The U.S. is in a “new era” of retirement income strategies, in part because of an avalanche of temporary and permanent policy and regulatory changes, said Jamie Hopkins, managing director of Carson Coaching and director of retirement research for the Carson Group.
In additon, he noted, it's a new era because the country hasn’t experienced interest rates that have been this low for so long.
“It’s making it difficult to find income, payout and return,” said Hopkins, adding that he's concerned that it's forcing people who are near retirement to be overweight in equities.
"They’re not being drawn to the fixed-income markets because they don’t feel like the payout return is high enough, so they’re chasing return in dividend paying stocks and the equity market,” he said.
And on top of that, he remarked, Americans are not exactly flocking to annuities or insurance, either.
There’s no telling what shape the economic recovery is going to take, Hopkins said, nor whether financial markets will continue their recovery. If anything, the data on investment behavior over the past several months paints a muddied picture.
“From the anecdotal side of things, we ran into people doing everything,” he said, noting that some people were buying during the March sell-off in equities while others were selling. "And it’s mixed on what people near retirement did. If you find you’re making big changes, it means you weren’t properly allocated going into that time period.”
Unintended Consequences
Hopkins is concerned that rule changes around early retirement account withdrawals and retirement plan loans will damage Americans’ retirement readiness.
The CARES Act allows for a $100,000 coronavirus-related distribution if someone has experienced illness, a loss of employment or other disruptions caused by the pandemic. Additionally, it allows for an expanded $100,000 loan from 401(k) accounts for people facing similar circumstances.
“The leakage issue is always a concern,” said Hopkins. “Any time we create more access to retirement accounts it becomes a larger concern because that money is being used for things other than retirement. We may see a lot of people using retirement funds for day-to-day expenses today just to get by, and in the future we’re not going to have as much saved for retirement.”
The CARES Act also allows taxes on coronavirus-related distributions to be paid over a three-year period, and extends the time in which people taking distributions can return those assets to their accounts.
Hopkins posits that the coronavirus relief packages did their job in putting more disposable income into consumers’ hands and stabilizing financial markets—at least temporarily. But at some point, the vast quantities of spending by Congress and the Federal Reserve are going to weigh on the national debt and annual payments to service that debt.
The Oncoming Retirement Wave
Based on what he saw from the global financial crisis of 2008-09, Hopkins expects a wave of early retirements due to job losses during the pandemic and corresponding recession.
“The expectation at this point is that a lot of people will not go back into the workforce,” he said.
Early retirement means that more people will have to claim Social Security sooner than they initially planned, and that more will have to find gap health insurance to cover them until they reach 65, the Medicare eligibility age.
For that reason, early retirement has a 30-year impact on a person’s life, at minimum, said Hopkins. While advisors are accustomed to crafting 30-year plans, most people think in terms of days, weeks and months.
A sudden decline in the workforce and payroll tax receipts also directly imperils programs like Social Security and Medicare, perhaps radically changing the retirement income equation for millions of Americans, said Hopkins.
“We’ll likely see the Social Security Trust Fund deplete a year or two faster than it would have otherwise,” he said. “I would expect by the time we see next year’s report, instead of being depleted in 2033 or 2034, it will have moved up to 2032 or 2033.”
A Less SECURE Retirement
Hopkins spoke favorably of another recent reform to Americans’ retirement accounts, The SECURE Act, which passed in late 2019. That law struck down the “stretch IRA” strategy allowing beneficiaries of inherited traditional IRAs to stretch required distributions across their lifespans. Under the new rules, inherited IRAs of any kind must be spent down within 10 years.
“To me, that’s the correct public policy move because when people inherit those they’re not retirement accounts anymore,” he said, adding that the 10-year rule is “generous” to IRA beneficiaries. He argues that Congress could have made the spend-down period much shorter, and could have included additional changes—such as required minimum distributions for Roth IRAs—to erode retirement tax shelters.
One concern, however, is that in a period of fast-moving news and changes, advisors aren’t focucsing as much as they probably should on the SECURE Act, said Hopkins. “It’s Covid, CARES Act, short-term planning and getting the clients’ businesses through the next week right now. A lot of stuff on the estate planning side is getting lost this year.
The SECURE Act was a huge change and it’s not top of mind anymore—it feels like it was a decade ago now.”
Hopkins was less favorable toward rules that clear the way for annuities in workplace retirement plans.
“I’m a fan of annuities as components in retirement income plans, and people may accuse me of talking out of two sides of my mouth, but I think they’re both oversold and underutilized,” he said. “Typically, consumers, plan sponsors and advisors lack the proper education to use annuities appropriately.”
The New Fiduciary Rule
The new U.S. Department of Labor fiduciary rule has been revised to come into accord with the SEC’s Regulation Best Interest, a regulation that falls well short of the DOL’s first attempt at fiduciary rulemaking.
That original rule gave clients the right to use lawsuits to redress the damages caused by a breach of fiduciary duty, but it was struck down by a federal court in 2018.
While the SEC’s rulemaking is intended to require advisors to act as fiduciaries, it does not contain a right of action on behalf of the clients. And neither does the DOL’s most recent proposal. In essence, the requirements do little more than provide disclosure of real and potential conflicts of interest to clients and prospective clients, Hopkins said.
“The DOL is proposing a loosening of their standard to allow more insurance agents to tell people they’re fiduciaries, but then they will not have to meet all of the conflict-of-interest rules that we previously had,” he said. “When you put it together with the annuity rules, it becomes concerning because you can now get these products into a plan without meeting the fiduciary standard at all.”
The risk for retirement savers is worsening because most workplace plan participants are not receiving quality investment and planning advice, Hopkins offered.
Last month, Carson Group decided to require advisors to have the Certified Financial Planner designation or an equivalent certification, framing the move as a response to the revised Department of Labor fiduciary proposal.
Hopkins also said that advisors need to explain the fiduciary standard in plain language and clearly demonstrate the value of working with professionals under this standard.
Regardless of who wins November's presidential election and what the composition of the new Congress looks like, Hopkins believes that another round of tax reform is coming. Some of it will raise additional taxes to help cover rising deficits; other parts will extend several of the more stimulative provisions in the Tax Cuts and Jobs Act.