Break from the Grind November 26, 2019

Americans Would Rather Receive a Debt Payoff Than a Christmas Present

Having debt can significantly affect retirement confidence, and debt control management should be considered in retirement planning.

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Seventy percent of Americans are stressed about the upcoming holiday season, with 32% feeling the greatest stress about holiday finances, according to a survey from COUNTRY Financial.

Given a choice, and if money were no object, 49% of survey respondents said having one of their debts, such as their mortgage (20%), credit card debt (13%), personal loan debt (9%), or student loan debt (7%) completely paid off would be at the top of their holiday wish list. Only 19% selected receiving a vacation or luxury item.

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Those who put paying off a mortgage at the top of their wish list said they would need $82,895 in order to be able pay off all of their various debts; those who chose credit card debt said they would need $41,159; those who said student loans, $50,914; and those who selected all other personal loans, $16,992. 

Having debt can significantly affect retirement confidence. Americans think it is bad thing for those in retirement to be carrying debt, the LIMRA Secure Retirement Institute found in a survey. However, data from the New York Fed Consumer Credit Panel indicates that those between the ages of 65 and 80 increased their debt load by 40% between 2003 and 2015. The LIMRA Secure Retirement Institute found that 51% of retirees with debt are confident they will be able to live the lifestyle they want, but for retirees without debt, that soars to 70%. Retirees who default on federal student loan debt can see their Social Security payments partially garnished.

Surveys from the Employee Benefit Research Institute (EBRI) indicate employees are not realizing the importance of debt control in retirement planning. Although a majority of workers thought workplace financial well-being programs would be either very or somewhat helpful in better preparing or saving for retirement, fewer than half of workers thought debt counseling or budgeting help would be helpful, EBRI found.

Some researchers suggest that analysts and policymakers should explore ways to enhance debt management practices as they examine factors driving retirement security. One important decision after retirement is how to decumulate wealth, and the researchers note that recent cohorts will also need to manage and pay off their rising debt burdens in retirement. They point out this is made more difficult by the fact that older persons often move some of their assets to fixed income assets. In addition, if equity returns are lower in the future than they were in the past (as many predict), it will be important for current older cohorts to manage assets and liabilities wisely and pay off some of their higher-interest debt first. “Accordingly, it appears that cohorts entering retirement will need to ensure that their income and asset drawdowns suffice not only to cover their target consumption streams, but also to service their mortgage and other debt during retirement,” the researchers say in a working paper.

Asked by COUNTRY Financial, 29% of Americans surveyed said they plan to use a credit card for holiday purchases this year.

Compliance November 26, 2019

Supreme Court Denies Review of Case About Annuity Contracts in Retirement Plans

The plaintiff said Great-West’s conduct in setting the credited rate of its Key Guaranteed Portfolio Fund violates ERISA’s clear rules barring parties in interest from using plan assets to benefit themselves.

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On November 25th, the U.S. Supreme Court denied a retirement plan participant’s petition to review a case in which the 10th U.S. Circuit Court of Appeals found that Great-West, as a non-fiduciary party in interest, was not liable for breaches alleged regarding its group annuity contract offered to retirement plans.

In the case, the plaintiff alleged that Great-West engaged in self-dealing transactions prohibited under the Employee Retirement Income Security Act (ERISA) Section 406(b), and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest in violation of ERISA Section 406(a). According to his complaint, Great-West had breached its general duty of loyalty under ERISA Section 404 by setting the credited rate of its Key Guaranteed Portfolio Fund for its own benefit rather than for the plans’ and participants’ benefit; setting the credited rate artificially low and retaining the difference as profit; and charging excessive fees.

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Previously, the 10th Circuit held that Great-West’s contractual power to choose the credited rate did not render it a fiduciary under ERISA because participants could “veto” the chosen rate by withdrawing their money from the fund in question. As to Great-West’s ability to set its own compensation, the 10th Circuit held that Great-West did not have control over its compensation and thus was not a fiduciary because the ultimate amount it earned depended on participants’ electing to keep their money in the investment fund each quarter.

In his petition to the Supreme Court, the plaintiff said Great-West’s conduct violates ERISA’s clear rules barring parties in interest from using plan assets (i.e., the fund contract) to benefit themselves. He pointed out that the U.S. Supreme court previously held in Harris Trust & Sav. Bank v. Salomon Smith Barney that where a party in interest violates those rules, plan participants can force them to disgorge their ill-gotten gains. Multiple courts of appeals have held the same.

The plaintiff said the 10th Circuit “flouted that rule, holding that disgorgement was unavailable because the plan asset at issue was the fund contract—not specific property over which petitioner could himself assert title.”

According to the petition, the sole question before the lower courts was whether equitable relief was available in the form of disgorgement of Great-West’s unreasonable profits derived from its contracts with ERISA plans. The plaintiff argued that by answering “no,” the courts erroneously distinguished plan contracts from any other type of plan asset, the use of which could support disgorgement.

The plaintiff also argued that the appellate decision makes no sense, as most prohibited transactions occur via contract.

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