Saturday, July 02, 2016

4 Things Plan Fiduciaries Have in Common With the 2nd Continental Congress

Anyone who has ever found their grand idea shackled to the deliberations of a committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we’ll commemorate on the Fourth.

That said, I think there are things that today’s investment/plan committee share with, and can learn from, the experience of those forefathers who crafted and signed the document declaring our nation’s independence.

It’s hard to break with the status quo.

By the time the Second Continental Congress convened, the “shot heard round the world” had already been fired at Lexington, but many of the representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and put George Washington at its helm. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to break things off, and take on the world’s most accomplished military force.

However, even those who were ready to declare independence weren’t of a single mind on how it should be done, or how those intentions expressed. Committee work is the art of compromise – and had those varying voices not been accommodated, the status quo would likely have prevailed.

As human beings we are largely predisposed to leaving things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, in the absence of a compelling reason for change, inclined to rationalize staying put.

As a consequence, you see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and an overall inertia when it comes to adopting potentially disruptive plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries don’t have that option. Their decisions are bound to an obligation that those decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.

Selection of committee members is crucial.

The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with everything from extralegal conventions, ad hoc committees, and elected assemblies relied upon to name the delegates. Delegates who, despite the variety of assemblages that chose them, were in several key circumstances, bound in their voting by the instructions given to them. Needless to say, that made reaching consensus on the issues even more complicated than it might have been in “ordinary” circumstances.

Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals – and if those individuals lack the requisite knowledge on a particular issue, they need to access that expertise from individuals who do.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, with the possible exception of the Gettysburg Address (which was heavily inspired by the former), its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned, and perhaps unprecedented. Putting that declaration – and the sentiments expressed – in writing gave it a force and influence far beyond its original purpose.

As for plan fiduciaries, there is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process – but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members – both past and future – with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were.

They also can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted – properly documented, of course.

Committee members should understand their obligations – and the risks.

The men that gathered in Philadelphia that summer of 1776 to bring together a new nation came from all walks of life, but it seems fair to say that most had something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants.

It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. And all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.

Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

- Nevin E. Adams, JD

Saturday, June 25, 2016

Your Plan Might Be an Excessive Fee Litigation Target If…

Last week another of the so-called excessive fee lawsuits was settled – not adjudicated, mind you. Here are some factors that the targets of these lawsuits seem to have in common.

Now, in fairness, most of these cases haven’t actually gone to court – and, by my count, most of the ones that actually get to court are won by the employers/plan sponsors. Even the Tibble case, which drew so much attention when it made it to the Supreme Court, eventually came out in favor of the plan sponsors (though they “lost” the Supreme Court decision).

However, a lot of litigation has been filed over the past decade, and millions of dollars spent — reminding me of an old mentor’s admonition that you can spend a lot of money in court being “right.” That so many employers have decided that it is “cheaper” to settle for millions of dollars gives you some idea of the magnitude of these challenges.

So, with that in mind – and with apologies to Jeff (“you might be a redneck…”) Foxworthy: Your plan might be an excessive fee litigation target if…

It’s a multi-billion dollar plan.

Nearly all of the excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason: that’s where the money is. And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found.

Harder to figure out is why plans of that size, and the expertise/resources that such employers can ostensibly bring to plan administration, have been so vulnerable.

Your multi-billion dollar plan has retail class mutual funds.

Granted, even at the largest employers, individuals frequently find themselves assigned the responsibility for being a plan fiduciary with little or no training or background. Still, in this day and age, it’s remarkable that so many of these targets were either so ignorant of the concept of share classes or so poor at negotiating with their providers that they included options in their multi-billion dollar plan menus funds that were, in some cases, no more competitive in price than what the individual plan participants could have acquired in their IRA.

You have proprietary funds on your menu.

As a financial services provider, there are any number of valid business reasons to include your own funds on the menu you offer to your workers. It’s a testament to your willingness to “eat your own cooking,” a statement of confidence in the skill and acumen of your investment management staff.

