Tuesday, December 27, 2005

Doctor’s Orders

Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

In the fifth in this series, IMHO offers another non-automatic alternative to help involve and engage participants. As always, I would appreciate your reactions, comments, and suggestions.

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(5) Set up regular checkups

When it comes to going to the doctor, I’ve always adhered to a very simple standard – if it ain’t broke, don’t. Of course, as one gets older, gains a family, and has greater responsibilities, one can – with the prodding of a caring wife, anyway – make exceptions to the strictest of rules. It was during one of those not-so-regular “regular” checkups years ago that I discovered that age, heredity, a bad diet, a busy/stressful occupation, and a relatively sedentary lifestyle can contribute to high blood pressure. Mine is a relatively mild case – I now exercise modestly and take a single pill daily – but that simple finding has transformed the mere inconvenience of going to a physician into a new area of stress. See, every time I go to the doctor, I am worried that my blood pressure will be high enough to warrant a more severe regimen – and that worry, in turn, engenders an increase in blood pressure. No matter how much I try to calm myself, I appear to have a severe case of what they call “white coat syndrome.” Fortunately, my doctor has learned to take a reading at the end of my visit, as well as at the beginning.

Back when the markets were consistently surging higher, participants seemed to look forward to opening that retirement plan statement, or booting up that account balance screen with the enthusiasm of a child on Christmas morning. Now that we’re back to the uncertainty of a more “normal” market cycle, many participants seem reluctant to pay attention to such matters. It’s more than that they don’t have the time or the expertise for such things – though those are certainly considerations. Like my occasional trips to the doctor, they are also “afraid” of what they’ll find reflected on that retirement plan statement – and what they’ll be told they have to do.

Those concerns notwithstanding, pretending the problem doesn’t exist won’t keep one’s retirement plan healthy, any more than my simply refusing to go to the doctor will keep my blood pressure under control. IMHO, a sold retirement plan checkup requires a commitment to the following:

Set ANNUAL savings goals – For too long we have pushed the long-term nature of retirement plan saving. Yes, we have time, but that time isn’t indefinite – and time works for you, but not if you don’t start. Participants need shorter-term goals – ones that fit within a mere mortal’s budget mindset. Ask them how much they can afford to save for the rest of their life (and that’s what most enrollment processes suggest), and you’ll get hesitation. But set a goal for the next year – and you might be surprised just how “aggressive” a goal people are willing to set.

Get quarterly, HARDCOPY participant statements – Ok, some people prefer online, and paper may cost more – but there’s nothing like the tactile experience of touching a retirement plan statement for conveying a sense of substance. More importantly, whether it’s once a year, or once a quarter, the arrival of that statement provides a built-in reminder/opportunity to keep an eye on what’s going on.

Set a time annually to evaluate, and if necessary, adjust goals -- Let’s be honest: Every financial advisor worth his/her salt would love to do this with participants – but even the most engaged participants may struggle with that kind of commitment. Ironically, the more often you do it, the less time – and the less pain – it seems to require.

Interestingly enough, just knowing that that regular semi-annual appointment is coming has kept me more aware of diet and exercise, and that has not only made those appointments less painful - ultimately I am healthier, and happier that I am healthier (and no doubt healthier because I am happier) -- even if I still hate going to the doctor. What might a similar approach mean for the retirement health of plan participants?

- Nevin Adams editors@plansponsor.com

Sunday, December 11, 2005

Meeting Minders

Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

In the fourth in this series, IMHO offers another non-automatic alternative to help involve and engage participants. As always, I would appreciate your reactions, comments, and suggestions.


(4) Once you’ve built it, make them come.

I spent most of my career working for companies that, once a year, put a hard push behind the support of a certain charitable campaign. That hard push included times when we were required to turn in pledge cards and, while the amount wasn’t mandatory, let’s just say it was pretty clear what the “right” amount was. However, adding insult to injury, either to reinforce our sense of charity or to create it, we also had to go to a meeting where we would have to watch a video and listen to a testimonial about the good work that has been, and now would be, done -- thanks to our contributions and support.

