degree from Stonehill College, and she will work with plan sponsors in New England. Hummel holds a bachelor’s degree from the University of Delaware and is based out of New Jersey. Both Signorello and Hummel will report to Christopher McTague, senior director of Client Engagement for the mega/large market segments at Transamerica.

“We are happy to have Stefanie Signorello and Matt Hummel bring their years of experience to Transamerica. Stefanie is well-known in New England as a knowledgeable and committed collaborator with plan sponsors and their financial advisers. Matt has a long track record of success and has established himself as an innovator of meaningful client solutions,” says M. Palmer Whitney, senior vice president of Client Engagement for all market segments at Transamerica. “We are very excited to have them join our team. I have every confidence both of these individuals will add to Transamerica’s momentum.”

TPA Relationships Director Moves to Securian

Industry veteran Matt King has joined Securian Financial as national third-party administrator (TPA) relationships director for the company’s retirement solutions division.

Based in West Hartford, Connecticut., King is responsible for developing a TPA program focused on strategic relationships, superior service and innovative solutions. 

Prior to joining Securian Financial, King served as TPA relationships director for The Standard and director of TPA sales support for Transamerica. He holds FINRA Series 6, 26 and 63 registrations, and earned a bachelor’s degree from Saint Michael’s College in Colchester, Vermont. King has served on the National Institute of Pension Administrators (NIPA) board of directors since 2016 and is currently CFO. 

“I believe deeply that all great TPA relationships are based on connection, commitment and conviction,” says King. “I am excited about joining the Securian Financial family to create a unique and memorable TPA experience.”

Strategic Investment Group Selects Managing Director for Relationships Team

Strategic Investment Group named Kenneth Shimberg as managing director on the Relationship Management team. Shimberg joins a team of six senior professionals with an average of 27 years of industry experience dedicated to partnering with Strategic’s 28 clients.

“Ken is an exciting addition to our team,” says Brian Murdock, president and chief executive officer of Strategic Investment Group. “He brings a wealth of investment expertise in both private and public markets, as well as deep knowledge of institutional investors. His experience both within the investment offices of two Ivy League endowments and as an outsourced chief investment officer position him well to work with our clients as a trusted adviser and partner.”

Shimberg joins Strategic from Mercer Investment Management where he was the chief investment officer of Mercer’s Not-for-Profit Institutions team. Prior to that, he worked at the Brown University Investment Office for 14 years, ultimately serving as managing director and acting chief investment officer, where he co-led the 19-member investment office team managing the University’s endowment and related financial assets. Previously, he co-managed the global private investment portfolio at the Princeton University Investment Company.

Shimberg has a bachelor’s degree in management science with a concentration in finance from the Massachusetts Institute of Technology and is a CFA charterholder.

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Categories: Industry News

Help for Employees Falling Behind on Retirement Savings

Fri, 2019-09-06 11:40

In 2018, 19% of Ascensus plan participants who used its online Retirement Outlook Tool found that they were on track for a successful retirement. In fact, across all generations, the outlook is rather grim, but it is especially challenging for those younger than 25. Of all savers who were “on track” to meet their goals, only 3% of those younger than 25 fell into this group.

Only 21% of  “on track” savers were between the ages of 25 and 24, 20% were between 25 and 44, 24% between 45 and 54, and 26% between 54 and 65.

As to what plan sponsors can do to rectify this dismal situation, Rick Irace, chief operating officer for Ascensus’ retirement division, says, “to start, plan sponsors should focus on educating employees on the fundamentals of their plan” the benefits of enrollment, including matching contributions if they’re offered. For younger generations of employees, many plan sponsors and financial advisers also find it useful to highlight why it makes sense to start saving now, even if it’s at a very modest rate. Many plan providers, including Ascensus, provide educational tools and calculators that illustrate to these younger employees the clear advantages of putting time on their side.”

Irace says digital tools can also be helpful, such as a mobile enrollment app. He adds that after first-time users of Ascensus’ Retirement Outlook Tool used it, they increased their savings to 8% within three weeks. So, helping people assess where they stand and how their current savings is projected to turn into retirement income can help, Irace says.

Even something as simple as logging into their 401(k) account can prompt a participant to improve their outlook, he says. “A saver who logged into our participant website at least once in 2019 shows an average 401(k) account balance 25% higher than a saver who has not logged in since 2018, 46% higher than one who has not logged on since 2017, and 67% higher than one who has not logged on since 2017.”

Richard Rausser, senior vice president at Pentegra says plan sponsors should automatically enroll and automatically increase deferrals for participants in the plan. Rather than starting at a 3% deferral rate, Pentegra recommends 6% and has found that a mere 5% to 7% of participants opt out at this rate. “Starting at 3% is selling employees short,” he says.

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Categories: Industry News

Simple Ways to Reduce Employees’ Current and Future Health Cost Concerns

Fri, 2019-09-06 11:24

Survey data from the Nationwide Retirement Institute reveals 63% of younger adults believe their health today will impact how much they need to save for retirement, and 69% of older adults noted that one of their top fears in retirement is their health care costs going out of control.

Younger adults reported health care expenses have caused them to go into debt (38%), stop saving money for discretionary purchases (43%), made it harder to contribute as much as they would like to a 401(k) retirement account (31%) or caused them to file for bankruptcy (13%).

Prioritizing preventative care, taking advantage of a health savings account (HSA), participating in employer physical wellness programs and working with a financial adviser are simple actions employees can take to help lessen the burden of health care costs before and in retirement, Nationwide notes.

Getting control of one’s health today can affect current health care expenses as well as ensure a healthier life in retirement. However, the survey found many younger adults have taken “risky” actions to save money on medical cost at the expense of their current health. These include delaying seeking medical help, taking less than the recommended dosage to extend the length of a prescription or stopping use of the prescription altogether, and not following a treatment plan recommended by a doctor. Nearly seven in 10 younger adults (69%) agreed that prioritizing self-care and mental health will help them save on health care expenses in the distant future and would like to do more to prioritize their health.

Taking advantage of preventative care is a way for adults to help ensure they are in good health. Only half of younger adults have had a physical or well-check and less than that (45%) have had preventive screening in the past year.