However, this access can be used to prop up funds with steady cash flow that aren’t deserving of that confidence, and can provide at least the temptation on the part of committee members to favor internal offerings to the exclusion of external choices. Moreover, since it can be difficult politically to “fire” an internal service provider, the plan might find itself paying “retail” prices, not only for funds, but for administrative services – an issue that has been made in several of these lawsuits.

The bottom line: However outstanding your internal options are, the current litigation environment seems to favor a “Caesar’s wife” approach – your actions need to be above (and beyond) suspicion.

You can’t remember the last time you benchmarked your plan/investments.

Let’s face it, even changing a single fund on an existing menu can be complicated, much less a full blown consideration of changing record keepers and fund menus. And plan sponsors, even plan sponsors at multi-billion dollar plans, juggle myriad responsibilities and are constantly pulled in multiple directions. “If it ain’t broke, don’t fix it” is a mantra born of practicality, if not necessity, for most. If the current process and services are working, that is often “enough.”

But if you haven’t been through some kind of competitive bidding/review process in recent memory – well, “it seems to be working” isn’t necessarily in keeping with the legal admonition to ensure that the services rendered and fees paid for those services are “reasonable” and in the best interests of plan participants and their beneficiaries.

And even if it is in the eyes of a judge, a motivated plaintiff’s bar can likely make an issue of it.

You are still paying asset-based record keeping charges, rather than a per-participant fee.

Okay, this is a new one. I don’t recall seeing this being an issue until this year – and though it has been alleged, and incorporated in a couple of the most recent settlements, to my recollection, no court has ever ruled on this.

That said, the current and apparently emerging argument is based on the notion that there is little correlation between record keeping services and the dollar value of that account. And the most recent litigation puts forth some fairly specific notions of what that reasonable per-participant charge should be. And did I mention that this has even been raised in some very recent litigation involving a $10 million plan?

You haven’t hired a qualified retirement plan advisor to help.

It’s possible that advisors have been involved in these plans, but to date I can only recall one situation where an advisor was involved/named (though not as a party to the litigation), and that more an investment consultant than an advisor, per se.

That said, when you look at the issues like share class selection, and the lack of regular review (not to mention documentation of that review) in many of these cases, you can’t help but think, “Where was the advisor?” The answer seems to be that these plans hadn’t engaged those services.

And then you can’t help but wonder what difference their involvement might have made.

