Saturday, May 19, 2018

Crisis ‘Management’

Rarely a week goes by that a headline, survey or academic paper doesn’t proclaim the reality of a retirement crisis with the certainty generally reserved for topics like the existence of gravity, or the notion that the sun will rise in the east.

And certainly based on the data cited, there would seem to be a compelling case that trouble lies ahead for many. That said – as was pointed out by Andrew Biggs at the recent Plan Sponsor Council of America conference – the reality is that good, reliable data is hard to come by. Indeed, many of the reports cited in those headlines rely on what you would expect to be a reliable source; the Census Bureau’s Current Population Survey, or CPS.1 Unfortunately, that reliable source turns out to be not-quite-so-reliable. It suffers from relying on what people tell the survey takers, but perhaps more significantly, Biggs, resident scholar at the American Enterprise Institute, pointed out that the survey only counts as income in retirement funds that are paid regularly – like a pension. “Irregular” withdrawals from retirement accounts – like IRAs and 401(k)s – aren’t included.

In fact, when you compare what retirees report to the IRS with what they report to the Census Bureau, only 58% of private retirement benefits are picked up, according to Biggs. Now, who do you suppose gets a more accurate read; the IRS2 or the Census Bureau? And yet, the CPS data serves as the basis for a huge swath of academic research on retirement savings.

Social ‘Security’

Biggs noted that IRS data also draws into question some of the “common wisdom” on things such as dependence on Social Security. Consider that the Social Security Administration – who arguably has “skin” in the game – claim that a third of retirees are heavily dependent – to the tune of 90% or more of their income – on Social Security. However, a study based on IRS data found that only 18% of retiree households are heavily dependent on Social Security, and just one in eight retirees receive 90% or more of their income from Social Security. Don’t get me wrong – Social Security is clearly a vital and essential component of our nation’s retirement security – but the IRS data indicates that, for most, it isn’t a primary source at present.

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but data suggests that most retirees aren’t exactly burning through their retirement savings. Not that some aren’t drawing down too rapidly, mind you – and that’s a valid concern. But many, perhaps most – aren’t.

Data suggests that today’s retirees are actually in pretty good shape. In addition to the IRS data cited above, that sentiment is borne out by any number of surveys (perhaps most notably the Retirement Confidence Survey, published by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald Associates) that continue to find that those already in retirement express a good deal more confidence about their financial prospects than those yet to cross that threshold. And certainly, the objective data available to us suggests that today’s retirees are better off than previous generations, though their retirement – and potential health issues – may at some point take a toll.

Still, in 2014, EBRI found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers — between 83% and 86% of them, in fact — with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold — and that’s making no assumptions about the positive impact of plan design features like automatic enrollment and annual contribution acceleration.

Not that there isn’t plenty to worry about; reports of individuals who claim to have no money set aside for financial emergencies, the sheer number of workers entering their career saddled with huge amounts of college debt, the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work (though not as enormous as some claim)…

That said, I shudder every time I hear an industry leader or advisor stand up in front of an audience and proclaim that there is a retirement crisis – because, however well-intentioned – they are almost certainly providing “aid and comfort” to those who would like to do away with the current private system as a failure, not a work in process.

What seems likely is that at some point in the future, some will run short of money in retirement, though they may very well be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels.

However, what seems even more likely is that those who do run short will be those who didn’t have access to a retirement plan at work.

- Nevin E. Adams, JD
 
Footnotes
  1. Nor is that the only shortcoming in that widely utilized source. The nonpartisan Employee Benefit Research Institute (EBRI) has pointed out that a change in survey methodology in 2014 has produced some questionable plan participation results from the CPS – a finding subsequently validated by the Investment Company Institute.
  2. Not that IRS data can’t be misapplied.

Saturday, May 12, 2018

Means 'Tested'

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but the data suggests that most retirees aren’t exactly burning through their retirement savings.

