Data and Research November 3, 2015

Study Gauges Worker Reaction to State-Run Retirement Plan

The majority of workers surveyed say such a program would be good for them, but a significant number still would not save or save enough.
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A survey of workers not covered by an employer-sponsored retirement plan, conducted for the state of California, shows most think a state-run plan is a good idea.

Workers were told the California Secure Choice Retirement Savings Plan would automatically deduct a percentage of their pay and deposit it into an individual account for them; they would have the option to opt out or change the automatic enrollment percentage. Their accounts would be invested in an age-based fund managed by a private company selected and monitored by the state. At retirement, they could choose to convert their account balance into a lifetime annuity. Half were told they would be automatically enrolled at 3% of pay and the other half were presented with a 5% automatic deferral rate.

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Six in seven of the 1,000 workers surveyed think it is a good idea, including 57% who say it is a very good idea. When shown an example of how savings in such a program could grow over time, 55% say it would be excellent or very good for them and another 26% say it would be good. Most respondents indicate they would participate in the program, with retention rates in the program higher for women than for men (77% vs. 71%) and the likelihood of staying the program increasing as personal income increases.

Automatically increasing contributions by 1% annually up to a maximum of 10% will not prevent most uncovered workers from participating—81% would stay in the program if it included automatic escalation.  However, about one-third of workers would not participate if they could not access their money if they became seriously ill (32%) or if their spouse dies (32%). More than one-quarter would not participate if they could not access their money in the event of a job loss (28%) or a family member becoming seriously ill.

The study has relevance for states other than California that are starting or contemplating a state-run retirement program, and for the Department of Labor (DOL), which will soon issue guidance in support of this effort to expand retirement plan coverage for workers.

NEXT: Not all would embrace coverage

While the study found the vast majority of uncovered workers have the desire and the ability to put at least some money aside for retirement, not all would embrace coverage in a state-run plan.

They agree that saving for retirement is important (96% very or somewhat important), but retirement ranks second as an overall savings priority (45% rank it first or second out of six potential savings needs) after having an emergency fund. Nearly all indicate they could save at least some amount in a retirement savings plan available at work; however, two-thirds feel the most they could contribute is less than $100 per month.

When presented with the California Secure Choice Retirement Savings Plan, one-quarter of workers say they would opt out, regardless of whether the automatic enrollment deferral percentage is 3% or 5%. Eighteen percent would ask to have their deferral percentage changes. Of that group, 32% of those presented with a 3% deferral rate and 43% of those presented with a 5% deferral rate would ask that their deferral percentage lowered.

If the plan automatically escalated deferrals each year, one-third indicate they would ask their employer to stop auto escalation.

The leading barriers for not saving more for retirement include low earnings and the debt burden they carry—these two issues are the primary reasons for more than half of uncovered workers. Four in ten say a major reason is that they are more focused on their family, and nearly as many (36%) report that dealing with unexpected expenses is a major reason they don’t save more.

A report of study findings is here.

Compliance November 3, 2015

ESOP Participants’ Breach Claims Not Supported

Participants in an ESOP that purchased shares with a loan from the sponsoring employer made allegations that were not backed by evidence, a court found.
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A federal judge dismissed a lawsuit brought by participants in the Personal-Touch Home Care Employee Stock Ownership Plan (ESOP) for failure to state a claim.

U.S. District Judge James B. Zagel of the U.S. District Court for the Northern District of Illinois rejected the participants’ first claim that GreatBanc trust, in its role as fiduciary, breached its fiduciary duty under the Employee Retirement Income Security Act (ERISA) by arranging for the ESOP to purchase Personal-Touch shares above value, financed with an unreasonable loan rate. The participants said the ESOP paid too much for the Personal-Touch shares that it purchased because the price went down after the transaction, and it borrowed money to fund this purchase at a rate higher than the market rate—without providing any supporting detail.

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Citing Bell Atlantic Corp. v. Twombly, Zagel found that without additional facts, the participants’ allegations are “merely consistent with” a breach, and they fail to nudge their claim “across the line from conceivable to plausible.” He found that the value of Personal-Touch stock years after the transaction does not speak directly to GreatBanc’s duty “under the circumstances then prevailing” at the time of the purchase. It is not necessarily indicative of the fair market value before the purchase.

In addition, citing the Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer, Zagel said that “absent an allegation of special circumstances regarding, for example, a specific risk a fiduciary failed to properly assess, any fiduciary would be liable for at least discovery costs when the value of an asset declines. Such a circumstance cannot be the intention of Rule 8(a), or Dudenhoeffer. An allegation of a special circumstance is missing in this case—in fact, we know absolutely nothing about the financial situation of Personal-Touch.”

Regarding the participants’ argument that the loan rate was higher than market rate, Zagel again found they had no evidence to support the claim. A reasonable rate is determined from all relevant factors, he said, including the amount and duration of the loan, the security involved, the credit standing of the ESOP, and the interest rate prevailing for comparable loans. While the participants offered up the interest rate for comparable loans, Zagel determined this only raises a possibility that the rate was unreasonable, while a dearth of other facts makes it impossible to draw a plausible inference that the mismatched rates were due to a breach of fiduciary duty.

NEXT: Did prohibited transactions occur?

Zagel also rejected the participants’ other claim that GreatBanc caused the ESOP to engage in prohibited transactions under ERISA when the ESOP both bought stock and received a loan from a “party in interest.” Personal-Touch is a party in interest because it is an employer whose employees are covered by the ESOP. Zagel noted that ERISA statute categorically prohibits almost any transaction between an ESOP and a party in interest, but then provides a long list of exemptions. 

A purchase of shares by an ESOP from a party in interest is exempted from being a prohibited transaction if the shares are purchased for “adequate consideration,” defined, for a security with no generally recognized market, as “the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary.” According to Zagel, under 7th U.S. Circuit Court of Appeals case law, this provision creates a two-part test that the ESOP paid no more than fair market value, and the fair market value was determined in good faith. As he found earlier in his opinion, the participants did not successfully plead that the ESOP paid more than fair market value for the Personal-Touch shares. 

Zagel noted that an extension of credit from a party in interest to an ESOP is a prohibited transaction unless the loan is primarily for the benefit of the plan participants and “such loan is at an interest rate which is not in excess of a reasonable rate.” Again, participants did not successfully plead that the loan interest rate was unreasonable. 

The plaintiffs in the case were participants in the ESOP when it purchased an unknown percentage of Personal-Touch shares for $60 million on December 9, 2010. The transaction was funded by a $60 million loan from Personal-Touch (and/or its principal shareholders) to the ESOP, payable over 30 years with 6.25% annual interest. 

According to the participants, the value of ESOP’s Personal-Touch shares was only 78% of the purchase price about one month after the transaction, 50% by the end of 2011, and 45% by the end of 2013. They also allege that the market rate for a loan similar to the one extended to the ESOP is 4.25%, significantly lower than the rate the ESOP received. 

The opinion in Allen v. GreatBanc Trust Co. is here.

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