A different survey by Lively found many employees don’t understand health benefits—including that most insurance covers preventive care. The Affordable Care Act (ACA) features a provision that requires private insurance plans to cover recommended preventive services without any patient cost-sharing. Better education can lead employees to use benefits correctly and become healthier.

Lively found almost half of survey respondents only see a doctor if they are sick or something catastrophic happens (such as a broken bone). Lower-income adults tend to only go when something catastrophic happens. Ameeth Reddy, founder and CEO of Equal Health, based in Detroit, says case studies have shown that by encouraging employees to use primary care doctors, which encourage them to get preventive care, employers reduce their claims for other services. One case study of an Equal Health employer member shows surgeries and hospitalizations dropped by more than 70% and patient satisfaction was in the 54% range for a control group versus 94% for those with primary care.

The IRS has issued guidance allowing high-deductible health plans (HDHPs) with HSAs to cover specified medications and services used to treat chronic diseases prior to meeting the plan deductible.

Nationwide found that both younger and older adults lack understanding of the advantages an HSA can provide them from a tax perspective and as a retirement savings tool. Only 17% of younger adults use an HSA and of those who have one, 25% use it to pay only for current health care expenses (rather than saving those funds as a tax-free way to cover health care costs in retirement).

Only two in five older adults (42%) know that HSA contributions or funds drawn to pay for qualified expenses are not taxed. Among older employed adults who contribute to their HSA offered by their employer, more than half (52%) use it to pay for current health care expenses only.

More than half of respondents to the Plan Sponsor Council of America’s (PSCA)’s first-ever survey on HSA design and use, sponsored by Empower Retirement, educate employees about allocating assets between their 401(k)/403(b) plan and an HSA–but employee education remains the dominant concern of plan sponsors (indicated by 60% of respondents). During a session at the 2019 PSCA Annual Conference in May, Ken Forsythe, head of product strategy at Empower Retirement, told attendees that plan sponsors should use touchpoints, with suggested actions, to communicate to employees about HSAs throughout the year.

“If a plan sponsor offers an HSA-capable plan and are not somehow connecting HSAs with retirement for employees, they are missing an opportunity to help employees with retirement readiness,” Forsythe said.

In addition to taking advantage of preventive care and HSAs, employees can use physical wellness programs provided by their employers to improve their health and reduce health costs now and in the future. Nationwide found only 29% of younger adults said they have access to wellness programs from their employer. But, of those, only 17% participate in those programs.

Finally, if an employer offers access to a financial adviser to its employees for retirement planning, it should encourage employees to include discussions about health care expenses in their meetings with advisers. According to Nationwide’s survey, only one in three older adults plan on discussing health care costs during retirement (33%) or long-term care costs (32%) with a financial adviser or consultant.

Breaking down retirement health care costs between fixed and variable expenses can help ease the fears that employees have about the future.

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Categories: Industry News

Broad ERISA Lawsuit Targets Texas Grocery Chain

Fri, 2019-09-06 09:23

Plaintiffs have filed a new proposed class action Employee Retirement Income Security Act (ERISA) complaint in the U.S. District Court for the Western District of Texas, San Antonio Division.

Their fiduciary breach suit is filed on behalf of the H-E-B Savings and Retirement Plan, naming as defendants some 20 John and Jane Does, along with the H.E. Butt Grocery Company and the retirement plan investment and administration committees.

The complaint contains an extensive amount of general information and statements about the defined contribution retirement plan industry, citing important precedent setting cases such as Tibble vs. Edison and Hughes Aircraft Co. vs. Jacobson.

According to the complaint, defendants failed to properly monitor and control the plan’s expenses, and allowed the plan to become one of the most expensive “jumbo” 401(k) plans in the country. Plaintiffs suggest the plan’s fees were, at a minimum, nearly three-times the average of peer plans, “and at least 50% higher than the 90th percentile.”

“And these fees were not attributable to enhanced services for participants, but instead defendants’ use of high-cost investment products and managers, and their continued retention of those managers even after performance results demonstrated that those high fees were not justified,” the complaint states.

Other allegations include that the defendants failed to prudently monitor the expenses charged within the plan’s index funds.

“These index funds charged fees that were up to seven-times higher than comparable alternative index funds that tracked the exact same indexes with the same level of effectiveness,” the complaint suggests. “Defendants also breached their fiduciary duties by utilizing an imprudent process to manage and monitor the plan’s target-risk funds, or ‘LifeStage funds,’ and by retaining those funds in the plan. Despite a marketplace replete with competitive target-risk fund offerings and experienced investment managers, defendants utilized an internal team to design and manage the LifeStage funds, with no previous experience managing investments for defined contribution plans.”

The complaint goes on to allege that defendants failed to prudently consider alternatives to the plan’s money market fund, “which offered only negligible returns that failed to keep pace with inflation.”

“The plan only included a money market fund, and did not offer a stable value fund as a capital preservation option, giving rise to an inference that defendants failed to prudently monitor the plan’s fixed investment option and investigate marketplace alternatives,” the complaint alleges.

Finally, the complaint alleges that defendants permitted inappropriate self-dealing and failed to properly investigate and negotiate a reasonable share of returns for the plan’s securities lending program.

“Based on this conduct and the other conduct alleged herein, plaintiffs assert claims against defendants for breach of their fiduciary duties of loyalty and prudence (Count One), engaging in prohibited transactions with a party-in-interest (Count Two), and engaging in prohibited transactions with a fiduciary (Count Three),” the complaint states. “In addition, plaintiffs assert a claim against H-E-B for failing to properly monitor the committee and its members to ensure that they complied with ERISA (Count Four).”

H.E. Butt Grocery Company has not yet responded to a request for comment.

The full text of the lawsuit is available here.

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Categories: Industry News

Court Finds Atrium Health’s Benefit Plans Are Governmental Plans

Fri, 2019-09-06 09:20

A federal court judge has dismissed a lawsuit alleging a health care system in North Carolina falsely claims to be a governmental entity, allowing it to dodge Employee Retirement Income Security Act (ERISA) requirements and protections for its retirement and health plans.

The complaint—naming defendants The Charlotte-Mecklenburg Hospital Authority, Atrium Health Retirement Committee and its individual members, and MedCost Benefits Services LLC—said Atrium has never satisfied the Federal law definition of a government of a state, a government of a political subdivision, or an agency or instrumentality of such and, therefore, the plans do not qualify as ERISA-exempt governmental plans. The plaintiffs claim Atrium’s plans were not established by a governmental entity, and the plans are not maintained by any governmental entity.