- Nevin E. Adams, JD

Saturday, June 18, 2016

Oliver's 'Twist': 5 Takeaways

I’ve long enjoyed John Oliver’s take on the world. He has a gift for bringing humor to subjects that aren’t generally seen as funny, and in the process not only helps make complex topics more approachable, he gives voice to the frustration that millions surely feel at the world around us.
That said, when he decides to weigh in with his style of biting commentary on your profession – well, let’s just say that you’re likely to be in for a bumpy ride. And so it was this weekend, when he took on retirement savings, retirement advisors and the process of setting up a small plan 401(k).
Now, it wasn’t as biased as some media treatments of the retirement plan profession have been. Oh, they brought in the exaggerated math on fees from that 2013 PBS Frontline special, copied (and doubled down on) their dismissal of active management …and he did reference termites. But all in all – and while continuing to emphasize throughout that this was a complicated process (one that your average worker, not to mention plan sponsor, probably isn’t prepared to undertake) – he looked at our industry through the kind of eyes that most of us can appreciate, for its humor, if nothing else.
Make no mistake, Oliver was, of course, exaggerating to make a point (or two). But to my ears, the most compelling part of the program was when he described the process his production company went through in trying to set up a 401(k) plan for their employees. Of course, we know nothing about the particulars of the plan, and that makes it nearly impossible to do a reality check. Suffice it to say that he felt that this tiny start-up plan was being overcharged (1.69% + $24/participant + investment management fees), and even more so by the broker engaged to help them set up the plan – who (aside from making spreadsheet errors) seemed to be basically collecting money (1% in year one, and 0.5% each year thereafter) for (apparently) doing little more than telling them that their plan was “too complicated” to be placed at Vanguard (and whose idea was that, anyway?).
Is that overly simplistic? Almost certainly. This was no mere “hatchet” piece, however. To my ears Oliver gave voice to some great advice that, with luck, every listener (and reader) will take to heart:
Start saving now.
Oliver acknowledged that this can be rather simplistic advice for some, noting that some individuals aren’t currently able to afford to save. However, he quickly set that aside to make clear to his listeners that saving for retirement should be a priority. And he said it more than once.
Seemingly tiny fees can add up.
It’s not all about the fees, of course (or shouldn’t be), but the point that fees compound just like returns was well worth understanding. In my experience the issue isn’t that individuals think their fees are small, but that they are either unaware of them or, even worse, think that because they are unaware of them (despite those reams of disclosures), they must be $0.00.
There is, of course, no such thing as a free lunch – or a free retirement plan. Even if participants aren’t paying those fees, someone is.
If you’re lucky, you have a 401(k) at work.
Though Oliver didn’t cite this statistic, we know that workers who have a plan at work are 15 times more likely to save than those who don’t. If you have a plan at work, you have the advantage of payroll deduction, the encouragement of an employer’s education program, and likely their match, and increasingly options like automatic enrollment, contribution acceleration, and defaulted investments into qualified default investment alternatives (QDIAs) like target-date funds or managed accounts, which are not only better diversified at the outset than your average worker would be able to do on their own, but are rebalanced automatically over time by people who actually know what they are doing.
Oh, and you have a plan fiduciary looking out over all of this, with a charge to ensure that the program’s design is in your best interests, and that the fees for those services are reasonable. Lucky indeed. And Oliver’s production firm employees seem to have been well served here.
The retirement plan is a potential minefield, and you need to pay attention.
Arguably this applies to both participants and plan sponsors, but Oliver’s admonition was to an employer, like his company, that goes about setting up a 401(k) plan for its workers. This may look easy from the recliner watching HBO, but in the real world, there are complicated legal documents, complex investment considerations, regulatory requirements, participant disclosures… oh, and did we mention the personal liability?
To his credit, Oliver acknowledged the complexity, explaining that his production company “spent weeks trying to understand our own 401(k) plan.” How many employers can say that?
If you don’t pay close attention, this can really get away from you.
Complicated as things can be during the set-up, Oliver made a subtler point: that if you think setting up a retirement plan is a “set it and forget it” project – well, you’re wrong. To his production company’s credit, they did the math on their fees (going so far as to not only involve, but get “Janice in accounting” excited about their potential savings. Of course, their team not only did the math, they also had in mind a specific figurethey thought was reasonable (though whether it actually was for a start-up plan of unknown complexity is another matter). It may not have been a very well researched benchmark, but it gave them an objective measure against which they could evaluate their plan.
Ultimately, Oliver stated that, “It doesn’t need to be this confusing.” More precisely, it shouldn’t be.
- Nevin E. Adams, JD
It's worth reading John Hancock's perspective on the plan setup situation described by Oliver.  It's here. 

Saturday, June 11, 2016

A Fiduciary ‘Idiot Light’

Among the assorted “idiot lights” that adorn my current car dashboard is one that alerts me to low tire pressure.

It’s come in handy on precisely two occasions – one when a nail had punctured my tire (though I had already discerned that I had a problem from the sound of the flat tire nanoseconds before the light came on); the other when I had neglected to keep an eye on the tire pressure (which coincided with a day that I had let my daughter take my car to work). Other than that, it’s never really been on or an issue – or a help – until recently, when it came on, and stayed on, about 100 miles from home.

Now my owner’s manual suggested that this behavior might be a sign of a bad sensor, and sure enough, (after 100 miles of driving angst) that was subsequently confirmed by my mechanic – who also informed us that it would cost a couple of hundred dollars to replace it. Perhaps needless to say, that light continues to illuminate my dashboard.