I remember my one and only conversation with my father about retirement income. He had already decided to quit working, and had gathered his assorted papers regarding his savings, insurance, etc. for me to review. Determined to “dazzle” Dad with my years of accumulated financial acumen, I proceeded to outline an impressive array of options that offered different degrees of security and opportunities for growth, the pros and cons of annuities, and how best to integrate it all with his Social Security.

And when I was all done, he looked over all the materials I had spread out before him, then turned to me and said – “so how much will I have to live on each month?”

See, my dad, like many in his generation, were accustomed to living within their means. And, according to new research, he isn’t the only one.

The study shows that retirees generally exhibit very slow decumulation of assets. More specifically, the nonpartisan Employee Benefit Research Institute (EBRI) found that within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets; those with between $200,000 and $500,000 immediately before retirement had spent down just 27.2%. Retirees with at least $500,000 immediately before retirement had spent down only 11.8% within the first 20 years of retirement at the median.

Those with pensions were much less likely to have spent down their assets than non-pensioners. During the first 18 years of retirement, the median non-housing assets of pensioners (who started retirement with much higher levels of assets) had declined just 4%, compared with a 34% decline for non-pensioners.

The median ratio of household spending to household income for retirees of all ages hovered around 1:1, inching slowly upward with age – a finding that the EBRI researchers said suggests that majority of retirees had limited their spending to their regular flow of income and had avoided drawing down assets, which explains why pensioners, who had higher levels of regular income, were able to avoid asset drawdowns better than others.

Not that that’s necessarily a heartening result, since those pensioners, arguably having guaranteed income for life, such as a pension, doesn’t lead them to spend down their assets. Indeed, of all the subgroups studied, pensioners have the lowest asset spend-down rates – though one might well expect that, with that pension “cushion” they might be more inclined to dip into their savings and “splurge.”

Why are retirees not spending down their assets? The EBRI report offers a number of reasons:
  • People don’t know how long they are going to live or how long they have to fund their retirement from these assets.
  • Uncertain medical expenses that could be catastrophic if someone has to stay in a long-term care facility for a prolonged period.
  • A desire to pass along assets to heirs.
  • A lack of financial sophistication – people don’t know what is a safe rate for spending down their assets, and are thus erring on the side of caution.
  • A behavioral impediment – after building a saving habit throughout their working lives, people find it challenging to shift into spending mode.
Now, the EBRI research was based on government data from the U.S. Health and Retirement Study to track retirees born between 1931 and 1941 with assets ranging from stocks, bonds, mutual funds, real estate and CDs to savings and checking accounts (individual homes were excluded). That’s “greatest generation” territory – retirees who were, as my father, accustomed to living within their means. Even then, it’s not all sunshine and unicorns; some retirees are indeed running out of money in retirement – though, at the same time, instead of spending down, a large – and to my ears, largely unacknowledged ­– number of retirees are continuing to accumulate assets throughout retirement.

But I’d still argue that the question “how much will I have to live on each month” winds up being a lot easier to answer at retirement – if you’ve been thinking about it pre-retirement.

- Nevin E. Adams, JD

Saturday, May 05, 2018

The Chicken or the Egg?

It is a question that has puzzled philosophers and scientists for centuries: which came first – the chicken or the egg? Similarly, an updated version of a classic survey of retirement confidence finds some interesting attributes among those who are more confident about their prospects – but are those attributes a result of that confidence, or is it the confidence that preceded them?

The 28th annual Retirement Confidence Survey (RCS) from the non-partisan Employee Benefit Research Institute (EBRI) and Greenwald Associates found that Americans are feeling a bit better about their retirement prospects.
However, the RCS also found – as it has in previous years – that certain factors are tied to higher confidence, specifically if they have access to a defined contribution plan, are relatively free from debt, are already retired – or, in a new finding from this year’s RCS – that they are healthy.

Now, the connection between access to a retirement plan and savings is well established. An updated analysis by EBRI finds that even those with modest incomes – those making between $30,000 and $50,000 – are nonetheless a dozen times more likely to save if they have access to a retirement plan at work.

