Rethinking retirement in the wake of the pandemic

While the Covid-19 crisis triggered severe economic hardships for many Americans, more than three-quarters of participants in a new study released Monday by Edward Jones and Age Wave credit the pandemic with helping them focus on what’s most important in life when it comes to retirement planning. Hint: It’s not all about the money.

The study, “The Four Pillars of the New Retirement: What a Difference a Year Makes,” reveals how the timing and funding of retirement have shifted as a result of the pandemic and how retirees are recognizing the importance of the nonfinancial aspects of a successful retirement.
The latest study, which updates an initial large-scale investigation of what it means to live well in retirement that began in 2019, has enormous implications for the financial advice profession as clients seek guidance on not just how to spend their money in retirement, but how to spend their time.
The initial study defined the four pillars of living well in retirement as health, family, purpose and finances.
“Over the past year, through these studies, we’ve witnessed an increase in people’s need and desire for help with retirement planning extending far beyond finances,” said Ken Cella, principal in the Edward Jones client services group. “By putting individuals and their families at the center and understanding how the four pillars complement each other … financial advisers seek to add value beyond investment returns.”
According to the latest online study conducted in March, retirees generally report much higher levels of contentment and happiness than non-retired Americans because they feel greater freedom from responsibilities and the freedom to pursue their own interests and purpose. In fact, 92% of retired respondents agree that a sense of purpose is the key to a successful retirement, and more than two-thirds derive the greatest sense of purpose from times spent with loved ones.

Of course, most retirees have more financial safety nets than working Americans, including Social Security and Medicare, pensions, savings and investments and home ownership. Without having to worry about losing a job or how to pay the bills during the pandemic, many retirees were able to focus on the qualitative aspects of their retirement.
“While every American has been challenged by the disruptions of the last year, we have also seen extraordinary amounts of gratitude and resilience, especially from retirees,” said Ken Dychtwald, founder and CEO of Age Wave. “Research has shown that having a sense of purpose can actually reduce the risk of cognitive decline, cardiovascular disease and depression, so finding meaning in one’s life is essential to a long, healthy and potentially fulfilling retirement.”

Not all the lessons from the pandemic are positive. Although 70% of Americans say the pandemic caused them to pay more attention to their long-term finances, the economic fallout has deepened the gender gap. Over a lifetime, the typical gender pay gap plus career interruptions results in a $1.1 million earnings gap for women, the study found.
Only 41% of women said they continued to save for retirement throughout the pandemic compared to 58% of men. As a result of lower earnings and lower savings, women’s retirement account balances are only two-thirds the amount of their male counterparts’.
Current retirees reflecting on the keys to a successful retirement say the financial and non-financial aspects are equally important, including how to live a healthy life (95%); how to maintain or improve family relationships (94%); how to find activities that impart a sense of purpose (94%); and how to save enough money to last through retirement (93%).
But pre-retirees don’t seem to be listening to that sage advice. Few pre-retirees say they have thought about any of those aspects of retirement planning, and those who have rank their priorities differently, including: retirement finances (37%); health (21%); sense of purpose (16%) and family (12%). But 77% of those planning to retire said they wish there were more resources to help them plan for their ideal retirement beyond their finances.

It sounds like fertile ground for deeper conversations with clients about how to plan for a long and satisfying retirement.
(Questions about Social Security rules? Find the answers in Mary Beth Franklin’s 2021 ebook at MaximizingSocialSecurityBenefits.com.)

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401(k) Real Talk: June 11

This week, Fred Barstein reviews Ric Edelman stepping down at the firm he cofounded, Captrust buying an estate-planning firm and more.

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Russell, Wake Forest, Generac targeted in lawsuits

Russell Investment Management has been sued again over the use of its products in a retirement plan — this time the $517 million Royal Caribbean 401(k).

