Saturday, February 24, 2018

5 Things Plan Sponsors Should Know Before Hiring an Advisor

About a year ago, I was asked by an advisor if we had ever written anything about the potential pitfalls of hiring a relative as a plan advisor.

We hadn’t, as it turns out, in no small part because some things just seem (painfully) obvious to me – but it resulted in a column that, as I tried to point out at the time, was applicable to more than just familial relations.

In recent weeks I have received similar requests: one from an advisor looking for something on the hazards of “tying” bank business to providing services to a retirement plan, and another looking for validation of the wisdom of using a qualified 401(k) advisor on a plan rather than a part-timer.

Now, as someone who has been involved with ERISA and its fiduciary strictures his entire professional life, the responses to these questions are nearly self-evident. But let’s face it: Many, perhaps most, plan fiduciaries haven’t had that much exposure.

Before making a decision to hire an advisor – or for that matter, any decision involving the plan – here are some key considerations that plan fiduciaries should bear in mind.

If you’re a plan sponsor, you’re an ERISA fiduciary.

If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals to control or invest those assets.

If you’re an ERISA fiduciary, you have specific legal responsibilities.

There are several specific duties under the law, but the primary one is that the fiduciary must run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.

Note the words “solely” and “exclusive purpose.” Now consider a plan fiduciary who decides to hire a service provider based on services they provide outside the plan. Would that be a decision solely in the interests of participants? For the exclusive purpose of providing benefits?

ERISA fiduciaries must avoid conflicts of interest.

ERISA fiduciaries must also avoid conflicts of interest – meaning, according to the Labor Department, “they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”

That means that a plan sponsor must not cause the plan/participants to pay for services if it results in free and/or discounted services for the employer/plan sponsor. Oh, and that’s even if the price the plan/participants pay is deemed reasonable.

As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.

It’s one thing to find yourself in a job for which you are not immediately trained, or perhaps even qualified, but there’s no beginner track for ERISA fiduciaries. You’re not only directed to act for the exclusive purpose of providing benefits, but to do so at the level of an expert. The DOL has said that “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert.”

There’s nothing that says that a relative can’t meet that standard, nor should providing other, unrelated services to the organization preclude a firm from consideration for offering services to the plan. And, of course, there is nothing that says a part-time advisor couldn’t provide a full-time level of service and attention.

On the other hand, as an ERISA fiduciary you need to be sure that they do, in fact, meet that standard.

As an ERISA fiduciary, your liability is personal.

ERISA holds plan fiduciaries to a high legal standard. Indeed, at least one federal court has described it as “the highest known to the law.”

There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that you, as an ERISA fiduciary, can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

It is, of course, possible that a brother-in-law, a banking relationship, or an individual who is only committed on a part-time basis is, in fact, an expert in such matters, that they bring real value to your plan and the participants and beneficiaries it serves, and that the decision to engage those services is based solely on your desire to fulfill your fiduciary obligations – for the exclusive benefit of the plan, its participants and beneficiaries.

Just make sure that you have made that determination independent of other factors, and that, perhaps particularly if those other factors are present, that your process and analysis is documented.

Your advisor-to-be will understand.

- Nevin E. Adams, JD

Saturday, February 10, 2018

The 3 Biggest Mistakes Fiduciaries Make

A recent Alliance Bernstein survey found that plan sponsors’ awareness of their fiduciary role, much less the responsibility, has deteriorated significantly in recent years. In fact, their survey found that less than half of plan sponsors knew they were fiduciaries.

Here are, in my estimation, the three biggest mistakes fiduciaries make.

Not knowing they are fiduciaries.

As noted above, a significant – and apparently growing – number of individuals who are, in fact, plan fiduciaries are oblivious to that reality. The reasons for that are varied, though the Alliance Bernstein survey suggests that knowledge gap is wider among those who serve on a plan committee than with those who have primary responsibility for the plan.

Of course, fiduciary status is based on one’s responsibilities with the plan, not a title. Simply stated, if you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. If you are able to hire a fiduciary, you’re almost certainly a fiduciary.

Speaking of committees, if you’re responsible for selecting those who are on the committee(s) that administer the plan, you’re a fiduciary. Not to mention if you happen to be on a committee that makes decisions regarding the plan’s assets…

Not knowing the liability that comes with being a plan fiduciary.