Now, I always hated having to go to those meetings – it was time I couldn’t spare on a subject I didn’t need to be educated on (there was one glorious year where, so long as you had pledged the “proper” amount, you didn’t have to go to the meeting). But aside from the fact that they took attendance, it was common knowledge that the company president was not only committed to the cause – he was inclined to meet/greet folks at the door. Needless to say, I grumbled, but I went.

My experience notwithstanding, one of the most obvious remedies to anemic plan participation is – mandatory employee meetings. Not that the concept is controversial with advisors – I have yet to meet one who didn’t advocate the practice. The problem, of course, is plan sponsors – or more accurately, managers reluctant to shut down production long enough to accommodate that 401(k) meeting.

I’ll concede it’s a challenge – aside from the production concerns of management, many workers don’t want, or don’t feel that they can afford to take the time off (and yes, some don’t think they require education on the subject) – and that reluctance all-too-frequently manifests itself as non-meetings, since your contact in HR may have little sway over the activities of the production line. Stuck between that rock and a hard place, many advisors try to do the best they can with the hand they are dealt, ultimately resigned to a “if you build it, you hope they will come” strategy. To their credit, many advisors have achieved success with some remarkable “workaround” approaches, but all too often at the sacrifice of their time and a lesser result for the plan. At best it is, after all, trying to do your job with one arm tied behind your back. After all, how are you supposed to help people become capable retirement plan saver-investors if they won’t even come to hear what you have to say?

The consequences go far beyond merely being unable to get your message to every eligible worker. If employees don’t have to come, then clearly the topic, the message, and perhaps the messenger, aren’t all that important. At that point, you’re probably left either preaching to the choir, or those who simply don’t have anything better to do. More insidious is the potential for a culture of “too cool to participate” -- where those who don’t attend the meetings because “they’re a waste of time” actually reinforce their position by ridiculing those who take the time to do so.

Confronted with these realities, what can an advisor do? The best time is on the front end, of course. Everyone talks about fund menus and fees – but the best advisors are now talking about things like participation and deferral rates. An integral part of your strategy to curing that 55% participation rate should be an insistence on mandatory enrollment meetings, for instance, and perhaps some kind of annual review, timed around the delivery of participant statements.

If you can’t get support for mandatory employee meetings, there are alternatives. Employers reluctant to shut down production can pay workers to show up a half hour early for their shift (I would not recommend an after-shift session when everyone is tired), or maybe the mandatory sessions could be set at various times for different units (or parts of different units). Still can’t get folks to come? Seek out what I call “missionaries” – or convert a few to your cause. These are the folks that everyone listens to on the shop floor. Get them involved in not only spreading the word about the importance of savings – but of the importance of attending the meetings. Their words – and example – can have a great impact (they can also help overcome language and cultural barriers for you) – and they can continue to deliver the message(s) well after you leave.

Employers unwilling to impose a “mandatory” meeting on workers may have at their disposal a tool that can be just as effective – maybe more. If you can get the company president to make the commitment to attend the sessions – well, trust me – not only will it support your efforts, not only will it provide the firm with some nice PR with the workforce – but workers generally won’t want – or won’t feel they can afford – to miss those meetings, even if they are “voluntary”.

- Nevin Adams

Sunday, December 04, 2005

Ask Me No Questions


Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

In the third in this series, IMHO offers another non-automatic alternative to help involve and engage participants. As always, I would appreciate your reactions, comments, and suggestions.



