Benefits September 12, 2014

Some Participants Using RMD as Guide for Draw Down

September 12, 2014 (PLANSPONSOR.com) - Some retirement plan participants think the required minimum distribution (RMD) is a good guide for an appropriate withdrawal rate in retirement, research suggests.
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Researchers at TIAA-CREF set out to determine the effect on participants of the RMD waiver allowed in 2009, but as they probed the issue, it created more questions, according to David Richardson, a Charlotte, North Carolina-based senior economist for the TIAA-CREF Institute. According to the survey report, published by the Bureau of Economic Research, a key motive for the survey was to explore the reasons behind participants’ decisions to suspend or not suspend their RMDs.

More than 80% of respondents indicated that “allowing money to continue growing tax free/save on taxes” was a very important factor in their decision to suspend their RMDs. Among those that did not suspend, roughly one-third indicated that they “depend on distributions for daily spending needs,” and another 27% listed this as a somewhat important factor in their decision not to suspend. However, 39% of those who did not suspend indicated that this was not important in their decision-making. This led researchers to further explore the responses about needing RMD funds to cover spending needs, and ask whether respondents think RMDs are a guide to an appropriate draw-down rate in retirement.

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Using administrative records TIAA-CREF holds for retirement plan participants who take RMDs, the researchers assigned survey respondents to quintiles by assets under management. Those in the lowest quintile have a 37% suspension rate, compared with 48% for those in the highest quintile. Researchers were surprised to find the percentage of survey respondents who say they could cover their spending needs without the RMD declines as the amount of assets at TIAA-CREF rises, from 88% (lowest quintile) to 79% (highest quintile). The researchers say this raises the possibility that some of those who are in the lowest quintile may have assets at other financial services firms that they use to support day-to-day consumption.

The survey responses also suggest that those with larger asset holdings at TIAA-CREF are more likely to assign some guidance role to the RMD amounts. The difference of more than twenty percentage points in the response to this question between the participants in the lowest (36%) and highest (58%) quintiles also may indicate that those with larger asset holdings at TIAA-CREF may not have as much assets elsewhere and rely more on income from assets from TIAA-CREF as a source of household income. Richardson admits this is a limitation of the survey and that it would be helpful to know about participants’ assets in other accounts.

A 2012 study found that using the RMD as a retirement savings withdrawal strategy does almost as well as traditional withdrawal options and outperforms the 4% rule. But, Richardson tells PLANSPONSOR “under a certain very restrictive set of assumptions about mortality and return, the RMD can provide a good guide for a draw down strategy, but we would think almost no one would meet that restrictive criteria.” 

He says there are a number of risks of using the RMD as a guide to spending in retirement. “It is not like longevity insurance; participants will draw down assets earlier and will have a lower level of assets generating income in later years than if they annuitized. What if there was another recession like in 2008? What if the participant has unexpected expenses? I don’t see RMDs as helping participants be prepared for these scenarios.”

Richardson adds that people using the RMD as a guide to a good spendable amount in retirement do not take into account market volatility. “That’s why the government allowed the suspension in 2009, they didn’t want people to realize capital losses on RMDs after the economy crashed,” he notes.

Richardson says it is important to remember that the RMD was designed to meet tax-policy objectives, not retirement-security objectives—it was established to help the government get back some of the tax deferral of retirement account contributions.  However, he notes that as defined contribution (DC) plans become the dominant way people receive retirement income, there is more interest in making sure RMD rules do not damage participants’ retirement security. “We don’t want a draw-down schedule that reduces the likelihood of people having financial security later in life.”

Richardson says a good first step in the trade-off between tax-policy objectives and retirement security objectives was included in the Internal Revenue Service's (IRS) proposed rules about longevity annuities—the rules would permit retirement account holders to use up to 25% of their account balance or $125,000, whichever is less, to purchase a qualifying longevity annuity without concern about noncompliance with RMD requirements.

For people really concerned about being forced to take assets out of their retirement accounts too early, Richardson suggests they can convert their assets to Roth accounts and will not have to worry about taking an RMD.

According to Richardson, the research shows there is still a lot of work retirement plan sponsors can do to provide retirement guidance and advice. “Especially as participants approach retirement, they need to be able to look at strategies for spending in retirement and making sure their assets are sustainable throughout their lifetime,” he says.

While behavioral finance has sparked changes to how plan sponsors get participants to accumulate assets for retirement—automatic enrollment, automatic investing solutions—the TIAA-CREF Institute is thinking about how to apply behavioral finance to at-retirement decisions. “We want plan sponsors to offer programs for education and advice about retirement withdrawal strategies, and incent participants to take advantage of those programs,” Richardson says.

The research report, "Do Required Minimum Distributions Matter? The Effect of the 2009 Holiday on Retirement Plan Distributions," is available for download here.

Benefits September 11, 2014

Survey Finds Stability in Employer-Sponsored Health Benefits

September 11, 2014 (PLANSPONSOR.com) – Employer-sponsored health benefits are very similar in 2014 to what they were in 2013, according to a survey by the Kaiser Family Foundation.
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Similar percentages of employers offered benefits to at least some employees, and a similar percentage of workers at those firms were covered by benefits compared to last year. Family premiums increased at a modest rate and single premiums are not statistically different than those reported last year. On average, covered workers contribute the same percentage of the premium for single and family coverage as they did last year.

