Data and Research April 26, 2018

Increased Savings Rates and Auto Escalation Can Boost Retirement Income

Those who are contributing less than 3% to a retirement plan are on track to replace 59% of their income in retirement, whereas those who contribute 10% or more are on track to replace 128% of their income, an analysis from Empower found.

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Americans are on track to replace 64% of their income in retirement, according to a report from Empower titled, “Scoring the Progress of Retirement Savers.” This figure includes projected Social Security benefits, both defined benefit (DB) and defined contribution (DC) plan assets, personal savings, home equity and business ownership.

Asked what source will provide income for their household in the first five years of retirement, 71% said Social Security, 56% said their DC plan, 38% said personal savings, 29% said employment, and 19% said a DB plan.

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Sixty-seven percent said at least one earner has a workplace retirement plan available to them, but 33% said they are not offered a plan. Among those with a plan, they are on track to replace 79% of their income; for those without one, the figure is 45%. “Clearly, providing access to a tax-deferred retirement savings plan is one of the most important first steps any employer can take to put people on the path to future security,” Empower says.

Younger workers are on track to replace a higher percentage of their income, most likely because they have had access to a workplace retirement plan for their full career, whereas early Baby Boomers did not. Thus, Millennials are on track to replace 75% of their income; Gen X, 61%; late Boomers, 61%; and early Boomers, 55%. Men are on track to replace 71% of their income in retirement, and women, 59%.

Those who are contributing less than 3% to a retirement plan are on track to replace 59% of their income in retirement, whereas those who contribute 10% or more are on track to replace 128% of their income. Additionally, when a DC plan includes auto escalation, participants are on track to replace 107% of their income.

Among those with a retirement plan, 79% are confident they are making the most of the plan to build retirement income, up from 70% in 2016. Empower says it is important for employers to educate participants about how much income their savings is projected to supply them with.

Thirty-two percent of participants said they would increase contributions to their retirement plan if they paid down the debt they owe. Another 22% said they would increase contributions if they received a raise, 12% if they reduced their spending, 10% if they achieved the maximum employer match, and 5% if they learned what their peers are contributing.

Participants who work with a traditional or online adviser are on track to replace 116% of their income. Those working with any paid adviser, 91%, and those with no adviser, 51%.

Empower’s findings are based on a survey of 4,038 adults between the ages of 18 and 65, conducted in conjunction with NMG Consulting last December and January. The full report can be downloaded here.
Compliance April 26, 2018

Motion for Class Certification Filed in American Airlines Stable Value Fund Suit

The complaint says that instead of offering a stable value fund in its 401(k) plan, American Airlines offered the AA Credit Union Fund, which yielded “tremendously” poor returns throughout the relevant time period.

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Plaintiffs in a case challenging American Airlines’ (AA) decision not to include a stable value fund in its 401(k) investment menu has filed a motion for class action certification.

According to the original complaint, the plan does not offer a stable value fund as its “income producing, low risk, liquid fund.” Instead, it offered during the class period the AA Credit Union Fund, which yielded “tremendously” poor returns throughout the relevant time period.

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“The AA Credit Union Fund effectively delivered, at all material times, the returns of a poorly managed checking account. The AA Credit Union Fund consistently failed to outpace inflation and was at all times thus a categorically imprudent retirement investment under ERISA [Employee Retirement Income Security Act]. Therefore, Defendants violated their duties of prudence under ERISA by including it as a retirement investment option in the Plan’s menu of investment options,” the complaint states.

The complaint notes that as of November 5, 2015, the one-month return for the AA Credit Union Fund was 0%. As of November 29, 2015, the one-month return for the fund was 0.07%, and as of January 3, 2016, the one-month return for the fund was 0%. At the same time, the AA Federal Credit Union has an actual checking account option called a “Priority” checking account that, according to the AA Federal Credit Union Internet site, is currently paying interest rates of up to 2.27%.

The plaintiffs allege that stable value funds are commonly used by large 401(k) plans like the American Airlines’ plan and typically offer more in return than the AA Credit Union Fund.

“In light of stable value funds’ clear advantages and enhanced returns compared to the AA Credit Union Fund, when deciding which fixed income investment option to include in a defined contribution plan, a prudent fiduciary would have included a stable value fund—and not the AA Credit Union Fund,” the complaint states. “Had the funds invested in the AA Credit Union Fund instead been invested in a stable value fund returning average benchmark returns, as represented by the Hueler Index during the proposed class period here, Plaintiffs and other Plan participants would not have lost tens of millions of dollars of their retirement savings, and would not continue to suffer additional losses as a result of the AA Credit Union Fund being retained in the Plan.”

Last November, U.S. District Judge John McBryde of the U.S. District Court for the Northern District of Texas denied American Airlines’ motion to dismiss the case saying, “The court is satisfied that plaintiffs have met their pleading burden. The arguments defendants make go to the merits of the claims and would more properly be presented by motions for summary judgment.”

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