Friday, February 20, 2015

3 Things Every Plan Committee Member Should Know

Plan investment committee members come in all shapes and sizes, sometimes drawn exclusively from staff of the employer sponsoring the plan, sometimes not. More importantly, they are frequently tapped for this important role for reasons that may have little to do with their background or expertise in the matters that will come before the committee.

Now, with luck they’ll learn early on about the requirement to act solely in the interests of plan participants and beneficiaries, the importance of process (and documenting that process) and the implications of the prudent expert rule.

But as important as those considerations are, there are some important things that every plan committee member should know before they sit down at their first committee meeting.

You are an ERISA fiduciary. Even as a small and relatively silent member of the committee, you’ll direct and influence retirement plan money — and it’s that influence over the plan’s assets that makes you an ERISA fiduciary.

As an ERISA fiduciary, your liability is personal. How personal? Well, you may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. You can obtain insurance to protect against that personal liability — but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

You are responsible for the actions of other plan fiduciaries. 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.

Having established those basics, as an ERISA fiduciary, you are expected to act solely in the interests of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them; to carry out those duties prudently (and by prudent, it is intended that you be a prudent expert); to follow the terms of the plan documents (unless inconsistent with ERISA); to diversify plan investments (specifically with an eye toward minimizing the risk of large investment losses to the plan); and to ensure that the plan pays only reasonable plan expenses for the services it engages.  

A couple of additional points on fulfilling those duties; it’s going to be hard to follow the terms of the plan documents if you haven’t read them, and it’s likely to be difficult to ensure that the plan pays only reasonable expenses if you don’t know what the plan is paying, or for what.

And finally, should you, as a plan fiduciary lack the expertise to carry out those duties, you will, of course, want to hire someone with that professional knowledge to carry out the investment and other functions.

Additional information on fiduciary responsibilities can be found here.

- Nevin E. Adams, JD

Friday, February 13, 2015

The Impact of Assumptions on the Impact of Leakage

It has become something of an article of faith in our industry that “leakage,” the distribution of money from retirement accounts prior to retirement, is bad.

Bad, of course, in the sense that those “premature” withdrawals, via hardship withdrawals, loans or the so-called “deemed distributions” that result when a termination occurs when a loan is outstanding, reduce individual retirement savings.

So when the Center for Retirement Research at Boston College published a paper last week entitled “The Impact of Leakages on 401(k)/IRA Assets,” it really wasn’t a question of “if” there was an impact, it was a question of how much. The answer, according to the paper: a reduction in wealth at retirement of a jaw-dropping 25%.

Now by any measure, a 25% reduction in retirement wealth is a massive problem — and one that would, if valid, call for the kind of countermeasures touted by the Boston College researchers.

But consider the findings published recently by the non-partisan Employee Benefit Research Institute (EBRI) based on its massive participant database of actual participant balances and activity. Among participants with outstanding 401(k) loans at the end of 2013, the average unpaid balance was a mere $7,421, and the median loan balance outstanding was $3,973.

Moreover, the report notes — as it has for a number of years examining trend analysis in that database — that overall, loans from 401(k) plans tended to be small, with a sizable majority of 401(k) participants in all age groups having no loan outstanding at all: 88% of participants in their 20s, 73% of participants in their 40s, and 86% of participants in their 60s had no loans outstanding at year-end 2013.

So, how did the Boston College researchers manage to come up with a 25% reduction in retirement wealth? Quite simply, they started by deriving an estimate based on a “host of simplifying assumptions” — their words, not mine.

What are those simplifying assumptions? It starts with a hypothetical participant who initially makes $40,000/year, gets a 1.1% annual pay increase in real terms, assumes that he/she defers 6% of pay, is matched at a rate of 50 cents on the dollar, and whose investments gain a 4.5% real annual return. But the key assumption — and the one that arguably creates the conclusion of the paper — is their further assumption that 1.5% of assets leak out each year!

Under these assumptions, the leakages result in accumulated 401(k) wealth of $203,000 at age 60 compared with $272,000 with no leakage. So their math (and assumptions) lead to a conclusion that these leakages reduce 401(k) wealth by 25%. To “prove” the point, they provide a simple chart of the numbers they just produced, and direct the reader to it as though it provides some sort of independent corroboration.

