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Benefits Business

Retirement savings

Employers need to provide better advice about options

By Len Strazewski

Will the newest generation of workers save enough to retire comfortably? Not unless more employers begin to provide better post-retirement benefits delivery options—and the retirement plan administrators reform their fees.

In September, The Society of Actuaries in Schaumburg, Illinois, and the Stanford Center on Longevity in Stanford, California, released a new report that challenges employers to provide more options for the delivery of retirement income and better education about how those options can work to deliver better financial security.

The report also provides some direction for agents, brokers and other benefits advisers about how to guide their clients in offering options that protect employees even after their retirement.

The problem is sustainability, the report says. Though many employers provide defined contribution benefit plans that help employees build savings for retirement, they do not always provide systems that deliver or distribute the accumulated lump sums over the remaining life of a retiree.

As a result, retired workers can easily spend assets at an unsustainable rate, the report says. Retirees are exposed to investment market volatility and inflation which can erode the value of their savings and put them at risk of outliving those savings.

The report, "The Next Evolution in Defined Contribution Retirement," is aimed at providing employers with more information about different types of retirement income delivery devices, which the study calls "income generators."

These generators function in three ways:

• Retirees can set up plans to distribute investment earnings such as interest and dividends from the lump sum, leaving the principal untouched.

• They can program systematic withdrawals over time that include principal and investment earnings but are designed to last a specific period, using target date funds or other structured investment to feed the withdrawal stream.

• Retirees can also buy annuities that guarantee lifetime payouts and may provide a survivor benefit.

Retirees with large lump sums or multiple pools of resources can also use a combination of the techniques to guarantee some income streams over time and keep some assets earning at investment market rates.

Employers can help in several ways, the actuaries say. Depending upon the defined benefit plan design and administrator, employers can let retirees keep their assets within the retirement plan trust account earning income through investments or annuities held by the trust and arrange for systematic withdrawals. Some employers already provide this option, the study says.

Or, employers can identify and promote selected financial institutions, mutual fund companies or annuity providers and then assist retirees in transferring their defined contribution plan payouts to those institutions which can offer more sustainable payment options.

While many employers prefer a hands-off approach to post-retirement income management, there are advantages to staying involved, the actuaries say. Employers may be better qualified to identify secure providers and assist with pre-retirement education about options. And, employers are more able to negotiate "institutional pricing" of various products, rates that reflect their clout in the marketplace.

This pricing is often lower than retail rates available to individual retirees, helping the retirees retain more of their principal savings over time.

"It is important for people to evaluate all of their options for a lifetime paycheck and to set clear goals of what their retirement plans need to achieve," says actuary Steve Vernon, consulting research scholar for the Stanford Center. "Different retirement income methods produce significantly different amounts of income depending on the method chosen. Employers can help retiring employees understand the pros and cons of each method as well as the amount of retirement income, so retiring employees can make informed decisions."

However, employers may need to be educated and encouraged to extend their planning to cover post-retirement decisions.

"A cultural shift is needed to get employers and plan sponsors to include retirement income options as part of defined contribution plans," said actuary Anna Rappaport, chair of the society's committee on post-retirement needs and risks.

Retirement administrator and investment advisor fees and their fiduciary responsibilities are also a concern for retirees. High administration fees can erode savings and, while a percentage point or two of management charges may not seem like much with double-digit investment returns, they become serious disadvantages during periods of low returns on equities or low interest on fixed-income investments.

Also administrators that do not provide a breadth of options or monitor competitive costs may be in violation of fiduciary responsibilities to their plan participants.

A recent class action lawsuit highlights the concerns. In September, 26 present and former Fidelity Investments employees and retirees joined the suit Bilewicz vs. FMR LLC, filed in U.S. District Court in Massachusetts in March.

The lawsuit was filed by a Fidelity Investments profit-sharing plan participant, charging that the employer violated its fiduciary duty under the Employee Retirement Income Security Act (ERISA) by restricting defined contribution plan investments to its own family of funds. The plan has more than 50,000 participants.

While Fidelity has more than 150 fund options, the complaint says that the company was "self-dealing" for its own profit against the interest of plan participants and that the administrative fees charged by the company were higher than the fees charged by other investment fund companies for similar investments and retirement services.

The suit also charges that the Fidelity investment committee did not communicate to plan participants its investigations into cost management and did not take advantage of opportunities to consolidate offerings into groups—such as target dated stocks or large cap stocks—which would have lowered fees and restricted some of the fund volatility.

The lawsuit also alleged that Fidelity used plan assets to "seed" new Fidelity Funds to the advantage of the company in general with no returned value to the plan participants.

Other investment companies have avoided these concerns by outsourcing their retirement plan to other investment companies, but in 2011 similar suits were filed by plan participants against Wells Fargo which administered its own plan and Wal-Mart which was administered by Merrill Lynch.

Fidelity is the nation's largest individual provider of defined contribution plan and workplace retirement savings services. The company reported a 60% increase in defined contribution plan sales for the first half of 2013, yielding assets totaling $40.5 billion. As a part of the first half sales announcement, Executive Vice President and Head of Workplace Retirement Services Steve Patterson said, "Plan sponsors' confidence in Fidelity's ability to help them navigate an increasingly complex regulatory environment and provide robust financial guidance for their employees have led many employers to choose Fidelity, a company with retirement at its core and a singular focus on delivering a superior experience for both plan sponsors and their participants."

Fidelity has filed for dismissal of the suit, saying that the lawsuit is without merit. However, the lawsuit has gotten wide media coverage in the financial press and employee benefits and investment industry.

The author

Len Strazewski has been covering employee benefits issues for more than 30 years. He has an M.S. in Industrial Relations from Loyola University in Chicago.

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