Administration July 18, 2016

Helping Baby Boomers Address Retirement Fears and Risks

Plan sponsors can educate Baby Boomers nearing retirement about what risks they face and provide them with helpful planning opportunities.
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There are many fears and risks facing Baby Boomers approaching retirement.

A survey from the Indexed Annuity Leadership Council (IALC) shows that Americans’ in general fear outliving their income in retirement (25%), not being able to maintain their current lifestyle (23%) and health care expenses (19%). However, the survey also found, among Baby Boomers, one in four have less than $5,000 saved for retirement.

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Jim Poolman, executive director for the Des Moines, Iowa-based IALC, who is located in Bismarck, North Dakota, tells PLANSPONSOR one could assume those 25% who fear outliving their savings are the more educated people that have actually done retirement planning. He contends that those who are not planning don’t have that fear because they haven’t yet learned about what they are going to need.

Poolman says understanding the need to plan is step one, along with determining what income will be needed in retirement. “Starting to save is imperative,” he says. “Even for Baby Boomers it is better to start now than put it off another day.” He adds that setting a budget can help Baby Boomers with retirement planning.

Mark Browne, head of the North American channel, global Institutional and retirement marketing, at BNY Mellon Investment Management in New York City, tells PLANSPONSOR how much a retiree needs for bills and unexpected expenses comes down to individual needs. “Part of a broader retirement plan is to start with the end goal and work backwards to do the necessary savings and investing, and ensure a good spending plan is in place.”

John Davis, director of retirement marketing and insights at BNY Mellon Investment Management in New York City, suggested income replacement ratios are good for savers in their early years to give them an idea of how much they will need in retirement. However, as savers approach retirement, it is not a good predictor because each individual will have his own needs specific to the retirement previously imagined. He suggests this is time for Baby Boomers to be directed to a professional adviser to put a plan in place. He also notes long-term care insurance should be considered, and those employees who have a traditional pension plan will need less from their defined contribution (DC) plans.

Poolman says, if Baby Boomers have a DC retirement plan, the should save in the plan enough to get the entire company match or profit sharing contribution to maximize retirement potential. Any gaps in retirement savings needed can be addressed with a fixed-income annuity. “They can combine a well-balanced retirement portfolio, using diversified assets in the plan, with a more conservative product outside of the plan,” he says.

NEXT: Longevity and market risks

An annuity can also help with health care costs, Poolman adds. “It’s interesting our study shows only 19% of people are worried about health care expenses. They are not recognizing that people are living longer. Health care costs are going to go up because as they age, they will have more health-related issues. An annuity can help because it can provide a steady stream of income to help pay for long-term care, and some have riders to withdraw for long-term care,” he says.

“One of the bigger points we try to show employees is the likelihood of living to certain ages,” Browne says. “For a married couple at age 65, there’s a 60% chance one will live to age 90 and a 30% chance one will live to age 95.” He says education plays an important role in planning for longevity.

Davis tells PLANSPONSOR a retiree should plan to live at least 25 years after work ends, conservatively for at least for 30 years. He agrees that deferred annuities are a way to address longevity risk because employees will know they will have some guaranteed income if they do live into their 80s or older.

Baby Boomers also face market risk. Poolman points out that during the recession of 2008/2009, many getting ready to retire lost a significant amount of their investment portfolios, and they didn’t have enough time to completely ride out the rebound. Many worked longer. “As you get closer to retirement, it is so important to look at investments and ask if market dropped 25% how would it impact your portfolio and could you still retire,” he says.

He suggests those nearing retirement need to do an annual checkup of their investment portfolio. Doing so allows them to make adjustments. “As we get older, typically investment instruments used should become more conservative. We don’t have time to outlive market volatility.”

There may also be market downturns after a retiree begins taking withdrawals. Browne says Baby Boomers shouldn’t assume a steady market when planning for withdrawals. As individuals enter retirement, they should work with an adviser to create a broadly diversified portfolio, especially one that seeks to reduce risk in down years, he suggests. “The draw down strategy should be dynamic and flexible. People should spend more liquid investments in the bottom years and give long-term investments time to recover,” he notes.

Davis says people tend to make due, and cut back on spending when markets are down, but people who are poor won’t be able to live the retirement they imagined. “There’s a rule of thumb that’s been out since 1984 called the “4%-rule,” but that was based on markets doing the middle of what they do, and they don’t always do that. The 4%-rule may be a good place to start, but when the market does poorly, retirees will have to cut back and take out less,” he says. Davis suggests plan sponsors can educate participants about what their account balance can buy and what their account balance will translate into for monthly or yearly income.

While one of IALC’s goals is educating people about the value of annuities, even more so, its message is about getting people to take notice that they need to plan, Poolman concludes.

Compliance July 18, 2016

Appellate Court Revives Berkshire Hathaway ERISA Suit

Berkshire Hathaway’s decision to freeze a subsidiary’s pension plan will get another look in district court. 

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The 5th U.S. Circuit Court of Appeals partly overturned the dismissal of claims against a Berkshire Hathaway subsidiary’s retirement plan, sending most of the ERISA-based complaint back to district court for reconsideration.