The case, filed Monday, is similar to one brought weeks against Russell and Caesars Holdings, with one of the same law firms, Nichols Kaster, representing the proposed class.
In the newer case, the plaintiff alleges that Russell went against its fiduciary duty under the Employee Retirement Income Security Act in 2015 by filling the plan menu with its own investments. Those funds, including its target-date series, underperformed options from other managers and cost participants money in terms of unrealized gains, according to the complaint filed in U.S. District Court for the Western District of Washington. The prior target-date manager was Vanguard.
“By adding over $300 million in new investment from the plan, Russell was able to prop up its struggling proprietary funds, which were losing other investors amid Russell’s performance and reputational shortcomings,” the complaint read. “Russell’s funds continued to underperform until Russell was eventually removed as the plan’s outsourced investment fiduciary in the middle of 2019, less than four years after assuming the role. In the meantime, the plan suffered millions in lost investment returns.”
In a statement provided by a company spokesperson, Russell disputed the claims.
“We believe this suit is without merit and we intend to vigorously defend the firm against these allegations,” the statement read.

Generator maker Generac was sued Tuesday over allegedly excessive fees in its $176 million 401(k) plan.
A plaintiff in the proposed class-action ERISA suit claims the Wisconsin-based manufacturer did not seek competitive bids for record-keeping services and permitted investment options that had higher fees than necessary.

Between 2015 and 2019, participants paid an average annual record-keeping fee of $90, according to the complaint, while a more reasonable rate would have been $52. Similar-sized plans paid anywhere from $20 to $64 for such services during those years, law firms representing the plaintiff stated. The fees that participants paid to Transamerica Retirement Solutions, which is not named as a party in the suit, included administrative fees it charged directly as well as money it received through revenue sharing paid by mutual funds, according to the suit.
Meanwhile, the plan investment options were more expensive than other options, including different share classes of the same funds — which in some cases had higher net fees but a larger proportion of revenue sharing that theoretically would be rebated to participants. Even so, there were other fund options from competitors for various types of investments on the plan menu that would have been less expensive, according to the ERISA complaint, which was filed in U.S. District Court in Washington, which is where the plaintiff lives.
The complaint was brought by law firms Walcheske & Luzi and Keller Rohrback, both of which have a history of 401(k) litigation.
In a statement provided by a public relations firm representing Generac, the company noted that it “is committed to providing employees a comprehensive benefits package” but could not comment on litigation.

Capozzi Adler, likely the most prolific filer of new ERISA retirement plan lawsuits over the past year, recently targeted Wake Forest University Baptist Medical Center.
In a lawsuit filed June 4 in U.S. District Court for the Middle District of North Carolina, the firm alleges that the medical center failed participants in its $2.3 billion plan by allowing excessive record-keeping and investment management fees.
Workers paid a range of $110 to $155 annually for record-keeping costs between 2015 and 2019, while a national average was closer to $40 for plans of that size, according to the complaint.
Further, nearly $1 billion of the plan’s assets in 2019 were invested in funds that had higher fees than those in similar-sized plans, the law firm stated. In one case, a fund on the plan’s menu charged fees of 90 basis points, while a lower-cost share class of the same product was available at 45 bps, according to the complaint.
Capozzi Adler also cited median total plan costs from an Investment Company Institute report of 22 bps for plans with at least $1 billion in assets. By comparison, the Wake Forest 403(b) had total plan costs of 52 bps in 2019, according to the complaint.
A representative from Wake Forest did not respond to a request for comment.
Serco Inc., an IT service management provider with Department of Defense contracts, recently settled a lawsuit over its 401(k) plan for $1.2 million.
A plaintiff filed a class-action case against the company last year alleging that it breached its duties under ERISA by failing to select prudent investment options. Both administrative and investment management fees were excessive, the plaintiff alleged.
A settlement was reached earlier this year, and terms of the deal were published June 1 in U.S. District Court for the Eastern District of Virginia Alexandria Division.
The class is represented by six different law firms and includes participants who were in the plan between Jan. 1, 2014, and Feb. 22, 2021. The Serco 401(k) represented $439 million as of the end of 2019, according to data from the Department of Labor.
Separately, Philadelphia-based engineering firm CDI Corp. this week settled a 2020 lawsuit over its 401(k) plan for $1.8 million.
Plaintiffs in the class-action lawsuit filed in U.S. District Court for the District of Pennsylvania alleged that CDI violated its ERISA duties by not prudently selecting and monitoring investment options, leading participants to pay more than they needed to for investment management. The $247 million plan included funds that underperformed other options from competitors, were costlier and in some cases were available in lower-fee share classes than those used within the plan, according to court documents.
As much as 30% of the settlement amount will go to attorneys’ fees. Law firm Edelson Lechtzin represents the plaintiffs.