Fifty-five percent of firms offer health benefits to their workers, statistically unchanged from 57% last year and 61% in 2012, according to the Kaiser Family Foundation’s 2014 Employer Health Benefits Survey. The likelihood of offering health benefits differs significantly by size of firm, with only 44% of employers with three to nine workers offering coverage, but virtually all employers with 1,000 or more workers offering coverage to at least some of their employees. Ninety percent of workers are in a firm that offers health benefits to at least some of its employees, similar to 2013 (90%). Offer rates also differ by other firm characteristics; 53% of firms with relatively fewer younger workers (less than 35% of the workers are age 26 or younger) offer health benefits compared to 30% of firms with a higher share of younger workers.

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Among firms that offer coverage, an average of 77% of workers are eligible for the health benefits offered by their employer. Of those eligible, 80% take up their employer’s coverage, resulting in 62% of workers at these firms having coverage through their employer. Among both firms that offer and do not offer health benefits, 55% of workers are covered by health plans offered by their employer, similar to 2013 (56%).

Twenty-five percent of large firms (200 or more workers) that offer health benefits in 2014 also offer retiree health benefits, similar to the percentage (28%) in 2013 but down from 35% in 2004. Among large firms (200 or more workers) that offer retiree health benefits, 92% offer health benefits to early retirees (workers retiring before age 65), 72% offer health benefits to Medicare-age retirees, and 3% offer a plan that covers only prescription drugs.

Kaiser notes there may continue to be evolution in the way that employers structure and deliver retiree benefits. Among large firms offering health benefits, 25% of firms are considering changing the way they offer retiree coverage because of the new public health insurance exchanges established by the Patient Protection and Affordable Care Act (ACA). In addition to the public exchanges, there is considerable interest in exchange options offered by private firms. Four percent of large employers currently offer their retiree benefits through a private exchange.

The majority of firms that offer coverage to at least some employees offer coverage to dependents (96%). Thirty-nine percent of firms offer coverage to same-sex domestic partners, the same percentage that offers coverage to opposite-sex domestic partners. Both percentages are similar to 2012, the last time the survey included this question. Some employers are requiring additional cost sharing (5%) or restricting eligibility for spouses (9%) to enroll if they have an offer of coverage from another source. Eighteen percent of large firms provide compensation or benefits to employees who do not enroll in coverage.

Wellness

One-third of employers (33%) offering health benefits provide employees with an opportunity to complete a health risk assessment. Large firms (200 or more workers) are more likely than smaller firms to ask employees to complete a health risk assessment (51% vs. 32%). Among these firms, 51% of large firms (200 or more workers) report that they provide a financial incentive to employees that complete the assessment. Thirty-six percent of firms with a financial incentive for completing a health risk assessment reported that the maximum value of the incentive is $500 or more.

Fifty-one percent of large firms (200 or more workers) and 26% of smaller firms offering health benefits report offering biometric screening to employees. Of these firms, one percent of large firms require employees to complete a biometric screening to enroll in the health plan; and 8% of large firms report that employees may be financially rewarded or penalized based on meeting biometric outcomes.

Virtually all large employers (200 or more workers) and most smaller employers offer at least one wellness program. Seventy-four percent of employers offering health benefits offer at least one of the following wellness programs in 2014: 1) weight loss programs, 2) gym membership discounts or on-site exercise facilities, 3) biometric screening, 4) smoking cessation programs, 5) personal health coaching, 6) classes in nutrition or healthy living, 7) web-based resources for healthy living, 8) flu shots or vaccinations, 9) Employee Assistance Programs (EAP), or a 10) wellness newsletter. Large firms are more likely to offer one of these programs than smaller firms (98% vs. 73%).

Of firms offering health benefits and a wellness program, 36% of large firms and 18% of smaller firms offer employees a financial incentive to participate in a wellness program, such as smaller premium contributions, smaller deductibles, higher HSA/HRA contributions or gift cards, travel, merchandise or cash. Among firms with an incentive to participate in wellness programs, only 12% of small firms and 33% of large firms believe that incentives are “very effective” at encouraging employees to participate. In lieu of or in addition to incentives for participating in wellness programs, 12% of large firms have an incentive for completing wellness programs.

The ACA exempts “grandfathered” health plans from a number of its provisions, such as the requirements to cover preventive benefits without cost sharing or the new rules for small employers’ premiums ratings and benefits. An employer-sponsored health plan can be grandfathered if it covered workers when the ACA became law, and if the plan has not made significant changes that reduce benefits or increase employee costs. One change in employer-sponsored health benefits noted by the survey is 37% of firms offering health benefits offer at least one grandfathered health plan in 2014, less than the 54% that did so in 2013. Looking at enrollment, 26% of covered workers are enrolled in a grandfathered health plan in 2014, down from 36% in 2013.

Fifteen percent of covered workers at small firms (three to 199 workers) and 81% of covered workers at larger firms are enrolled in plans which are either partially or completely self-funded. The percent of covered workers enrolled in self-funded plans has increased for large firms since 2004, but has remained stable for both large and small firms over the last couple of years.

While relatively few covered workers at large employers currently receive benefits through a private or corporate health insurance exchange (3%), many firms are looking at this option. Thirteen percent of large firms are considering offering benefits through a private exchange, and 23% are considering using a defined contribution method (see “Exploring DC Models in Health Care Benefits”).

Kaiser notes there may be bigger changes to employer-sponsored health benefits in 2015 as the economy improves and the employer shared-responsibility provision in the ACA takes effect for large employers. Kaiser also expects more changes in 2015 as employers and insurers continue to develop more integrated approaches to assessing individuals’ personal health risks and offer programs to address them.

More information from Kaiser Family Foundation’s survey is here.

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