ERISA fiduciaries 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. That’s right, the legal liability is personal (you can, however, buy insurance to protect against that personal liability – but that’s not the fiduciary liability insurance some have in place, nor is it typically covered by your standard corporate director liability insurance).

What does that liability mean? Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.

And all fiduciaries have potential liability for the actions of their co-fiduciaries. 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.

Thinking that they can outsource their fiduciary liability.

Even when they aren’t fully aware of their liability exposure – and certainly once they are – plan fiduciaries have a strong interest in shielding themselves from the consequences of that exposure.
They often think that by hiring another plan fiduciary – and frequently that’s a financial advisor –  they have managed to absolve themselves from that responsibility.

As it turns out, ERISA has a couple of very specific exceptions; more precisely, ways in which you can limit – but not eliminate – your fiduciary obligations. One exception has to do with the specific decisions made by a qualified investment manager – but even then, the plan fiduciary remains responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan.

The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA section 404(c). Here also, even if the plan meets the 404(c) criteria (and it is by no means certain it will), the plan fiduciary remains responsible for the prudent selection and monitoring of the options on the investment menu.

It is important to remember that ERISA’s “prudent man” rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. Fiduciaries who are concerned that they fall short of that standard – and let’s face it, many, perhaps most, are placed in those roles without training – may want to look to the counsel of the Department of Labor, which has said that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Doing so may not insulate you from all liability – but turning to experts is not only prudent, it surely minimizes the likelihood of making big mistakes.

- Nevin E. Adams, JD

Saturday, February 03, 2018

Why the Match Matters – to Employers

It has been heartening in recent weeks to see a number of employers announce plans to expand and increase benefit programs, offer bonuses, and increase the employer match. Better still, a recent survey indicates that more positive changes could lie ahead.

A decade ago, the headlines were filled with stories about a number of large firms announcing that they were cutting, and in some cases eliminating altogether, the employer match. While the vast majority of employers didn’t reduce those matches, it was nonetheless a stark reminder that those defined contributions are “defined” annually, not in perpetuity.

The Match Matters

There are a number of things that we know about the importance of the employer match; there’s the obvious (though sometimes glossed over) impact that an employer contribution means in terms of retirement security in simple dollars, for one thing. Indeed, the nonpartisan Employee Benefit Research Institute (EBRI) has estimated that if future employer contributions were eliminated for Gen Xers, their retirement readiness rating would decline from 57.7% to 54.6% – and that doesn’t consider what might happen to employee contributions as a result.

And then there’s the reality that those who it save in a retirement plan at work appear to save at/near the level matched (though the amount of the match matters less than the existence of the match), suggesting that it provides a savings target of sorts for workers.

There’s little question that the match does good things for workers and their retirement security – but, let’s be honest, the employer match that is “free” for workplace savers is anything but for the employers that provide it. Here’s why it’s worth the money.

Better Finances Mean Better Work

A 2017 Mercer study found that on average, people spend about 13 hours per month worrying about money matters at work – about 5 hours at the median, suggesting that some spend a lot more time than others thinking about such things.

EBRI’s Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence – are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course – but it’s a big part of it.

Little wonder that more than 8 out of 10 (82%) finance executives surveyed by CFO Research with Prudential Financial, Inc., believe that their companies benefit from having workforces that are financially secure – and nearly as many believe that employers should assist employees in achieving financial wellness during their working years.

Better Benefits Attract Better Workers

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. Thinking about that next generation of workers? Well, the 2018 Millennial Benefit Trends Report from Pentegra found that, asked if they take into account whether a job offers benefits when considering applying – well, pretty much everyone (96.77%) said yes. And, asked to rate five general benefits categories in order of importance, “401(k) Retirement Savings” easily outpaced the others, with about 4 in 10 rating it “extremely important.”

The CFO Research survey noted above also found that nearly two-thirds (63%) say that employee satisfaction with benefits is important for their company’s success, and 65% believe that employee benefits are critical to attracting and retaining employees.

Better Benefits Keep Workers

By far, the finance executives surveyed consider higher employee satisfaction (59%) and increased retention (53%) as the most important benefits of a focus on financial wellness.

State Street Global Advisors’ 2016 research suggests that there is a noteworthy interplay between people’s happiness with their working life and their financial well-being. In fact, reports indicate that financial wellness actually influences an employee’s happiness at work.

Poor Savings Postpones Retirements

A report by Prudential (aptly titled “Why Employers Should Care About the Cost of Delayed
Retirements”) found that a one-year increase in average retirement age results in an incremental cost (the difference between the retiring employee and a newly hired employee) of over $50,000 for an individual whose retirement is delayed.

