Data and Research December 17, 2018

Study Shows Why Targeted Financial Education Is Needed

Among Asians, Blacks, caregivers, Latinos, LGBTQ Americans and women, Prudential Financial found some groups are better prepared for retirement, and some groups focus more on helping others than themselves.

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In “The Cut: Exploring Financial Wellness Within Diverse Populations,” Prudential Financial looked at the financial health of Asians, Blacks, caregivers, Latinos, LGBTQ Americans and women. Asian-Americas have a higher average household income than the general population. In fact, the median household income for Asian Americans was the highest among all race and ethnicity groups, at $81,331. Forty percent are financially well, compared to 34% of the general population.

Seventy percent of foreign-born Asian Asians have household incomes above $50,000. Asian-Americans also place a high level of importance on financial goals, particularly those related to helping their children and their parents.

Sixty-eight percent of foreign-born Asians and 50% of U.S.-born Asians provide financial support for others, including children, parents and other relatives. Overall, 51% of the general population provides such support. Thirty-six percent of foreign-born Asians and 41% of U.S.-born Asians act as caregivers, compared to 24% of the general population.

Foreign-born Asians save or invest 47% of their monthly income in accounts earmarked for retirement. U.S.-born Asians allocate 36% of their income to such accounts, and the general population, 10%. Asian Americans spend only 20% of their monthly income on necessities, while the general population spends 46%.

More than one-third of Asian Americans say they are comfortable determining what to buy and sell in their investment portfolios and how to allocate their assets. This is true for only about one-quarter of the general population. Foreign-born Asians are more likely than the general population to utilize a workplace retirement savings plan, while U.S.-born Asians are less likely.

Fifty percent of foreign-born Asians say they are optimistic about their financial future. This compares to 31% of U.S.-born Asians and 41% of the general population.

The study also found that many Black Americans are optimistic about their future. Almost three-quarters of higher income Black Americans—those with household incomes above $60,000 annually—are confident they will be able to meet their financial goals. This is also true for two-thirds of lower-income Black Americans. This is true for only two-thirds of the general population, both for those in the higher income bracket and those in the lower income bracket.

However, only 39% of higher-income Blacks and 29% of lower-income Blacks say they are on track to have enough money to last throughout their retirement. The general population is more optimistic, with 50% of higher income members and 30% of lower income members saying this is true.By significant margins, Black Americans at all income levels are more likely than the general population to prioritize helping others financially. They achieve this by taking care of their parents or other family members, providing college tuition to their children, helping their children with a down payment on a house, leaving an inheritance or giving to a charity.

Both higher income and lower income Black households (75% and 55%, respectively) are more likely than the general population to provide financial support to others outside of their households. The comparable percentages for the general population are 54% and 42%.

Thirty-five percent of the higher income Black households earned more than $100,000 a year, compared to 52% of higher income general population households. As a result, higher income members of the general population have saved six times more than higher income members of the Black population ($276,406 versus $54,151).

Furthermore, 57% of Black households have no retirement savings, compared to 44% of the general population. Among those with retirement savings, the average amount for Black households is $23,000, compared to $154,000 for general population households. Only 45% of higher income Black households and 20% of lower income Black households have a workplace retirement savings plan.

Forty-two percent of Black households carry credit card debt, compared to 40% of the general population. Thirty-five percent of higher income Black households have student loan debt, compared to 17% of higher income general population households.

Twenty-four percent of those surveyed say they are caregivers, with the most common recipients being parents, followed by a spouse, a child with special needs, or a sibling or other relative. Caregivers for parents are more likely to be men than women (56% versus 44%), while caregivers for children with special needs are slightly more likely to be women than men (53% versus 47%).

Caregivers for parents spend an average of 30.5 hours on the task, while caregivers for children with special needs spend 31.3 hours. Half of caregivers work full time, while fewer than one-quarter are retired.

Caregiving is also more common among people of color, with 33% of Black Americans, 35% of Latino Americans and 32% of Asian Americans saying they are caregivers.

Caregivers place a higher priority than non-caregivers on financial goals that revolve around others. Thirty-eight percent of caregivers do not think they will ever be able to retire, compared to 25% of non-caregivers.

Caregivers are more likely to have personal loans unrelated to financing a house, a car or college—such as medical debt, personal loans, home equity loans, loans from family or friends, or loans from their 401(k).

Caregivers are also more likely to work with a financial adviser than non-caregivers, with nearly half of caregivers having an adviser, compared to only one-third of non-caregivers.

