In this year’s final episode of our Plan Talk podcast, Retirement Director Ben Rizzuto recaps notable updates, trends and legal cases from the past year in the defined contribution space. And as always, he shares a playlist of his favorite new songs from 2020.
Ben's Top Ten Songs of 2020
- "All That Ever Mattered" - HAIM
- "I Live at Night" - I Break Horses
- "Inspirit" - Julianna Barwick
- "Ingydar" - Adrianna Lenker
- "Something I Do" - Sweet Whirl
- "Ghost of Soulja Slim" - Jay Electronica
- "A few words for the firing squad" - Run the Jewels
- "Can I Believe You" - Fleet Foxes
- "Highway" - St. Panther
- "Lost in Yesterday" - Tame Impala
- "Born Confused" - Porridge Radio
- "Michigan Hammers" - Protomartyr
Ben Rizzuto: Hi, this is Ben Rizzuto from Janus Henderson Investors and you’re listening to Plan Talk, the podcast dedicated to the latest news and trends in defined contribution.
2020 was one for the record books. We as a country went through so much. So much, in fact, that you consistently see jokes and memes online asking about your 2020 bingo card.
Who had murder hornets on their bingo card? Who had toilet paper’s gonna be an issue? Who had that by the end of the summer I will have a face mask that goes with every outfit I own?
Because of these issues and, more importantly, the coronavirus, most of us were happy to see 2020 come to an end. Even though that’s the case, it’s important to look back, and today we’ll do that as we have for the past few years to talk about some of my favorite stories from the retirement plan marketplace.
In this “Best of” edition of Plan Talk, I’ll review some of the more important and noteworthy items we’ve covered in our Top DC Trends and Developments Guide over the last 12 months. This, as many of you already know, is a guide we put out quarterly that helps advisors and plan sponsors keep their finger on the pulse of that which is going on at the plan, participant, legal and regulatory levels. It helps us make sure we’re thinking about how we can implement best practices, keep participants engaged and make sure we’re meeting our fiduciary responsibilities. And even though some of these stories came out months ago, I still think they are important and may prove useful in the future.
Along with that, I always like to give listeners a list of my favorite songs from the year. This year more than any in the past has been a year for music. It has certainly helped me – and I would guess many of you – get through the year, or at least disconnect from everything going on outside and focus on something else. I usually put together a list of ten songs, and I’ll mention a few of them today. The full list is on the Janus Henderson blog, or if you’d like to listen to them, you can find the “2020 Top Tunes” playlist on Spotify under my handle, @forzaben.
We’ll start with a couple items from the Quarterly Highlights section of our guide, which provides ideas and best practices that other companies are using to help their participants and their plans.
First, in the second-quarter 2020 guide we covered a change that MGM Studios made to help its participants. MGM has been providing a financial wellness program to its employees for years but recently they realized that the company was simply giving employees information on the 401(k) plan and leaving them on their own devices. This led to a majority of its employees neglecting to save. MGM saw this as an opportunity to make plan design changes such as making automatic enrollment and escalation available.
Plus, the company began offering a four-part, in-person comprehensive curriculum, which helps employees contemplate their entire financial future. The program addresses basic financial goals and gives participants tools and links that they can use throughout their careers. Also, for even those who have their financial affairs in order, many said that these tools served as a wonderful checklist.
Finally, for several years MGM has offered participants the capability to make after-tax contributions to the plan, but this feature had a small adoption rate. Couple that with the discovery that participants were increasingly taking loans for small dollar amounts, and these loans were being taken due to unexpected situations.
To help alleviate this problem, the company and its record keeper rebranded its after-tax contribution feature as an in-plan emergency savings solution. Turns out that participants found this much more relatable if not much more understandable, which led to more employees contributing to after-tax accounts and the average deferral rate increasing to 7.8%.
Now, as we know, employees must pay taxes on any earnings from withdrawals and there is a 10% penalty if they are younger than 59 ½, but in an emergency situation, I feel this is a small price to pay and it highlights how important emergency savings programs have become over the course of 2020.
Another story from the second-quarter guide was about the student debt repayment program Unum [Insurance Company] offers. As we know, monthly student loan payments can leave employees struggling to build emergency savings or to save in their 401(k).
To address that challenge, the company first considered the resources available that could help the company’s employees consolidate their student loans. They implemented a tool which enables borrowers to see what they owe by aggregating all of their federal and private student loans in one place. It also provides borrowers with suggestions relating to loan refinancing and re-amortization.
