Congress: Don’t Turn Your Back on Workers Struggling to Save for Retirement

By Yuqi Wang, Policy Analyst, Economic Policy Project, NCLR

Social Security is widely recognized as playing an important role in workers’ retirement security. In 2015 alone, Social Security benefits kept 22 million retirees out of poverty, and more than 60% of elderly beneficiaries relied on Social Security for most of their retirement cash income.

To celebrate National Social Security Month this April, the Social Security Administration created an online guide that workers can use to learn more about the program and its benefits.

Continue reading

How States Are Planning to Fix the Country’s Retirement Crisis

By Yuqi Wang, Economic Policy Analyst, NCLR

Photo: www.aag.com, http://ow.ly/IYcvj

A secure retirement is a right of all workers, yet 45 percent of working-age households in the U.S. do not have either an employer-sponsored retirement plan, such as a 401(k), or an Individual Retirement Account (IRA). For Latinos, the data paints a starker picture: 60 percent of Latino workers do not have access to an employer-sponsored retirement plan, which is among the most effective ways for people to save for retirement.

Having states provide auto-enroll IRAs to private sector workers who don’t have access to such benefits through their workplaces and who tend to be lower-income is one effective solution. State-based retirement plans benefit employees of small businesses where 50 percent of employers don’t offer retirement plans. It also allows employers to provide IRAs to employees without requiring the employer to sponsor or contribute to the IRAs. Workers who participate are automatically opted in to a retirement savings account that takes out a predetermined amount from monthly paychecks and saves it in the IRA. Workers also have the option to opt-out at any time. Several states already passed legislation enacting these plans (e.g. California, Connecticut, Illinois, Maryland, and Oregon), with 27 more states considering this or other program variants.

Continue reading

Ensuring that Retirement Advice Is Sound

Photo: www.aag.com, http://ow.ly/IYcvj

Photo: www.aag.com, http://ow.ly/IYcvj

Things have changed since 1975, the last time rules for retirement investment advisors were updated. Since then, the retirement savings market has seen a shift from employer-managed pension plans to self-directed plans like Individual Retirement Accounts (IRAs) and the 401(k). Now more than ever, savers rely on the advice of financial professionals to help them make decisions that will affect their financial security in retirement. While most financial advisors are knowledgeable and ethical, the outdated rules create avenues for deceptive or abusive financial management practices.

To protect workers from unscrupulous investment advice, the Employee Retirement Income Security Act (ERISA) was enacted in 1974 to apply a fiduciary standard to those advising on the management of retirement savings. The requirement demands that advice be in the best interest of the advisee and that advice doesn’t constitute a conflict of interest for the advisor. Last week, the Department of Labor proposed a rule to update the fiduciary requirement to align ERISA protections with the contemporary retirement savings environment. The rule would require that the advice from advisers on 401(k)s and IRAs must be the best possible for the advisee.

Latinos have much at stake in this debate as nearly 2.3 million Latino households use either a financial planner or broker, according to the Federal Reserve Survey of Consumer Finances. Additionally, Latinos face larger barriers to save for retirement and have fewer retirement savings options. Two-thirds of Latinos work for employers, often small businesses, which do not offer private retirement plans; as a result, their reliance on professional financial advice increases.

Photo: http://401kcalculator.org, Creative Commons

Photo: http://401kcalculator.org, Creative Commons

Currently, a gap in the law permits brokers who provide this advice to evade this fiduciary standard to the detriment of hardworking Americans. For example, advisors might recommend retirees or those transitioning between jobs to roll over their 401(k) funds into an IRA, which could subject enrollees to higher fees and weaker consumer protections. Further, advisors could steer IRA investors toward high-cost financial products if better, less costly choices were available. These costly and potentially risky investments cost American workers billions of dollars each year. A report from the Council of Economic Advisers emphasized the cost of unsound retirement savings advice, finding:

  • Conflicted advice leads to lower investment returns. Savers receiving conflicted advice earn returns roughly one percent lower each year (for example, conflicted advice reduces what would be a six percent return to a five percent return).
  • An estimated $1.7 trillion of IRA assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.
  • A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible, absent conflicted advice, his or her savings would run out more than five years earlier.
  • The average IRA rollover for people ages 55–64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 were lost in the transfer.

The report estimates that total losses amount to be between $8 billion and $33 billion a year. NCLR stands with a broad coalition of consumer groups, worker’s rights organizations, and civil rights advocates to support the Department of Labor and the proposed rule protecting all Americans from harmful retirement savings advice.