Products June 14, 2019

IRI Promotes Need for Guaranteed Income for Retirement

According to the Insured Retirement Institute, systematic withdrawal strategies, whether a simple “x%” rule or based on a more sophisticated stochastic analysis of the probability that assets will not be depleted at various withdrawal rates, have two significant drawbacks.

Reported by

The 4% rule, proposed by William Bengen in the 1994 paper “Determining Withdrawal Rates Using Historical Data,” is outdated, the 2019 Insured Retirement Institute (IRI) Fact Book contends.

Get more!  Sign up for PLANSPONSOR newsletters.

An underlying assumption of the rule is a 50% allocation to stocks, and a 50% allocation to bonds, but with interest rates at historic lows and equity markets at historic highs, expected returns may well be much lower in the future, IRI says. “Withdrawal rates can vary widely based on the portfolio assumption used and the desired probability of success,” it adds.

According to IRI, systematic withdrawal strategies, whether a simple “x%” rule or based on a more sophisticated stochastic analysis of the probability that assets will not be depleted at various withdrawal rates, have two significant drawbacks: first, they are based on historic asset class returns, which may not repeat in the same sequence in the future, and secondly, they assume that the investor acts rationally, maintaining the asset allocation assumed in the models even during periods of significant negative returns. However, many consumers may weight more heavily toward cash and cash equivalents after a period of negative returns, and miss out on subsequent positive returns. This is why it contends there is a need for the use of products and solutions that guarantee income and/or protection against principal loss and other risks regardless of market conditions.

IRI notes that with longer life expectancies and health care costs trending higher, retirement continues to get more expensive. For example, if a person has annual expenses of $50,000 in retirement. Expenses for a 65-year-old living 14 years in retirement would total $700,000. Expenses for a 65-year-old living 19 years in retirement is $950,000, an increase of 36%. Factoring in inflation, assuming an annual rate of 3%, a 65-year-old living 14 years to age 79 would need $854,000 in income to meet his or her expenses. And by living an additional five years to age 84, he or she would have total retirement expenses of $1,256,000, 47% higher.

According to Fidelity estimates, a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement. The IRI notes that Medicare does not provide complete coverage. Long-term care is another significant component of health care costs in retirement, one which many mistakenly assume is always covered by Medicare. IRI’s 2019 Boomer study showed half of respondents believed long-term care would be covered by Medicare.

The IRI Fact Book discusses risks retirees will face—longevity risk, inflation risk, health care risk and sequence of returns risk—to make its case for the need for guaranteed income in retirement.

It is a guide for the retirement income industry and go-to resource for financial advisers, professionals, public policymakers, and financial and insurance regulators. The new edition updates research findings on generational retirement readiness, explores product development and market trends in the retirement income space, and offers data and research-based insights into advisers’ practices and consumer retirement planning success factors. It includes in-depth descriptions of fixed, fixed indexed, income and variable annuity products and features.

A digital or print version of the IRI Retirement Fact Book may be purchased from here.
Compliance June 14, 2019

Regulators Finalize New HRA Rule

Starting next January, employers can give their workers tax-deferred funds to go shopping for a health plan, thanks to individual coverage health reimbursement arrangements.

Reported by

The U.S. departments of Health and Human Services, Labor and the Treasury issued a final regulation that will expand the use of health reimbursement arrangements (HRAs).

Under the rule, starting in January 2020, employers will be able to use what are referred to as individual coverage HRAs to provide their workers with tax-preferred funds to pay for the cost of health insurance coverage that workers purchase in the individual market, subject to certain conditions. The departments say these conditions strike the right balance between employer flexibility and guardrails meant to protect the individual market against adverse selection, and include a notice requirement to ensure employees understand the benefit.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Besides allowing individual coverage HRAs, the HRA rule creates an excepted benefit HRA. In general, this aspect of the rule lets employers that offer traditional group health plans provide an excepted benefit HRA of up to $1,800 per year—indexed to inflation after 2020—even if the worker doesn’t enroll in the traditional group plan. Employers may also reimburse an employee for certain qualified medical expenses, including premiums for vision, dental, and short-term, limited-duration insurance. According to the departments, this provision will also benefit employees who have been opting out of their employer’s group health plan because the employee share of premiums is too expensive.

When the rule was first proposed, John Barkett, senior director of policy affairs at Willis Towers Watson, in Washington, D.C., called it the first legal framework for employers that want to contribute to employees’ purchase of health insurance but not to pick the plan. He added that this model could lower costs for employers if they find and adopt plans from the individual marketplace that would be attractive to employees and cost less than the group plan they have today.

A press release from the departments says the HRA rule makes it easier for small businesses to compete with larger businesses by creating another option for financing worker health insurance coverage. The rule enables businesses to better focus on serving their customers and growing their businesses, vs. navigating and managing complex health benefit designs.

Additionally, the HRA rule increases workers’ choice of coverage, increases the portability of coverage, and should generally improve workers’ economic well-being. The rule will also allow workers to shop for plans in the individual market and select coverage that best meets their needs. Because HRAs are tax-preferred, workers who buy an individual market plan with an HRA receive the same tax advantages as workers with traditional employer-sponsored coverage. Further, by increasing employee options and empowering more people to shop for health plans in the individual market, the final rule should spur a more competitive individual market that drives health insurers to deliver better coverage options to consumers, the departments say.

The departments estimate that, when employers have fully adjusted to the rule, the expansion of HRAs will benefit approximately 800,000 employers, including small businesses and more than 11 million employees and family members, including an estimated 800,000 Americans who were previously uninsured.

An unpublished version of the final rule is available for download here. A Q&A about the final rule is here. And a model notice can be viewed here.

«