U.S. District Judge Thomas D. Schroeder of the U.S. District Court for the Middle District of North Carolina noted in his opinion that the Authority is a non-profit health care conglomerate headquartered in Mecklenburg County, North Carolina. The City of Charlotte created the Authority in 1943 pursuant to the Hospital Authority Act (HAA) of North Carolina’s General Statutes. The HAA authorizes cities and counties to create hospital authorities “whenever a city council or a county board of commissioners finds and adopts a resolution finding that it is in the interest of the public health and welfare to create a hospital authority.” The Charlotte-Mecklenburg Hospital Authority is registered as a “municipal” body.

According to the court document, the Authority is governed by the Board of Atrium Commissioners. The Mayor of Charlotte appointed the Authority’s original commissioners, who took an oath to support the state and federal constitutions. To appoint new Board members, the Board submits a list of nominees to the Chairman of the County Commissioners, and the chairman appoints commissioners from that list. The chairman can remove the commissioners for inefficiency, neglect of duty, or misconduct in office, after notice and a hearing, and is required to remove any commissioner who, after notice and a hearing, is found to have acquiesced in any willful violation by the Authority of state law or of any contract to which the Authority is a party.

The Authority is granted “all powers necessary or convenient to carry out the purposes of [the Act].” The Authority has the power of eminent domain, may issue tax-exempt bonds, is not subject to tax on real property, personal property, or motor fuel, and is not subject to federal or state income tax or state franchise tax. The commissioners of the Authority’s board may not be compensated for their services. The Authority is also subject to open meetings laws and public records laws.

The defendants asked the court to take judicial notice of the Authority’s governing statute and articles of incorporation, the Authority’s registration in the Secretary of State’s website, as well as several statutes, administrative rulings, and an IRS private letter ruling.

Schroeder noted that, according to ERISA, a governmental plan is a “plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing.” The parties in the suit agreed that if the Authority’s plans are governmental plans, then the plans are not subject to ERISA coverage and the plaintiffs’ claims fail as a matter of law.

According to Schroeder, while the 4th U.S. Circuit Court of Appeals has not established a test for determining whether an entity is a governmental plan, to determine whether an entity is a “political subdivision” under federal law, courts routinely apply the test from NLRB v. Natural Gas Utility District of Hawkins County. This test provides that “political subdivisions” are “entities that are either created directly by the state, so as to constitute departments or administrative arms of the government, or administered by individuals who are responsible to public officials or to the general electorate.”

Schroeder said the Authority satisfies the first prong of the Hawkins test because it was created by the state of North Carolina through a delegation of its authority pursuant to the HAA. The plaintiffs argue that the Supreme Court in Hawkins cited the 4th Circuit’s decision in NLRB v. Randolph Electric Membership Corporation for the principle that a court looks to “the actual operations and characteristics of [entities] in deciding whether [they are] political subdivisions.” However, Schroeder pointed out that both the Supreme Court in Hawkins and the 4th Circuit in Randolph Electric considered the state statutes under which the entities were organized to ascertain the entities’ characteristics.

“Because Defendants have provided ample persuasive case law holding that creation by a local entity pursuant to a state enabling statute is sufficient to satisfy the first prong of the Hawkins test, and Plaintiffs have neither distinguished these cases from the present case nor provided persuasive contrary authority, the court finds that the first prong of the test is satisfied,” Schroeder wrote in his opinion.

Schroeder said that because the Hawkins test is disjunctive, satisfying either prong is sufficient for an entity to attain “political subdivision” status and thereby categorize its retirement benefits plans as “governmental plans” exempt from ERISA coverage. However, he explained why he was also persuaded that the Authority meets the second prong of the test.

“Courts have held that the second Hawkins prong—that the entity is administered by individuals who are responsible to public officials or to the general electorate—is met when public officials appoint and may remove the entity’s governing members. The complaint alleges that the Authority’s commissioners do not include state officials and that the commissioners are not appointed or removed by state officials. But there is no requirement that the entity consist of state officials or individuals who are appointed by state officials, so long as local government officials have appointment and removal power,” Schroeder stated.

Among other things, he also rejected the plaintiffs’ argument suggesting that the county chairman’s removal power is insufficient because it is limited to removal only for inefficiency, neglect of duty, or misconduct, as the removal power in Hawkins itself was limited to removal only for misfeasance or nonfeasance.

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Categories: Industry News

Investment Product and Service Launches

Thu, 2019-09-05 13:08

Art by Jackson Epstein

John Hancock Announces Second Round of Reduced Fees

John Hancock Investment Management, a company of Manulife Investment Management, has announced expense reductions on additional funds, representing a combination of direct management fee cuts, contractual expense cap reductions, and new breakpoints primarily sourced through growing economies of scale, providing further value to shareholders.

Expense reductions of up to seven basis points vary by fund and class and provide immediate cost savings to shareholders. The reductions decrease these funds’ fees by an average of 5.25 basis points.

The funds affected are John Hancock Investment Grade Bond Fund, John Hancock Disciplined Value International Fund, John Hancock New Opportunities Fund, and John Hancock Fundamental All Cap Core Fund and were made effective on July 1. Front-end sales charges on Class A shares of both John Hancock Balanced Fund and John Hancock Multimanager Lifestyle Portfolios were also reduced effective on August 1.

This is the second announcement made this year by John Hancock Investment Management regarding expense reductions. These fee reductions for John Hancock Multifactor Sector ETF suite, John Hancock Floating Rate Income Fund, and John Hancock Small Cap Value Fund were made effective on the first of January. They are consistent with John Hancock’s approach to building a multimanager network of specialized asset managers, through a rigorous investment oversight and due diligence process, to offer the best choices to shareholders, the firm says.

“Our shareholders are looking for the best place to invest, and regardless of how an investor implements our funds, comparing funds and fees is a part of the process to build a portfolio that suits an investor’s risk-and-return profile,” says Andrew Arnott, president and CEO of John Hancock Investment Management and head of Wealth and Asset Management at Manulife Investment Management, United States and Europe. “We continue to reduce fees across our offering so investors may find even more value when making their investment decisions.”