More intuitive is the negative impact that debt, particularly heavy debt, can have on retirement savings, not to mention the impact on confidence about that savings, or more precisely, the lack thereof.

As for the new finding in this year’s RCS, 6 in 10 workers who are confident about their retirement prospects say they are in excellent or good health. As for those who are not confident about retirement, only 28% report such good health. The same is true for retirees: 46% of confident retirees are in good health, compared to just 14% who are not confident. What’s less clear is whether they are confident because they are healthy, or healthy because they are confident (or have a reason to be).

In fact, those of us still looking ahead to retirement can draw some comfort that those in retirement are – and have consistently been – more confident about retirement. Indeed, in this year’s RCS, a full three-quarters of retirees are very or somewhat confident they will have enough money for retirement – and that’s as high as that metric has been going all the way back to 1994 (except for last year, when 79% were that confident).

Of course, retirees were also more than twice as likely (39% versus 19%) as workers to have tried to calculate how much money they would need to cover health care costs in retirement – and those who had were less likely to have experienced higher-than-expected health costs and are more likely to say that costs are in line with their expectations.

Ultimately, there’s nothing like actually living in retirement to provide a solid sense of what it costs to live in retirement. When it comes to retirement confidence, it may not always be obvious as to whether the chicken or the (nest) egg came first.

But it seems to me that a "bird"
in the hand is nearly always worth two in the bush…

Saturday, April 28, 2018

(Too) Great Expectations?

My schedule – and aversion to crowds – means that I rarely see a new movie the first weekend it comes out (a rare exception – Avengers: Infinity War this weekend).

While this means that there are times when I’m the only one in the office the following Monday who hasn’t seen the latest blockbuster (and thus can’t offer an opinion), more often than not, it’s also spared me the time, money (and potential aggravation) of rushing out to see a movie that is more likely to be up for a “Razzie” than an Oscar.

However, I’ve also found myself in situations where the hype surrounding a new blockbuster is so compelling that it builds up my expectations beyond the reality – leaving me… underwhelmed.

Doubtless that was the sense of many in reading the Best Interest Regulation proposal published by the Securities and Exchange Commission last week. Those who had hoped that a uniform fiduciary standard might emerge were surely disappointed, as were those who might have anticipated that the SEC’s proposal might step up and fill a gap potentially created if the 5th Circuit’s ruling was unchallenged. There is, of course, an irony in a Regulation Best Interest that doesn’t define “best interest,” and understandable concerns that a standard that leans so heavily on “reasonable” tests is portrayed as an objective standard.

On the other hand, all will surely find comfort in the acknowledgement that “cheapest” isn’t deemed equivalent with “best,” and some will certainly be reassured by the “principles-based” emphasis, not to mention the acknowledgement of the Labor Department’s fiduciary rule and Best Interest Contract Exemption (BICE) and the latter’s stated objectives as consistent with Regulation Best Interest, even if the latter doesn’t create fiduciary status.

Odds are, if you liked the Labor Department’s fiduciary rule and its structures, you won’t be satisfied with the SEC’s take. On the other hand, if you thought the DOL went too far, the SEC’s proposal might well be more in line with your expectations. And yet, the lingering uncertainty as to the when – or if – of the SEC’s response – and the (at last until lately, relative) certainty of the Labor Department’s approach has led many firms to institute processes and procedures suited for the latter, not the possibility of the former.

Arguably, the vast majority of advisors committed to serving workplace retirement plans were well along the path of satisfying ERISA’s compensation strictures, and the Best Interest Contract Exemption (BICE) – with all its shortcomings – provided a means for the rest to work their way there. What many found most confounding about the Labor Department’s fiduciary rule was its extension of oversight to IRAs, notably the enormous IRA rollover market – and, in that regard at least, the SEC proposal seems to be reasserting its authority. Will that be an area of “compromise” between the agencies? Time will tell.

