PSNC 2015: The Regulatory Environment

Lifetime income, service provider process changes and privacy of retirement plan information are just a few things for which plan sponsors need to prepare.

Forty-four percent of attendees at the PLANSPONSOR National Conference in Chicago said they are somewhat challenged to keep their retirement plans compliant in a shifting regulatory landscape, and it is getting more difficult.

Indeed, rulemakers, lawmakers and the courts have been very busy in the past year or so. Marcia Wagner, the president and founder of Wagner Law Group, noted there is great change on the regulatory front, with a new proposal regarding the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), rules for using qualified longevity annuities in retirement plans and rules for using annuities in target-date fund (TDF) offerings. “Lifetime income is the direction the Department of Labor (DOL) and Internal Revenue Service (IRS) are moving in,” she told conference attendees.

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David Levine, principal of Groom Law Group Chartered, noted that the greatest stumbling block to adopting annuities in retirement plans is the question of their fiduciary risk. The DOL has provided safe harbor rules for selecting annuity products, but the rules say “appropriately” select and review. According to Levine, it has been on the DOL’s agenda for a while to clarify what “appropriately” means exactly. He thinks in the next year, the agency will move to clear that up. He told plan sponsors the important thing is to document selection and review processes.

The proposed fiduciary rule is also linked to retirement income in some ways, as it pulls plan rollovers into individual retirement accounts (IRAs) into the areas the DOL wants to protect. For plan sponsors, though, the biggest impact will be how services are rendered to the plan and participants, Levine said. Wagner added that plan sponsors will see an effect on the quality of help they receive, fee compression and new service provider contracts. Both Wagner and Levine agree the rule will change during the regulatory process, but the final result will still focus on transparency, and plan sponsors will be subject to the repapering of contracts.

NEXT: Judicial moves and data breaches.

Wagner also noted some big changes on the judicial front for plan sponsors, including the Supreme Court decision in Fifth Third v. Dudenhoeffer whereas plan sponsors that offer company stock in their investment lineup do not have a presumption of prudence, and the Supreme Court decision in Tibble v. Edison, establishing that the duty to monitor investments is ongoing and just as important as the duty to prudently select investments. “Plan sponsors should monitor their investments with the same level of diligence as they select investments initially,” Wagner says.

She also noted that there currently is a case before the Supreme Court that will determine whether states in which same-gender marriage is illegal have to recognize same-gender marriages performed in other states.

Finally, Wagner mentioned discussion by lawmakers about how to handle data breaches of retirement plan participant data—should this be governed under ERISA or fall under state law? “The question is, ‘Is the data about a retirement plan a plan asset that should be protected under the duty of prudence?’” she said.

Until that question is answered, Wagner recommends plan sponsors only allow certain people access to retirement plan participants’ private information, make sure they know vendors’ protocols for protecting data, and ask if vendors will indemnify the plan sponsor if a data breach occurs on a vendor’s watch. She also said plan sponsors should establish a best practice protocol for backing up data and employ a privacy officer or at least work with counsel to establish best practices.

However, Levine disagreed, saying if plan sponsors are not sure they can follow through with protocols or practices, they shouldn’t create policies on paper that attorneys can come after them for not following. He said, however, that plan sponsors should check their overall insurance policies to see if cyber policies include ERISA plans. 

PSNC 2015: Re-Visioning Retirement

Age Wave Co-Founder Maddy Dychtwald invites retirement plan sponsors to act as guides and leaders for the new retirement landscape. 

“We are in the middle of seeing some major transformations take place in retirement,” said Age Wave Co-Founder Maddy Dychtwald, speaking at the 10th annual PLANSPONSOR National Conference. “Throughout most of history, people didn’t age—they died.” Today, she said, there are two dynamic forces shaping retirement: Longevity and demography.