Additional information on these expense reductions, including details about the impact on other fund share classes, can be found in the funds’ latest prospectuses.

Voya Financial Releases New TDF Solution

Voya Financial, Inc. announced that its retirement business has added a new target-date fund (TDF) solution.

Designed by flexPATH Strategies Inc., MyCompass Index is now available to all of Voya’s retirement plan customers. The new solution is designed to address retirement needs of individual plan participants.

“As one of the most widely used investment options in defined contribution plans, target-date funds provide a relatively simple way for Americans to save and invest for retirement,” says Charlie Nelson, CEO of Retirement and Employee Benefits at Voya Financial. “However, we recognize that many individuals have diverse financial goals and risk tolerances, which may not be defined by a date alone. MyCompass Index combines the ease of target-date fund selection with the unique needs of plan participants.”

Voya’s MyCompass Index leverages the expertise of flexPATH retirement planning capabilities along with fund management from experts in the marketplace, including Voya’s own stable-value capabilities. In addition to a competitive expense structure and integrated enrollment experience, the solution also offers participants added protection against market volatility and uncertainty. 

The MyCompass Index includes features and benefits such as multiple participant glide paths; fund name transparency; and fiduciary protection.

“We understand that no two individuals are alike when it comes to planning for their future,” says Jeff Cimini, senior vice president, Retirement Product Management at Voya Financial. “The reality is that most plan sponsors and their participants today are looking for investment solutions that are more tailored to their individual needs. We’re excited to offer the new MyCompass Index solution to participants, as it provides a unique saving solution that is truly focused on the individual, helping them to secure the best possible retirement outcome.”

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Categories: Industry News

Investing HSA Savings Is Key to Building Accounts

Thu, 2019-09-05 12:53

According to Devenir’s 2019 Midyear HSA Market Statistics & Trends report, there are now over 26 million health savings accounts (HSAs), holding $61.7 billion in assets, a year-over-year increase of 12% for accounts and 20% for HSA assets for the period ended June 30, 2019.

The growth is understandable as HSAs are now being touted as a vehicle for saving for health care expenses in retirement. New guidance from the IRS, which expands the list of preventive care benefits permitted to be provided by a high deductible health plan (HDHP) under section 223(c)(2) of the Internal Revenue Code without a deductible, or with a deductible below the applicable minimum deductible (self-only or family) for an HDHP, offers the potential for even more growth.

The Devenir report suggests HSA providers, employers and employees are seeing the advantage of being able to invest their HSA savings. HSA investment accounts have an average total balance of $15,982—six times larger than a non-investment holder’s average account balance. There was $13.3 billion estimated in HSA investment assets as of June 30—an estimated 35% year-over-year increase. Devenir says 22% of all HSA assets are in investments as of June 30th, 2019.

But, employees will not reap the benefits of HSAs if they don’t fund them. Devenir continues to see seasonality in the percentage of accounts that are unfunded. Accounts are often opened during the fall open enrollment season, but remain unfunded until early the following year. Halfway through 2019, about 15% of all accounts were unfunded, similar to a year ago.

Jack Towarnicky, executive director of the PSCA, has said employers struggle with telling employees how to allocate their savings dollars. He suggested that employers make sure the HSA account is open with the employer or employee contributing at least one dollar, and it can be funded later to cover expenses incurred. Ken Forsythe, head of product strategy at Empower Retirement, noted that if the account is not open with the first dollar, employees cannot get any potential employer contributions. Entry-level employees to top executives need HSA education.

Devenir’s report is available here.

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Categories: Industry News

Court Dismisses Prohibited Transaction Claim in MIT Excessive Fee Suit

Thu, 2019-09-05 11:30

The U.S. District Court for the District of Massachusetts has moved forward most claims in an Employee Retirement Income Security Act (ERISA) lawsuit alleging mismanagement and disloyalty on the part of Massachusetts Institute of Technology (MIT) defined contribution retirement plan fiduciaries. 

However, U.S. District Judge Nathaniel M. Gorton affirmed a motion to dismiss a claim alleging a prohibited transaction between MIT and Fidelity Investments.

The underlying claims in the suit are for a breach of the duty of prudence (failure to monitor, imprudent investment lineup and excessive recordkeeping fees) and prohibited transactions in violation of ERISA.

As background in the case, prior to July 2015, the plan consisted of four tiers of investment options. Most relevant to the claims at issue is Tier 3, the “MIT Investment Window,” which offered a wide range of investment products and was designed to give individuals with experience conducting investment research a large degree of choice. In July 2015, the plan underwent a major reorganization removing hundreds of mutual funds from Tier 3 and eliminating all but one Fidelity fund. In essence, the plan committee eliminated Tier 3 and expanded Tier 2 to include 37 core options.

Citing a U. S. Supreme Court decision in Tibble v. Edison International, Gorton said an ERISA fiduciary has an ongoing “duty to monitor trust investments and remove imprudent ones” and must review investments at “regular intervals.” With respect to MIT’s duty to monitor, which falls under the general duty of prudence, plaintiffs allege two kinds of breaches regarding MIT’s process for monitoring the plan and MIT’s inclusion of specific underperforming or excessively risky funds.

According to the court order, the plaintiffs assert that MIT’s process for evaluating investments was deficient and lacked due diligence in that the defendants ignored relevant advice from consultants and outside counsel, failed to institute a robust policy to monitor investment alternatives, and before July 2015, failed to make necessary changes to the MIT Investment Window. The defendants respond that MIT’s investment committee is composed of a variety of MIT-affiliated economic experts who diligently executed their duties by collecting data on the performance of the investment window, maintaining a “watch-list” of potentially underperforming funds, and soliciting and duly considering independent advice. They also point to the 2015 reorganization of the plan as clear evidence of the committee’s robust deliberative process and ability to implement logical adjustments.

Gorton found that with respect to the issue of whether MIT met its duty of prudence regarding its process for monitoring, the parties have set forth compelling and competing narratives. On one hand, the plaintiffs submit that MIT’s lack of action and failure to implement outside advice demonstrates its failure adequately to discharge its duty to monitor. The defendants rejoin that their monitoring strategy was reasonable under the circumstances, appropriately deliberative and well in line with its duty and industry practice. “Thus, because neither party has demonstrated as a matter of law that MIT did or did not act prudently, defendant’s motion for summary judgment with respect to the monitoring claims of Count I will be denied,” Gorton wrote in his order.