(3) Eliminate Self-administered “Risk Tolerance” Questionnaires

A number of years ago at an offsite management meeting, I was introduced to the Myers Briggs Type Indicator. For those not familiar with MBTI, it is a personality inventory–-based on the theory that how we behave as individuals is due to basic differences in the way we, as individuals, prefer to rely on our perception and judgment. There are more than a dozen types, combinations that supposedly not only help you better understand yourself, but also the behaviors and preferences of those you work with. I don’t know that it ultimately made much difference in how our management team interacted with each other but, for a short time anyway, we were at least more aware of the differences in how individuals process information and respond.

It may be a crude comparison, but many retirement plan programs have instituted a questionnaire that also purports to help individuals better understand how they feel about the process of investing–-the risk tolerance questionnaire. Originally designed to assist financial advisors to develop a workable financial strategy for higher-net worth customers, the initial applications to the retirement plan space were largely crude and awkward: They used terms that the average retirement plan investor didn’t understand, relied on them to assess how they would feel about events they had never experienced, and ultimately tried to buttonhole the investor as either “conservative,” “aggressive,” or “moderate”–-oh, and were generally self-administered. A determination that was then used to match them up with a sample asset allocation model that applied to their expressed tolerance for risk.

Much as these questionnaires have improved over the years, I still shudder at their application to the uninitiated investor. In the hands of a skilled advisor, they can provide valuable insights into both the investment knowledge and concerns of a participant. However, administered in the absence of that grounding, they seem capable of providing a result that is irrelevant at best.

By its very existence, the questionnaire serves to intimidate the would-be participant–-imposing a “test” that still uses terms that the average retirement plan participant doesn’t understand to present potential risk scenarios that that same participant cannot envision as a precursor to the result. That might be an acceptable trade-off if it contributed value to the ultimate result–-but what in the world does one’s tolerance for investment risk have to do with achieving retirement security? Even if one fits someone’s textbook definition of a “conservative” investor, that doesn’t necessarily mean that one is comfortable with the notion of the smaller nest egg that a more conservative investment approach may yield. In fact, the typical questionnaire focuses only on the perceived risks of investing, rather than the potential risk of having accumulated too little.

Let’s assume for a minute that the would-be retirement plan investor gets through the questionnaire, let’s assume that he or she isn’t confused by the nomenclature affixed to his investment style, let’s even pretend that that affixation actually has some bearing on how they should invest to achieve a comfortable retirement. Having figured out their investment type, they must now move to the next stage of the process–-matching their risk “type” with the sample portfolio designed for that type. Just a matter of picking the right pie, right?

Generally not–-because it is at this stage that those swollen fund menus (see last week’s IMHO at http://www.plansponsor.com/ad_type1/?RECORD_ID=31619) reemerge as a problem. All too frequently, the participant is shown a pie chart that is color-coded with the various asset allocation categories–-and he/she must then not only figure out which funds from the plan menu match those colors, he/she must also pick between multiple funds in the same category.

No small part of the success of our Myers Briggs exercise was that the results were administered by a person trained to interpret and explain those findings. Similarly, a well-designed risk tolerance questionnaire (and by that I mean one that also deals with the risks of not investing enough, or aggressively enough, to meet retirement income expectations) administered by a trained professional can lay a valuable foundation for informed decisionmaking by both the advisor and the participant.

However, IMHO, participants should not be making retirement investment decisions based on their tolerance for investment risk. In far too many cases, we are still asking a participant who doesn’t know what to do (and who is already intimidated by the process) to take a quiz that he doesn’t understand–-so that we can affix a label that may not have anything to do with achieving retirement security–-so that we can let him put together a portfolio that is probably more complex than he needs–-through a process so complicated that he will likely never want to go through it again.

And then we wonder why they want someone else to do it for them.

- Nevin Adams editors@plansponsor.com

Saturday, November 26, 2005

Less is More

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Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

In the second in a series, IMHO offers another non-automatic alternative to help involve and engage participants. As always, I would appreciate your reactions, comments, and suggestions.