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Roth conversions may not pay off until age 90 for most

Roth conversions almost always work out in a client’s favor, but not necessarily for the reasons that advisers often recommend them, according to an academic study published this week.

Contrary to conventional wisdom, tax-rate changes — up, down or flat — have a minimal effect on the long-term financial benefits from converting a traditional IRA or 401(k) to a Roth account, Edward McQuarrie, professor emeritus at Santa Clara University, wrote in a recent paper.
Instead, the overarching factor that gives Roth conversion an edge, given enough time, is compounding, McQuarrie found.
In his study, he examined the reasons driving recommendations of Roth conversions, particularly given several big changes to the law that now affect those decisions, such as the increase in the required minimum distribution age to 72 and the demises of the stretch IRA strategy and the recharacterization provision.
“If you recommend that people make small prepayments of their mortgage, so that over the decades they save tens of thousands of dollars in interest, then Roth conversions would probably also make sense for thrifty clients with the same time horizon,” McQuarrie said in an interview.
He found that tax rates don’t need to be higher for a Roth conversion to be beneficial and that the practice of using funds outside the account to pay the tax on a conversion doesn’t make much difference. Further, Roth conversions can be almost as beneficial for middle-class earners as those in the top tax bracket, his report concluded.

Only in the unlikely scenario that someone is in the 0% tax bracket is it justifiable to recommend a conversion based on higher tax rates in the future, McQuarrie noted. And unless a couple’s peak wage earnings are above $200,000 or for some reason they haven’t saved much for retirement, they will most likely be in a low tax bracket when taking required minimum distributions, according to the study.
“[U]nless both members of a sixty-something couple are 401(k) millionaires, their tax rate in retirement will likely be 12%,” McQuarrie wrote in the paper. “They will have last seen tax rates that low when they were students.”

In most cases, “the benefits from a Roth conversion are often small and slow to arrive,” past age 90, “and so long as annual distributions from converted amounts are not taken,” he wrote.
“[T]he success of a Roth conversion is guaranteed by the mathematics of compounding. Assets in a totally tax-free structure must compound faster than those same assets in an account subject to even the most minimal tax drag. It may take decades, but given decades, faster compounding always overcomes the initial tax debit.”
Therefore, the questions advisers should ask when deciding to recommend a conversion are whether the client is on track to build surplus assets in their tax-deferred account and whether they are OK with not seeing a benefit until age 90 or later, the report noted. And, tongue-in-cheek, another question that would provide an obvious recommendation for a Roth conversion is whether a client’s living expenses can be covered while they are in the 0% tax bracket.
If a client answered “no” to all of those, other options could be considered, such as a backdoor Roth IRA or life insurance products, McQuarrie wrote.

Additionally, there is no benefit to a Roth conversion for the sake of tax diversification, he said.
“Proponents of the diversification thesis naively imagine that if Congress takes an action hostile to traditional [tax-deferred accounts], it will somehow always bless and spare Roth accounts,” he wrote. That notion was proven incorrect most recently by the SECURE Act’s virtual elimination of the stretch IRA, he noted.
“Imposition of RMDs, excise tax on undistributed balances, stacking rules and other devices can be used to extract revenue from holders of large Roth accounts … Roth accounts cannot provide tax diversification; nothing can. The one Congress controls it all.” 