The plaintiffs, relying on expert testimony, also allege that the University retained several kinds of imprudent and underperforming funds in the plan including regional and sector funds, funds without sufficient performance history and target-date funds. They assert that if MIT had acted prudently, those funds would have been removed or replaced. The defendants dispute those assertions with expert testimony of their own and evidence regarding industry practice.

Gorton decided, “The debate over whether certain kinds of funds should have been included in the plan is a material factual dispute that will be preserved for trial. Accordingly, defendants’ motion for summary judgment with respect to the specific funds claim in Count I will be denied.”

Regarding the claim about excessive recordkeeping fees, Gorton explained that in a revenue-sharing system, the recordkeeper retains some of the investment income of the retirement plan to satisfy the plan’s administrative expenses. In Count II, the plaintiffs claim that the plan was subject to excessive recordkeeping fees in violation of ERISA’s duty of prudence because MIT knew that Fidelity’s recordkeeping fees exceeded the industry standard and MIT did nothing to reduce the fees to the market rate. They assert that MIT’s failure to solicit a request for proposal (RFP), which allegedly would have exerted competitive pressure on Fidelity, demonstrates a clear lack of prudence and that the defendants did not leverage the plan’s size as a bargaining strategy to reduce fees.

The defendants proffer contrary expert testimony that MIT’s fees were well within industry standard, especially when compared to similar university and corporate plans. They contend that the plan committee maintained adequate procedures to constrain costs and succeeded in successfully negotiating revenue sharing rebates from Fidelity, their 2014 restructuring of Fidelity’s compensation to a yearly per-participant flat rate of $33 is clear evidence that MIT took concrete steps to control recordkeeping fees, and ERISA does not rigidly require a fiduciary to submit bids for an RFP periodically because an RFP is just one of many ways to discharge its monitoring duty.

Similar to Count I, Gorton found that the opinions of the parties’ experts as to the proper industry protocol and the amount of fees that should be considered reasonable are in stark contrast. Both parties also present competing narratives surrounding the decision not to conduct an RFP.

“Because those disputes are more than superficial, the Court concludes that they are best resolved at trial. Viewing the entire record in the light most favorable to the nonmoving party, there are genuine issues of material fact as to whether defendants breached their duty of prudence with respect to recordkeeping fees. Accordingly, defendants’ motion for summary judgment on Count II will be denied,” Gorton wrote.

The plaintiffs also allege that MIT failed to monitor its appointed fiduciaries. Gorton said that ordinarily, a duty to monitor other fiduciaries is derivative of the plaintiffs’ other claims. “Thus, because the parties dispute the alleged underlying breach of fiduciary duty claims, plaintiffs’ derivative claims that defendants breached their duty to monitor will also be preserved for trial,” he wrote.

Separate from their claims for breach of the duty of prudence, the plaintiffs allege that defendants breached their statutory duty under ERISA Section 1106(a)(1), which prohibits certain transactions between a plan and a “party in interest.” Gorton found that the plaintiffs have failed to proffer any concrete evidence of self-dealing or disloyal conduct. “The Court is not convinced that plaintiffs’ non-mutual fund claims are more than conclusory.”

Moreover, Gorton said the court now finds that defendants’ non-mutual fund options fall under an exception to Section 1106. He explained that Section 1106 is subject to a number of exceptions, including Section 1108(b)(8) which exempts prohibited transactions where “the bank, trust company, or insurance company receives not more than reasonable compensation.”

In support of its position, MIT cites expert testimony stating that the expense ratios of the plan’s non-mutual fund options were comparable to or less expensive than fees of similar investments during the class period. The plaintiffs offer no rebuttal and simply rejoin that the fees on the non-mutual fund options add to the already unreasonable recordkeeping and administrative fees alleged in Count II.

“In short, plaintiffs have proffered no evidence that the fees specific to the non-mutual fund options were unreasonable or not subject to the exception in Section 1108(b)(8). Accordingly, MIT’s motion for summary judgment with respect to plaintiffs’ Section 1106(a) claim will be allowed,” Gorton wrote.

The prohibited transaction claim had previously been dismissed along with other claims recommended to be dismissed by a Magistrate Judge. However, the plaintiffs in the case filed an amended complaint reiterating their claims. Upon the Magistrate Judge’s recommendation, the court denied the request for a jury trial, which led to the recent motion for summary judgment by the MIT defendants.

Gorton ordered that a pre-trial conference will be held September 11, and the bench trial will commence on September 16.

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Categories: Industry News

PSCA Offers Retirement Savings Communication Campaign Materials

Wed, 2019-09-04 10:27

The Plan Sponsor Council of America (PSCA) is offering football-themed education and communication materials for retirement plan sponsors.

PSCA’s new 401(k)/403(b) Day campaign can be used any time during the year, although it was released for its official 401(k) Day this year, September 6. The campaign includes five pieces that can be used as posters, flyers, email content and website content. Each module highlights different retirement savings concepts.

The materials come with a coach’s handbook that offers a guide for plan sponsors on how to use the campaign materials. It includes information on how to use each of the modules, as well as how to make it fun for participants. It also includes online links to football themed games and events that can tie in with the communications.

Module 1: Get in the Game is designed to get participants in the retirement savings game. There is a version that talks about the employer match in general terms, or plan sponsors can use the customizable version to include specific information on their match formula.

Module 2: Paying Offense covers investments and the importance of diversification and rebalancing. Module 3: Avoid Getting Sacked discusses the impact of loans and hardship withdrawals on long-term savings. Module 4: Making a Comeback covers strategies as people near retirement, including the catch-up contribution.

Module 5: Winning is a post-game recap that covers the key concepts covered in modules 1-4. Plan sponsors can review what participants have learned and determine if further information or education is needed in particular areas.

The materials are available at https://www.psca.org/401kday_2019.

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Categories: Industry News

More Employers Focusing on Lifetime Income

Wed, 2019-09-04 09:23

More employers are adopting lifetime income solutions, according to the 2019 Lifetime Income Solutions Survey by Willis Towers Watson.