(2) More is Less – Put that Fund Menu on a Diet

Remember the first time you walked into Starbucks looking for coffee? Well, I do – and I was awfully glad that the line was so long that I had a chance to try and figure out something to order without sounding like a total idiot. I’m sure you’ve seen those studies about participant choice and inertia – the studies about how people given 24 jellies to choose from chose to buy none, while those with a mere six flavors were significantly more likely to actually buy one.

Then there was that study by Columbia University’s Sheena Iyengar in cooperation with The Vanguard Center for Retirement Research – research that found that, on average, every additional 10 investment choices cut participation rates by 2%. Those researchers noted that, while an employee with five funds in his or her plan has a predicted participation rate of 72%, one with 35 funds in the plan has a predicted participation rate of just 67.5% (in another interesting irony, the more options, the more likely participants were to invest in company stock).

We’re never surprised when we see the results of those kinds of surveys because - whether it was that first step through the door at Starbucks, maybe that first childhood trip to Baskin-oviRobbins 31 Flavors, or maybe even the first time you made fund selections for YOUR 401(k) – we all know that it’s harder to pick from among a large number of choices than from a smaller list, and we all know that it’s even harder when the choice has a significant financial impact.

Despite that, for the past 20 years, the average 401(k) menu has steadily expanded to a point where PLANSPONSOR’s 2005 Defined Contribution Services Survey found that the average number of investment options is 19! Think about it: Think about what that means in terms of the number of prospectuses they must be given, the length of the enrollment form, the sheer amount of time that it takes a voice-response unit to repeat the choices….What has happened to your ability to discuss those kinds of fund menus in those brief enrollment meeting windows? Are all those participants unable/unwilling to get engaged in making fund choices – or, in our exuberance for beefing up fund menus, have we made the process so complicated that only a true investment geek is able – or inclined - to do so?

I realize that less isn’t necessarily more when it comes to selling your services – in fact, it will generally work to your benefit to be able to present a robust menu of choices to your plan sponsor clients, and it should. But dumping an exhaustive menu on most plan participants isn’t doing them any favors, IMHO – even with the able assistance of the best advisor in the world.

- Nevin Adams

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MORE on the participant inertia study at http://www.plansponsor.com/magazine_type1/?RECORD_ID=22288

Too Many Fund Choices Can Drive Away Participants at http://www.plansponsor.com/pi_type10/?RECORD_ID=21209

A contrary view – researchers who say the average 401(k) menu today isn’t broad enough at http://www.plansponsor.com/magazine_type1/?RECORD_ID=29957

Sunday, November 20, 2005

Participant Directives - I

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Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

For the next several weeks, IMHO will focus on some non-automatic alternatives. As always, I would appreciate your reactions, comments, and suggestions:

(1) Make employees fill out and return their enrollment forms.

There was a time when participants’ contributing to a retirement plan was a means of enhancing a retirement that was primarily funded by a traditional pension plan and Social Security – a time when the so-called three-legged stool of retirement security actually had three legs. Now, of course, things are different, and while savings remains – and should remain - a voluntary action, there is no reason that we have to let employees simply ignore the option.

And yet, in many – if not most – companies these days, we let new employees do just that. Typically, on that first day the employee is given a stack of information and forms to complete – W4s, health-care forms, emergency numbers, etc. Most of that information must be provided immediately, while others must follow shortly thereafter. However, generally speaking, the 401(k) enrollment form isn’t treated with the same level of urgency. In face, particularly since they frequently aren’t eligible to participate right away, we simply tell them to take the information home, and when they have to turn it in. Sometimes they are scheduled for an enrollment meeting. But if they don’t turn in the form, that’s the end of it. And in a time when the industry keeps pushing plan sponsors to embrace automatic enrollment – where they must take on the responsibility for picking a deferral amount AND accept fiduciary accountability for deciding where to invest those deferrals – I am amazed at how many firms have never just made people turn back in the signed form.

