Early enthusiasts of 401(k) plans regret what the retirement plan has become

Timothy W. Martin has an article in The Wall Street Journal where he writes about how the early backers of 401(k) plans regret their support of this type of retirement plan. Martin writes:

Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days. Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.

“The great lie is that the 401(k) was capable of replacing the old system of pensions,” says former American Society of Pension Actuaries head Gerald Facciani, who helped turn back a 1986 Reagan administration push to kill the 401(k). “It was oversold.” Misgivings about 401(k) plans are part of a larger debate over how best to boost the savings of all Americans. Some early 401(k) backers are now calling for changes that either force employees to save more or require companies to funnel additional money into their workers’ retirement plans. Current regulations provide incentives to set up voluntary plans but don’t require employees or companies to take any specific action.

Alaska and California top states with highest market pension debt per household

At the website US Pension Tracker, they rank the states by Market Pension Debt per Household (for 2015). Here are the top 5 and bottom 5 states:

1. Alaska        $110,538

2. California    $92,748

3. Illinois        $84,353

4. Connecticut    $81,273

5. Hawaii        $67,638


46. Nebraska    $24,992

47. Vermont    $24,326

48. North Carolina $22,066

49. Indiana        $19,686

50. Tennessee    $19,586




California and Illinois among states looking to make saving for retirement mandatory

Ben Steverman writes in Bloomberg that five states have plans over the next couple of years to introduce legislation which will require its citizens to save for retirement. He writes:

Now five states, where one in five Americans lives, are attempting a similar feat, this time with retirement. The goal in California, Oregon, Illinois, Maryland, and Connecticut over the next few years is to give nearly every worker the chance to save for retirement at work. Currently, 36 percent of U.S. private-sector workers don’t have access to a pension or 401(k)-style plan on the job, according to the Pew Charitable Trusts. Even those who have a plan at work don’t always find it easy to sign up. As a result, 55 percent of workers aren’t saving for retirement at work. Young workers and Latinos are the least likely to have access to workplace retirement options. The states are trying to get more workers saving for retirement by requiring employers either to offer a plan to workers or to connect them to a portable, state-run retirement option. “It is an ambitious step that is part of a growing national movement aimed at protecting millions of Americans who are on track to retire into poverty,” California State Controller Betty Yee said in a speech earlier this month.

No new SEC regulations expected before the Trump administration takes office

Securities and Exchange Commission (SEC) Chair Mary Jo White stated in testimony before the House Financial Services Committee that she did not believe the SEC will attempt to rush through regulations before Donald Trump is inaugurated in January. Ms. White said: “I don’t see any last-minute rushes. I intend to carry out the agenda I released in February 2016 as much as I can. I don’t think there’s consensus to move forward on the current commission.” This means new rules on investment advice standards will have to wait until the new administration is in office.

Low interest rates hurting pensions throughout the world

The Wall Street Journal
article looks at the problems facing pension funds due to the extended period of low interest rates.

“Interest rates have never been so low,” said Corien Wortmann-Kool, chairwoman of the Netherlands-based Stichting Pensioenfonds ABP, Europe’s largest pension fund. It manages assets worth €381 billion, or $414 billion. “That has put the whole system under pressure.” Only about 40% of ABP’s 2.8 million members are active employees paying into the fund. Pension funds around the world pay benefits through a combination of investment gains and contributions from employers and workers. To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. They range from as low as a government bond yield in much of Europe and Asia to 8% or more in the U.S. The problem is that investment-grade bonds that once churned out 7.5% a year are now barely yielding anything. Global pensions on average have roughly 30% of their money in bonds. Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis.


A Trump presidency brings uncertainty to DOL’s new fiduciary rules

Timothy Weatherhead writes in The Hill that the Department of Labor’s new fiduciary rules for financial advisors may be terminated when Donald Trump takes over presidency on January 20th. He writes:

Jill Hoffman, vice president of government affairs for Financial Services Roundtable, told The Hill Extra she expects the Trump administration to initially suspend the rule upon taking office, given his campaign platform. “The Trump campaign made very clear that any new regulations from the Obama administration that were not compelled by Congress or for public safety there’s a plan to put a temporary hold on any of those regulations,” Hoffman said. “We can reasonably assume that there’s going to be some kind of freeze on, not just the DOL rule, but any other rules not compelled by Congress or for public safety reasons.” Brian Gardner, managing director of financial services firm KBW, told The Hill Extra the length of the suspension is entirely up to the new administration. Following the suspension, the administration has to determine how to proceed, he said. 