Thirty percent of employers say have adopted one or more lifetime income solution in this year’s survey, up from 23% in 2016. Additionally, 60% say they would consider offering their employees lifetime income solutions in the future.

“Employer concern about their employees being financially ready for retirement has never been greater,” says Dana Hildebrant, director of investments at Willis Towers Watson. “And while many employers are making headway to help workers save more, their efforts to transform individual savings into a consistent flow of income that will last a lifetime remain a work in progress. The increased adoption of lifetime income solutions is an exciting step in the right direction.”

Asked why they are adopting lifetime income solutions, 74% said it is because they are concerned about an aging workforce and increasing longevity, up from 45% in 2016. Seventy-four percent said it is due to their focus on retirement readiness, and 46% said it is due to the shift from defined benefit (DB) to defined contribution (DC) plans.

Among those that offer a lifetime income solution, the most common is systematic withdrawals (80%), followed by lifetime education and planning tools (70%) and in-plan managed account services (44%). Only 17% offer an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component. Fifteen percent support out-of-plan annuities, and 15% offer in-plan deferred annuity investment options.

“While it is encouraging more employers are embracing various lifetime income solutions, it’s disappointing relatively few have adopted what the industry sees as more effective income-generating solutions, such as annuities and other insurance-backed products,” Hildebrant adds. “However, employer interest in these options may pick up steam as they better understand the value and associated benefits.”

The survey also found 41% of employers that are currently offering a lifetime income solution are considering an in-plan asset allocation option with a guaranteed minimum withdrawal to be implemented in 2021 or later, 31% are considering an in-plan annuity option, and 23% are considering an out-of-plan annuity.

Willis Towers Watson, in “Lifetime Income Solutions: Progress, With Work Ahead,” says that perhaps the most practical approach to offering workers annuities is to embed them in target-date funds or balanced funds. Today, 4% of survey respondents offer such a solution.

Asked why they do not offer insurance-backed solutions, 75% of employers say they are too complex for them and their recordkeepers to administer. Sixty-one percent said fees are too high, 60% said the products themselves are too complex, 58% said they fear there may be restrictions in portability for departing employees, 55% said they are not transparent, and 52% said workers just are not demanding these options.

“Policymaking is uncertain at this time, but the wheels appear to be in motion for more regulatory support for all stakeholders as it relates to lifetime income,” Willis Towers Watson says in its report. Seventy-seven percent of sponsors want a specific safe harbor that lessens the burden of overseeing an annuity provider. Fifty-seven percent of sponsors are waiting to see if other sponsors adopting lifetime income solutions, 52% want a wider range of guaranteed products, and 33% want to see investment-only products.

Willis Tower Watson’s findings are based on a survey of 164 companies conducted in May and June.

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Categories: Industry News

Retirement Investors Should Take a Look at International Equities

Wed, 2019-09-04 07:00

During this period of heightened market volatility, active asset managers are marketing international and global equity strategies to institutional investors based on valuations and the value they could add to their portfolios, particularly in emerging markets and small-cap equities, says Alexi Maravel, director of institutional research for Cerulli Associates.

“With the volatility in the markets, there is a feeling that a lot of institutions have had a lot of exposure to U.S. equities for a long time and have benefited from that, just on a valuation basis,” Maravel says. “But international and emerging markets are undervalued relative to U.S. equity markets, so a lot of the institutional investors we talk to are reassessing their U.S. allocations.” Retirement plan investors should do the same, he says.

A survey that Cerulli sent to asset managers last month asked them where they expect to receive requests for proposals (RFPs) in the next 12 months. “The top strategy they expect to receive RFPs for is multi asset class solutions,” Maravel says. “The fifth highest was international and global equities. We are seeing a subtle shift of institutional investors moving their assets.”

Nigel Bliss, senior portfolio manager with Mondrian Investment Partners agrees that international investing is taking hold: “For investors with long-term time horizons, international equity markets offer diversification and present a meaningful opportunity, given the near decade-long outperformance of U.S. equities over international and the material overvaluation of the U.S. dollar relative to most market developed market currencies.”

Susan Czochara, practice lead, retirement solutions, at Northern Trust Asset Management, says her firm views “international investing in the context of retirement investors as a strategic move. We want to keep that long-term strategic focus broadly diversified in investments, including international. Risk and risk control are essential in down markets. Our research shows that a strategic portfolio that includes international will, over time, have a better risk-adjusted return. We think of it more from a strategic standpoint, especially as it relates to retirement investors.”

As to whether investors should seek out actively managed or passively managed international investments, Maravel says institutional investors are seeking out passive investors when the risk/return is low, that is “where it is easy to do passive replications. As you get further out on the risk spectrum into emerging or frontier markets, or small cap, you see less passive and the search for best-of-breed active managers.”

Northern Trust Asset Management views the active/passive debate slightly differently. “Our belief is that the debate around passive versus active presents a false dilemma,” Czochara says. “The best features of both can be found in factor-based investing. It is rules based and transparent, both of which you would find in a typical passive style, plus it offers a potential increase in returns over the index. That is what we believe is a great approach to use for both non-U.S. and U.S. exposure. As a pioneer in factor-based investing for nearly 30 years, we have seen how it provides excess returns.”

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Categories: Industry News

Groups Urge Supreme Court Not to Undermine Value of Plan Disclosures

Tue, 2019-09-03 13:14

A group has filed a brief of amici curiae in the case of Intel Corporation Investment Policy Committee v. Sulyma, asking the Supreme Court to reverse a decision made by the 9th U.S. Circuit Court of Appeals.

The U.S. Supreme Court granted a petition for writ of certiorari filed by the Intel committee asking the court to determine whether the provision of plan documents, in itself, creates for participants “actual knowledge” of an alleged fiduciary breach under the Employee Retirement Income Security Act (ERISA).

The original lawsuit said Intel invested participant assets in custom-built target-date funds (TDFs)—which included alternative investments—that have underperformed peer funds by approximately 400 basis points annually. The lawsuit claimed automatic enrollment and a re-enrollment of existing participants resulted in more than two-thirds of participants being allocated to custom-built investments. The text of the complaint goes into great detail about why the plaintiffs believe hedge funds and private equity funds are inappropriate investments for ERISA retirement plans.

