Data and Research March 1, 2019

Reducing Financial Fragility Important to Improving Retirement Savings

The Society of Actuaries says financial wellness programs need to be designed so individuals of different fragility levels can connect to what is useful and important to their situation.

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There are dramatic differences when it comes to retirement planning behavior by levels of financial fragility, according to a report from the Society of Actuaries (SOA), “Aging and Retirement: Financial Fragility Across the Generations.” The SOA interprets financial fragility as vulnerability to a financial crisis and having a negative outlook of personal finances

Those with high fragility are much more likely to have short planning horizons and to prioritize everyday bills over retirement or emergency savings. Debt, especially credit card debt, is a major barrier, with 94% of those with high fragility holding some form of debt and 56% reporting credit card debt.

“Reducing financial fragility is an important step in helping individuals manage the priorities of today and those of the future, especially funding a secure retirement,” the report says. “Financial wellness and education programs looking to address these issues should understand the range of differences among financial fragility issues. These programs need to be designed so individuals of different fragility levels can connect to what is useful and important to their situation.”

There is significant variation in financial planning time frames based on levels of financial fragility. Six in 10 of those with high fragility can only plan paycheck to paycheck, while this is only the case for 20% with moderate fragility and just 5% of those with low fragility. On the other end of the planning spectrum, only 6% with high fragility plan for the rest of their lives compared to 10% of those with moderate fragility and 29% of those with low fragility.

While almost all of those with high fragility are prioritizing being able to afford everyday bills, those with low fragility are prioritizing saving for the future, including for retirement (67%).

To address their financial priorities that mainly focus on affording everyday bills and current debt, those with high financial fragility are more likely to say they are sticking to a budget and learning to use credit cards wisely than those with low fragility. Additionally, they are significantly more likely than both moderate and low fragility individuals to say they will be cutting back on things like vacations and eating out, making efforts to get their debts under control, and cutting back on needed medical costs to address their financial priorities this year. Those with low fragility are more likely to plan for tomorrow’s priorities by sticking to a monthly savings plan, contribute to an employer’s retirement plan, target investing to grow their money and produce income now and in retirement, and work with a financial adviser.

Concerns around retirement are high for all, but especially for those who are more financially fragile. The biggest concern for retirement for those who have high financial fragility is they might not be able to maintain a reasonable standard of living for the rest of their life. For those with moderate and low financial fragility, the biggest concern for retirement is that savings and investments may not keep up with inflation.

Greenwald & Associates conducted an online survey of 2,001 individuals for the Society of Actuaries last July on which the financial fragility index is based.

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Compliance March 1, 2019

ERISA Annuity Safe Harbor Bill Introduced in House

H.R. 1439, known as the Increasing Access to a Secure Retirement Act, would establish a stronger Employee Retirement Income Security Act (ERISA) safe harbor for defined contribution (DC) plan sponsors to offer in-plan guaranteed income products.

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U.S. Representatives Lisa Blunt Rochester, D-Delaware, and Tim Walberg, R-Michigan, have introduced another piece of legislation aimed at tackling a longstanding retirement security issue faced by private-sector workers.

H.R. 1439, or the Increasing Access to a Secure Retirement Act, seeks to help more Americans retire with dignity and peace of mind, according to Blunt Rochester and Walberg. They say their bipartisan bill “clarifies and strengthens existing rules to make it easier for retirement plan sponsors to provide guaranteed lifetime income products as part of their employee benefits.”

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While a variety of in-plan income options have been available for some time, in-plan guaranteed lifetime income solutions are not being used as much as they could, industry experts agree. Fewer than half of plan sponsors offer a retirement income solution as part of their defined contribution plan—typically a 401(k)—and only one-fifth of those offer a guaranteed income product, Prudential says.

While introducing the legislation, the lawmakers said benefit plan sponsors are concerned about potential fiduciary breaches when they are selecting an annuity provider. Survey data shows sponsors are concerned about the prospect of an annuity provider losing solvency in the future after participant assets have been annuitized—and that the plan sponsor could then again become liable for paying the promised benefit to participants.

Representative Blunt Rochester, citing the Federal Reserve Bank of St. Louis, suggested retirement savings are “down by 75% over the last 50 years,” and that over one-third of surveyed households do not participate in a retirement plan today.

“This is an alarming trend that we must correct because all Americans deserve a financially secure future,” she said.

In short, the Increasing Access to a Secure Retirement Act would clarify the rules surrounding annuities and strengthen safe harbor protections for plan fiduciaries under the Employee Retirement Income Security Act (ERISA).  

According to the Representatives, currently only about 10% of retirement plans in America offer a guaranteed lifetime income product—largely due to confusing and ambiguous regulations that employers must follow when selecting an insurance provider.

Full text of the bill will be available here within several days. The bill was introduced on February 28 but is still being reviewed prior to public circulation.

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