Latino Americans earn less than the general population. Foreign-born Latinos have a median household income of $41,000 compared to $49,000 for U.S.-born Latinos. The general population, by comparison, has a median household income of $61,372.

Latinos and the general population are equally focused on keeping up with current expenses, having enough money to last throughout their retirement, being able to cover future health care costs and investing money for long-term growth. However, Latinos place greater importance on paying down debt, supporting family members and increasing home ownership.

Only 21% of foreign-born Latinos and 32% of U.S.-born Latinos participate in a workplace retirement savings plan, compared to 40% of the general population. Twenty-two percent of Latinos and 20% of the general population say current expenses keep them from participating in a workplace retirement savings plan.

Three-quarters of foreign-born Latinos and two-thirds of U.S.-born Latinos are confident they will be able to buy a home. Two-thirds of the general population say the same.

Foreign-born Latinos are significantly more confident they will be able to reduce credit card and student loan debt, provide their children with college tuition and help their children with a down payment on a house. Thirty-three percent of the general population worry their incomes will not rise much in the future, but only 18% of foreign-born Latinos and 28% of U.S.-born Latinos say the same.

Among members of the LGBTQ community (lesbian, gay, bisexual, transgender and questioning), both men and women say their top financial goal is keeping up with current expenses, followed by saving enough money to last throughout retirement. LGBTQ women are more confident than their male counterparts that they will be able to keep up with current expenses and maintain their current lifestyle in retirement.

More than 40% of LGBTQ women do not have a financial adviser, compared to less than 30% of LGBTQ men, and non LGBTQ men and women.

Only 27% of the LGBTQ respondents say they have a workplace retirement savings plan, compared to 41% of non-LBGTQ respondents. Among the LGBTQ respondents without a retirement savings, 62% are not saving for retirement in any way. Fifty-five percent of LGBTQ  members have nothing saved for retirement, compared with 42% of non-LGBTQ respondents. However, among LGBTQ members with retirement savings, their average balance is $126,000, just slightly less than the $158,000 of their non-LGBTQ counterparts.

Additionally, only half of LGBTQ respondents have a checking, savings, money market account or certificate of deposit. By comparison, two-thirds of non-LBGTQ respondents own at least one of these products.

The survey found women place more emphasis than men on financial goals, but are further behind in reaching them. Fifty percent of men say they are on track to reach their financial goals, but this is true for only 38% of women.

Women earn an average of $52,521, 37% less than the $84,006 men earn on average.

Women are also piling up more debt than men, with 25% of women having a student loan, with an average balance of $7,860, compared to only 18% of men, with an average balance of $4,126. Fifty-five percent of women have non-mortgage debt, with an average balance of $7,793, versus 49% of men, with an average balance of $7,080.

Fifty-four percent of women have begun saving for retirement, with an average balance of $115,412, compared to 61% of men, with an average balance of $202,859. Fifty-two percent of women and 42% of men are worried about their financial future.

“This new analysis presents a layered portrait of the financial lives of Americans and exposes factors that underlie and sometimes impede our ability to achieve financial security,” says Judy Dougherty, financial wellness officer at Prudential Financial. “These insights are critically important to Prudential’s businesses, informing our efforts to develop products and services that help more Americans improve their financial health.”

Prudential Financial’s findings are based on a survey of 3,000 people. The full report can be downloaded here.

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Compliance December 17, 2018

Stock-Drop Lawsuit Targeting IBM Revived and Remanded

An appellate court has taken the rare step of overturning a successful motion to dismiss a stock drop lawsuit targeting IBM.

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The 2nd U.S. Circuit Court of Appeals has ruled in favor of the plaintiffs in a now-revived Employee Retirement Income Security Act (ERISA) lawsuit alleging imprudence in IBM’s management of the firm’s employee stock ownership plan (ESOP).

The plaintiffs/appellants are participants in IBM’s retirement plan, whose arguments will now be reevaluated by the U.S. District Court for the Southern District of New York. According to case documents, the plaintiffs invested in the IBM Company Stock Fund, which is an ESOP governed by ERISA. The defendants/appellees include the retirement plan committee at IBM, along with several individually named fiduciary officers charged with overseeing the retirement plan’s management.

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The plot of the “stock-drop” allegations echo previous ESOP-focused lawsuits. Plaintiffs allege that IBM began trying to find buyers for its microelectronics business in 2013, “at which time that business was on track to incur annual losses of $700 million.” Plaintiffs say IBM failed to publicly disclose these losses and continued to value the business at approximately $2 billion. Plaintiffs further allege that the plan defendants knew or should have known about these undisclosed issues with the microelectronics business.