In April 2017, a federal district court judge found the claims were time-barred under ERISA’s three-year statute of limitations. U.S. Magistrate Judge Nathanael M. Cousins of the U.S. District Court for the Northern District of California found that the plaintiff had actual knowledge of the facts underlying his substantive claims because financial disclosures sent to plan participants over the years provided information about plan asset allocation and an overview of the logic behind investment strategy.

However, the 9th U.S. Circuit Court of Appeals overturned the decision in December 2018 and remanded it back to the District Court, finding that the lower court used an errant interpretation of “actual knowledge.”

The appellate court’s decision said: “The lesson we draw from these cases is two-fold. First, ‘actual knowledge of the breach’ does not mean that a plaintiff has knowledge that the underlying action violated ERISA. Second, ‘actual knowledge of the breach’ does not merely mean that a plaintiff has knowledge that the underlying action occurred.” It concluded: “In light of the statutory text and our case law, we conclude that the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action is filed. The exact knowledge required will thus vary depending on the plaintiff’s claim.”

In their brief, the National Association of Manufacturers, the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association (SIFMA), the American Benefits Council, the ERISA Industry Committee and the American Retirement Association note that breach of fiduciary duty claims under ERISA ordinarily must be filed within six years of the alleged breach. If the plaintiff learns of the breach earlier, Section 413(2) of ERISA shortens the limitations period to “three years after the earliest date on which the plaintiff had actual knowledge of the breach.”

They say, “In an action challenging the prudence of a retirement plan’s investment strategy, the three-year limitations period begins to run when the plaintiff has actual knowledge of the mix of investments [the plaintiff] claims [is] imprudent.”  They add that ERISA makes it easy for plan participants to learn this information by requiring plans to disclose investment options to them in simple-to-understand language that informs them of their rights and obligations. Citing the Supreme Court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch, the groups say Congress adopted these disclosure requirements to “ensur[e] that ‘the individual participant knows exactly where he stands with respect to the plan.’”

The brief notes that the plan here made the required disclosures, and the plaintiff actually received them. However, the groups suggest, the 9th Circuit held that the plaintiff could avoid the three-year statute of limitations simply by disclaiming that he read (or could recall having read) those disclosures. “The decision breaks with the near-uniform, common-sense rule in numerous federal courts that disclosing information to plan participants gives those participants actual knowledge of the information disclosed. The decision is wrong, it seriously undermines the important protections provided by the three-year limitations period, and it threatens to exacerbate the growing trend of meritless litigation against ERISA plans and plan fiduciaries. It should be reversed,” the groups argue.

While the term “actual knowledge” may mean different things in other contexts, “here it must include required disclosures that Congress designed to inform plan participants about their plans,” they continue. The groups argue that the original codification of the limitations provisions provides further evidence that actual knowledge includes information in required disclosures, because Congress originally charged plan participants with potentially having actual knowledge that comes from an even more indirect source of information—reports that are filed with the Secretary of Labor and never even sent to plan participants. The brief explains that, as originally enacted, the statute provided that the limitations period to allege a breach of fiduciary duty in violation of ERISA could be triggered either by “actual knowledge” of the violation or “constructive knowledge” of information reported to the Secretary under ERISA’s reporting rules. The groups contend the statute did not separately address plaintiffs’ knowledge of information furnished directly to plan participants under ERISA’s separate disclosure rules because that information was already covered by the statute’s “actual knowledge” provision.

“Furnishing disclosures to plan participants ensures that they have ‘actual’ knowledge of the information disclosed, so Congress did not need to separately charge those participants with ‘constructive’ knowledge of the same information.  The only tenable reading of the statute as enacted, therefore, is that plan disclosures give rise to actual knowledge,” the brief states.

The groups also argue that by informing participants about their plans (including available investment options), the disclosure requirements are also designed to assure plan sponsors and fiduciaries that participants are accountable for the information disclosed to them.  “Plan sponsors and fiduciaries also rely on the three-year statute of limitations to create predictability about the plans’ exposure to potential liability. That system breaks down if participants can disclaim knowledge of the information disclosed to them,” the groups say.

They point out that there is no way to ensure that participants actually read the disclosed information or to verify that they have done so. Therefore, the three-year statute of limitations cannot serve its purpose of creating certainty about potential liability if there is no objective basis for plan sponsors and fiduciaries to ensure that plan participants are sufficiently informed of their rights to trigger the limitations period.

The groups also argue that the 9th Circuit decision exacerbates the threat that plan sponsors and fiduciaries will face legal challenges to their investment strategies based on hindsight alone. “While ERISA requires, and courts recognize in theory, that the prudence of an investment decision must be judged in light of the information available to the fiduciary at the time of the decision rather than in hindsight, triers of fact often struggle in practice to avoid the natural tendency toward hindsight bias in evaluating past decisions,” they contend. “Even where courts ultimately reach the correct outcome, plan sponsors and fiduciaries may incur significant costs in defending themselves from meritless, hindsight-based claims.”

The groups say ERISA’s three-year statute of limitations mitigates the risk of hindsight bias by requiring plan participants to decide whether to challenge adequately disclosed investment strategies promptly—with the benefit of only three rather than six years of hindsight.

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Categories: Industry News

Orphan Participants Affecting Multiemployer Plan Funding

Tue, 2019-09-03 12:05
In “Orphan and Inactive Participants in Multiemployer Plans, 2015 Plan Year Reporting,” the Pension Benefit Guaranty Corporation (PBGC) estimates that there are between 1.6 million and 2.5 million participants in orphan multiemployer plans, i.e. plans whose employer has withdrawn from the plan.

Orphan participants in ongoing plans that reported plausible non-zero values for orphans total 1.6 million, which accounts for 24% of participants in those plans and 16% of the 10.3 million participants in all multiemployer plans.

PBGC notes that employers are permitted to withdraw from a multiemployer pan, typically by paying withdrawal liability to the plan based on the plan’s funding level at the time of the employer’s withdrawal. The participants in the withdrawing employer’s plan are still entitled to receive their accrued vested benefit from the plan. The remaining contributing employers become financially responsible for funding the benefits of these “orphan” participants.

PBGC says it is possible for an orphan-heavy plan to be appropriately funded. However, the potential for future funding problems may still exist.