They go on to clarify: “This estimate represents the overall impact for the whole population, averaged across both those who tap their savings before retirement and those who do not.” That’s right — averaged across everyone, not just those who actually dip into those savings prior to retirement.

Now at that point, it’s arguably just math, not so much a quantification of the impact of leakages as the mathematical impact of a series of simplifying assumptions. As for the so-called impact of leakages? It might more accurately be described as the impact of assumptions.

- Nevin E. Adams, JD

That’s not to say that leakages don’t have an impact on retirement accumulations, and doubtless for some, that impact is significant. EBRI’s analysis found that among loan defaults, hardships and cashouts at job change, cashouts were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). The leakages from cashouts resulted in a decrease in the probability of reaching an 80% real replacement rate of 5.9 percentage points for the lowest-income quartile and 4.5 percentage points for those in the highest-income quartile. In fact, the effect from cashouts (by themselves) — not loans or hardship withdrawals — turns out to be approximately two-thirds of the leakage impact.  

It’s also worth noting that it’s one thing to quantify the impact of not allowing early access to these funds — and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes, perhaps by reducing their contribution levels, or by either deciding to continue to participate or to participate in the first place.

Friday, February 06, 2015

A Deja View on Retirement Policy?

One of my favorite movies — and perhaps my favorite “holiday” move — is Groundhog Day, the 1993 film starring Bill Murray as an arrogant weatherman who finds himself stuck in Punxsutawney, Penn. by a blizzard, who then discovers that he is also “stuck” reliving February 2 — over and over and over. A feeling, quite literally, of “déjà vu all over again.”

Murray’s character goes through some semblance of the five stages of grief (denial, anger, bargaining, depression and acceptance) as he comes to terms with his predicament, but even as he tries to break out of this cycle, he learns from his past experience(s) and modifies his behaviors accordingly; avoiding stepping in a deep puddle of slush, ducking an insurance salesman, and even carrying his own jack to help change a tire. Eventually, of course, all that “learning” pays off, though not without a lot of pain and frustration.

There was, in fact, something of a feeling of déjà vu in President Obama’s budget proposal yesterday, certainly with regard to workplace retirement plans. In addition to some new incentives around encouraging automatic enrollment and expanding access to part-time workers, making a return appearance was giving the Pension Benefit Guaranty Corporation (PBGC) the authority to set risk-based premium rates for pension plans and the administration’s proposal to mandate employer offering of “automatic” IRAs who do not already offer a workplace retirement plan, this time channeled to the myRA structure outlined a year ago.

The 2016 budget proposal also resurrects the notion of imposing a reduction on the value of itemized deductions to 28% — including retirement contributions, and the imposition of a retirement savings cap.

Arguably, these proposals stand little chance of making their way into reality. That said, the latter two proposals in particular are blunt policy instruments, and seem likely to reduce, not enhance, the nation’s retirement security prospects.

Consider that a year ago when the savings cap was introduced in the 2015 budget, projections by the nonpartisan Employee Benefit Research Institute (EBRI) show that more than 1 in 10 current 401(k) participants are likely to hit the proposed cap sometime prior to age 65, even at the current, albeit historically low, discount rate of 4%. When you apply the higher discount rate assumptions closer to historical averages, the percentage of 401(k) participants likely to be affected by these proposed limits increases “substantially,” according to EBRI.

As for the itemized deduction cap, it would mean that those affected — likely those making the decisions on matching contributions of offering a plan in the first place — would pay taxes on contributions in the year the contributions are made, and then again at the full rate when contributions are distributed at retirement. How’s that for dis-incentivizing workplace retirement savings?

Indeed, perhaps the thing most troubling about the latter two proposals in particular is that they reveal a basic misunderstanding about the interrelationship between the incentives to employers to offer these programs, and the existence and expansion of these plans.

In sum, they don’t appear to understand that if you diminish the incentives to employers of participating in workplace retirement plans, you’ll likely see fewer retirement plans in the workplace.

So, while we’d like to think that those guiding retirement policy would learn from their mistakes, it looks like instead it’s déjà vu all over again.

- Nevin E. Adams, JD

Friday, January 30, 2015

Stocks Swayed by the Super Bowl?

Will your portfolio soar with the Seahawks, or get pummeled by the Patriots?

That’s what adherents of the so-called Super Bowl Theory would likely predict. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, whereas when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time; for 38 of the 48 Super Bowls, in fact.

