Participants February 28, 2018

Social Security Sophistication Can Boost Employees’ Retirement Outlook

A lack of sophisticated advice and support solutions for optimizing Social Security claiming decisions is holding employees back from achieving greater retirement security, warns Bill Meyer of Social Security Solutions, in Leawood, Kansas.
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Results of a recent Social Security Administration (SSA) audit by the Inspector General, published on February 14, 2018, show that the federal retirement benefit program is underpaying widows—and other groups of beneficiaries.

This is “a huge U.S. retirement security issue,” warns William Meyer, founder and managing principal of Social Security Solutions in Leawood, Kansas, and one which he in fact discussed in front of the U.S. Senate about a year ago. Since then no action has been taken on the subject by Congress or the Trump administration, he notes. 

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“To put the problem simply, the SSA does not have the necessary tools and analysis to notify widows of when they could switch from survivor benefits back to their retirement benefit to secure more money,” Meyer warns. “There is a flaw in the system such that the Social Security agents don’t have the ability to recommend the strategy in question, in part because they don’t have the training needed to recognize this situation and also in part because they are not even really allowed to give ‘advice’ or ‘recommendations’ in the first place. They just give ‘information,’ and so this potential strategy is not being taken advantage of by this quite vulnerable population. It’s a real shame.”

Meyer is following the issue closely because his firm is in the process of rolling out what he hopes will be a groundbreaking Social Security claiming optimization software product that comports directly with defined contribution (DC) retirement plans. More on this is available on the firm’s website. 

“We are coming to market now with a new software product that coordinates the claiming of Social Security with portfolio drawdown decisions in the defined contribution plan arena, so it is a great time for us to get acquainted with your readership,” Meyer says. “This is a topic that I have seen a tremendous amount of interest in from all the stakeholders—advisers and consultants, plan sponsors and participants. Our big pilot clients so far include Vanguard and Northern Trust, and other firms as well, including Financial Engines.”

Meyer suggests that, to date, a lot of the “big successful DC plan recordkeepers” are not really including sophisticated Social Security or tax considerations in their planning capabilities.

“This is a problem because we can show that, by optimizing Social Security decisions and better tying these to the DC plan drawdown and rollover decisions, a given plan participant can make their money last between two and 10 years longer,” Meyer says. “It can be that dramatic. Unless you’re in the top 1% of income earners, when and how you claim Social Security is, in a very real sense, the largest single financial decision of your lifetime. So it should be no surprise, given how little advice is available out there are on this topic in particular, that people are not making optimal decisions. It is vastly complicated.”

Meyer recalls that, earlier in his career as he first started researching how his firm could build some software methodologies to help manage Social Security planning, it immediately became clear that the choices around Social Security would be much more complicated than anything faced on the accumulation side.

“There are something like 3,000 rules and 20,000 pages of explanatory material that set out all the different claiming strategies and possibilities for drawing Social Security,” he says. “It is an area where software and artificial intelligence can really shine. One other thing I want to say: There are a lot of free Social Security tools out there right now that are just not sophisticated at all. They might consider a small number of inputs and then pick from perhaps three or four possible strategies. The type of tool we are bringing to market considers and compares thousands of possibilities for each individual. This is not a part of the planning process where we can cut a corner—the details matter so much to the quality of the advice on the Social Security question.”

According to Meyer, what has also proved to be interesting as the firm has looked to the 401(k) space is that there is some discomfort among plan sponsors and advisers with the fact that the way participants will claim Social Security can be “lumpy,” making point-in-time education or advice a tricky proposition.  

“By that I mean that there are oftentimes situations where, whether you decide to file earlier or later, this will directly impact the way you start tapping down other savings down the line, both the tax-deferred money in the 401(k) and any other after-tax sources,” Meyer says. “And then your marriage or life situation can change. If you’re married or divorced, you can often get survivor or spousal benefits before you actually start to draw your full benefit, which can kick in as late as age 70. So what we tell plan advisers, sponsors and participants is that, the way people decide to draw Social Security will have a direct impact on delineating the way they draw all their other assets. It’s going to impact your risk tolerance in investments, what type of return you’re expecting to see, etc.”