When the earliest Baby Boomers were born, life expectancy was under 65; now, it is nearly 80 years old. The benchmark for old age, and what that stage means for individuals, is changing. The traditional number, 65, was selected by Otto von Bismarck in the 1880s—when the average life expectancy was just 47 years old. The age at which participants consider themselves “old” can be one of the most powerful differentiators in their retirement readiness reports. For our industry, whether “old” means, 75, 85 or, as one conference attendee suggested, 102, can have a significant impact on the economic outlooks of plan sponsors and their participants.

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Dychtwald shared the story of Ida, whose 61-year-old daughter is an active runner and a model of mental and physical health after age 50. When she was in her 60s, Ida was inspired by her daughter, and took up running herself. Now a competitive sprinter, the 99-year-old Ida dreams of racing on her 100th birthday.

More and more retirees are staying alive—many of them active and healthy, too—well past age 80. They will need plan sponsors to guide them on their way to retirement, helping them to navigate obstacles and reach a place where they are free to make the most of what Dychtwald calls the “longevity bonus.”

NEXT: “Age should not be an obstacle.”

The 30-year longevity bonus is challenging how people think about their careers. “Work” and “retirement” are no longer mutually exclusive, as many are choosing to pursue vocations in their golden years. Dychtwald gave the example of her friend David, a 50-something dentist who decided to sell his practice and go back to school and get a degree in psychology. His reasoning: “I decided to be a dentist when I was 18 years old, I am not going to live with an 18-year-old’s decision for the rest of my life.”

Americans are working into their 70s and 80s, but their reasoning is markedly different from what pre-retirees expect. Pre-retirees predict that their biggest losses upon leaving the work force will be reliable income (25%) and social connections (22%). Retirees report that the greatest loss to them was social connections (44%), followed by mental stimulation (18%) and reliable income (13%).

Rather than a linear progression for education to work and family to leisure, longer lifespans enable individuals to cycle between stages—enjoying more leisure time during their healthiest years, and staying active long after 65.

When accounting for that “extra” time, Dychtwald reminded attendees to factor families into the equation. Today, it is not uncommon for four, five or even six generations of a family to be alive at the same time. The more different generations are involved with one another, the greater chance members will become interdependent when it comes to family finances. Plan sponsors should encourage their participants to think not only about their own costs and needs as they get older, but also any future financial assistance they may be called upon to provide for aging parents, boomerang children, grandchildren and even siblings.

NEXT: “The retirement clock is being re-set.”

For the first time ever, “The biggest growth in our population is in the oldest segments of our population,” Dychtwald noted. Baby Boomers have always culturally identified as change makers—both socially and in the workplace—and now they are changing retirement.

Facing retirement, less than one-third (29%) intend to quit entirely, and most of these are physical laborers. The majority plan to remain at work part-time (39%), cycle between work and leisure (24%) or even stay at work full-time (8%). Eight in 10 retirees (83%) report that continuing to work helps keep them youthful and engaged, while two-thirds (66%) believe that not working leads to faster mental and physical deterioration. Dychtwald cautioned attendees that these numbers reflect individual beliefs, not facts, but these opinions do point to the changing trends in retirement behavior.

Baby Boomer retirees, plan sponsors among them, are looking to the future as an “opportunity to live your dreams,” Dychtwald says. They plan to remain engaged, rekindle relationships, continue learning and reinvent themselves. One popular course of action is the “encore career,” a profession that may provide monetary compensation, but also gives retirees a sense of purpose and lets them give back some good to their community.

In order to take that chance, 51% of pre-retirees say they need to achieve financial independence. That is where retirement plan sponsors can make a difference. From the Silent Generation to Baby Boomers to Gen Xers to Millennials, retirement planners expect to take on more responsibility for their own financial security. Plan sponsors can encourage participants to save, save well, and see their investments as the means to live their dreams, not merely pass the time and pay the bills after a set retirement date.

Dychtwald encouraged plan sponsors to share the new vision of age 75—when an individual can pursue an active and exciting life—with their participants. After all, many plan sponsors are pre-retirees themselves. As the leaders of this new wave of retirement, sponsors can guide their peers into a more secure and satisfying future. 

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