Since the initial flurry of so-called “excess fee” litigation a decade ago, many have perhaps become numbed to the filings. Nearly all have involved multi-million, and multi-billion dollar plans – name brand companies. One might well expect – and many pundits have opined – that this litigation, funded, if not fueled, by a contingency fee structure, was really a concern for those larger plans and their larger asset pools.

Fiduciary Failings?

Or would have, until the recent filing in the case Damberg v. LaMettry’s Collision, Inc. (D. Minn., No. 0:16-cv-01335), which involved participants who were part of a 114-participant plan that had (in 2014) less than $10 million in plan assets.

These small plan participants alleged that the plan fiduciaries breached their fiduciary duties by:
  • selecting an unduly expensive structure for its 401(k) plan – one that bundled recordkeeping and investment management services;
  • failing to conduct an RFP for the structure to minimize expenses;
  • failing to evaluate whether an unbundled or alternative fee structure was a better option;
  • failing to conduct due diligence regarding whether the assessed fees (retail versus institutional shares) were appropriate; and
  • failing to actively monitor the selected structure’s fees and expenses.
They also challenged the application of asset-based fees for recordkeeping (rather than a flat per-participant fee), and went on to suggest that for retirement plans with more than 100 participants, a reasonable annual per capita fee paid by retirement plan participants should not exceed $18.

Nothing New?

These types of charges are nothing new, of course. All (with the possible exception of the concerns expressed about the bundled pricing structure) have been invoked in just about every one of the previous excessive fee lawsuits.

What is different, of course, is that these charges are being leveled at a plan that is considerably smaller than those that have thus far been the targets of this type of litigation.

On many occasions during the months since that sensor light on my car dashboard started blinking, I have worried that I might actually have a problem, one “masked” by my choosing to ignore the glaring reminder on my dashboard. I’ve worried that, by ignoring the warning signs that “idiot light” is meant to detect, I will one day wind up feeling like a true idiot, and all because I was too cheap (or lazy) to replace that tire sensor.

Plan fiduciaries – and those who guide them – have had at least a decade to see the writing on the wall on these excessive fee lawsuits. Those who have been ignoring these risks because they think they are immune, or are too small to be a target, should have just seen an “idiot light” come on their fiduciary dashboard.

- Nevin E. Adams, JD

See also: 5 Things Plan Sponsors Should Know; 5 Things Plan Sponsors Don’t (Always) Do — But Should.

Saturday, May 28, 2016

The Deification of DB-ification

I recently stumbled across another of those “DC plans are becoming like DB plans” articles — you know, the so-called “DB-ification” of 401(k)s? This is all supposed to be a good thing, of course, but is it?

We are, of course, routinely told that defined benefit plans do (or did) a better job of providing adequate income in retirement than defined contribution plans — though we aren’t generally reminded that that assumes that workers have actually managed to accumulate service credits sufficient to vest in those benefits, and that those programs are properly funded.

However, this interest in emulation of DB plans by DC plans is a relatively recent focus, fueled in no small part by the success of Pension Protection Act-engendered trends, primarily auto-enrollment (after all, nobody asks people to fill out a form to be covered by their DB plan) and asset allocation fund defaults (ditto on asking participants to choose the investments in the DB plan). But while it’s said that imitation is the sincerest form of flattery, it’s not like those auto-designs were actually copied from DB plans.1

Don’t get me wrong — anything that turns employees into participants (and automatic enrollment surely does that) and helps them make better investment decisions (and, generally speaking, asset allocation solutions fulfill that need) has to be a good thing. But to suggest — as many of these reports do — that these trends are essentially helping DC programs mature into their more “responsible” DB counterparts seems a gross misinterpretation of what is going on.

If we’re really looking to bring the best of the DB approach to DC plans, we need look no further than the definition of a defined benefit. Defined benefit plans are funded — at least, they are supposed to be — with an eye toward the benefit that will be paid out. As the name suggests, the benefit is defined — and the decisions that are made about how much to contribute to the plan and how those contributions will be invested are also done with that in mind.