If an employer withdraws from a fully funded plan, it may owe no withdrawal liability payments. However, the orphaned participants no longer have an employer to backstop any changes in funded status, and if the plan experiences an unforeseen shock, the remaining employers and their workers must fund the benefits. On average, funding for multiemployer plans fell by more than 50% between 2000 and 2010. Plans that had employers withdraw before this period now face large funding shortfalls with fewer contributing employers.

In the case where a withdrawing employer pays its full withdrawal liability, the risks are similar to the scenario above—if the withdrawal is calculated on a market basis. Should it not incorporate the full market price, there is additional risk.

In the case where the withdrawing employer is unable to pay its withdrawal liability, the plan will seek to fund the gap by taking on riskier investment strategies or by requiring the other participating employers to make up the difference. Requiring higher contributions can affect the remaining employers’ ability to compete both in terms of attracting and retaining employees and in terms of cost structure and profitability.

In conclusion, PBGC says multiemployer plans are seriously underfunded, with 130 projected to become insolvent in the next 15 to 20 years. The concentration of orphan participants varies by industry, with five industries reporting that 25% or more of participants are orphans. Those are: agriculture, mining, manufacturing, transportation/utilities and leisure/hospitality. The orphan burden is significantly higher, when measured as the ratio of the number of orphans to the number of active participants, for plans in agriculture and mining (ratios of 6.6 and 4.8, respectively).

Plans reporting a zone status of critical or critical and declining have a much higher concentration of orphans than plans in the green zone. Plans with a higher ratio of inactive to active participants report being in critical or critical and declining zone status with a higher frequency than other plans in the system.

The worse the zone status, the higher the concentration of orphans and the higher the ratio of inactive to active participants. Both orphaned participants and inactive participants are concentrated in plans experiencing financial distress.

Legislation has been introduced that would provide funds for 30-year loans and new financial assistance, in the form of grants, to financially troubled multiemployer pension plans.

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Categories: Industry News

Reducing Employee Panic About Health Costs in Retirement

Tue, 2019-09-03 11:17

Those planning for retirement have anxiety about future health care costs. It’s understandable when estimates are provided for a total amount of costs during retirement—Fidelity estimates a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement.

But, a report from T. Rowe Price contends it’s more practical to look at health care as an annual expense incurred over 20 to 30 years than as a lump sum. “For example, a couple might spend a total of $86,000 for cable TV in retirement. But when budgeting, they’d consider it a monthly expense of about $150, not a single large payment. The same holds true for health care,” says Sudipto Banerjee, Ph.D., senior manager, thought leadership, T. Rowe Price, in the analysis.

He says lump-sum estimates are not very helpful for individual retirement planning. “There are embedded health insurance coverage assumptions in most of these calculations. Health insurance coverage varies significantly for retired Americans, even under the broad umbrella of Medicare. It is not clear if any particular type of health insurance coverage can be termed as ‘typical,’” Banerjee says.

Premiums are relatively stable at the individual level, but out-of-pocket costs are more uncertain and, as a result, account for most of the variation in health care expense projections. The article notes that premiums also constitute the bulk of their health care expenses for the majority of retirees—about 75%. “As a result, for most retirees, a large chunk of their annual health care costs is predictable and can be easily planned for, a fact masked by the combined lifetime health care cost estimates,” Banerjee states.

He points out that it is hard to build a financial plan around a lump sum since health care expenses are not incurred as a lump sum, and it is not clear how such information can be used to plan for retirement health care costs. Using the example of a hypothetical 65-year-old couple who needs $300,000 to fund their health care costs in retirement, he queries, “How should they go about it? Should they set aside $300,000 from their retirement savings at age 65 to meet their future health care cost needs? If so, how should they allocate the sum between savings and investments? And what if they only have $280,000 in retirement savings? Does that mean they have no chance of affording their projected health care expenses? And if they should not set aside the $300,000 as a lump sum, how much do they need at age 65, 75, or 85?”

The article suggests framing health care costs in retirement should be based on (at least) three factors: Annual costs; type of health insurance coverage; and separation of premiums and out-of-pocket expenses. “Premiums, similar to other monthly expenses, like a cable or utility bill, are often paid from monthly income. On the other hand, out-of-pocket expenses are much more likely to be funded from savings,” Banerjee says.

He notes there are a host of other factors (income, age, health status, marital status, state of residence, etc.) that can be added to personalize the planning experience for individuals. But, since it is not always possible to reliably estimate retiree health care costs using all these factors, the three-factor approach is a reasonable basic framework to estimate health care costs in retirement.

“If premiums are a fixed month-to-month expense item, they are no different than rent or a cable bill. So, like those other items, premiums should also be funded from the regular stream of monthly income. Doing this helps retirees form a more accurate monthly budget, which in turn helps to create a better income plan,” Banerjee suggests.

On the other hand, non-routine out-of-pocket health care expenses are likely to be funded from a pool of liquid assets (savings). “A realistic estimate of such expenses could help retirees to plan how much in liquid assets they should hold at any point in time to meet their health care cost needs,” Banerjee says. “We suggest maintaining a liquid fund, like a savings account, with enough money to meet out-of-pocket expenses. Replenished annually, this fund can help retirees cope with out-of-pocket uncertainties.”

The huge numbers often reported are usually skewed by an unfortunate few who pay very high expenses over a long period, but that won’t be the case for most retirees, he points out. His study found half of retirees who have traditional Medicare (Parts A and B), a prescription drug plan (Part D) and Medigap will spend less than $1,110 a year on out-of-pocket expenses. Only one in 10 will likely spend more than $4,500, and, and it’s unlikely they’ll keep paying that much over the rest of their lifetime.

Employers and advisers can replace employees’ panic with a prudent plan. Start by presenting health care expenses rationally, as a combination of predictable monthly expenses (insurance premiums) that can be budgeted for, and less predictable expenses (out-of-pocket) that can be managed from savings, Banerjee suggests. Next, emphasize careful consideration of Medicare options, comparing premiums, coverage and out-of-pocket expenses. Finally, suggest keeping a liquid cash reserve to help cover unpredictable expenses, replenishing it each year based on the previous year’s expenditures.

The report, “A New Way to Calculate Retirement Health Care Costs,” may be downloaded from here.

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Categories: Industry News