Ultimately, the current SEC proposal – and bear in mind, this is really just a starting point – is bound to disappoint more than it pleases, if only because it introduces an element of uncertainty at a particularly critical time. Many, having waited nearly a decade for the proposal to emerge, doubtless hoped it would be more proscriptive in scope and/or detail. Indeed the industry commentary thus far seems to be a sense that it feels half-finished, rushed to press, perhaps even opportunistic in its timing, what with the ink on the 5th Circuit’s decision still damp. Let’s face it, even the SEC commissioners who supported its publication did so with cautioning commentary, if not outright reluctance.

That said, having waded through the 1,000-plus pages twice and half again, one can’t be help but be struck by the amount of space in those 1,100 pages dedicated to questions from the proposal’s authors – questions that merit consideration and thoughtful response.

The work may be unfinished, it may be unsatisfying in scope or clarity, but we now have a window (albeit a short one) – and an invitation – to comment, inform, and yes, perhaps even remedy those shortfalls.

- Nevin E. Adams, JD

Saturday, April 07, 2018

College ‘Intuition’

Much remains unsettled – and, as yet, largely unadjudicated – in the large, and growing series of excessive fee litigation directed at university 403(b) plans. However, certain trends in the litigation have emerged – some very different than 401(k)s, others not. Here’s what to look (out) for.

The list of these so-called university 403(b) suits – the first were filed in August 2016 – now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Yale. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University – both of which are currently proceeding to trial – and the University of Pennsylvania, which recently prevailed in a similar case. Another – involving Princeton University’s 403(b) plans – is on hold awaiting an appeal in the University of Pennsylvania litigation.

By my reckoning, here are the grounds upon which the university 403(b) plans that have been sued thus far have in common.

They have more than one recordkeeper.


While not every university 403(b) plan against which a lawsuit has been filed employed the services of more than one recordkeeper, they all seem have done so at one point in their history.

Indeed, a couple of lawsuits filed against university plans that have consolidated to a single recordkeeper have pointed to the consolidation decision as proof that the plan fiduciaries knew that the multiple provider approach was inefficient and costly – and should have acted sooner.

They offer a “dizzying array” of funds (generally from each of the aforementioned recordkeepers).

In the 401(k) world, large fund menus have long been considered a nuisance, if not downright unproductive. We’ve even got a behavioral finance study involving jams to back up the sense that, given too many choices (whatever that may be – with jams, it’s apparently more than 6), people tend not to decide.

With university 403(b) plans – certainly the ones that have found themselves sued – the “norm” seems to be in excess of 100. And frequently they approach that number with each recordkeeping provider.

That said, at least one court presented with the issue has said “Having too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.” And a second one has just held that “plaintiffs have neither alleged that any participant experienced confusion nor stated a claim for relief.”

They offer “duplicative” investments.

One of the reasons the fund menus, at least in total, seem to be so large is that each recordkeeping provider seems to put forth their own optimal menu of choices – and if you have more than one recordkeeper – well, you apparently wind up with “duplicates” in what the plaintiffs frequently claim are “in every major asset class and investment style.”

And in numerous of these cases, the only funds offered are the proprietary offerings of those recordkeepers.

Their recordkeeper choice “tethered” them to certain fund options.

Many, though not all, of the lawsuits involve plans that had TIAA-CREF as recordkeeper, and those all cite how the choice of TIAA-CREF as recordkeeper bound (“locked” and “tethered” are other terms employed to describe the arrangement) the plan to include certain (allegedly inferior) TIAA-CREF investment options on the menu, notably the CREF Stock Account and Real Estate Fund. Other issues unique to some TIAA-CREF investments are certain transfer restrictions, and some differences in their loan account processing.

Share ‘Alike’

There are, of course, elements that these programs share with their 401(k) brethren.

They use retail class mutual funds and/or active when passive would “do.”

Yes, not only are those fund options “duplicative,” they are often retail, rather than institutional class. Or actively managed when passive varieties were available. And thus more expensive, so the argument goes.

They pay for those (multiple) recordkeepers via asset-based, rather than per participant fees.