Meyer says there is actually evidence that people are getting “not great advice” on this subject.   

“The conventional wisdom on how someone should draw down their various assets to maximize retirement income—used by all the big recordkeepers, by the way—is that you should take all your taxed money first until it’s gone, and only then do you take all your tax-deferred money until it’s gone. Finally you take the tax-exempt dollars,” Meyer observes. “That rule of thumb is pervasive, but we can now show, using our software, how this is actually typically the opposite approach of what would maximize lifetime wealth for a given individual.”

Why is this? According to Meyer, when one retires, on average he will drop into a lower tax bracket, because he is moving out of his prime earning years and instead starting to live off savings. Then the logic goes as follows: “As you hit the age where you start drawing full Social Security at 70, that’s right about the time when required minimum distributions [RMDs] kick in. When that happens, we often see people’s income jump up pretty significantly, and as a result their Social Security benefits that they waited to claim will be taxed at potentially up to 85%, because this rate is based on withdrawals from the IRA or 401(k). So, the point is that by winnowing down the 401(k) or IRA first, while you are waiting to file Social Security, this reduces the lifetime impact of RMDs and reduces the taxes, potentially quite significantly, on the income from Social Security.”

It’s a complicated matter to discuss in the abstract, Meyer concludes, “but the example at the very least shows how you claim Social Security and how you coordinate this with all the other decisions about drawing income from the 401(k) or IRA has a dramatic impact on the final outcome of the life-long savings effort.”

Administration February 27, 2018

Transamerica Requires TPAs for Small Plans, Reflecting Competitive Landscape

Our series of behind-the-scenes articles speaking with new and established retirement plan service providers about their biggest challenges and opportunities turns next to Transamerica—which has instituted a requirement that new plan sponsor clients under a certain asset size must utilize a retirement specialist third-party administrator.
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Transamerica announced recently that the services of a third-party administrator (TPA) “specializing in retirement” will be required for all new retirement plans coming onto the recordkeeping platform with less than $3 million in assets.

According to an interview with Joe Boan, senior vice president and executive director, individual and workplace distribution for Transamerica, the move is meant to be a clear signal to the defined contribution (DC) plan marketplace, underscoring what the firm sees as the clear value delivered by TPAs to small retirement plans.

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Given that Transamerica already sources much of its new small-plan business through the TPA avenue, Boan says the announcement should not be all that surprising, nor should it cause any significant client disruption. Reflecting on the evolving TPA landscape and his firm’s decision to directly promote the greater use of retirement specialist TPAs in the small-business or “micro-plan” market, Boan agrees that the use of TPAs in all market segments has increased alongside the sheer complexity of running a compliant retirement plan. While it used to be that, at say $5 million or even $10 million and up, a plan just didn’t work with a TPA anymore because they could probably do all the administration all in-house—that thinking has diminished as plan complexity has increased.

Against this backdrop, Boan says Transamerica’s decision here makes a lot of sense.

“Our experience is that smaller companies benefit significantly from the expertise of a third-party administrator who can have deep conversations about their client’s business and goals,” he tells PLANSPONSOR. “With this announcement, we are firmly stating that working with a retirement-focused third party administrator is a best practice for small retirement plans.”

So what are some of the specific ways that smaller companies benefit from the expertise of a third-party administrator? Boan stresses the fundamental importance of “having deep conversations about the client’s business and goals.”

“That’s what the TPA ultimately should deliver,” Boan explains. “And of course, they will support and promote flexible plan design customized to meet the specific needs of both the business and their employees. They promote high levels of compliance and technical expertise on issues like loans and distributions; enhanced consultative services; and they assume many important time-intensive responsibilities.”

