Data and Research February 22, 2016

Most Americans Only Report Modest Savings Progress

Only about half of non-retired persons say they are saving enough for a suitable standard of living in retirement.
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The ninth annual America Saves Week survey has found that only two-fifths (40%) of U.S. households report good or excellent progress in “meeting their savings needs.”  

Less than half (49%) say they are saving at least 5% of their income; 52% say they are saving enough for retirement with a “desirable standard of living,” 43% report some kind of automatic saving outside of work, and 38% report they have no consumer debt.

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Responses to other questions, however, suggest that around two-thirds of Americans are making at least modest savings progress: 70% report at least some progress in meeting savings needs; 66% say they save at least some of their income; and 63 percent report “sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit.”

More Men Than Women Report Saving Progress 

On 12 separate questions on various financial well-being indicators, men’s responses were more positive than women’s responses, with differences ranging from five to 13 percentage points.  For example, 74% of men, but only 67% of women, report they were making saving progress, and 44% of men, but only 36% of women, report good or excellent saving progress.

Similarly, 72% of men, yet only 60% of women, report they are spending less than income and saving the difference. This gender gap persisted for those saving at least 5% of income—54% of men and only 45% of women.

During a media call, Stephen Brobeck, executive director of the Consumer Federation of America and a founder of America Saves, said these gender differences were not surprising because men tend to have more income and assets than women.

NEXT: Retirement savings shortfalls

When the survey asked whether respondents were "saving enough for a retirement in which you will have a desirable standard of living," only about half of non-retired persons (52%) said "yes." That figure is down three percentage points from last year (55%) and down six percentage points from 2008 (58%).  Moreover, there was a significant gender gap: 57% for non-retired men, and 47% for non-retired women.

While these findings are discouraging, Harry Conaway, chairman of the American Savings Education Council, told reporters the positive could be that as individuals become more educated and begin planning, they grow more realistic about their retirement savings needs.

For those non-retired persons who say they are not saving enough for retirement, about one-quarter (27%) say the main factor is high day-to-day expenses, and another one-quarter (25%) say the main factor is debt and related expenses, with about half this group (12%) citing education expenses and debt.  For those younger than 45, 22% cite education expenses and debt as the main reasons for not saving enough. For those older than 45, the most cited reason (16%) after day-to-day expenses is mortgage or housing expenses.

For the first time, the annual America Saves Week survey asked for respondents’ views about participating in retirement programs. When asked the highest percentage of their salary that they would contribute to a plan offered by their employers with auto-escalation, more than four-fifths (82%) indicated they would contribute more than 3%, with 40% indicating they would save 10% or higher. 

Conaway says this suggests more employees would be open to automatic enrollment and automatic deferral escalation than retirement plan sponsors think.

Also, when asked what they would do if their employer did not offer a retirement plan and they were automatically enrolled in an IRA administered by their state government with a default annual contribution of 3%, roughly equal percentages said they would contribute less than 3% (32%), 3% (31%), and more than 3% (28%). 

NEXT: Those with a plan for saving are more successful

The survey findings reveal that those with a “savings plan with specific goals” save more successfully than those without a plan. Sixty-one percent of those with a plan for savings know their net worth, versus 33% without a plan. Eighty-five percent of those report no or reducing consumer debt, versus 64% without a plan. Eighty-four percent of those with a plan say they are spending less than income and saving the difference, versus 46% of those without a plan.

In addition, more of those with a “savings plan with specific goals” report sufficient emergency savings than those without a plan (79% vs. 46%); automatic savings outside work (60% vs. 26%); and making good or excellent savings progress (55% vs. 23%).

Income appears to be correlated with some but not all of these differences. More specifically, the financial well-being indicator gaps between those who plan and do not plan are always larger than those gaps between households with annual incomes of $25,000-$50,000, and those households with incomes above $100,000.

Brobeck said there is hope; he suggests low-income workers be encouraged to start with saving their loose change. And, he says, all households can save more with a specific plan and goals.

“The survey responses underscore how important it is for all retirement industry players and policymakers to educate employees and support key savings goals,” Conaway concluded.

The research included responses from a representative sample of 1,004 adult Americans between January 28 and 31.

More about America Saves Week, including a toolkit, can be found at http://www.americasavesweek.org/.

Compliance February 22, 2016

Lawsuit Questions Plan’s Lack of Alternatives to Mutual Funds

The lawsuit filed by Jerome J. Schlichter of Schlichter Bogard & Denton against Chevron Corporation also accuses the firm of not using its negotiating power to obtain lower investment and recordkeeping fees.
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A new lawsuit claims that by providing participants the Vanguard Prime Money Market Fund instead of a stable value fund, as represented by the Hueler Index, from February 2010 to September 30, 2015, Chevron Corporation caused its 401(k) plan, participants and retirees to lose more than $130 million in retirement savings. 