Earlier in my career, I worked for an employer that was very supportive of the efforts of a certain large charitable organization. I was never sure whether the tactics employed to engage workers in supporting that program financially were the brainchild of that organization or my employer – but I can promise you, they were effective. Rumors abounded that failing to contribute the proper amount could slow one’s career advancement – and there were many stories of people “called in” to explain their lack of support. But, IMHO, one of the most effective tactics employed was the year we were required to turn in those pledge cards to our supervisor. Now, as a supervisor, I cared not a bit about someone’s charitable inclinations – but it became part of my job to make sure that all the cards were turned in by the deadline, and that the contributions were recorded. And, as silly a use of my time as it seemed, I did it (after all, I had heard the same stories).

I’ve little doubt that the requirement to turn those pledge cards over to a supervisor, coupled with the aforementioned paranoia about career advancement, had an impact on the success of those campaigns – certainly in contrast with prior campaigns where we could just stick the cards in an anonymous letter to personnel. But beyond that, I am sure there are some who, under the prior system, intended to fill out the card – but just never got around to it. However, the new system meant that they could look forward to “gentle” reminders from their boss (who, I should add, was getting “gentle” reminders from his boss) until they acted on those intentions.

There’s actually been a study on the impact of making participants turn in their enrollment forms. Called “active enrollment,” researchers noted that three months after hire, 401(k) plan participation was 28% higher among those required to turn in the forms, compared to those at firms with more traditional enrollment practices. And while automatic enrollment has registered higher results, active enrollment achieves them without imposing additional fiduciary responsibility on the plan sponsor – other than to simply do for the 401(k) form what they already do for other forms. Beyond that, since many automatic enrollment programs use a fairly low default rate (generally 2% or 3%), and one that is lower than most participants choose when they actually take the time to fill out an enrollment form, automatic enrollment can actually result in a savings rate lower than might otherwise be the case (at least one study has shown that, over time, average deferral rates actually declined as more and more participants simply let the automatic enrollment process take over and, as a result, more “participants” deferred at those lower rates).

While automatic enrollment does work to get workers participating who might otherwise not, the decision brings with it some fairly significant fiduciary concerns for plan sponsors that adopt it. It “works” by not involving the participant – and one could argue that that isn’t working at all. Certainly not when a process as simple as making sure that enrollment form is turned in helps keep the participant involved – without forcing additional fiduciary responsibility on the plan sponsor.

- Nevin Adams

MORE on active enrollment at http://www.plansponsor.com/pi_type10?RECORD_ID=26835 and http://post.economics.harvard.edu/faculty/laibson/papers/plandesign.pdf

Sunday, November 13, 2005

(Not) Getting It

Many in the provider community appear to have given up on participants, and you see study after study purporting to document the futility of the cause. Studies that show employees don’t participate when they could, studies that show that participants don’t save enough when they participate – that show that they don’t invest “properly” when they do participate – that they don’t know a bond fund from a bond issue. In fact, as an industry we’ve become so convinced that participants can’t do it properly – or at least have no interest in doing it properly – that we have crafted a whole set of solutions that require no participant involvement whatsoever, other than to provide the funding.

There is a point to be drawn from these studies, of course, and there clearly is a challenge looming, even if we once thought that all we had to do was conduct a few enrollment meetings, hand out several hundred thousand prospectuses, and provide a Web site link to turn participants into savvy and enthusiastic retirement investors. “If you build it they will come” is a “Field of Dreams,” not a strategy for retirement education.

I will concede that there is a group of hardcore non-participants who have no interest in saving or investing those savings. But my sense is that that only accounts for 15-20% of workers, not the 80-85% that many now seem to place in that category.

Think that making retirement savings decisions is tough? Consider that we ask the very same group of people who struggle with retirement decisions to choose a health-care option. To assist them in their understanding, we use acronyms like HMO, PPO, PPS – casually toss around terms like co-pays, out-of-network – and distribute explanatory materials that make most mutual fund prospectuses look clean and simple. Struggling to communicate these concepts with a less-than-technically astute workforce? Years before we were inclined to dispense with paper forms on the 401(k), we insisted that workers enroll in these programs online or via the phone – AND we make people go through this same harrowing process every year.