It certainly “worked” in 2014, when these same Seattle Seahawks bumped the Broncos, a legacy AFL team, and in 2013, when a dramatic fourth quarter comeback rescued a victory by the Baltimore Ravens who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. Admittedly, that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII — the Ravens and the San Francisco 49ers — were NFL legacy.

However, consider that in 2012 a team from the old NFL (the NY Giants) took on — and took down — one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). And, in fact, 2012 was a pretty good year for stocks.

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers — two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.

There was the string of Super Bowls where the contests were all between legacy NFL teams: 2010 (when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts)), 2009 (the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals), 2007 (where the Indianapolis Colts beat the Chicago Bears 29-17), and 2006, when the Steelers besting the Seattle Seahawks. The markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the legacy AFL’s Patriots’ hopes for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn't “work.”

Patriot Gains

Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21, and, according to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55%. Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Consider also that, despite victories by the (AFL legacy) Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams and the Baltimore Ravens, did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.1 And, not having entered the league until 1976, wherever they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance — and lost — the S&P 500 gained nearly 16%.

As for Sunday’s contest, after the Seattle Seahawks opened as 2-point favorites, the Patriots now appear to be 1-point favorites — and this is the first time since 1975 that we actually have two Number 1 seeds facing off in the Super Bowl. It looks like it will be a good game, and that — whether you are a proponent of the Super Bowl Theory or not, would be one in which whoever wins, we all do!

- Nevin E. Adams, JD

1. In fact, Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

Saturday, January 24, 2015

Third Time a Charm for Fiduciary Reproposal?

So, advisors, how does it feel to be compared to a termite?

That’s right, a powerful coalition of retirement, union, and so-called consumer protection groups has launched a new attack on retirement plan advisors.

They’re doing so ahead of the president’s State of the Union address, and doing so now because he is expected to throw his support behind the Department of Labor’s fiduciary rule (re)proposal. Yes, that one.

Not that they yet know what they are supporting. In a new website launched to help promote their position, even they say “If the Department gets the rule right…”, apparently relying on the word of the Department of Labor that “…its goal is to make sure that all financial professionals have a legal obligation to put the interests of their customers first when they offer retirement advice.”

We don’t yet know what will be in this latest version. What we do know is that the last version raised significant concerns about its impact on the retirement plan marketplace, especially with regard to plans for small business, for IRAs, and for distributions from qualified retirement plans. We know that they saw fit, as part of an unprecedented power grab, to create a right to impose Labor Department oversight on non-ERISA individual retirement accounts that has not existed since the origins of those programs a generation ago. We know that they didn’t believe that a comprehensive and transparent disclosure of potential conflicts and financial interests were sufficient to preserve the long-standing seller’s exception for business owners who might be considering offering a workplace retirement plan.

As for this newest version, there is reason to think it may go even further; that it might actually prohibit existing plan providers from advising participants on investment options for plan distributions, blocking retirement plan participants from the plan advisor they most know and trust — while at the same time effectively leaving them vulnerable to the solicitations of others outside the plan who often offer more expensive options.

No, we don’t yet know what will be in the latest version — because, having brought two previous flawed versions to light, the Labor Department seems to have developed a case of stage fright when it comes to sharing, much less discussing the new version. Will the third time be a “charm?” Not likely, with so little input from, or dialogue with, those actually working with these programs.

As for those advocacy groups backing this as-yet-sight-unseen regulation — well, they might see advisors as a colony of termites, but the so-called solutions that the Labor Department has put forth thus far seem more likely to burn down the house of America’s retirement than to save it.

- Nevin E. Adams, JD

The website is funded by AARP, AFL-CIO, AFSME, Americans for Financial Reform, Better Markets, the Consumer Federation of America, and the Pension Rights Center.

Saturday, January 17, 2015

6 Things 401(k) Participants Need to Know

Our industry spends a lot of time and money educating workers about the advantages and mechanics of saving for retirement.

But here are six things I think too often go unsaid.

Your 401(k) isn’t free.

That’s right, it isn’t free. It may be heavily subsidized by your employer, and you’re likely paying a lot less for the fund(s) and features you have access to than if you were to try and buy them on your own (say, via an IRA or brokerage account) — but even then, it’s probably not “free,” nor should you expect it to be. But if you don’t know how much you are paying, you should find out.