Small business owners unprepared for retirement

Rodney Brooks writes in The Washington Post
of a recent survey which shows small business owners are unprepared for retirement. He writes:

According to a new report from BMO Wealth Management, only a fraction of the nation’s 28 million small business owners are prepared for retirement. BMO called the report “startling.” According to the survey:

  • 75 percent of small business owners have saved less than $100,000 in retirement funds. In the upper age bracket (ages 45-64) the entrepreneurs were only slightly more prepared — 68 percent have saved less than $100,000.
  • Only 8 percent had saved more than $500,000, which is still not considered enough for retirement for many people.

Jason Miller, national head of wealth planning at BMO Wealth Management, says they weren’t surprised by the results. “Unfortunately, the results bear out what we see in practice,” he says. “I don’t know that there were any surprises.”

Treasury clarifies rules on partial lump-sum distribution of pensions

A National Law Review article summarizes some rule clarifications by the Department of Treasury regarding partial lump-sum distributions of pensions.

In September, the US Department of the Treasury issued final regulations that clarify the minimum present value requirements for defined benefit plans in order to simplify the rules associated with partial lump sum distributions. These new rules, which generally apply to distributions with annuity payments starting in plan years beginning on or after January 1, 2017, are intended to encourage plans to offer hybrid distribution options that include an annuity, to ensure a lifetime benefit stream.

One retiree opines: Waiting to receive Social Security until age 70 is good for the retiree but bad for younger workers

Mark Hendrickson, a fellow at City Grove College, has a commentary in The Wall Street Journal where he criticizes the current law that say if a person postpones receiving Social Security from age 66 to age 70, they would receive an 8% annual rate of return over the four-year period. That is, waiting until 70 would mean receiving a payment that is about 32% higher than if one started getting monthly checks at 66. Instead, Hendrickson advocates basing the increase on the growth of GDP. He writes:

It’s time to do away with the unmerited, unaffordable gift of 8% annual raises to seniors who delay collecting Social Security. Congress should amend the program so that its annual raises track GDP. If GDP increases 4.5% in a year, then seniors who have deferred collecting will receive a 4.5% increase in their eventual benefit. If GDP shrinks 2%, then so would the accruing benefit. Such a change won’t happen in the near future, as both presidential candidates have shied from embracing real reform. Eventually, however, it will become unavoidably obvious that this automatic raise for millions of seniors is an unjustifiable fiscal extravagance.

House and Senate working on bills to make it easier for small businesses to offer retirement plans

Ted Knutson writes at Financial Advisors that the House and Senate are working on bills to make it easier for small businesses to offer 401(k) plans. He writes:

Bills making it easier for small businesses to offer 401(k)s by cutting costs and red tape are advancing in the Senate and the House this week. The Senate Finance Committee passed the Retirement Savings and Enhancement Act on Wednesday, while the House Education and the Workforce Committee is scheduled to take the first step to pass similar legislation Thursday.

Finance Committee member Sen. Sherrod Brown, D-Ohio, said the Senate bill has the potential to dramatically increase the number of workers with payroll retirement savings plans by easing the way for small employers to join together to take advantage of economies of scale in workplace 401(k)s—the so-called open multiple-employer plans (Open MEPs). Making it easier for small employers to offer retirement savings is important because only 20 percent of workers at companies with under 500 employees are in job-based retirement plans, while the number is four times greater for businesses with over 500 workers, noted Virginia Democrat Sen. Mark Warner, D-Va., who serves with Brown on the Senate finance and banking committees.

House Financial Services Committee looks to repeal DOL new fiduciary rules

House Financial Services Committee Chairman Jeb Hensarling (TX-R) introduced a bill late last week that contains provisions to repeal the Department of Labor’s new fiduciary rules. The bill is called the Financial CHOICE Act, HR 5983, and it will:

End taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from growth-strangling regulation that slows the economy and harms consumers; impose tougher penalties on those who commit financial fraud; and demand greater accountability from Washington regulators.

New regulations help Americans save for retirement via state plans

David John of AARP—and past speaker at a number of Savings and Retirement luncheons—describes how new Department of Labor regulations make it easier for people to save for retirement through state plans. He writes:

The final regulations offer states that choose to establish automatic enrollment savings plans that are not covered by the Employee Retirement Income Security Act (ERISA) flexibility in the way they administer and regulate the plans. Several states have taken this approach because they believe ERISA imposes greater costs and regulatory responsibilities on employers. While the plans must be established under state law, boards or commissions may set the details of plan design, and operations may be contracted out to private sector vendors.  However, states must take responsibility for the security of payroll deductions by establishing procedures to ensure that the contributions go to the accounts within a reasonable time period.

The state-sponsored plans may use automatic enrollment if the state requires employers to offer the plan or an equivalent private sector option and the role of the employer is limited to providing information and collecting deductions. Under automatic enrollment, participation is completely voluntary, but an employee is part of the plan, contributing a pre-set amount to a certain investment choice unless the worker decides otherwise. States must set out a consumer’s rights and establish a mechanism to enforce them.