This wasn’t always an issue in excessive fee litigation, but in recent years – well, it’s become something of a regular “feature” of this type litigation – and it’s been part and parcel of the fabric or 403(b) university plan litigation.

The argument, of course, is that recordkeeping is about keeping up with individual records, and whether that individual account balance is $100 or $100,000, the cost of keeping up with the balance is the same. However, not content to argue with the method of calculation, these days the plaintiffs nearly always take the next step – and proffer what they consider to be a reasonable per-participant fee – on their way to alleging that the fees being charged – are not.

They are big plans.

Nearly all of the 401(k) 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.

And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found; a.k.a. plaintiffs.

Less cynically, the plaintiffs generally charge that, despite the plan’s large (“jumbo”) size, rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendant caused the Plans to pay unreasonable and excessive fees for investment and administrative services.”

Where does this leave your “average” multibillion dollar 403(b) university plan? Well, they say that forewarned is forearmed. However, the reality is that corrective actions now may not be enough to keep the plan out of “cite” – but it might be enough to keep your plan out of court.

- Nevin E. Adams, JD
 
Note: It bears acknowledging that the reason that so many of these suits allege the same things is not only that the plans have similar structures and characteristics, but that many of the suits have been filed by the same firm (Schlichter Bogard & Denton) – or by firms that have taken pages (literally in some cases) from the suits filed by that firm.


Saturday, March 31, 2018

Parental Guidance


Photo of Nevin and his mom.
Nevin and his mom.

This weekend will mark the 12th anniversary of my father’s passing. There’s sadness associated with that date, of course, but he left behind a rich legacy in friends, family, and his life’s ministry that manages in the oddest ways to touch me at least once a month, even now.

At 76, Dad lived longer than I think any of the men on his side of the family had to that point (as a lineal descendant, I’m happy to note that on my mother’s side, my grandfather and great-grandfather made it past 90). Ultimately, he was with us longer than he expected to be – but a lot less time than I ever anticipated. However, for all the good that Dad did in this life for others, as I have thought about my father this week, it’s my mother that is more often in my thoughts. Because she, like many women, have spent longer in retirement than their husbands.

As is the case in many families, “Mom” was our family’ CFO. She was the one who encouraged me to start saving in my workplace retirement plan as soon as I was eligible (and I did), and over her lifetime she has continued to practice what she preached.

Now nearly 88, Mom’s still independent, vibrant, financially self-sufficient – and that’s no accident. On top of the expenses of rearing four kids, Dad, a minister, considered self-employed for most of his working life, funded both the employer and employee portions of Social Security withholding and still found a way to set aside money in a tax-sheltered account (he also tithed “biblically,” for those who can appreciate that financial impact).

Mom, a school teacher, took a fairly significant (and unpaid) “sabbatical” so that she could stay at home with her four kids until the youngest was ready to head off to school. When she returned to work she was covered by a state pension plan, albeit one that required from her paycheck a much more significant contribution than most defer into 401(k)s). On top of that she saved diligently to buy back the service credits she had forgone during the years she worked in our home without a paycheck – and then set aside money in her 403(b) account (over Dad’s objections, I might add). Somehow, despite all those draws on their modest incomes during their working lives, they managed to accumulate a respectable nest egg – and bought a long-term care policy before such things were “cool” so as not to be a burden on their kids. Don’t tell me those of modest incomes can’t and won’t save.

Indeed, generally speaking, women face many more challenges regarding retirement preparation than men. They live longer (and thus are likely to have longer retirements to fund), tend to have less saved for retirement (lower incomes, more workforce interruptions, both when children are young, and as their parents age), and in addition to longer retirements, those longer lives mean that they are also more likely to have to fund what can be the catastrophic financial burden of long-term care expenses.

Sadly, because we all know how much difference it can make in retirement savings, women are less likely to work for an employer that offers a retirement plan at work (or to be part-time workers, and thus less likely to be eligible to participate). Only one in three women use a professional financial advisor to help manage their retirement savings and investments.

Oh, and like my mother, they tend to outlive their spouses –often by far more than the variance in average life expectancy tables suggest.