Moreover, the report notes that it results in an incremental annual workforce cost of about 1.0%-1.5% for an entire workforce. This represents the incremental annual cost of a one-year delay in retirement averaged over a five-year period. Prudential notes that for an employer with 3,000 employees and workforce costs of $200 million, a one-year delay in retirement age may cost the employer about $2-3 million.

It’s been great to see so many employers announce enhancements to their benefits programs, cash bonuses and – most particularly – increases to their 401(k) matches. However, every year tens of thousands of employers commit to helping their workers save for retirement by committing to making a company match – and they have done so in good times and times that weren’t so good.

It’s a commitment that makes a huge difference – and one that shouldn’t be taken for granted.

- Nevin E. Adams, JD

Friday, February 02, 2018

Are Stocks Swayed by the Super Bowl?

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

That’s what adherents of the so-called Super Bowl Theory would likely conclude. 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, and 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 40 of the 51 Super Bowls, in fact. Though last year’s big comeback by the AFC Champion Patriots (who once were the AFL’s Boston Patriots) against the then-NFC champion Atlanta Falcons — alongside the 2017 market surge — surely places its validity in question. Not to mention 2016, and the AFC’s (and original AFL) Broncos 24-10 victory over the Carolina Panthers, who represented the NFC.

It was an unusual break in the streak that was sustained in 2015 following Super Bowl XLIX, when the New England Patriots (yes, those same Patriots) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the Denver 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, the fact 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 teams.

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

Steel ‘Curtains’?

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. 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 (thus, no matter who won, the markets should have risen):
  • 2006, when the Steelers bested the Seattle Seahawks;
  • 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
  • 2009, when the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals; and
  • 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.
Sure enough, 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 hopes of the AFL-legacy Patriots 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” (well, until this past year – oh, and the year before THAT).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles (yes, it’s a rematch this year of sorts) 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year – but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that 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 (the one that probably nobody except Patriots fans remember because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction” with Justin Timberlake - who, as it turns out, is back to perform in this year's Super Bowl) 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 (couldn’t resist).

Bronco ‘Busters’

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 (that have now returned to the City of Angels) 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 2003 victory, 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 (see below). And, not having entered the league until 1976, regardless of when 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, the Patriots have been here before (to put it mildly), the Eagles (just) twice – but not since 2004 (when they lost to the Patriots) and before that in Super Bowl XV against the Oakland Raiders — but are 0-2 in those appearances.

On a separate note, despite (technically) being the home team, the Patriots will (again) be wearing white jerseys. Not that they’re superstitious or anything, but 12 of the last 13 Super Bowl winners were wearing white jerseys — and, according to CBS, not only were the Pats in white the last time they beat the Eagles, they are (only) 2-2 when wearing blue jerseys in the Super Bowl, and 3-1 when in white (Bears fans at least will recall what happened when the Patriots wore red in Super Bowl XX).

All in all, 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 regardless of which team wins, we all do!

- Nevin E. Adams, JD
Note: 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 27, 2018

5 Things of Which Plan Fiduciaries Need to Be Aware

Whoever said ignorance was bliss surely wasn’t talking about fiduciary litigation.

While I’ve had the opportunity over the past decade and change to peruse plenty of filings and findings related to excessive fee suits, the recent amended filing in a case against New York University (NYU) included something new – a long list of statements and acknowledgements by plan fiduciaries that, according to the plaintiffs, “displayed an alarming lack of understanding of basic terms and principles in investment management and fiduciary best practices.” Indeed, one of the plan committee members was called out for their “remarkable unawareness of basic facts” relating to the plan.

Now, one must take care in accepting the assertions in litigation at face value, and it’s too early to say if they – along with a response by the defendants – will carry the day with a judge. Still, it’s hard, more than a decade after the first of the so-called excessive fee cases were filed, to believe that there remain multi-billion dollar retirement plans in operation with committees – and as here, with the involvement of an investment advisor – that don’t know – well, the things that the long-standing practices of these committees suggest are still in place.

The job of a plan fiduciary isn’t all about fees, of course, though it’s certainly been a focus of these excessive fee lawsuits. Still, it seems to me that there are some things that plan fiduciaries of any plan size should be aware, and of which responsible plan fiduciaries should have a working knowledge.

