dsmWealth: April 4, 2024

Nonprofit Job Rides helps workers get to work
BY STEVE DINNEN

Here’s how a for-profit, nonprofit relationship typically works: The for-profit company makes money and then donates some of its earnings to a nonprofit it wishes to support. The for-profit gets a tax break, while the nonprofit gets financial support.

And here’s the way that relationship got upended in the world of Bill Raine: His for-profit business set up a side business that eventually spun off as its own nonprofit entity. Then he sold his for-profit business so he could devote his time, his talents and a considerable amount of his resources to operating the nonprofit, which serves the for-profit’s efforts to help hundreds of men and women get to work and get back on their feet financially.

Raine’s nonprofit venture is Job Rides. It provides transportation to and from factories and offices all over Greater Des Moines, at all hours, for people who don’t have a car or access to one. They’re often living in a shelter, rehabbing from drug or alcohol abuse, or in some sort of work release program. (The Iowa Correctional Center at Fort Des Moines is a popular pickup spot.) In most cases, the place where they live or the place where they work aren’t located on bus lines, or the hours of their shifts don’t match DART’s schedules.

“We’re 24-7,” said Raine — nights, weekends, rain or shine.

Job Rides builds on his efforts to help the employers his original for-profit recruiting firm worked with. Raine Recruiting found workers for factories but often discovered that their tenure was cut short because they lacked access to reliable transportation.

So Raine Recruiting got a van and started hauling workers around. Then it got another, and another, and the business grew enough that Raine carved it out of the employment agency and set up a nonprofit. And now that nonprofit has taken control of Raine’s life: He’s just closed on the sale of Raine Recruiting, so he can devote all his energies to Job Rides, its seven vans and its hundreds of daily commuters. Raine estimates that Job Rides customers are averaging $16 an hour in pay.

One of those customers, David Johnston, was way down on his luck and living in a men’s shelter when he got a job offer at a local manufacturing plant. He had no way to get to and from their plant, however — until Job Rides came along.

“This van was the biggest thing,” he said the other day, as he hopped out of a van that brought him home from a long day at work.

Immigrants have tapped into Job Rides, too. Raine recalled that in late 2022 an immigration service sent him 65 Afghans. Most had worked on HVAC systems (heating, ventilating and air conditioning) at a U.S. Army base in Afghanistan, so they had plenty of desirable skills. Job Rides delivered every one of them to their workplaces every day, and within months, they all had earned enough money to buy their own cars and say farewell to the nonprofit.

Raine had good success finding workers, and factories were eager to hire his recruits. Nearly all of the Job Rides passengers are heading to “second-chance employers,” including businesses that hire people with criminal records.

Job Rides pays its drivers but otherwise relies on volunteers. That includes Raine, who has plowed his own money into the enterprise and works countless hours on his new life mission. He estimates the nonprofit’s 2024 budget is around $500,000, including a big chunk of change for fuel. Most of the operating expenses are covered by riders, who each pay $50 a week for door-to-door service.

Raine is pondering a stronger financial strategy, maybe something that will actually earn him a small amount of money versus the zero dollars he currently receives.

He’s always thinking about how the model could work in other Iowa cities, as well. There are second-chance employers across the state, so he just hopes to match them up with second-chance workers.

The new magic number for retirement is $1.46 million.
Here's what it tells us.
BY ANNE TERGESEN FOR THE WALL STREET JOURNAL

The stock market gave 401(k)s a 19% boost last year. Inflation cooled. Still, lots of people feel no closer to hitting their magic number for retirement.

It would take $1.46 million to retire comfortably, according to a recent survey of 4,588 adults released Tuesday by financial services company Northwestern Mutual. That is up from $1.27 million a year ago. And over $1 million more than the average survey participant’s nest egg.

The rising magic number reveals more about retirement anxiety than retirement planning, said Teresa Ghilarducci, an economist at the New School for Social Research in New York City.

People don’t really know how much money they will need in retirement, and often overestimate it, Ghilarducci said.

