Opinions July 20, 2016

Women and Retirement Risk: What Should Plan Sponsors Know?

Anna M. Rappaport, FSA, MAAA, a fellow of the Society of Actuaries (SOA) and member of the American Academy of Actuaries, suggests actions to help women better prepare for retirement.
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As the Baby Boomers are reaching retirement age, there are growing concerns that many Americans are inadequately prepared for retirement. Women face the same lifetime risks as men: outliving their assets, facing a long-term-care event, getting disabled earlier in life, saving too little, investing insufficiently, or suffering a loss due to a scam. But because they have different life paths, many women face greater challenges and are less prepared for the period late in life. 

There are many reasons for women’s and men’s different retirement experiences:

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  • Women live longer, and the population at the highest ages is primarily female. Therefore, their retirement funds need to last longer than men’s, and older women are more likely to run out of money.
  • A high percentage of older women are widows, and some spend many years as widows. If their spouse was sick prior to death, that may mean assets were used for the spouse’s medical care, and less is left for the widow.
  • Overall, women have fewer years of paid work and lower career earnings. In the allocation of family responsibilities, women often assume more of them, at home and in caregiver roles over many life stages. However, they may spend their later years alone, and they need to plan for their future security.
  • On a societal basis, women experience higher long-term care costs. They are more likely to need help with the activities of daily living later in life. But they will likely be alone, whether widowed, never married or divorced. Therefore, they are less likely to have a family caregiver.
  • Mothers are the first line of help for their children and are extremely devoted to them.
  • Many women have trouble thinking about their needs first, or at the same time others have needs, with the result that their needs become secondary or may even be forgotten for long periods of time.

Lessons Learned From Retirees  

The Society of Actuaries Committee on Post-Retirement Needs and Risks (CPRNR) has recently conducted focus groups with financially resource-constrained retirees retired for more than 15 years as well as those retired more recently. Focus groups were conducted separately by gender. The CPRNR has also surveyed retirees and near-retirees with regard to post-retirement risks, with the surveys conducted every two years starting in 2001. Some of the findings from this work include:

  • Gaps in knowledge and misperceptions are very common.
  • People commonly deal with things as they happen, rather than anticipating and planning for financial shocks.
  • Retirees are very resilient and adapt to many unexpected changes and shocks.
  • Widows often adapt quite well.
  • Divorce after retirement and a major long-term care event cause major financial disruption.
  • Some retirees make very large gifts to children when the child loses a job or experiences major problems.
  • Dental expenses and home repairs are major items of unexpected expense for retirees.
  • Women are much more likely to be caregivers and to time their retirement because of the caregiving needs of others.
  • Women are more concerned about retirement risks.
  • Many people have retirement planning horizons that are too short.
The decisions that people make throughout life can lead to inadequate savings for retirement and a need for long-term care without resources to support it.

Traps to Avoid  

  • There are several common traps that should be avoided. These are:
  • Spending too much on housing;
  • Not having an adequate emergency fund and using retirement assets for that purpose;
  • Taking on too much debt, particularly credit card and other high-interest debt;
  • Giving too much money to others, particularly children; and
  • Giving up a job for caregiving, without adequately focusing on personal needs. 

What Employee Benefits are Helpful   

Throughout working years, it is important to build up enough assets for retirement. This means saving enough and including protection so that asset growth can continue in the event of disability or a partner’s death. Investing in long-term care insurance is also important.

Post-retirement, it is crucial to make savings last the rest of one’s lifetime, and there are a range of options for doing this. Having long-term care protection is also important. 

Recommendations: Creating a Better Future  

This essay is about some of the challenges facing women. It offers the proposition that women really have different life circumstances than men that affect their retirement needs; individuals, actuaries, financial service companies, advisers, plan sponsors and policymakers all have roles in creating a better future for them.

Steps to a better future include:

  • A planning checklist for women. The example below is a start.
    • Plan for the long term, and remember there will probably be a time when you can’t work.
    • Balance short- and long-term thinking.
    • Understand family resources and what will be there for you in the event of a family breakup.
    • Save enough for the long term.
    • Provide for continued income and asset building in the event of disability.
    • Provide for the family in the event of the death of income earners.
    • Be careful about gifts to children.
    • Do not overuse credit and build up debt.
    • Evaluate the options if you are asked to be a caregiver, and do not sacrifice your future for others.
    • Maintain an emergency fund.
    • Have a plan for dealing with longevity risk. Consider using payout annuities.
    • Have a plan for dealing with long-term care needs. Consider using long-term care insurance.
  • Benefit plan sponsors including women’s retirement issues in their employee education programs, financial wellness programs and offering support for good retirement outcomes.
  • More long-term personal retirement planning by women, both independently and with knowledgeable advisers.

Anna M. Rappaport, FSA, MAAA, a fellow of the Society of Actuaries (SOA) and member of the American Academy of Actuaries  

This is a condensed version of the paper “Women and Retirement Risk: What should plan sponsors, planners, software developers and product developers know?” published by the Society of Actuaries in its Diverse Risks Essay Collection, in 2016. https://www.soa.org/News-and-Publications/Publications/Essays/2016-diverse-risk-essays.aspx.

