Data and Research October 22, 2018

U.S. Retirement System Still Ranks Low, But Slightly Improved

This year’s Melbourne Mercer Global Pension Index suggests reducing pre-retirement leakage; requiring that part of the retirement benefit must be taken as an income stream; and increasing the funding level of the Social Security program are just some steps that can be taken to improve the U.S. retirement system.

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Now in its tenth year, the Melbourne Mercer Global Pension Index (MMGPI) reveals how countries are doing to balance the twin goals of delivering financial security for their retirees that is both adequate for the individual and sustainable for the economy.

Measuring 34 pension systems, the index shows that the Netherlands and Denmark (with scores of 80.3 and 80.2 respectively) both offer A-Grade world class retirement income systems with good benefits. However, common across all results was the growing tension between adequacy and sustainability.

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The Index uses three sub-indices—adequacy, sustainability and integrity—to measure each retirement income system against more than 40 indicators. This year, the U.S. scored a 58.8 overall, up from 57.8 in 2017. For each sub-index, the U.S. scored 59.1, 57.4 and 60.2, respectively.

According to the full report, the adequacy sub-index considers the benefits provided to the poor and the average-income earner as well as several design features and characteristics which enhance the efficacy of the overall retirement income system. The net household saving rate, the level of household debt and the home ownership rate are also included, because non-pension savings represent an important source of financial security during retirement.

The sustainability sub-index considers a number of indicators which influence the long-term sustainability of current retirement income systems. These include factors such as the economic importance of the private pension system, its level of funding, the length of expected retirement both now and in the future, the labor force participation rate of the older population, the current level of government debt and the level of real economic growth.

The integrity sub-index considers three broad areas of the pension system, namely regulation and governance; protection and communication for members; and costs. This sub-index asks a range of questions about the requirements that apply to the funded pension plans which normally exist in the private sector. Well-operated and successful private-sector plans are critical because without them the government becomes the only provider, which is not a desirable or sustainable long-term outcome.

A sub-report about the U.S. retirement system says the slight increase in the U.S.’s score was due to a number of small changes in the adequacy sub-index. It suggests the overall index value could be increased by:

  • raising the minimum pension for low-income pensioners;
  • adjusting the level of mandatory contributions to increase the net replacement for median-income earners;
  • improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement;
  • reducing pre-retirement leakage by further limiting the access to funds before retirement;
  • introducing a requirement that part of the retirement benefit must be taken as an income stream;
  • increasing the funding level of the Social Security program;
  • raising the state pension age and the minimum access age to receive benefits from private pension plans;
  • providing incentives to delay retirement and increase labor force participation at older ages; and
  • providing access to retirement plans on an institutional group basis for workers who don’t have access to an employer sponsored plan.

“Ageing populations, high sovereign debt levels in some countries and the global competition to lower taxes constrain the ability of some jurisdictions to improve retirement income security. With a decade of unique data, the MMGPI and associated research can provide valuable global comparative insights to planners and policymakers on the way forward,” says Professor Deep Kapur, director of Australian Centre for Financial Studies.

Compliance October 22, 2018

DOL Seeks to Expand Access to ‘Association Retirement Plans’

These plans allow small businesses within a business group or association to join together to offer defined contribution retirement savings benefits.

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Under the direction of President Trump, the Department of Labor (DOL) is seeking to make it easier for small businesses to form association retirement plans, which permit them to join together to offer defined contribution (DC) plans within a single administrative framework.

To this end, the DOL has published a set of proposed regulations under Title 29 of the Code of Federal Regulations to expand access to retirement saving options by clarifying the circumstances under which an employer group, association, or professional employer organization (PEO) may sponsor a workplace retirement plan. In particular, the proposed regulation clarifies that employer groups or associations and PEOs can, when satisfying certain criteria, constitute “employers” within the meaning of Section 3(5) of the Employee Retirement Income Security Act (ERISA) for purposes of establishing or maintaining an individual account “employee pension benefit plan” within the meaning of ERISA Section 3(2).

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As an “employer,” a group or association can sponsor a defined contribution retirement plan for its members, as can a PEO sponsor a plan for client employers (collectively referred to as “MEPs”). The proposed regulation would allow different businesses to join a MEP, either through a group or association or through a PEO. According to the DOL, PEOs will contractually assume administrative responsibilities for their client employers.

“President Donald J. Trump is moving to expand quality, affordable workplace retirement plan options for America’s small businesses and their employees,” said Secretary of Labor Alexander Acosta. “Many small businesses would like to offer retirement benefits to their employees, but are discouraged by the cost and complexity of running their own plans. Association retirement plans give these employers a simple and less burdensome way to offer valuable retirement benefits to their employees. The proposed rule helps working Americans and their families take care of themselves in their retirement years.”

The DOL notes that 38 million Americans do not have access to workplace retirement plans. Association retirement plans would permit companies within a city, county, state or multi-state metropolitan area, or within a particular industry, to band together. Sole proprietors, as well as their families, would also be permitted to join such plans. According to the DOL, PEOs generally are going to be human resource specialist companies.  

DOL says that the proposal would enable small businesses to offer benefit packages comparable to those offered by large employers. DOL expects the plans to reduce administrative costs through economies of scale and to strengthen small businesses’ hands when negotiating with financial institutions and other providers.

MEPs have long been a focal point for the retirement plan industry, but the topic gained traction when, earlier this year, President Trump ordered the DOL to address the issue directly. Important to note, this proposal does not address “open MEPs,” described by analysts and experts as one of the primary ways to address the retirement plan coverage gap among employees of small businesses. This step comes after, earlier this month, the Office of Management and Budget finished its review of DOL’s MEP proposal, calling it “major” and “economically significant.”  

Some experts have suggested, should the push to expand multiple employer plans find success, this could result in many more small businesses offering MEPs—which will in turn open up new opportunities and challenges for advisers, as well as for their existing plan sponsor clients.

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