Defined contribution plans, on the other hand — even the “automatic,” DB-ified ones — have an entirely different focus. They are (still) mostly focused on how much participants can afford to put into them (or can be forced to put into them without them opting out), not how much you need to get out of them. Oh, sure, the PPA’s safe harbor automatic enrollment — and a growing number of DC plans — includes a provision to increase those contributions on an annual basis. But is it any replacement for the kind of true funding discipline that a defined benefit focus represents? More importantly, will it be enough to provide the same kind of retirement security that the DB system promised?

Let’s not kid ourselves — when they worked (and they didn’t always), DB designs were “better” not because they made decisions for individuals (though that helped), but because somebody else was generally doing the funding,2 but more importantly doing so based on specifically targeted outcomes.

We’re not likely to shift the funding paradigm — but there’s nothing to keep us from emphasizing the focus on the ultimate benefit, the outcome that we hope to achieve — and the discipline to fund those DC accounts so that they can provide it.

- Nevin E. Adams, JD


Footnotes
  1. Another DB “innovation” – the annuitization of the benefit — is certainly talked about (though not yet widely adopted) in the context of DC plans. Ironically, the trend in DB plans seems to be to replace that with the lump sum option so prevalent in DC plans.
  2. Another significant DB/DC difference — and one that tends to get glossed over — is that DB plans not only don’t ask employees to sign up or make investment decisions — they — at least the ones in the private sector — generally don’t ask participants to fund them. Oh, sure, that DC plan frequently comes with a match, but the primary source of funding for most of these programs lies with the participant.

Saturday, April 23, 2016

Did We ‘Need’ a New Fiduciary Regulation?

I was recently asked by a reporter if the new fiduciary regulation was “needed.” The question caught me a bit off guard, because having been in “figure out how to deal with this” mode for most of the past year, I had long since moved past “why” and “if” to “when” and “how.”

I was reminded of our last home purchase – which we bought in a bit of a rush. Oh, it wasn’t like we didn’t know we were moving – but our ability to actually hone in on a new home was hindered by the fact that our current home had to sell first. And, as is often the case in such things (or has been for us), we had gone a long time with nary an offer, much less a viable one.

Once that offer came, of course, we had to move quickly (literally). And so, the planning that we had done mentally in anticipation of that day was thrust into overdrive. Ultimately we settled on a house that wasn’t the best we had seen, but it was the best available at the time (within the price and commuting distance restraints we placed upon it). At the time we moved in, I took some comfort from the fact that its prior residents had lived there more than a quarter century. More than enough time, I thought, to have fixed whatever ails might have arisen there.

It wasn’t long, however, before we realized that with that longevity in residence had come a certain complacency about the upkeep and maintenance; the even uglier things we found underneath the ugly pink carpet, the doors that we hadn’t opened during the inspection that fell off the hinges, the garage door opener that dropped out of the ceiling after a dozen uses…. I was later to tell folks that we spent the next several years (and no small amount of money) doing the 25 years of maintenance that the former residents had simply chosen to live without.


Was Fiduciary Regulation Needed?

So, with that experience in mind, I returned to the reporter’s question… was the new fiduciary regulation “needed”.

After a quick pause, I responded that, more than 40 years on, it certainly bore consideration. After all, the retirement savings world has changed a lot over the past generation, and if DB plans were never quite as ubiquitous as some remember them, defined contribution plans, and IRAs – which now have more assets than the DC plans which spawned many of them – increasingly are. It’s not just those individual retirement savers, either – the plan sponsor fiduciaries that play such an integral role in critical areas like plan design and outcomes measurement need all the help they can get in these increasingly complex areas.

At some point you can’t be in this business and not know that, as in all human endeavors, there are bad actors. Generally speaking, and thankfully, they are the minority. But they are out there, and every retirement plan advisor I have ever spoken with can cite examples, frequently multiple ones, of situations they have encountered, and not always been able to fix. You can’t credibly argue there aren’t problems – only whether this particular solution is well suited to, and cost effective for, the task for which it has been presented.