Then Unum initiated its student debt relief program, which allows employees to transfer up to 40 hours of paid time off [PTO] carry-over if they have any at the end of the calendar year into dollars to put toward student loans.
The way this works is, in January, all full-time employees who have elected to make the trade will receive an email from Unum telling them how many hours they have carried over and the cash equivalent. The email provides a link they will follow to register their information for one or more student loans and assign all or part of that PTO carry-over to the repayment. At the end of the eligibility period, the company’s RK [record keeper] will send Unum a communication listing the employees who have taken up the benefit, and Unum will then wire that money to the record keeper, which then pays the loan providers and sends a confirmation to Unum and the employee to verify the payments have been made.
This is one of the most creative things I saw this year and shows that there may be other ways to help participants with student loans.
And that is what I love about this quarterly highlights section of the guide, is that it provides so many new ideas that we can consider.
Now, to go along with those new ideas, two new musical artists I discovered this year were Julianna Barwick and St. Panther. Barwick’s song “Inspirit” is 10 minutes of healing calm whereas St. Panther’s “Highway” is a rhythmic jaunt you can’t help but nod your head to.
Next let’s cover a couple items from the Participants Corner section of the guide, where we look at research that helps us better understand the needs of participants.
First there was a great survey from Empower [Retirement] entitled “It’s Not About Generations” that came out during the third quarter that I thought highlights an important consideration for plan sponsors. The survey found that 80% of participants believe their views were created by individual characteristics and not the generation they were born into. This is important because stereotypes exist for every group, whether it’s millennials, Gen Xers or baby boomers.
But it turns out that life stage and experience are actually far more important predictors of an individual’s financial concerns than the year in which they were born. Because of this, employers may be able to better understand workers’ needs by studying their past experiences and personal backgrounds, which can then help employers better evaluate the financial wellness tools they offer and create more targeted solutions that help workers take action to reach their financial goals – especially in times of uncertainty.
Some of the personal experiences to consider include life stages like recently graduating from college, starting a new job, recently switching careers, empty nesters or parent caretakers.
Along with that, it’s important to consider financial or life events like loss in economic recession, loss in the housing market crash, receiving an inheritance, or an unexpected medical emergency.
The most important takeaway is that people take action with regard to their financial plans most often as a result of major life events. Because of this, employers should use retirement planning tools that recognize differences within generations without lumping people together under those labels. Financial wellness communications should aim to connect through stories people relate to, while framing retirement as a shared goal.
Over the past year we’ve all thought about ideas like post-COVID, post-election, maybe post-Trump administration. Well, another song for this year comes from the post-punk group Protomartyr. Their song “Michigan Hammers” has been a favorite, and it brings us to a story that may signal that we are entering a post auto-features period.
In an April survey, the Defined Contribution Institutional Investment Association, which represented the views of 175 defined contribution plan sponsors and is based on year-end 2018 data, found that auto features and auto enrollment saw growth in adoption to 69% in 2019, up from 60% in 2016, including 73% of plans with at least $200 million in assets. However, when looking ahead, only 7% of plans currently not offering auto enrollment said they were "very likely" to do so in the next 12 months. Another 14% report that they're “somewhat likely” to add this feature, the survey found.
When asked why they wouldn't offer the feature, respondents frequently cited possible increases in record-keeping expenses; appearing too paternalistic; it being deemed unnecessary, as participation was already high; the thoughts that costs would be too great (due to the match required); and concern over possible employee complaints.
So, the question is: Have we come to a point where auto features have reached maturity? And if that’s the case, do we need to start thinking about the next feature to add? Is it emergency savings options or maybe student loan debt repayment options? Either way, I think we need to start thinking about what’s next.
Moving on to the Legislative Review section, in the third quarter we discussed one of the proposals that may be coming out when the Biden administration begins. It would revamp 401(k) savings and, as it is known, help to “equalize” the tax treatment of contributions into retirement plans.
Under current law, most individual contributions to employer-sponsored retirement plans are made with pre-tax dollars. An individual who earns $60,000 a year and is in the 20.5% tax bracket would receive a $205 tax deduction for every $1,000 pre-tax contribution to his or her retirement plan. However, someone who earns $600,000 and is in the 37% tax bracket would receive a $370 deduction for every $1,000 contribution. This hypothetical scenario illustrates the fact that the present system provides greater tax benefits to savers in higher-income tax brackets.