While $1.46 million might make sense as a savings target for some higher-income households, most families with lower incomes likely need far less, she said.

“Anxiety about retirement is sky-high,” she said, noting that concerns about the costs of health care and long-term care add to the worry.

Some of this nest-egg disconnect stems from the shift from pensions to 401(k)-type plans, which require savers to make investment and planning decisions on their own.

Retirees with little financial background have to figure out how to make their nest eggs last for as long as several decades, a task BlackRock Chief Executive Larry Fink called “an impossible math problem” in an annual letter to shareholders last week that raised alarms about a retirement crisis.

It is hard for workers to imagine what their 401(k) balance ultimately buys in retirement. The Wall Street Journal profiled retirees with $1 million, $2 million and $5 million to show the range of lifestyles and challenges people face. About 2% of Fidelity Investments' 401(k) participants have a balance of $1 million or more.

Understanding how far retirement savings will go is further complicated by the uncertain future of Social Security.

Younger workers, in particular, worry about what looming shortfalls will mean for benefits, said Kurt Rupprecht, partner and private-wealth adviser at K Street Financial, a Northwestern Mutual Private Client Group.

The retirement program is projected to deplete its reserves in a decade, triggering a 23% reduction in benefits unless Congress acts.

Millennials, those born between the early 1980s and late 1990s, sharply raised their estimates compared with before the pandemic. When they retire, millennials now expect to need $1.65 million. That is up from just under $1 million in 2020. Baby boomers, born between 1946 and 1964, said they would need $990,000, up from $830,000 in 2020, according to the poll, the latest installment of which was conducted in January.

People who have at least $1 million to invest think they will need about $4 million to retire comfortably, up from $2.1 million in 2020.

Retirement math

There is no single magic number or formula for knowing when it is financially safe to retire. The actual size of the nest egg you need depends on factors including your income, marital status, expected longevity, where you plan to live in retirement, and whether you want to leave money to heirs, Rupprecht said.

There are rules of thumb to measure your retirement readiness. One shortcut devised by Fidelity Investments, calls for saving 10 times your annual salary by age 67.

Using that guideline, a household with around the median income of $75,000 would need to have $750,000 saved by age 67. A family earning at least $153,001, the threshold for the top 20% of earners, according to the 2022 U.S. Census, should save $1.53 million or more.

To hit those targets, Fidelity recommends saving about 15% a year starting at age 25, including any contribution your employer makes to a 401(k)-type account.

This approach is designed to replace 45% of your income—or $45,000 annually for someone with a $100,000 salary—with Social Security providing the rest.

According to the Federal Reserve, the average American has saved $333,940 in 2022, up from $282,100 in 2016. Households ages 65 to 74 have average retirement savings of about $609,000 in 2022, according to the Fed.

Those polled by Northwestern say they have saved an average of $88,400.

Is it enough?

People often end up retiring earlier than expected, due to job changes or health issues. Others find they already have enough saved.

About 35% of retirees the nonprofit Employee Benefit Research Institute surveyed in 2023 said they retired sooner than planned because they felt they could afford to, down from 41% in 2021.

Younger workers are getting a head start on saving for retirement, compared with older generations. Those in Gen Z, born around 1997 or later, report starting at age 22, compared with 27 for millennials. Baby boomers, who began their careers before employers widely offered automatic enrollment into 401(k) plans, started at an average age of 37, the survey said.

The early start is putting younger workers on track to surpass their elders in retirement savings, according to data from Vanguard Group.

By the time older millennials, around 37 to 41, now earning a median salary reach retirement, Vanguard estimates they will be able to replace almost 60% of their income with Social Security and savings from sources including their 401(k)s and individual retirement accounts.

Gen Xers and the youngest baby boomers with median earnings are, by contrast, likely to replace about half of their paychecks in retirement.

How a new rule could change the way advisers handle your retirement money
BY TARA SIEGEL BERNARD FOR THE NEW YORK TIMES

It seems like an issue everyone can agree on: Financial professionals should be required to handle our retirement money with the utmost care, putting investors’ interests first.