The move by the appellate court actually comes in three parts. The ruling first affirms the district court’s dismissal of certain claims against the Berkshire subsidiary Acme, which originally independently owned and operated the relevant pension plan prior to the Berkshire acquisition; second, it affirms the district court’s dismissal of the derivative breach of fiduciary duties claim against Berkshire; and finally, it reverses the district court’s dismissal of all other claims against Berkshire, sending the bulk of the case back to the district court for new consideration.

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Case documents paint a complicated picture of the suit. Pulling out some key details, the initial complaint was filed by two present employees and one former employee in the U.S. District Court for the Northern District of Texas, challenging Berkshire’s top-down decision to freeze accruals to Acme’s defined benefit (DB) plan and reduce the company matching contribution rate in its 401(k) plan.

According to the plaintiffs, Berkshire had acquired Acme in approximately 2001, and subsequently in 2006 Berkshire executives allegedly contacted Acme about the possibility of imposing a hard freeze on the pension plan that would eliminate future accruals of benefits for plan participants and would preclude participation in the plan by new employees. After receiving advice from outside ERISA counsel, Acme advised Berkshire that a hard freeze would violate certain sections of the merger agreement and ERISA. Berkshire dropped the issue until the summer of 2012, plaintiffs claim, “when it informed Acme that it wanted to move forward with reducing retirement benefits.”

The plaintiffs contend that the acquisition agreement by which Berkshire Hathaway acquired Acme approximately 14 years ago requires the plan sponsor to permit participants to accrue additional defined benefits indefinitely, at the same rate that benefits were being accrued at the time of the acquisition, and to make additional 401(k) matches available indefinitely, at the same rate as the matches at the time of the acquisition. Participants filed the initial suit to attempt to protect these benefits. 

NEXT: What the appellate court said 

After its own consideration of the complicated facts at hand, the appellate court has allowed to stand the lower court’s ruling that Acme should not be held liable in the case, based on its limited cooperation/control with regard to Berkshires’ alleged ERISA violations.

Further, “Section 5.7 of the merger agreement expressly allows Acme to amend, modify or terminate any individual company plans in accordance with the terms of such plans and applicable law,” the appellate court finds. “[The plan provisions being disputed] do nothing to restrict Acme from amending, modifying, or terminating any of the plans. The provisos instead restrict Berkshire from causing Acme to reduce benefit accruals or employer contributions. Thus, plaintiffs’ prayers to enjoin Acme from amending the Pension Plan to reduce or eliminate future benefits and accruals and to enjoin Acme from failing to make such 50% contributions to the 401(k) Plan in the future are wholly inconsistent with a fair reading of Section 5.7 of the merger agreement.”

This ruling is based on a 2004 case,  Habets v. Waste Mgmt., Inc., which according to the appellate court previously determined that in this context, “where the contract language is clear and unambiguous, the parties’ intent is ascertained by giving the language its ordinary and usual meaning.”

“Accordingly, plaintiffs have failed to plead a plausible claim to relief that Acme acted inconsistent with the plans when it adopted the amendment to the Pension Plan in August 2014 and did not retroactively increase its 401(k) matching contribution,” the appellate court explains. “Additionally, we agree with the district court that plaintiffs have failed to state plausible claims for breaches of fiduciary duties against Acme. Acme acted akin to a settlor of a trust, rather than in a fiduciary capacity, when it implemented the amendment in August 2014.”

NEXT: Additional findings from the appellate court 

According to the appellate court, the district court “read plaintiffs’ complaint to seek unalterable, lifetime benefits.” It therefore rejected plaintiffs’ claims by relying on principles of contract law.

“Citing M & G Polymers USA, LLC v. Tackett, it noted that the parties’ agreement must unambiguously reflect their intent to vest lifetime benefits. Because section 5.7 of the merger agreement is silent regarding the duration of maintaining Pension Plan benefit accruals and the employer matching contributions, the district court held that the provision could not be read to vest benefits for life,” the appellate court explains. “Rather, the district court read the provisions to be operative for a reasonable time. And because plaintiffs’ complaint did not allege that fourteen years was an unreasonable amount of time, the district court dismissed plaintiffs’ claims.”

But, according to the new appellate court ruling, the district court erred in its construction of plaintiffs’ claims against Berkshire. “Plaintiffs’ complaint did not seek only lifetime, unalterable benefits. Alternatively, it sought to enforce a contractual commitment rather than a vested benefit under ERISA,” the ruling finds. “This is evident by plaintiffs seeking an order enjoining Berkshire Hathaway from causing Acme to reduce any benefits or benefit accruals to employees pursuant to the Pension Plan and an order enjoining Berkshire Hathaway from causing Acme to reduce any employer contribution to the 401(k) Plan.”

The appellate court concludes that “ERISA regulates pension benefits through statutory accrual and vesting requirements … An employer can impose extra-ERISA contractual obligations upon itself, and when it does so, these extra-ERISA obligations are rendered enforceable by contract law … Extra-ERISA commitments must be found in the plan documents and must be stated in clear and express language.”

As such, employers “generally are free under ERISA to modify or terminate plans, but if the plan sponsor cedes its right to do so, it will be bound by that contract … This court has recognized that a reservation-of-rights clause in a plan document, which allows a company to amend or terminate a plan at any time, cannot vitiate contractually vested or bargained-for rights. To conclude otherwise would allow the company to take away bargained-for rights unilaterally.”

The appellate court decision is here.

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