Since at least February 2010, Chevron has provided plan participants as their sole capital-preservation, conservative investment option the Vanguard Prime Money Market Fund, initially in the higher-cost Investor class, and as of April 1, 2012, in the lower-cost Institutional class. During that time, the Vanguard Prime Money Market Fund provided an annual return that was 0.07% at its highest and as low as 0.04%. The lawsuit says “that microscopically small return did not even beat the rate of inflation during that time period.” 

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In the complaint, the Hueler Analytics Pooled Fund Comparative Universe (Hueler Index) data was used to show the returns of the funds in the Hueler Index have far exceeded the returns of the Vanguard Prime Money Market Fund in the plan. The Hueler Index shows stable value funds dramatically outperformed the plan’s money market fund—up to 67 times the return of the Vanguard Prime Money Market Fund.

NEXT: No consideration of collective trusts and separate accounts

The lawsuit also questions Chevron’s lack of investigation into non-mutual fund alternatives, such as collective trusts and separately managed accounts. “Holders of large pools of assets know that these investment vehicles are readily available to them and can be used for the same investment style and with the same portfolio manager, but are much less expensive,” the compliant says. Each mutual fund in the plan charged fees far in excess of the rates Chevron could have obtained for the plan by using these comparable products, according to the lawsuit.

The complaint quoted the United States Department of Labor’s Study of 401(k) Plan Fees and Expenses, which says separate accounts can “commonly” reduce “[t]otal investment management expenses” to “one-fourth of the expenses incurred through retail mutual funds.”

The complaint also notes that collective trusts also provide much lower investment management fees than the plan’s mutual funds, and in some instances, separate accounts. “Collective trusts are a common investment vehicle in large 401(k) plans, and are accessible even to midsize plans with $100 million or more in total plan assets, an amount which is a tiny fraction of the size of the Chevron plan,” the compliant says, stating that the Chevron plan has assets around $19 billion. The complaint notes that Vanguard offers low-cost collective trust funds to qualified retirement plans in several asset styles, including large-cap domestic equities, small-cap equities, international equities, and target-date funds.

The lawsuit also claims the plan’s recordkeeping fees were excessive in part because Chevron failed to monitor and control the amount of asset-based revenue-sharing fees Vanguard received. From February 2010 through March 31, 2012, Chevron caused the plan to compensate Vanguard for its recordkeeping services with assed-based revenue sharing of the annual expenses of the plan’s investment options instead of a fixed recordkeeping fee. “Chevron could have and should have capped the amount of revenue sharing to ensure that excessive amounts were returned to the plan but failed to do so. As a result, the plan therefore paid millions of dollars in excessive recordkeeping fees from February 2010 through March 31, 2012” the complaint contends.

The lawsuit also accuses Chevron of failing to conduct a competitive bidding process for the plan’s recordkeeping services within the past six years, which it says would have produced a reasonable recordkeeping fee for the plan.

NEXT: Failure to bargain for lower fees

Jumbo retirement plans, such as Chevron’s, have much more bargaining power to negotiate low fees for investment management services than even large plans, the complaint contends. Lower-cost institutional share classes of mutual funds compared to high-priced retail shares are readily available to giant institutional investors or even smaller asset holders that meet minimum investment amounts for these share classes.

According to the lawsuit, from February 2010 until on or about April 1, 2012, Chevron imprudently and disloyally provided participants the more expensive share class of Vanguard mutual funds, even though the identical investment was available to the plan at a much lower cost. The lower-cost shares of these mutual funds were available to the plan many years before Chevron moved to lower-cost share classes for the Vanguard mutual funds in 2012.

In addition, from February 2010 to April 1, 2014, Chevron provided the Artisan Small Cap Value Fund as a plan investment option. As of February 1, 2012, Artisan provided the exact same investment in an Institutional class share, which charged 99 to 100 bps in annual fees, compared to 122 to 124 bps for the Investor class shares, which were the shares in the plan. The lawsuit lists similar complaints with the Artisan Mid Cap Fund and Neuberger Berman Genesis Fund.

“Even though Chevron switched to the less expensive but otherwise identical share class of the plan’s Vanguard mutual funds on April 1, 2012, …inexplicably, and to the plan’s detriment, Chevron failed to do the same with the non-Vanguard funds when cheaper share classes continued to be available to the plan,” the lawsuit alleges.

The lawsuit charges that participants paid far higher fees than they should have, which resulted in receiving lower returns on their retirement investments, and fewer retirement assets to build for the future, than they would have obtained had Chevron performed its fiduciary duties. It contends that because Chevron imprudently and disloyally provided participants the much more expensive versions of the plan’s same mutual fund options during these dates, plan participants lost more than $20 million of their retirement savings through unnecessary expenses.

The lawsuit seeks to enforce defendants’ personal liability to make good to the plan all losses resulting from each breach of fiduciary duty and restore to the plan any profits made through the defendants’ use of the plan’s assets. In addition, the plaintiffs seek to reform the plan to comply with the Employee Retirement Income Security Act (ERISA) and to prevent further breaches of ERISA’s fiduciary duties and other such equitable or remedial relief for the plan as the Court may deem appropriate.

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