Participants October 12, 2015

Survey Reveals Struggles with Retirement Saving

Some say they cannot afford to save, some think they are too young to worry about it, and many need to be taught the right factors when making investment decisions.
Reported by

Asked what motivates them to save, 80% of people surveyed for Aon Hewitt’s “Financial Mindset Study,” say being financially responsible.

Seventy-seven percent say being able to do what they want when they retire motivates them to save, 76% say being prepared for any unforeseen problem and 51% say being able to buy something they want but can’t afford right now.              

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While having an emergency fund (86%) and retirement income (82%) were top savings priorities, asked what they are actually saving for, 78% of respondents cite vacation or travel, 74% say retirement income, and 70% say an emergency fund.

Forty-eight percent said they are doing some broad financial planning but need to do more, and 57% said they are doing some retirement planning but need to do more. As to what is keeping them from saving, 37% said not being able to afford to save is a very significant or significant barrier. Other significant or very significant barriers: concern that they may not be able to access their savings when they need it (19%), not understanding where to save (16%), not having the need to save (15%) and not understanding how to save (14%).

Only 54% of respondents have compared how much they will need in retirement to how much they are likely to have, only 53% have projected how much they will need to live on when they retire and only 40% have created a financial plan to reach their goals. Thirty-eight percent say they save regularly but don’t have a long-term plan, 30% say they save regularly according to their long-term plan, 15% don’t save because they cannot afford to, 9% save only from time to time and 5% plan to start saving but say they haven’t had the time to start.

Twenty-five percent think they will need less than 80% of their pre-retirement income in retirement, and 25% have no idea of what they will need.

NEXT: Views of employer-sponsored retirement plans

Forty-six percent of surveyed employees strongly agree or agree that they are satisfied with their current employer’s retirement plan, and 49% think their employer’s retirement benefits are on par with other companies’. Only 33% think it is well above or above other employers’ retirement benefits.

The Aon Hewitt survey indicates employees like automatic features in retirement plans, because when asked what influenced their decision to save, 91% say automatic enrollment, 86% say their company’s match, 76% say the tax advantages of a 401(k) plan and 72% say access to good investments that are monitored by the company. Asked how much they contribute to their plan, 37% indicate it’s 5% or less, 35% report 6% to 10%, 11% say 11% to 15%, 8% indicate it’s 16% to 20%, and only 9% say 21% or more.

For those not contributing to their employer’s retirement plan, 48% say they cannot afford to do so. Nineteen percent report they don’t know enough about the plan, 16% are concerned about losing money, and 15% believe they can get better returns elsewhere.

Thirteen percent of respondents say they are too young to make retirement plan contributions a priority, 11% are worried about not being able to access the money when they need it, 10% think they don’t need to make any additional contributions, and 8% want a greater range of investment options.

NEXT: What guides investment decisions

Asked about their risk tolerance, 40% say they are cautious, 32% say they are balanced and 21% say they are aggressive. The most frequent time that participants check their retirement account is quarterly, cited by 42%, and of this group, only 17% make a change to their retirement plan.

Asked what are the most important factors in making investment decisions, first up is the fund’s past performance (37%) followed by the fund’s risk level (35%). Expectation of the fund’s future performance (33%), economic factors such as the stock market (30%), and the length of time until the money will be needed (29%) are other important factors in making investment decisions. Some heed the advice of a professional financial planner (15%) and information on their retirement plan’s website (15%).

As to the percentage of their retirement income coming from various sources, the majority (36%) expect it will be from their current employer’s retirement plan, 29% say Social Security, 24% say other assets and income, and 12% say different employers’ retirement plans.

Asked what they think their employer should help them with financially, 91% say saving for retirement, 56% say establishing an emergency fund, 52% say saving for a child’s education, 52% say saving for short-term needs, and 42% say creating or managing a personal budget.

The Futures Company conducted the survey among 2,001 employees for Aon Hewitt in April. The full study can be downloaded here.
Compliance October 12, 2015

Foot Locker Ordered to Reform Cash Balance Plan

A court found purposeful miscommunications led participants to expect a different benefit than they were accruing.
Reported by

A U.S. District Court has ordered Foot Locker to reform its cash balance plan to calculate accrued benefits in a way expected by participants.

U.S. District Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York found that the plan’s summary plan description (SPD) as well as other communications to participants failed to inform them that their benefits would be in a period of “wear-away” during which new accruals would not increase the benefit to which a participant was already entitled.

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Upon conversion from a traditional defined benefit (DB) plan to a cash balance plan design, Foot Locker established a beginning balance based on a participant’s earned DB plan benefit and a 9% discount rate, as well as a mortality discount. Following the conversion, participants’ account balances were credited with pay credits and an interest credit at a fixed annual rate of 6%. The company understood that for years, the account balance under the new formula would be smaller than the ending accrued benefit under the traditional DB plan for most participants. So, to avoid a violation of the Employee Retirement Income Security Act’s (ERISA’s) anti-cutback rule, the plan provided that retiring employees were entitled to the greater of the benefit accrued under the DB plan or the cash balance plan benefit.

According to Foot Locker, participants had the information necessary to inform them they were in a period of wear-away. The company concedes that it did not describe wear-away explicitly because it believed it was too complicated and its variations and effects too unpredictable. But, Forrest disagreed, finding from testimony of plan participants that the communications to them led them to believe their pension benefits were growing with their years of service.

In her opinion, Forrest said all of the communications share core common characteristics: all failed to describe wear-away, and all failed to clearly discuss the reasons for the difference between a participant’s accrued benefit under the old plan and his or her balance under the new plan. She determined that all the statements were intentionally false and misleading, and that the SPD contained a number of intentionally false misstatements.

“Here, there is no doubt that Foot Locker committed equitable fraud,” Forrest wrote. “It sought and obtained cost savings by altering the Participants’ Plan, but not disclosing the full extent or impact of those changes.”

Comparing the case to that of Amara v. CIGNA Corp., but calling Foot Locker’s violations “more egregious,” Forrest said to remedy Foot Locker’s misrepresentations, the plan must be reformed to actually provide the benefit that the misrepresentations caused participants to reasonably expect. With respect to class members who have already retired, the court ordered that retirees and former employees shall be entitled to receive the difference in value between the reformed plan calculation and the benefit they received, in addition to prejudgment interest at a rate of 6% per annum.

Forrest ordered Foot Locker to enforce the plan as reformed, but ordered that all of the remedies provided be stayed to allow the parties to pursue an appeal, if they so choose.

The opinion in Osberg v. Foot Locker, Inc. is here.

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