FYI: Retirement


Thursday, December 6, 2012
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Doubting Retirement Readiness

Despite efforts to increase employee participation and deferral rates in 401(k) and other defined-contribution plans, a majority of U.S. employers lack confidence in the retirement readiness of their employees, finds a survey from New York-based Towers Watson.

The poll of 371 U.S. employers that offer a 401(k) plan as their primary DC retirement plan found 56 percent of respondents reported employee-participation levels at or above 80 percent in 2012, compared to 50 percent two years ago.

However, only 22 percent of respondents said they believe employees generally make informed decisions about their retirement savings. "While employers continue to offer various communication vehicles and education and advice tools, and have made recent strides by automating retirement-plan-savings features and offering investment choices that help employees diversify their savings, it appears that the intended impacts of these moves have fallen short of their goals," says Robyn Credico, senior retirement consultant with Towers Watson.

Fannie Mae Lawsuit Proceeds

A New York federal judge has ruled that Fannie Mae employees may pursue much of their lawsuit to recover losses on company stock that remained in their retirement plan even as the company headed toward near collapse in 2008.

U.S. District Judge Paul Crotty has allowed claims to go forward against several Fannie Mae directors, including former chief executive Daniel Mudd as well as members of the company's benefits-plan committee. The case was brought on behalf of current and former plan participants between April 17, 2007, and May 14, 2010, during which time Fannie Mae's share price fell from nearly $57 to $1.

According to Crotty, the Fannie Mae employees made a plausible case that officials knew or should have realized the mortgage financier faced "dire circumstances" that would make investing in its stock -- and contributing stock rather than cash to the plan -- unwise.

Crotty also dismissed all claims against defendants who joined Fannie Mae's board after the company, along with the smaller Freddie Mac, was seized and put into a conservatorship in September 2008.

Increasing Retirement Security

Setting a higher starting point for 401(k) contributions would make a significant difference in improving workers' likelihood of a financially viable retirement, according to research from Washington-based Employee Benefit Research Institute.

EBRI evaluated the impact of raising the default contribution rate on younger workers -- with 31 to 40 years of simulated 401(k) eligibility -- to see how many would be likely to achieve a total income real replacement rate of 80 percent at retirement.

Nearly 26 percent of those in the lowest-income quartile who had not previously been modeled to have a financially successful retirement would be successful as a result of the increase in the starting deferral rate to 6 percent of compensation. EBRI found that employees in the highest-income quartile would benefit as well, although not as much. Just over 18 percent of those folks who would not be successful under the actual default contribution rate would be successful due to the higher 6 percent default rate.

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Plan Sponsors Question PBGC

The Washington-based American Benefits Council has voiced "serious concerns" about the Pension Benefit Guaranty Corp.'s attempt to modernize its enforcement policy for companies with pension plans that cease operations.

Under ERISA Section 4062(e), if an employer with a pension plan shuts down operations at a facility and more than 20 percent of the company's employees who are plan participants are separated from employment, the employer is required to provide the PBGC with short-term security in the form of a bond or escrow amount based on the plan's unfunded termination liability.

The PBGC's new enforcement policy "aims to target enforcement requirements to plans that are at the most risk and reduce requirements elsewhere by using measures of financial soundness such as credit rating," according to an ABC statement.

"The final result will be a system that punishes the weakest companies, which will only reduce their ability to sustain the pension plan and recover their core business," says Lynn Dudley, American Benefit Council senior vice president of policy.

"Since PBGC has committed to an open dialogue on this issue," says Dudley, "we will continue urging them to withdraw this policy and the proposed regulations on which [it is] based, so we can start over with an enforcement system that works for plan sponsors, participants and the PBGC."

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