And yet, while all that was known and acknowledged, like the family having grown accustomed to the walls that surround our existence, there were no clarion calls for change, certainly not of the scope and scale contemplated by the Labor Department’s fiduciary regulation.

Not that I ever bought the widely cited $17 billion figure that proponents of the regulation said (and continue to say) it was costing American savers. Nobody knows the exact figure, of course (though I’m pretty sure you won’t be close if your assumptions are predicated on the notion that all active management choices are at an advisor’s direction, and only look at IRAs, even if you do cut that result in half). But let’s say it was exaggerated by a factor of two – would a $9 billion “rip-off” have been enough to warrant redress? What if it were a “mere” $1 billion?

But is the cure “proportionate” to the ills it purports to address? I’m pretty sure it will cost more than the current projections suggest – that’s the nature of such things. However, I’ve been in this business too long not to appreciate the benefits that ERISA’s oversight can bring, and those may well be understated. That said, it would be na├»ve to assume that flat fees (or flat rates) are necessarily cheaper in every situation. Or that the advice that comes with those pay structures is inherently “better.” But a shift in those directions will remove what is surely at least a temptation for some. And if fewer individuals take advice at those rates, and on those conditions – well, they will almost certainly do so with a greater appreciation for what such insight is worth, even if they are unwilling to pay for it.

Though it is less than a week old, there’s a pretty consistent sense that the final regulation is more workable than its predecessor. Indeed, many would argue, considerably so. Make no mistake, the Labor Department may not have acquiesced in every comment or suggestion made over the past year, but they were clearly taking notes.

That does not, however, mean that it doesn’t still have “bugs” that have to be worked out, provisions that need to be refined, definitions that need to be clarified. We may have known this was coming, but this new fiduciary “home” has only just come on the market.

It’s not unusual for “cures” to be worse than the disease – or to at least be more costly. The fiduciary regulation may yet turn out to have unintended consequences (count on it) – or, hard as it may be to imagine right now, we may look back in a couple of years and wonder at how quickly we adjusted.

Regardless, the waiting is over. The work begins.

- Nevin E. Adams, JD

Saturday, April 16, 2016

5 Reasons to Plan and Save for Retirement Now

As April is National Financial Literacy month, and this is National Retirement Planning Week, those who work with retirement plan participants know it’s important to do the right thing(s) when it comes to retirement planning and savings.

But for those you are trying to help encourage, here are five reasons to plan and save for retirement now, and as an integral part of that financial plan.

Because you don’t want to work forever.

Seriously, no matter how much you love your job, if you want to stop working one day – and trust me, you will – you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t “free.”

Many people assume that expenses will go down in retirement – and, for many, perhaps most, they do. On the other hand, there are changes in how we spend in retirement as well – and they aren’t always less. A recent report by the nonpartisan Employee Benefit Research Institute (EBRI) notes that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age. Health care expenses capture around 10% of the budget for those between 50–64, but increase to about 20% for those age 85 and over,” EBRI notes. And those spending shifts don’t take into account the possibility of a need or desire to provide financial support to parents and/or children.

Because you may not be able to work as long as you think.
In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, 37% of workers report that they expect to retire after age 65, and 6% say they don’t plan to retire at all, according to the 2016 Retirement Confidence Survey. At the same time, the percentage of workers who say they expect to retire before age 65 has decreased, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned – nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

Because you don’t know how long you will live.

People are living longer, and the longer your life, the longer your potential retirement, especially if it begins sooner than you think. Retiring at age 65 today? A man would have a 50% chance of still being alive at age 81 (and a woman at age 85); a 25% chance of living to nearly 90; a 10% chance of getting close to 100. How big a chance do you want to take of outliving your money in old age?

Because the sooner you start, the easier it will be.

As recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses have tried to calculate – even a single time – how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

Whether or not you feel fully financially “literate” now, you need to have a plan for your retirement. And there’s no time like the present to start.

- Nevin E. Adams, JD