But that type of care comes in degrees, and deciding exactly how far advisers should go has been the center of heated debate for nearly 15 years, pitting financial industry stakeholders, who argue their existing regulatory framework is enough, against the U.S. Labor Department, the retirement plan regulator, which says there are gaping holes.

The issue has re-emerged as the department prepares to release a final rule that would require more financial professionals to act as fiduciaries — that is, they’d be held to the highest standard, across the investment landscape, when providing advice on retirement money held or destined for tax-advantaged accounts, like individual retirement accounts.

Most retirement plan administrators who oversee the trillions of dollars held in 401(k) plans are already held to this standard, part of a 1974 law known as ERISA, which was established to oversee private pension plans before 401(k)s existed. But it doesn’t generally apply, for example, when workers roll over their pile of money into an IRA when they leave a job or retire from the workforce. Nearly 5.7 million people rolled $620 billion into IRAs in 2020, according to the latest Internal Revenue Service data.

The Biden administration’s final regulation, which will be released this spring, is expected to change that and patch other gaps: Investment professionals selling retirement plans and recommending investment menus to businesses would also be held to its fiduciary standard, as would professionals selling annuities inside retirement accounts.

“It shouldn’t matter whether you’re getting advice on an annuity, any kind of annuity, a security — if it’s advice about your retirement, that should have a high standard that applies across the board,” said Ali Khawar, the Labor Department’s principal deputy assistant secretary of the Employee Benefits Security Administration.

The evolution of brokers’ and advisers’ duties to American investors stretches back decades. But the journey to extend more stringent protections over investors’ retirement money began during the Obama administration, which issued a rule in 2016 that was halted shortly after President Donald J. Trump took office and was never fully enacted: It was struck down in 2018 by an appeals court in the Fifth Circuit.

That rule went further than the current one — it required financial firms to enter contracts with customers, which allowed them to sue, something the court argued went too far.

The Biden administration’s plan — and the final rule could differ from the initial October proposal — would require more financial professionals to act as gold-standard fiduciaries when they’re making an investment recommendation or providing advice for compensation, at least when holding themselves out as trusted professionals.

The standard also kicks into play when advisers call themselves fiduciaries, or if they control or manage someone else’s money.

As it stands, it is much easier to avoid fiduciary status under the ERISA retirement law. Investment professionals must meet a five-part test before they are held to that standard, and one component states that professionals must provide advice on a regular basis. This means that if an investment professional makes a one-time recommendation, that person is off the hook — even if the advice was to roll over someone’s lifetime savings.

Though investor protections have improved in recent years, there isn’t a universal standard for all advisers, investment products and accounts.

The varying “best interest” standards can be dizzying: Registered investment advisers are fiduciaries under the 1940 law that regulates them, but even their duty isn’t viewed as quite as stringent as an ERISA fiduciary. Professionals at brokerage firms may be registered investment advisers, to whom the 1940 fiduciary standard applies — or registered representatives, to whom it does not. In that case, they’re generally held to the Securities and Exchange Commission’s best interest standard. Confused?

There’s more. Annuity sellers are largely regulated by the state insurance commissioners, but legal experts say their best interest code of conduct, adopted in 45 states, is a weaker version than the one for investment brokers. Variable annuity and other products, however, fall within the domains of both the SEC and the states.

Stakeholders in the financial services and annuities industries say the current standards that apply are enough. This includes Regulation Best Interest, enacted by the SEC in 2019, which requires brokers to act in their customers’ best interests when making securities recommendations to retail customers. They argue that the more stringent ERISA standard would cause customers to lose access to advice (though comprehensive lower-cost advice from fiduciaries has become more accessible in recent years).

The SEC’s adoption of Regulation Best Interest “requires all financial professionals subject to the SEC’s jurisdiction to put their clients’ interest first — to not make recommendations that line their own pockets at the expense of their client,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute, an industry group, during a House hearing about the rule in January.