Now, every employee’s health-care choices aren’t that complicated – but the ones that involve employee contributions frequently are (remember that we only started giving workers the ability to make investment choices after we starting funding the programs with their money). Don’t tell me that people understand the health-care system any better than they do mutual fund investments – and don’t tell me that they are any more excited at the prospect of open enrollment than they are at sitting down with their retirement plan enrollment kit. And yet, year after year – every year – those same workers who don’t “get” retirement savings choices dutifully complete those health-care enrollment forms (IMHO, the large number of younger workers who fail to enroll for health-care coverage aren’t just confident of their health – they’re probably confused by the options).

I can’t say that workers understand those health-care options any more than they do those in that retirement-plan menu, or that they make good choices, but the take-up rate is significantly higher. Perhaps the reason is that the commitment is only for a year; perhaps because the need is “here and now,” not 40 years in the future. Maybe it’s as simple as the fact that you’re more likely to get a call from personnel if you haven’t turned in a health-care enrollment form than if you don’t return one for your 401(k), or maybe it’s because you only have a small window, once a year, to act on medical care enrollment. Maybe – and this may seem a bit counterintuitive – it’s because we make them sign up for the medical plan every year, rather than allowing them to “set it and forget it.” Maybe it’s because, in a dozen different ways, we send signals that retirement saving is optional.

Whatever the reason(s), IMHO, it suggests that the problem with retirement-plan participation isn’t that workers can’t, won’t, or don’t want to “get it.” If we can get them “involved” with making decisions like health care, surely we shouldn’t have to give up on retirement savings.
Next week: Some suggestions.

- Nevin Adams editors@plansponsor.com

Sunday, November 06, 2005

The Rest of the Story

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On Friday, the Government Accountability Office, or GAO, issued a report reflecting its analysis of cash balance plans and their impact on worker pensions. Before turning to the results of that report, we should start with some basic points of understanding. Simply stated, cash balance programs are widely described as “hybrid” benefit plans – technically a defined benefit plan, but with many of the characteristics of defined contribution plans. Like DB plans, they are typically employer-funded and insured by the Pension Benefit Guaranty Corporation (PBGC). They are like DC plans in that the benefit is a function of interest credited to your account each year, there is generally a regular statement of your account, and there is a lump sum payment option. The GAO report acknowledged, “CB plans may provide more understandable benefits and larger accruals to workers earlier in their careers, advantages that may be appealing to a mobile workforce.” However, most of the controversy around these plans revolves not around the plan design per se, but around how companies with existing pension plans have converted to the cash balance design.

The headlines regarding the GAO report were fairly consistent: “Workers lose in cash balance plans,” “GAO: Pension Plan Switch Hurts Employees,” "Cash-Balance Pensions Criticized.” And in fact, the report did note that, in its comparison of a typical pension plan (which it termed a final average pay, or FAP) converted to a cash balance (CB) plan, more workers would have received greater benefits under the FAP than under the typical CB plan. Those comparisons are complicated, of course, a point acknowledged by the GAO, even if the mainstream press coverage didn’t.

The GAO noted that the effects of a conversion depend on a variety of factors, including "the generosity of the CB plan itself, transition provisions that might limit any adverse effects on current employees, and firm-specific employee demographics." The GAO went on to note that most plans it studied provided some form of transition provisions to mitigate the potential adverse effects of a conversion on workers’ expected benefits for at least some employees, and that nearly half (about 47%) of all conversions used some form of grandfathering that was applied to at least some of the employees in the former traditional DB plan. In other words, if employers had simply done a straight conversion from a traditional pension to a cash balance, most workers would have lost benefits – but most employers didn’t do a straight conversion. Realizing the impact, they took special steps to mitigate, if not eliminate, that potential shortfall.