Now, if enacted, this would change the deductibility rules of retirement plan contributions and would make it so all individuals – regardless of income – would be entitled to a refundable tax credit (estimated to be 26%) for each dollar contributed to a plan.
The thing to remember, a 26% credit is equal to a deduction of 20.5% marginal tax rate. (As a reminder, credits reduce the amount of tax you owe, while a deduction lowers your taxable income). For higher-income taxpayers, the tax benefit of contributing to a retirement plan would be diminished with the proposed flat credit.
Remember this is just a proposal, but if it moves forward, it may push higher earners to utilize Roth 401(k)s and IRAs more. This has typically been a part of the 401(k) that hasn’t been utilized as much as the traditional tax deferred side of plans, but this could be the idea that gets more people thinking about it and may prompt plan sponsor to remind participants that it is available.
Next, I want to move forward to the Regulatory Review section, where we’ve covered several items regarding the DOL [Department of Labor] this year. Their thoughts on ESG, private equity, as well as a number of pieces of guidance. The one that I found most interesting was the guidance given on lifetime income illustrations, which was in the third-quarter guide.
As you’ll remember, the SECURE Act will require plans to provide participants with a lifetime income illustration at least once a year based on their plan account balances. The goal of this provision was to help people understand what their account will look like as a stream of monthly income payments.
The DOL’s guidance gave us a better idea of what these will look like as they must be based on the current value of a participant's account at the time the illustration is prepared; ssume that payments start to be paid immediately, even though a participant may not be close to retirement age; assume the participant has reached at least age 67; and be expressed as both a lifetime stream of payments to the participant and a lifetime stream of payments for the joint lives of the participant and a spouse.
I’m interested to see not what these look like, but what participants will do once they see them. Some have said this will help get guaranteed income products become part of plans, but even before that my concern is that a participant will receive their illustration and see that their 401(k) account balance may not amount to much on a monthly basis over their retirement. This could lead them to make emotional changes to their asset allocation or become more aggressive in order to increase their account balances. It could lead them to become discouraged and quit saving all together. Because of that, it really will be up to us to help provide the next best steps to participants when they receive these illustrations.
Moving on, a few other songs that I really enjoyed this year came from Fleet Foxes, Haim and Jay Electronica. All three albums included several great songs, but if you’re looking for places to start, take a listen to “Can I Believe You” from Fleet Foxes, “All That Ever Mattered” From Haim and “Ghost of Soulja Slim” from Jay Electronica.
Next, let’s move forward to a section that, like these albums, is always full of several interesting items: The Legal Review.
I’ve seen headlines saying that 2020 was the year of retirement plan litigation or that when all is said and done, lawsuits may have increased fivefold. To me, it seems like every year is the year of retirement plan litigation, but there were a few cases that I thought were important to note here.
In the first quarter guide, we discussed the Supreme Court’s ruling in the Intel vs. Sulyma case. This case centered around the interesting idea of “actual knowledge.”
The main idea from this case is that if you're going to bring claims for fiduciary breach in the world of ERISA, those claims need to be brought within the statute of limitations. One of the criteria that's used, if you bring suit within three years, is having actual knowledge that a breach occurred.
Intel argued that it provided participant communications, summary plan descriptions and that participants had plenty of information available to them. The plaintiff argued that, well, yes, those things may have been distributed but I don't remember getting them, I don't remember reading them. So how can I have actual knowledge of something that I don't remember getting, I didn't get, or I didn't read?
The Supreme Court ruled in favor of the plaintiff and explained that actual knowledge could be inferred in a number of ways, including electronic records showing a participant viewed the disclosures and evidence that participants took action in response to the information contained in the disclosures.
From a fiduciary perspective, it may not be good enough to simply send out a communication; you may need some type of affirmation that in fact the communication was received, was read, and was hopefully understood.
Cybersecurity is an issue the industry has been discussing a lot of late and this year we saw cases against Estée Lauder and Abbott Laboratories.
In the Estée Lauder case, a participant had $99,000 stolen in three separate transactions from her 401k account. The withdrawals were in different amounts and went to three different bank accounts by someone who posed as the participant.
Along with that, Abbott Laboratories and its recordkeeper were sued by a participant who had $245,000 stolen from her retirement plan account. More specifically, the suit claimed that Abbott and the RK “failed to enforce a security question routine” and instead simply provided a one-time code over the phone that was used to loot the account. Along with that, lawyers for the plaintiff said the transfer was actually “effectuated by two phone calls, with zero security protocols of any type,” and that in the first phone call recording, the fraud artist actually mispronounces the participant’s last name.