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New York state advances auto IRA bill

Under the bill, businesses in the state that have been operating for at least two years and have at least 10 employees would be required to participate. The state passed legislation in 2018 to establish a voluntary IRA system for the private sector, but it has yet to implement that program.

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Three Social Security do-over options

I often receive emails from financial advisers asking for guidance on how to help a client undo a Social Security claiming decision.

Sometimes it involves someone who claimed benefits early and now regrets collecting reduced monthly benefits rather than holding out for a bigger check. In other cases, a client may have waited longer than necessary to claim a benefit and now wonders if there’s a way to recoup that loss. And sometimes a client is looking for an infusion of cash to get them through a temporary rough spot.
The good news is there are three do-over options that an individual can use to change a Social Security claiming decision after the fact. But each option involves specific rules. These strategies have sparked renewed interest in the wake of the Covid-19 pandemic, when some older clients had to revise their retirement plans either because they stopped working earlier than planned or realized that they could extend their careers a few more years by working remotely.
The first do-over option involves withdrawing an application for Social Security benefits. Anyone can withdraw their application within 12 months of first claiming benefits by filing Form 521.
But there’s a catch. You must repay any benefits that you have received, including those of any family members who have been collecting benefits on your earnings record, such as a spouse or minor child. You can only withdraw your application for Social Security benefits once, but you can apply for benefits again later when the monthly amount would be larger.
Withdrawing an application for Social Security benefits is a bit more complicated if you are already enrolled in Medicare. Although you can choose to continue your Medicare coverage, you must pay your Medicare Part B and Part D premiums directly as you will no longer be able to have the premiums deducted from your monthly Social Security benefits.

If repaying Social Security benefits would create a financial hardship, there is another do-over option, but an individual must wait until he or she reaches full retirement age or later. At that point, a client can suspend his or her Social Security benefit.
The good news is people who suspend their benefits do not have to repay anything. The bad news is their monthly Social Security benefits stop and so do those of any dependent family member (except a divorced spouse). During the suspension, benefits earn delayed retirement credits of two-thirds of 1% per month, for a total of 8% per year up until age 70.

Suspended benefits would automatically resume at 70, or a client could choose to resume Social Security benefits earlier, but would only receive delayed retirement credits for the period when benefits were suspended.
Assume a client with a full retirement age of 66 claimed benefits four years early at age 62. He would receive 75% of his full retirement age benefit amount. If that client suspended his benefits at age 66, his monthly benefits would stop but they would start earning delayed retirement credits of up to 32%. At 70, his benefits would be worth 99% of his full retirement age amount (75% x 1.32).
This strategy offers added benefits to married clients. If that client died first, his widow would receive the larger amount as a survivor benefit. A survivor benefit is worth up to 100% of what the deceased worker was receiving or entitled to receive at the time of death.
A third option involves requesting a lump-sum payout of up to six months of retroactive benefits.  You must be full retirement age or older to request a lump-sum payout, and retroactive benefits cannot begin before full retirement age.

So someone with a full retirement age of 66 who applies for benefits at 66 and 6 months could receive the maximum six months of retroactive benefits but someone with the same full retirement age who files for benefits at 66 and 3 months could only receive three months of retroactive benefits. Individuals who claim Social Security benefits before their full retirement age are not eligible for retroactive benefits.
A lump-sum payout can make sense for clients who waited until after their full retirement age to claim either spousal or survivor benefits — both of which are worth their maximum amount at the beneficiary’s full retirement age. Unlike retirement benefits, spousal and survivor benefits do not earn delayed retirement credits.
Requests for a lump-sum payout also makes sense for a client in need of immediate cash. And here’s another strategy: After receiving a lump-sum payment, that client could then voluntarily suspend benefits and earn delayed retirement credits up to age 70, boosting future monthly benefits.
(Questions about Social Security rules? Find the answers in Mary Beth Franklin’s 2021 ebook at MaximizingSocialSecurityBenefits.com.)

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