Participants June 20, 2017

Millennials Long for Financial Education

Several Millennial respondents to a recent survey by Pentegra reported that they could have benefited from learning about saving for retirement as early as middle school.

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Even though most Millennials (81.37%) are saving for retirement, a new study by Pentegra finds that many are in desperate need for guidance on how to develop good spending habits and saving strategies.

According to the survey, 45.1% of Millennials are contributing less than 5% of their annual salary or what the firm calls an “inadequate level” into a retirement savings plan. Meanwhile, 18% aren’t contributing anything toward retirement. For many, conflicting financial priorities including rent, mortgage and student loan bills are establishing major barriers to funding retirement.

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StudentLoanHero reports that the United States student loan debt stands at $1.44 trillion at the hands of 44.2 million Americans. The average monthly student loan bill for a borrower between the ages of 20 and 30 is $351. The Citizen Financial Group reports that college graduates under the age of 35 are spending nearly a fifth of their income on paying off their student loans.

But the Pentegra study also found that spending on “wants” in relation to “needs” is also impeding building up savings. The report found that 31.38% of respondents spent at least $75 a week on eating out including purchasing coffee. Pentegra noted that if a person spends $5 on a cup of gourmet coffee five days a week, the annual price tag for coffee alone is $1,300. In 40 years of active work, this cost jumps to $52,000. And assuming a 6% compound annual growth rate, it ends up at $152,000.

One survey respondent who is a middle school teacher in Tampa, Florida said, “A lot of people my age, including some of my friends, find it easy to spend what they have when they get it. Retirement for a person my age is years and years away. It seems hard to plan for developments that are 40 years down the road.”

That sentiment was shared by a lot of respondents, highlighting the need for plan sponsors and employers to stress the importance of retirement saving and the value of contributing as early as possible.

One respondent noted, “If we educate new employees that have never had a 401(k) account, then maybe they will see the importance of what it’s really there for. At my first job that offered a 401(k), I didn’t contribute, the reason being I didn’t know what it was for and the benefits of it.”

Still, many chimed in that they could have benefited from learning more about retirement saving before they even stepped through the door of their first job. “People my age don’t know about saving for retirement,” said a marketing coordinator at a financial services firm in Shelton, Connecticut. “In high school we never heard anything about it. Nor was the subject of retirement discussed in college … They should probably start teaching it in high school, if not earlier – even junior high would make sense to me. They don’t talk about personal budgets or explain compounding interest, or any of that. Addressing how you need to be actively saving for 40 years is something all public schools should be doing.”

And if the American public school system does move forward with an emphasis on financial wellness, employer efforts to promote good spending and saving habits among their workforce could provide an added benefit. One social worker from Shelton, Connecticut, reflected “I attended a meeting with the bank that manages our 401(k) at work. I discussed with my family what percentage would be appropriate to have taken out of my check bi-weekly toward my 401(k), and I’ve been able to change the percentage as my salary increases.”

Small businesses can also benefit from entering the 401(k) space sooner than later. The Pentegra report found that 78.43% of respondents said they look for companies that offer retirement benefits when job hunting. However, the U.S. Census Bureau reports that only 14% of employers offer a tax-deferred retirement plan and most are large companies.

Pentegra stresses that “While most large companies offer a 401(k) with an employer match and/or other retirement plans, this should serve as a wake-up call for smaller firms that may be undersupplying—or not offering at all—some kind of retirement benefit plan.”

The firm believes that key players in the industry can address the negative aspects of Millennial savings and spending habits along with perceptions of retirement by taking certain steps. These include encouraging conversations about saving for retirement with family, friends and peers; improving economic education at schools; encouraging young people to delay instant gratification; and redoubling efforts at educating employees.

The Pentegra Millennial Saving Survey was conducted by interviewing more than 100 people born between 1980 and 2000 during May 2017. The full report can be found at Pentegra.com. 

Compliance June 20, 2017

Sponsor Reaches Settlement Agreement with Merrill Lynch

Plaintiffs say the settlement agreement “provides an excellent recovery” for class members, paying them “100% of their losses.”

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Merrill Lynch has reached a proposed settlement with trustees of retirement plans that filed suit over the calculation of sales charges and fee waivers.

The retirement plans in question are run by the LAAD Corporation, short for the Latin American Agribusiness Development Corporation. Trustees of the LAAD Corp filed their suit in the U.S. District Court for the Southern District of Florida.

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The case itself is relatively straightforward in retirement industry standards and is being resolved following related action by the Financial Industry Regulatory Authority (FINRA). About a year before plaintiffs filed their lawsuit, Merrill entered into a letter of acceptance, waiver and consent with FINRA, acknowledging its failure to provide appropriate sales charge waivers for mutual fund purchases by “RCMA 05 small business retirement accounts,” including the ones held by the LAAD plans and settlement class members. As the settlement agreement lays out, Merrill made two sets of remediation payments, one voluntary and another pursuant to the FINRA letter—totaling about $79 million.

Plaintiffs in their lawsuit called the remediation insufficient and sued for breaches of fiduciary duty under Section 404(a) of the Employee Retirement Income Security Act (ERISA). In addition to a “complete remediation,” plaintiffs sought under ERISA 409(a) the disgorgement of profits derived by Merrill of the result of the practices in question.

Two years of litigation and negotiation later, the parties have reached a preliminary agreement to settle the class action, valued at an additional $25 million. Plaintiffs say the settlement agreement “provides an excellent recovery” for class members, paying them “100% of their losses” and including “accounts that were incorrectly excluded from the [initial] remediation.” The remediation also gives the class members additional millions in disgorged profits.

NEXT: Merrill’s arguments fell flat 

Background information in the text of the proposed and uncontested settlement agreement should offer some important food for thought for PLANSPONSOR readers. As part of the proceedings, class counsel “scoured 6.5 years of Merrill’s documentation … as well as the plans’ account statements to confirm the existence of a shortfall. Beyond this, the discovery effort included "six motions to compel, 11 depositions taken or defended and a review of more than 125,000 pages of documents and dozens of complex spreadsheets.”

Class counsel also hired a “data scientist” whose work “confirmed that the shortfall amounted to millions of dollars in unremediated sales charges and unpaid interest.”

Moreover, arguments leveled by Merrill Lynch generally seemed ineffective. Merrill for example initially challenged plaintiffs’ standing on the ground that the plans “did not invest in each of the 106 mutual funds sold by Merrill to class members.” Merrill contended that plaintiffs “could represent only those plans that invested in the same 14 mutual funds purchased by the plans.” If Merrill’s standing argument had prevailed, it would have greatly curtailed the scope of the action and the number of participant accounts receiving relief. The defense also (unsuccessfully) challenged class certification on ascertainability and manageability grounds.

Finally, Merrill failed in its assertion that it was not a fiduciary under ERISA or otherwise. With this, the final argument was made that the firm should be protected by ERISA’s statute of limitations, arguing many of the sales in question took place outside the limitation period anyway. In the end, pending a fairness hearing and the district court’s approval, the company seems to feel it’s arguments along these lines are less certain to reach a positive outcome than simply settling the claims outright.

Read the full settlement proposal here. 

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