Asked to speak further about the business growth aspects of this move for Transamerica, Boan agrees wholeheartedly that third-party administrators “are a really important source of business for us in the small- and mid-market, there’s no question.” In fact, the TPA silo helps Transamerica to source roughly 90% of all new small-plan business each year. On an annual basis, TPAs are helping the firm to source something like 65% of all new plans coming online from the plan count perspective, Boan says.

“Really the TPAs do so much to help us better deliver our product at the best possible pricing for our clients, so it is fair to say this new limit we have established is underscoring our commitment to the TPA marketplace,” Boan says. “Other firms have dipped their toes in the water here and, say, put the ceiling for requiring a TPA at $500,000, but we feel like our approach is denoting a true commitment to the TPAs. We think $3 million is a sensible limit because it helps us with our servicing model, frankly, and it really helps us create and maintain partnerships in the local communities.”

While a lot of the business coming in these days already has a TPA relationship established, not all small plans coming to Transamerica have a TPA relationship in place. What will that situation look like for clients when they come to Transamerica with a small plan and no TPA? Boan says this will not be an issue at all, from the client perspective.

“Our first task will be to educate them on why working with a TPA partner might make sense for them,” he explains. “The second part is for us to try to introduce them to a partner that makes sense for everyone involved from the cost and service perspective. We have an entire division that is focused on working with our TPA partners in just this way. It is not really our approach to pick and choose from the top down, what providers we’ll be working with. This remains a relationship-focused business, so as our wholesalers are out there in the marketplace they are naturally working with the TPAs and providers in their communities. They may have a propensity to work with certain providers in their community that they already know very well, and that’s great, from our perspective. The plan sponsor can then take the time to understand how a given relationship would work, and how we can all work together to the benefit of plan participants.”

Another important factor that Boan points out about the new move by Transamerica is how the firm continues to work closely with advisers and has no plans to move away from that approach.

“All the business that we continue to do is involving advisers, and we’re not looking to bypass that at all,” Boan confirms. “We are not moving in the other direction. If a TPA brings us a piece of business we will want to engage an adviser to help established this relationship. And we will be doing the reverse of that as well, connecting advisers to TPAs. We’re not trying to, in any way, eliminate the role of the adviser in this segment of the market.”

It should be noted that Transamerica is far from the only provider revamping its approach to this space. In a recent conversation with PLANSPONSOR, Matt Schoneman, president of The Retirement Advantage, a growing TPA and financial technology support firm based in Wisconsin, was not at all shy about his company’s plans for growth in this market segment, both organic and via merger and acquisition activity. Like Boan at Transamerica, Schoneman pointed to the torrent of regulatory changes, shifts in consumer expectations, the pace of technology development and the race to the bottom on fees as all contributing to a dramatically changing third-party administrator (TPA) market. For firms that are not having success building scale and streamlining their approach to doing business, the words “overwhelming” and “relentless” seem appropriate, he mused.

Similarly, the firm Ascensus has described in detail its plans for growth and evolution both on the TPA and recordkeeping sides of the retirement plan business. Raghav Nandagopal, executive vice president of corporate development and mergers/acquisitions, took some time to explain the firm’s strategic vision for the near- and mid-term future, and suffice it to say, Ascensus is charging full steam ahead on the goal of rapidly building scale, also partly through organic growth but with a real focus on rapidly paced mergers and acquisitions. Not only would the firm like to grow, Nandagopal explained, frankly it must grow to ensure it can continue to reinvest in its serving offerings and new technologies.

The experts all broadly agree that industry changes, such as the introduction of a stricter Department of Labor fiduciary rule, will benefit and strengthen the role of TPAs. “Nonproducing” TPAs in particular, who do not involve themselves in the sale of investment products and perform none of the functions that a financial adviser or investment consultant would typically perform, are benefiting, as they may be able to supplement (or even win some business from) those recordkeeping or advisory firms that have not embraced flat-fee work but have favored business models based on brokerage commissions.

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