The Estée Lauder case was settled, and the Abbott Labs case saw a partial dismissal in favor of the plan sponsor. However, the recordkeeper may still be on the hook for these losses.
What’s important to note about these cases is that cyber-criminals in many instances are simply imposters posing as participants. They are going through many of the available channels such as the “forgot password” button or calling the plan’s customer service line in order to gain access to information.
What’s also important and is really the question that now faces plan sponsors is what responsibilities they have when it comes to keeping participant assets safe from cyberattacks. Is it the plan sponsor’s duty, the recordkeeper’s duty or some combination of the two? From a process standpoint, I think these two cases and others really highlight how plan sponsors must improve their due diligence processes to better screen service providers and evaluate their cybersecurity processes to ensure they are robust and up to date.
Finally, for this year I wanted to talk about two stories from our Global Headlines section. Here of course we’re looking at what’s going on outside of the United States when it comes to how other folks view retirement and the issues that retirement plans are dealing with.
With that said, two of my favorite songs from international acts this year were: “Something I Do” by Sweet Whirl, a singer from Australia, and “I Live at Night” by I Break Horses, from Sweden.
Speaking of Australia, early in 2020 we saw a 24-year-old environmental scientist from Australia sue his A$57 billion ($39 billion) pension fund for not adequately disclosing or assessing the impact of climate change on its investments.
The question that this participant posed to his superannuation pension fund was, how it was ensuring his savings were future proofed against rising world temperatures? Its response – or lack thereof – didn’t satisfy him.
Here we see that, yes, participants – at least in Australia – are concerned with ESG investing and want their plan sponsors to make sure they consider how these factors may affect pension assets in the future.
The second question which is being asked more and more is, “Are pension funds in breach of their fiduciary duties by failing to mitigate the financial ravages of a warmer planet?”
Just this past November, this case was settled ahead of a three-day hearing. While details of the agreement were not revealed in court, the pension fund released a statement pledging for the first time to join the growing group of pension funds vowing to align investment portfolios to a net-zero emissions by 2050 and report against the Task Force on Climate-related Financial Disclosures (TCFD).
Now we haven’t seen a case like this here in the U.S. as of yet, and the DOL released their thoughts on ESG or, more accurately, pecuniary items this year, but this is an idea that I think we will hear more about around the world and eventually here in the U.S.
So there we had a young investor interested in ESG factors but on the other hand we also found a study in the second quarter of 2020 that showed that millennials prioritize performance over ethics. This was a study administered by Calastone in the UK that found that over half of millennials interested in investing prioritize long-term returns and fees when choosing investment funds, while less than a third consider ethical causes such as environmental, social and governance (ESG) which seems to contradict the current sentiment that suggests ESG is of high importance for younger investors.
Along with their thoughts on ESG investing, the study also found that respondents seek transparency in a firm’s investment strategy, with 53% of people aged between 23 and 35 saying they take this into account when deciding how to invest. However, one final thing the study found that may be most important is that for millennials, investing is not as high on their agendas. On average, less than 40% take an active interest in finance compared to 69% for travel, 61% for social media and 58% for video games. Out of 3,000 respondents, almost 50% of millennials said they have a limited understanding of investments – which could be inhibiting their ability to invest. So there we have a few more ideas that may help us better understand this increasingly important group of investors.
With that, let’s close the books on 2020. Those were a few of my favorite defined contribution-related stories from the last year. Of course, these are just a few of my favorites, but there are so many other topics and ideas that we’ve covered this year. My hope is that these ideas help you connect with those that you work with, whether it be plan sponsors, investment committees or participants.
Remember that all of these stories and others are available in our Top DC Trends and Developments guide, so if you’d like to get copies of them, let us know and we can get you the specific edition.
Finally, I’d like to wish everyone a happy new year! 2020 was a time when all of us dealt with so much and I hope all of you have been able to relax and recharge over the holiday season. And remember, if you’re looking for some music, check out my playlist.
This year, we’ll continue to provide these updates, ideas and best practices in our Top DC Trends and Developments Guide and through this podcast, so be sure to subscribe. And if you’d like to discuss these topics or anything else, feel free to reach out … I’d love to hear from you.
So until next time, I’m Ben Rizzuto and you’ve been listening to Plan Talk from Janus Henderson Investors.