We don’t have a crystal ball, but for those who are retired and those folks saving for retirement, here are a few of the risks and opportunities looming in 2015.
“My perspective is that there are several major issues facing the retirement system, but progress in addressing them has been very slow,” said Anna Rappaport, the chair of the Society of Actuaries (SOA) Committee on Post Retirement Needs and Risks. “We need to do more and stalled efforts need to move ahead.”
So, what more needs to be done, what needs to move ahead? Here’s what Rappaport and other experts said should/could happen in the coming year.
New laws and regulations
Experts seem to agree that those saving for and living in retirement can expect new laws, regulations, rules, and the like. “In 2015, Americans can expect to see continued regulatory activity related to retirement savings and possibly tax reform initiatives that may impact retirement savings,” said Kevin Crain, managing director and senior relationship executive for Bank of America Merrill Lynch.
The global chief investment officer at Guggenheim says global economic pressures, from European disinflation to a strengthening dollar, could keep a lid on inflation, and rates.
This may include, he said, continued regulatory oversight of plan disclosures, open brokerage windows and participant statements. “Congressional policy discussions over retirement savings incentives related to tax reform may also include: whether to place an overall individual limit on aggregated retirement savings, contribution cost-of-living adjustment freezes, and proposals that would split 401(k) deferral limits between Roth after-tax contributions and traditional pretax deferrals,” said Crain.
With the change to a Republican majority in the Senate, Crain said, new committee leadership such as Sen. Orrin Hatch (R-Utah) on Senate Finance may bring renewed support to retirement savings. “Sen. Hatch has been very supportive of expanding coverage for workers without access to workplace retirement savings plans, managing risk in public pension plans and encouraging expanded retirement savings through his proposed Secure Annuities for Employee Retirement (SAFE) Act,” said Crain.
The SAFE Act includes, by the way, language that would stop the Department of Labor from writing fiduciary rules for individual retirement accounts.
Of note, the Labor Department has been working on its re-proposal of a new definition of “fiduciary” since 2011, according to a PlanSponsor report. Now calling it the “conflict-of-interest rule,” the agency still has the re-proposal slated for January 2015 on its most recent regulatory agenda.
Sen. Hatch has also said that he’ll fight efforts to take away tax incentives designed to encourage retirement savings as well as reintroduce a bill to establish a state- and local-government retirement plan, according to published reports.
Also noteworthy, many states are now proposing laws to offer retirement plans to private-sector workers. In December, for instance, Illinois lawmakers approved the Illinois Secure Choice Savings Program bill), which gives Illinois workers the tools to save their own money for retirement through automatic payroll deductions.
If you plan to take a hardship distribution from your retirement account in 2015, plan on it being more of a hassle than in years past. Yes, Uncle Sam plans to require “more substantiation” for hardship distributions from retirement plans,” according to published reports. Apparently, participants are taking distributions that don’t qualify under the hardship rules.
In 2014, Treasury issued regulations making it possible to provide disability coverage (similar to waiver of premium coverage) with a defined contribution plan, said Rappaport. “My view is that this was a very important development because the gaps in disability coverage are serious,” she said. “However, there has not been much response to date.”
And one of the biggest issues facing the retirement system is how to respond to the combination of increasing longevity and the aging of the boomers leading to overall population aging, said Rappaport. “I believe that there are many people in the research and actuarial communities who feel strongly that retirement ages need to rise, but there is little focus on this in Washington,” she said.
Rappaport also expects government and public pensions to continue to develop new ways to manage pension plan risk. The shared-risk program is New Brunswick, Canada — which is part defined-benefit and part defined-contribution — is particularly interesting, said Rappaport.
Guidance on how to use annuities in 401(k) plans
In 2014, the government gave the go ahead for qualified longevity annuity contracts (QLACs) and deferred income annuities (DIAs) to be used in retirement plans. But no job is finished until the paperwork is done, said David Blanchett, head of retirement research at Morningstar Investment Management.
“I’d like to see additional guidance from the Treasury on using annuities in defined contributions plan,” Blanchett said. “They provided guidance on using deferred annuities a few months ago, but the guidance specifically excluded other types of annuities, such as variable annuities with a guaranteed lifetime withdrawal benefits that are far more popular today.”
New retirement products
Those saving for or living in retirement can also expect to see more even innovative retirement products in 2015. “I think many investors and advisers are looking for more packaged solutions to help tackle retirement,” said Blanchett.
Others agree. “Without question, as Americans continue to become more aware of their retirement income needs, the industry will continue to innovate and develop new products to match the increasing demand for insured retirement strategies,” said Cathy Weatherford, president and CEO of the Insured Retirement Institute, a lobbying group for variable and other types of annuities.
What else to expect? A summary prospectus for variable annuities will be a real win for consumers; it will help them “more deeply understand their investments,” said Weatherford.
Laura Varas, a researcher with Hearts & Wallets, expects the industry to focus on building better IRA accounts, which in 2013 accounted for nearly half (46.8%) of the $6.5 trillion in retirement savings in U.S. households.
“IRAs are highly mobile,” said Varas. “This isn’t your father’s rollover. Consumers are moving them around to access different services and products. It’s a positive for retail investors and will be a big development in the years to come for both consumers and the industry.”
New focus on education
Preretirees and retirees will also continue to struggle with many of the complicated questions that come with retirement planning, said Varas. Indeed, there are major gaps in the way people address and manage retirement risks, said Rappaport. “This is a bigger issue for people with defined contribution plans or no retirement savings than for those with defined benefit plans, but it is an issue in any case,” Rappaport said.
The good news is that resources to questions about Social Security, long-term care insurance and required minimum distributions from IRAs will become readily available in 2015. Visit this website to read the SOA’s 2013 Post Retirement Risk Survey reports.
More employers are offering financial wellness programs to their workers, as well. And some firms are adding incentives to workers to save or to save even more. In 2014, for instance, Buck Consultants at Xerox launched “SavIncent,” a new financial wellness program that improves employees’ financial health and retirement readiness.
Others see that trend continuing. “We also expect to see employers increasingly adopt a more holistic approach to employee benefits by pairing retirement and health savings, specifically 401(k)s and HSAs,” said Crain.
Goodbye, traditional retirement
One trend — Americans forgoing traditional retirement – will continue in 2015, according to Varas. “As Americans live longer, who wants to have 30 years of sitting in the rocker on the porch, even if one could,” she said. “Our greater longevity, while wonderful, is creating problems for Americans.”
And now the big question for those saving for retirement is identifying the year when they will stop working. In 2014, for instance, 61% of Americans said this was a difficulty, according to the annual Hearts & Wallets Investor Quant IQ database survey. “That difficulty translates into the types of products they select — or opt not to purchase,” said Varas.
For her part, Rappaport said more could be done to make it easier for older Americans to keep working. The Federal Phased Retirement Program is a step in the right direction, Rappaport said. But more is needed.
Higher interest rates, lower bond returns
Blanchett also noted that if interest rates do increase in 2015, it could have a negative impact on bond returns. And that, he said, is “something that may persist for years to come depending on how rates eventually go.”