Administration June 9, 2014

80% of DB Sponsors Interested in Risk Transfer

June 9, 2014 (PLANSPONSOR.com) - Eight in 10 defined benefit (DB) plan sponsors expressed interest in pension risk transfer products.
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A survey by the LIMRA Secure Retirement Institute found, of the nearly 400 DB plan sponsors surveyed, one in five were unfamiliar with pension risk transfer products, and another 50% were only somewhat familiar with pension risk transfer products. Plan sponsors more familiar with the products were more interested in them, as were plan sponsors with frozen DB plans.

The survey found half of the traditional DB plans were still open to new participants, while 36% of plans were partially frozen and another 14% were fully frozen. Plans with more than $250 million in assets were more likely to be open to new participants than smaller plans (69% vs. 47%). The research revealed only 6% of plan sponsors said they plan to freeze their DB plan within the next two years. 

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The majority of plans sponsors surveyed (55%) use a liability driven investment strategy (LDI) to mitigate the financial risk of their DB plan. Other employers said they considered or implemented risk settlement options like lump-sum payouts and group annuity buyouts.

Among DB plan sponsors not very or not at all interested in pension risk transfer, the top reason is lack of knowledge. Other reasons given by plan sponsors for not considering a pension risk transfer product include using another method to address the risk, purchasing costs of annuities, and potential negative perceptions by stockholders.

“There is a misconception that the cost of transferring the risk through an annuity would be prohibitive but recent analysis by Mercer found that it was slightly cheaper for a plan sponsor to purchase a buyout for the retiree portion of its plan than it was to keep it in-house,” notes Alison Salka, senior vice president and director of the LIMRA Secure Retirement Institute (see “DB Sponsors Should Not Be Reluctant to Transfer Liabilities”). “We expect the growing impact of DB plans on balance sheets is going to drive more CFOs and others in finance to learn about and consider pension risk transfers in the future.”

Benefits June 9, 2014

Taxes a Surprise Expense in Retirement

June 9, 2014 (PLANSPONSOR.com) - Retirees significantly underestimated the impact taxes would have on them during retirement years, according to a recent Lincoln Financial Group survey.
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When asked what they expected their top expenses to be before they retired, the majority of retirees surveyed for the 2013 — Expense Challenges of Age 62-75 Retirees survey anticipated home and mortgage, health care and travel/leisure to be the most significant expenses during retirement. However, these retirees found their actual top expenses included taxes, rather than health care.

On average, when reviewing all household expenses paid on an annual basis, retirees reported spending the most on federal income tax. Additionally, 36% of retirees said taxes were a larger expense than they had anticipated, while 23% did not even consider planning for taxes as an expense prior to retirement.

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Underestimating the role of taxes was not based on a lack of knowledge among those responding to Lincoln’s survey. When participants were asked if they were aware of recent tax law changes, 62% said they were, while only 16% were unaware of tax law changes. Fifty-seven percent of survey participants said their advisers regularly discussed tax changes with them and shared the impact those changes could have on retirement. However, 43% said their advisers did not take that initiative.

Other key survey findings included:

  • Women had higher levels of concern, especially as it related to the health of their spouse, health care expenses and receiving full Social Security and Medicare benefits throughout retirement;
  • Reinforcing the need for wealth protection, individuals in the 62 to 65 age range have more intense anxiety than other age segments about major retirement concerns, such as leaving an inheritance, generating enough income, and having assets to last throughout retirement; and
  • About 43% of retirees ages 62 to 65 indicated they would like to pass on a financial legacy to children, grandchildren or a charity, yet nearly half of survey participants indicated they had not worked with a professional to establish an estate plan.

 

The survey is based on interviews with 750 individuals, with an annual household income of $100,000 or more. The survey included individuals who worked with a financial adviser, as well as those who did not. The survey report is available here.

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