What the GAO report also noted was that, under its simulations, vested workers under either a typical or equal cost CB plan still fare better than if the pension plan is terminated – and let’s face it, with all the uncertainty and expense of running a traditional pension plan (not to mention its lack of design appeal to many in today’s private sector workforce), eliminating the benefit altogether is an increasingly viable option for employers. Indeed, the GAO report noted the importance of striking “a crucial balance between protecting workers’ benefit expectations with unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system.”

Ultimately, what the GAO report tells us is this, IMHO: It tells us that conversions from a traditional pension to a cash balance plan can result in reduced benefits – but generally don’t because employers have taken steps to mitigate that impact, on their own and without legislative mandate. It tells us that having a cash balance plan benefit is better than having no benefit at all. And it tells us that there is a fine line between an honest evaluation of these programs and driving employers away from offering their benefits altogether.

- Nevin Adams editors@plansponsor.com

You can read more about the GAO report at http://www.plansponsor.com/pi_type10?RECORD_ID=31339

Sunday, October 30, 2005

“Broken” Record

By now you have perhaps read – or at least been told about – the recent cover story in Time magazine titled “The Broken Promise.” The promise - one of retirement benefits and health coverage – has been broken by employers, with the complicity of government, according to the story’s authors. And, in fairness, if one is looking for trouble in the nation’s private pension system, there is trouble to find. Some of those “troublemakers” have been taken to task in this very column.

It isn’t just workers who have had “promises” reneged on, of course. Lawmakers have made significant changes to the laws regarding these programs over the years and, unlike the portrait painted by Time, they have frequently served to discourage both the funding of existing programs as well as the formation of new defined benefit programs. Generally, as in the current wave of “reform” legislation, they are targeted at the bad behaviors of a few – but come into effect well after those targets have skipped town. In effect, they punish those still trying to play by the rules for the misdeeds of others, which simply accelerates the rush to the exits.

Have you wondered how pension funding got to be such a big problem seemingly overnight? The problem with pension funding isn’t generally due to poor employer funding policies or lousy market returns, though both play a role. No, most of the “damage” to the system is a direct result of the elimination of the issuance of the 30-year Treasury bond – a decision that effectively undermined the rational basis upon which pension liability calculations had been predicated since the advent of ERISA. While this may have appeared to be good economic policy at the time, its impact on pension funding calculations has been enormous, unanticipated, and imposed upon employers without regard to its impact on those calculations. Congress was late to focus on the issue – and we’re still dealing with “temporary” replacements for this calculation.

As for retiree health care, lawmakers have refused to permit employers the kind of funding flexibility necessary to set aside funds for those obligations. Little wonder, given the dramatic double-digit increases in costs over the past several years – and the accounting changes imposed more than a decade ago - that a growing number of employers feel they simply cannot continue to support the expense. An expense that, certainly in some cases, seems relentlessly driven higher by the complacency of workers with a co-pay-only accountability for the financial implications of those decisions. Little wonder, too, that employers might look to offset their financial obligation by the amount of Medicare coverage, in much the way that they have for pension offsets with Social Security.

But the most significant “betrayal” of the pension promise, IMHO, comes from the accounting community – more specifically the Financial Accounting Standards Board (FASB) – which, in the “interests” of accuracy and transparency, have transformed the long-term nature of these commitments into short-term obligations. This space is too short to debate the merits of that approach – but one cannot credibly dispute that the accounting treatment of pension and retiree health-care obligations has undergone significant change since ERISA was passed, certainly since many of these promises were made. In a very real sense, employers made their pension promises based on a specific set of financial terms and conditions - that were totally, and dramatically, rewritten a decade later by the accounting profession.