March has been designated Women’s History Month, and it seems a good time, even as it draws to a close, to acknowledge not only the special challenges that women face, but the amazing women out there – like my Mom, and perhaps yours – who are not only overcoming those challenges, but passing on the good habits of a lifetime to a new generation of savers, to boot.

- Nevin E. Adams, JD

Saturday, March 24, 2018

‘End’ Adequate? Are We Getting an Accurate Read on Retirement Readiness?

The title of a new report by the Society of Actuaries poses an intriguing question: “Retirement Adequacy in the United States: Should We Be Concerned?”

When all is said and done, the answer from the report’s authors seems to be “it depends.”

And, as it turns out, it depends on a lot of things: who is asking the question, who you are asking the question about, and what you think the answer should be. And that doesn’t even take into account the questions about the assumptions one makes to come up with the answers.

The SOA report draws some conclusions:
  • The current system of voluntary employment-based retirement plans has been largely successful from the perspective of companies sponsoring plans for individuals with long-term employment covered by such plans.
  • The mandatory Social Security system has done much to reduce poverty in old age, though adequacy studies using replacement ratios may overstate the success of this safety net for those in the lowest-income groups, because too many rely solely on Social Security as their sole source of support. Moreover, for households that don’t have access to employer-sponsored retirement plans, Social Security alone will not allow them to maintain their preretirement standard of living.
  • There is a need for future research that delves into the retirement challenges of particularly vulnerable populations, such as those who are widowed, divorced, long-term disabled or long-term unemployed.
But when it comes to answering the question posed in the title – well, the report’s authors concede that “significant differences in methodologies that are used in retirement adequacy research makes direct comparisons of results more difficult.” Specifically that most studies:1
  • do not adequately account for major unexpected expenses or shocks, such as poor investment performance, long-term care, death of a spouse and unexpected out-of-pocket medical expenses;
  • assume that the adequacy objective is to maintain pre-retirement living standards (surveys indicate retirees are willing to live more conservatively);
  • assume that people retire at a “normal” retirement age; and
  • differ significantly in their treatment of housing wealth (if housing wealth is accessible to meet retirement needs, overall adequacy is higher).
The report also offered some cautionary notes, specifically that:
  • You need to consider the source(s). “Different stakeholder groups are asking different questions, offering different solutions and measuring success in different ways.”
  • Reliance on replacement ratios can be misleading. While they are easily explained, can be compared over time, and may be used for individuals, groups of individuals or the entire retiree population, “there is no universally agreed-upon definition or consensus on what constitutes an adequate replacement ratio or on how to adjust for differences in individual circumstances.”
  • Post-retirement spending patterns can, and do, vary. Lifetime spending needs are also highly dependent on the length of the retirement period, changes that occur over time and whether a household experiences a spending shock during retirement. On the one hand, focus group and survey data show that most retirees are frugal and are satisfied with a lower standard of living in retirement than what is considered adequate in most research studies. However, large expense shocks “have a significant negative effect on retiree finances,” and many models ignore those impacts.
Ultimately, they conclude that some studies conclude that there is a retirement crisis in the United States and while others conclude that the system is in good shape – inconsistent outcomes that the authors say can be shown to be due to differences in research objectives, methodology, assumptions, definition of adequacy and population studied.

“The truth is that our retirement system has both successes and failures.”

Here’s to maximizing the first, and whittling away at the second – and not getting distracted by headlines in the meantime.

- Nevin E. Adams, JD
 
Footnote
  1. However inconsistent current reports are, things might be worse when it comes to considering the current state versus future retirements. The report notes that many of the current studies fail to take into account the impact of changes in retirement ages, phased retirement and work during retirement. And that most studies focus on the retirement adequacy of current and near retirees, although retirees of the future may face more difficulty than today’s retirees “because of demographic issues, high debt load, lower likelihood of being married and owning a home, potential future reforms to Social Security, shifts in employment, and changes in the structure of employee benefit plans.”