But there is enough of a difference between the different best interest standards and ERISA fiduciary status that firms take pains to make disclosures on their websites that they aren’t that kind of fiduciary.
On its website, Janney Montgomery Scott, a financial services firm in Philadelphia, said fiduciary status was “highly technical” when it came to retirement and other qualified accounts and depended on the services chosen. “Unless we agree in writing, we do not act as a ‘fiduciary’ under the retirement laws,” the firm said, referring to ERISA, “including when we have a ‘best interest’ or ‘fiduciary’ obligation under other federal or state laws.”

“It would be unreasonable to expect ordinary retirement investors to understand the implications of these disclosures,” said Micah Hauptman, director of the Consumer Federation of America, a nonprofit consumer association.

Under the latest proposal, fiduciaries must avoid conflicts of interest. That means they can’t provide advice that affects their compensation, unless they meet certain conditions to ensure investors are protected — that includes putting policies in place to mitigate those conflicts. Disclosing conflicts alone isn’t enough, department officials said.

“Our statute is very anti-conflict in its DNA,” Khawar of the Labor Department said. “There are ways that we’re going to expect you to behave to ensure that the conflict doesn’t drive the decision that you make.”

Kamila Elliott, the founder and chief executive of Collective Wealth Partners, a financial planning firm in Atlanta whose clients include middle-income to high-earning Black households, testified at a congressional hearing in favor of the so-called retirement security rule. Elliott, who is also a certified financial planner, said she had seen the effects of inappropriate advice through her clients, who came to her after working with annuity and insurance brokers.

One client was sold a fixed annuity in a one-time transaction when she was 48. She invested most of her retirement money into the product, which had an interest rate of less than 2.5% and a surrender period of seven years. If she wanted to allocate any of that money in the market, which Elliott felt was more appropriate for her age and circumstances, she would owe a penalty of more than 60% of her retirement assets.

“A one-time and irrevocable decision as to whether and how to roll over employer-sponsored retirement assets may be the single most important decision a retirement investor will ever make,” she said before a House committee in January.

Another client who had just $10,000 in an individual retirement account was sold a whole life insurance policy with an annual premium of $20,000 — something most average investors cannot keep up with, causing them to lose the policies before they can benefit from them.

“For many investors, it would not be wise to put your entire retirement portfolio in an insurance product,” she said.

Jason C. Roberts, chief executive of the Pension Resource Institute, a consulting firm for banks, brokerage and advisory firms, said he expected that financial services providers would need to change certain policies to adhere to the new rule, such as making the compensation more level across products, so advisers would not be paid more for making certain recommendations, and curb certain sales incentives and contests.

“It’s really going to hit the broker-dealers,” he said, adding that parts of the annuity industry may be more affected.

Labor Department officials said they took industry stakeholder and others comments into consideration when drafting the final rule, though they declined to provide details.

After the White House’s Office of Management and Budget completes its review of the final rule, it could be published as soon as next month.

Given the rule’s history, that may not be the end of the road. Legal challenges are expected, but fiduciary experts say regulators devised the rule with that in mind.

Arthur B. Laby, vice dean and professor at Rutgers Law School, said the court that voided the Obama-era rule did not recognize the societal changes that had affected the market for retirement advice.

In her opinion on behalf of the majority, the judge argued that when Congress enacted ERISA — in 1974 — it was well aware of the differences between investment advisers, who are fiduciaries, and stockbrokers and insurance agents, who “generally assumed no such status in selling products to clients.” That’s why, in part, the court argued fiduciary status shouldn’t apply to brokers now.

But times have changed. “Today,” Laby said, “many brokers function as advisers through and through.”

The latest proposal acknowledges that: If a professional making a recommendation can be viewed as someone with whom an investor has a relationship of trust and confidence — whether a broker or an insurance agent — that person would be considered a fiduciary.

“A relationship of trust, vulnerability and reliance,” Laby said, “calls for the protections afforded by a fiduciary duty.”