Said another way, a plan fiduciary could be in trouble if you don’t:
  • Know how much your plan pays in fees. And to whom. And for what.
  • Know how many (and which ones) of your plan’s investment choices are offered in retail class shares. And if institutional class shares are available, and under what circumstances/conditions.
  • Know how much of your plan’s investments are in funds that belong to your recordkeeper. And why.
  • Know what revenue-sharing is (and where it goes).
  • Have a basis for determining that the fees paid by the plan/participants are “reasonable.”
That’s not an exhaustive list, of course though, at least with regard to fees and expenses, I think it covers the key issues, certainly the ones that have arisen in litigation. Remember that plan fiduciaries – who have personal liability for their actions – are charged with “paying only reasonable plan expenses.” And, as noted above, 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.

Arguably, that can’t be done without first knowing what those expenses are, and having some basis of comparison/evaluation to ascertain if they are, in fact, reasonable in view of the services provided.

Particularly if you don’t want to be caught “unawares.”

- Nevin E. Adams, JD
See also:

Saturday, January 20, 2018

Awesome ‘Sauce’

Earlier this year I went to an event in our nation’s capital called “Awesome Con.”

As event names go, it’s a bit corny, but if it evokes a reference to Comic-Con, well that’s the point. Awesome Con is a mixture of cosplay (dressing up like your favorite comic book, gaming, or anime characters), celebrity meet-and-greets, and forums where like-minded individuals can not only learn, but debate plot lines, scientific trends that affirm (or refute) science fiction, and sit in on panels by some of the industry’s leading minds (and artists). No, I didn’t dress up – but I very much enjoyed getting to meet (and get autographs from) Marvel Comic’s Stan the Man Lee (see photo), Doctor #10 (David Tennant), and Eliza Dushku (of Buffy the Vampire Slayer fame), among others).

To be honest, I didn’t attend my first – the first – 401(k) Summit with that kind of anticipation. I had accepted an invitation to speak at an event – not that unusual – but at what was then a pretty unusual event – a conference for advisors who worked with retirement plans. What was even more unusual is that it was sponsored by ASPPA, a group I hadn’t previously associated with advisors. But what a remarkable event it turned out to be, both in terms of content, and the opportunity to meet and network with individuals like Fred Reish (our industry’s own Stan Lee?), and so many great advisors, many of whom would go on to be part of the group that would, a decade later, form the National Association of Plan Advisors.

A lot has happened since that first 401(k) Summit, most significantly the formation of NAPA itself. And a lot has happened to the NAPA 401(k) Summit since then – so much so that we now refer to it proudly, and with justification, as the nation’s retirement plan advisor convention. In an era where many advisors have chosen to cut back on such things, the NAPA 401(k) Summit continues to grow and expand.

This growth is both a function of the quality of the content and presenters – not to mention that of the attendees. Everybody is at the top of their game at the NAPA 401(k) Summit, and it shows. From those relatively humble, but promising beginnings, it has emerged as the must-attend event for advisors who are committed to the business of retirement plans.

As we reminded attendees last year, as important and impact-filled (and fun) as the NAPA 401(k) Summit is, it is much more than “just” a conference. This year more than most we’ve had the opportunity to see the impact that NAPA has on critical issues like the fiduciary regulation – creating and pushing for innovative solutions like the level-to-level fee exemption – and tax reform – pushing back against Rothification as a means of paying for corporate tax cuts, and outlining a set of retirement policy principles for tax reform ahead of the first reform proposals. And yes, in state capitals like Nevada, which is contemplating its own fiduciary standard, or in Oregon, Connecticut, and California, where state-run alternatives for private sector workers could be problematic.

But here’s the thing that many don’t appreciate. The NAPA 401(k) Summit is responsible for a significant amount of funding for our advocacy efforts on behalf of retirement plan advisors. That’s right – your registration fee doesn’t go to some private equity firm’s bottom line, nor does it simply act to keep a conference company in the business of organizing conferences – it supports advocacy efforts on your behalf, on Capitol Hill, with regulatory agencies, and – these days – in state capitals as well.

I know that April (still) seems a long ways off – but this year more than most the NAPA 401(k) Summit is that advisor experience you won’t want to miss. Even if you have been attending for years, you’ll get more from it than you can imagine – and your support will mean more to the benefit of the nation’s retirement system and retirement security than you may expect.

Join us. Your voice, more than ever, is needed. It’s going to be… Awesome.