For more understanding of post-retirement risks, see “Managing Retirement Risks, a Guide for Retirement Planning,”at https://www.soa.org/research/research-projects/pension/research-post-retirement-needs-and-risks.aspx.

For further information, visit Women’s Institute for a Secure Retirement (WISER) (www.wiserwomen.org).
Compliance July 20, 2016

Target Hit With a Second Stock-Drop Challenge

Plaintiffs say the “artificial inflation of the company stock price” made Target shares a bad investment for the ESOP. 

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The text of a new lawsuit accusing the Target Corporation of violating ERISA in the management of its employee stock ownership plan (ESOP) shows the ripple effects of the Supreme Court’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer are still very much in play.

Close readers of PLANSPONSOR.com will notice this is actually the second such case to be filed against Target in just a matter of days. Related to the previous case brought by another set of Target employees seeking class action status, plaintiffs are bringing this case to remedy alleged breaches of fiduciary duties under Employee Retirement Income Security Act (ERISA) Sections 404(a)(1), 29 U.S.C. § 1104(a)(1).

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“Under ERISA, defendants were obligated to protect the interests of the plan’s participants,” the lawsuit contends. “Specifically, defendants breached their duties by, among other things, retaining common stock of Target Corporation as an investment option in the plan when a reasonable fiduciary using the care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would use would have done otherwise.”

Plaintiffs make an argument that has come up many times in the district and appellate courts post-Dudenhoeffer: “Defendants, who had access to nonpublic information relating to Target’s operations, permitted the plan to continue to offer Target Stock as an investment option to participants even after the defendants knew or should have known that Target Stock was artificially inflated during the Class Period (February 27, 2013 to May 19, 2014, inclusive).”

Due to the “artificial inflation of the company stock price,” which according to plaintiffs the defendants knew would be corrected upon the forthcoming revelation of negative information, “Target Stock was an imprudent retirement investment for the plan given its purpose of helping plan participants save for retirement. As fiduciaries of the plan, defendants were empowered to remove Target Stock from the plan’s investment options, or to take other measures to help participants, but failed to do so or take any other action to protect the interests of the plan or its participants.”

NEXT: Not an easy case to make

As in related “stock drop” cases argued post-Dudenhoeffer, plaintiffs will benefit from the fact that ESOP fiduciaries no longer have a “presumption of prudence” as it pertains to choosing to keep employer stock in the plan—but they will still have to prove to the court that plan fiduciaries could have and should have known to take another action, besides holding onto the falling stock, without violating critical insider trading rules policed by the Securities and Exchange Commission.

Plaintiffs say this is no problem, citing the nuances of Fifth-Third vs Dudenhoeffer: “The Supreme Court has explained that an ERISA fiduciary’s perpetuation of an imprudent investment violates his obligations under ERISA. In Fifth Third Bancorp vs Dudenhoeffer, the Supreme Court considered a class action in which participants in and ERISA plan challenged the plan fiduciaries’ failure to remove company stock as a plan investment option.”

On the plaintiffs’ interpretation, the Supreme Court held that retirement plan fiduciaries are required by ERISA to determine independently whether company stock remains a prudent investment option. In cases where fiduciaries feel non-disclosed information could likely tank the employer stock price, possible actions to protect participants should at the very least be investigated and seriously considered, if not actually implemented.

“Moreover, the Supreme Court rejected the defendant-fiduciaries’ argument that they were entitled to a fiduciary-friendly presumption of prudence, holding that no such presumption applies … and further held that the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary,” the complaint argues. “Thus, even if the plan purportedly required Target Stock be offered, the plan’s fiduciaries were obligated to disregard that directive once company stock was no longer a prudent investment for the plan.”

Acknowledging that it can be tricky for an ESOP investment committee to field and manage insider information about the employer stock price and the rationality of its valuation, plaintiffs argue the Target officials in charge of the plan in this case did not live up to ERISA’s strict standards of care.

“During the class period, the company made a series of reassuring statements about Target’s new Canadian stores and operations,” plaintiffs add. “These statements were materially false and misleading and/or omitted to disclose: (a) at the time of the opening of its first group of stores in Canada, Target had significant problems with its supply chain infrastructure, distribution centers, and technology systems, as well as inadequately trained employees; (b) these problems caused significant, pervasive issues, including excess inventory at distribution centers and inadequate inventory at retail locations; (c) this excess inventory at distribution centers and lack of inventory at retail locations forced Target to discount heavily products and incur heavy losses; and (d) these supply-chain and personnel problems were not typical of newly launched locations in Target’s traditional U.S.-based market.”

Given the totality of circumstances prevailing during the class period, plaintiffs conclude that “no prudent fiduciary could have made the same decision as the defendants to retain and/or continue purchasing the clearly imprudent Target Stock as a Plan investment.”

Full text of the complaint is available here. 

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