You’ve probably been provided some information about your 401(k) plan fees already. You can find out how to use that information here. More information about 401(k) fees is available here.   

That employer match isn’t “free” either.

You may have heard that you should save enough to receive the full employer match — that “you don’t want to leave that free money on the table.” It is, of course “free” money to you when you save in your workplace retirement plan. But not every employer provides a matching contribution, and it’s a real out-of-pocket cost for those that do. Remember that, if you’re lucky enough to have an employer who makes a matching contribution — and thank them.

Saving to the level of the match is probably not enough.

As noted above, many employers choose to encourage your decision to save for retirement by providing the financial incentive of an employer matching contribution. While there are a number of factors that go into determining the amount and level of the match, how much you need to set aside for your own personal retirement goals is almost certainly not one of those factors.

You certainly don’t want to leave any of that match on the table by not contributing to at least that level. But if that’s where you stop saving, you’re probably going to come up short.

How much you save is more important than how you invest what you save.

There are bad investments that can cost you money, and good investments that can help your account grow faster. But what really matters in achieving financial security for retirement is how much you save (including the amount of the employer match, if any).

For more information, see “Missing the Forest for the Trees” here.  

If you’ve never tried to figure out how much you’ll need to live in retirement, you may not live very comfortably in retirement.

Surveys routinely show that most Americans have not even tried to guess how much money they will need to live on in retirement, much less actually made an educated guess. Sure, it sounds complicated, and sure, things can change over time — and yes, you’re busy. But saving for retirement with no idea of how much you might need is a bit like going on a long trip in a car you don’t know with a gas gauge that isn’t working.

Chances are, your 401(k) plan has some resources that will help you do the calculation. If not, or if you’d like a “second opinion,” try the free Ballpark E$timate at

If you don’t know what you’re doing, get help.

And not the kind you might get from Joe in the lunchroom, Sally in accounting or “experts” you’ve never met. If there’s a professional advisor working with your 401(k) plan, that’s a great place to start.

- Nevin E. Adams, JD

Saturday, January 10, 2015

5 Things Plan Sponsors Should Know

Whether or not you’re in the habit of making New Year’s resolutions, this is a time of year when reassessments seem appropriate, and perhaps in no area as much as that of retirement plan administration. Many find themselves in the role of plan sponsor (or plan committee) with no background, limited training, and far more responsibility than they may appreciate at the outset.

For those of you who find yourself starting the year with new plan sponsor clients, or new members of the plan committee, or perhaps even incumbents who could benefit from some New Year’s resolutions, here’s five things every plan sponsor should know:

How much your 401(k) plan costs.

Okay, fees are just one of several factors plan sponsors need to consider, but when the fees for services are paid out of plan assets, there is an obligation to understand the fees and expenses charged. This is important because you are expected to ensure that the fees paid and services rendered to the plan are reasonable. It’s hard to know if the fees paid are reasonable if you don’t know what they are. Oh, and even if the plan fees were determined to be reasonable in the past, they need to be monitored. Things change over time, after all.

Need some help? Check out this information from the Employee Benefits Security Administration. 

The services that you receive for those 401(k) fees.

As noted above, determining reasonability of fees and services means not only understanding the fees paid, but also the services provided for those fees. Larger fees may, of course, be reasonable for more expansive or comprehensive services. But also note that paying big fees for unnecessary services could be considered unreasonable.

See also “Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan.”

How much of your 401(k) plan fees/costs go to whom.

Arguably, knowing how much who is being paid for what is required to assess reasonableness. But the Department of Labor now requires that “covered service providers” (CSP) furnish in writing “the services to be provided and all direct and indirect compensation to be received by a CSP, its affiliates, or subcontractors. You can find out more about these requirements here.

Who the plan fiduciaries are.

Odds are, if you as a plan sponsor are reading this, you are one. But don’t take my word for it. Check out “Meeting Your Fiduciary Responsibilities.”

The responsibilities — and obligations — of plan sponsors.

Since you (probably) are one, you should make sure you know what your responsibilities are, the extent of your personal liability, and what kind of insurance is maintained by your employer to address that exposure.

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently.

That brings up a sixth item for our plan sponsor list: If a plan fiduciary lacks the expertise to fulfill those duties, they should, of course, consider hiring a professional to help them.

- Nevin E. Adams, JD