As recounted in case documents, on October 20, 2014, IBM announced the sale of the microelectronics business to GlobalFoundries Inc. The announcement “revealed that IBM would pay $1.5 billion to GlobalFoundries to take the business off IBM’s hands and supply it with semiconductors, and that IBM would take a $4.7 billion pre‐tax charge, reflecting in part an impairment in the stated value of the microelectronics business.” Thereafter, IBM’s stock price declined by more than $12.00 per share.

At the core, the ERISA lawsuit argues defendants continued to invest the ESOP’s funds in IBM common stock despite the plan defendants’ knowledge of undisclosed troubles relating to IBM’s microelectronics business. In doing so, plaintiffs allege, the plan defendants violated their fiduciary duty of prudence to the plaintiffs under ERISA. The plaintiffs also pleaded that “once defendants learned that IBM’s stock price was artificially inflated, defendants should have either disclosed the truth about microelectronics’ value or issued new investment guidelines that would temporarily freeze further investments in IBM stock.”

In its initial ruling on these arguments, the district court determined that the plaintiffs did not plausibly plead a violation of ERISA’s duty of prudence, because a prudent fiduciary could have concluded that earlier corrective disclosure would have done more harm than good. This ruling mirrors many stock drop decisions handed down after the U.S. Supreme Court’s consequential decision in a case known as Fifth-Third vs. Dudenhoeffer.

On appeal, the plaintiffs/appellants assert that the standard expressed by the district court is actually stricter than the one set out in Dudenhoeffer and that the district court and others have applied this stricter standard in a manner that makes it functionally impossible to plead a duty‐of‐prudence violation. Taking up the appeal, the 2nd Circuit appears quite sympathetic to plaintiffs.  

The text of the appellate decision offers a detailed analysis of Dudenhoeffer and applies the pleading standards set therein to the case at hand. According to the appellate court, the Supreme Court first set out a test that asked whether “a prudent fiduciary in the same circumstances would not have viewed an alternative action as more likely to harm the fund than to help it.” This formulation, the appellate court says, suggests that lower courts must ask “what an average prudent fiduciary might have thought.”

“But then, only a short while later in the same decision, the [Supreme Court] required judges to assess whether a prudent fiduciary ‘could not have concluded’ that the action would do more harm than good by dropping the stock price,” the appellate decision explains. “This latter formulation appears to ask, not whether the average prudent fiduciary would have thought the alternative action would do more harm than good, but rather whether any prudent fiduciary could have considered the action to be more harmful than helpful.”

The appellate court says it is “not clear which of these tests determine whether a plaintiff has plausibly alleged that the actions a defendant took were imprudent in light of available alternatives.”

In the IBM case at hand, the plan defendants urge the appellate court to view Dudenhoeffer (and a related case known as Amgen) as setting out a restrictive test, noting that at least two other circuits have adopted that interpretation. Against this argument, the plaintiffs/appellants note that no duty‐of‐prudence claim against an ESOP fiduciary has passed the motion‐to‐dismiss stage since Amgen, and they therefore assert that the courts—and the plan defendants—have misread that decision.

According to plaintiffs, imposing such a heavy burden at the motion‐to‐dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third vs. Dudenhoeffer to lower the barrier set by the presumption of prudence.

“Our sole precedential post‐Amgen duty‐of‐prudence opinion does not explicitly take a side in this dispute,” the 2nd Circuit decision states. “See Rinehart v. Lehman Bros. Holdings Inc. We need not here decide which of the two standards the parties champion is correct, however, because we find that plaintiffs plausibly plead a duty‐of‐ prudence claim even under the more restrictive ‘could not have concluded’ test.”

According to the appellate decision, the district court inappropriately held that plaintiffs failed to state a duty‐of‐prudence claim under ERISA “because a prudent fiduciary could have concluded that the three alternative actions proposed in the complaint—disclosure, halting trades of IBM stock, or purchasing a hedging product—would do more harm than good to the fund.”

“We respectfully disagree,” the appellate decision states. “Plaintiffs have limited the proposed alternative actions on appeal to just one: early corrective disclosure of the microelectronics division’s impairment, conducted alongside the regular SEC reporting process. Several allegations in the amended complaint, considered in combination and drawing all reasonable inferences in plaintiff’s favor, plausibly establish that a prudent fiduciary in the plan defendants’ position could not have concluded that corrective disclosure would do more harm than good.”

The full text of the new decision, which also includes detailed discussion of the way the circuit court views the interaction of ESOP fiduciary duties and securities law, is available for download here.

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