Nevin E. Adams, JD

Saturday, January 13, 2018

Debt ‘Limits’ – Causation, Correlation or Coincidence?

You have to wonder what the Wall Street Journal has against automatic enrollment.

The latest instance of finding the cloud in this silver lining arose in a recent Journal article by Anne Tergesen, “Downside of Automatic 401(k) Savings: More Debt” (subscription required). The article, based on the findings of a recent academic study, says that automatic enrollment has “pushed” millions of people who weren’t previously saving for retirement into those plans – but quickly cautions that “many of these workers appear to be offsetting those savings over the long term by taking on more auto and mortgage debt than they otherwise would have.”

This “crowding out” concern – that automatic enrollment would stretch already strained financial resources, particularly among lower-income workers – has long been a sticking point for those advocating caution regarding automatic enrollment.

The Study

So did the study – drawn based on what the researchers termed a “natural experiment” created by the decision of the U.S. Army to automatically enroll civilian workers into their retirement savings plan at a point in time – validate this concern? Well, the researchers found “no significant change” in debt levels of those automatically enrolled four years after hire – excluding auto loans and first mortgages.

In those categories, the researchers noted that automatic enrollment increased auto loan balances by 2% of income, and first mortgage balances by 7.4% of income. However, the researchers didn’t seem overly concerned about these increases, noting that they involved the acquisition of assets (and in the case of a home mortgage, an asset that might actually play a factor in retirement security) – though they did conclude that the advent of automatic enrollment seemed to leading workers to take on more debt to offset the “loss” in income to automatic enrollment savings.

On the other hand, the researchers note that it seems likely that much of the increase in first mortgage debt is caused by automatically enrolled employees being able to obtain larger mortgages due to their extra TSP balances loosening down payment constraints. And as regards their preparation for retirement, automatic enrollment clearly helps. The researchers noted that at 43-48 months of tenure, automatic enrollment increases cumulative employer plus employee contributions since hire by 5.8% of first year annualized salary.

Where’s the ‘Beef’?

So, what’s the beef about automatic enrollment? Well, despite the headline (and the subhead, “New research finds employees auto-enrolled in retirement plans borrow more than they otherwise would have, offsetting savings”), the article struggled to find anyone (including three of the authors of the research) who would say anything bad about automatic enrollment. But then, back in 2013, this same Ann Tergesen wrote about the “Mixed Bag for Auto-enrollment,” claiming that “employees who are automatically enrolled in their workplace savings plans save less than those who sign up on their own initiative.”

That article, in turn, built on – and cited – a 2011 article Tergesen jaw-droppingly titled “401(k) Law Suppresses Saving for Retirement.” In the case of the latter, Tergesen glommed on to one of 16 possible scenarios, and focused on the notion that some workers would simply rely on the mechanics of automatic enrollment’s 3% default, rather than picking the higher rate that they might if they filled out an enrollment form (encouraged by things like education meetings and incentivized by things like a company match). Remember that nothing about an automatic enrollment option requires workers to rely on automatic enrollment. In fact, under automatic enrollment, total savings actually went up, notably for lower income workers.
Auto Impact

The nonpartisan Employee Benefit Research Institute (EBRI) has estimated that moving to automatic enrollment improves projected retirement outcomes by anywhere from 17.5% to more than 33%, depending on age and income. Indeed, the lowest income quartile saw their outcomes improve by more than 20% pretty much across the board. In fact, EBRI has previously projected that approximately 60% of those eligible for automatic enrollment would immediately be better off in those plans than in one relying on voluntary employment, and that over time (as automatic escalation provisions took effect for some of the workers) that would increase to 85%.

And while it wasn’t mentioned in the most recent Journal article, the study at hand acknowledged that automatic enrollment was “extremely successful at increasing contributions to the TSP at the left tail of the distribution while leaving the middle and the right of the distribution unchanged.” Said another way, automatic enrollment did a great job of increasing contributions among lower income workers.

All in all, while automatically enrolled workers in the study (and let’s remember this is a specific subset of the population for a limited period of time), on average had more debt in two very specific categories, it’s far from clear that this was a consequence of automatic enrollment – and it’s by no means certain, even if it were, that in the long term it’s a bad thing.

Indeed, it’s not clear that the dots connected here are causality or simply an interesting correlation.
What is clear is that automatic enrollment has been enormously successful at helping workers – particularly lower income workers – prepare for a more financially secure retirement.

- Nevin E. Adams, JD