None of that context addresses the very real plight of retirees who find themselves without the financial resources they had hoped for, or counted on, at the end of their working lives. For years employers have been expected to simply absorb the impact of these dramatic changes in policy, while changes in the underlying programs are widely pilloried as a betrayal of worker trust. Unfortunately, coverage like that in the Time article sheds no light on the root causes of the problem. Rather, it attempts to create a villain by caricature – the greedy employer – which it seeks to hold accountable for the challenges that confront us.

But by glossing over the real culprits and causes of the crisis it seeks to perpetuate, it contributes to the problem, rather than the solution.

Sunday, October 23, 2005

Peer Pressures

One of the most valuable skills in my profession - and perhaps in any profession – is an ability to discern trends early. Just as valuable is the ability to discern the sometimes fine line of distinction between what may be a trend, and what may, in fact, be nothing more than a fad. Most plan sponsors have a functional aversion to the latter, and the vast majority have no real passion for being too early in the adoption of the former. After all, nowhere in the fiduciary directive to do only things that are in the best interests of participants and beneficiaries can there be found an admonition to be first.

Notwithstanding those natural disinclinations, ours is a business in which trends – and fads – constantly emerge. Whether it is simply a function of the incessant "arms race" deemed necessary to cement a provider's position in the market, or a genuine pursuit of excellence, it seems as if there is always some new idea or product coming to market. That’s a good thing for journalists, but plan sponsors, and to some extent advisors, can find it to be somewhat discomfiting. After all, adhering to that other fiduciary admonition – the requirement that services offered to participants and the fees paid for them be “reasonable” - is most certainly a fluid determination as well.

So, how do plan sponsors make that determination? One must be careful in making generalizations about such things, of course. The difference between a fad and a trend is often no more than one of time and acceptance, after all, and each plan sponsor situation is based on hugely independent factors. Still, in my travels (and travails) in working with plan sponsors, I have found that a new idea/product can quickly evolve to become a trend if it:

Is cheap
Is easy
Solves a problem
Helps participants
Seems the right thing to do

As a corollary, things that cost money, seem complicated to introduce, or that don’t address a current perceived problem will naturally be a harder sell. But even if all the factors listed seem to apply, that new product/idea can be “trumped” by one simple factor – does it mean taking on additional risk for the plan, or the plan sponsor? And, IMHO (and in my experience), if it does, all the other factors don’t really matter.

No wonder things like daily valuation (which, at least on the outside, seemed to be both cheap AND easy), burgeoning fund menus, and, more recently, lifestyle funds seem to become the “norm” almost overnight. Little wonder, too, that things like self-directed brokerage accounts, wireless PDA delivery of participant account information, automatic enrollment, and, yes, even offering advice to participants, are harder sells. It also helps explain why things like offering advice can, over time, be seen in a new light – to wit, that the risks of not offering advice may be greater than doing so.

There is, however, one additional factor that influences plan sponsors in their decisionmaking process, and as odd as it may seem, it is a factor that influences most of us from a very young age. For as surely as plan sponsors are understandably reluctant to be first to embrace a new concept, as human beings we also have a tendency to go with the flow, to follow the crowd. Fads become trends sometimes for no reason other than the rationale offered by teenagers everywhere for occasionally aberrant behavior – because “everybody is doing it.”

Plan sponsors rely on advisors not only to keep them abreast of current trends, but to help them cut through the clutter and “spin” of the latest hot product pitches, and to help them fulfill their fiduciary obligations to act in the best interests of participants by providing access to services (and services at fees) that are reasonable for their needs. The best advisors resist the siren call of the crowd, while helping plan sponsors understand both the pros – and cons – of new concepts.

Or, as I’m sure your mother once told you – “So, I suppose if everyone else jumps off a bridge, you're going to?"

Sunday, October 16, 2005

Simply, Stated

I don't get the Roth 401(k).

More accurately, I don't get the need for the Roth 401(k).

I understand that there is an emerging common wisdom that tax rates in the future will be higher than they are at present. I also understand that some may well believe that they are in a better position to pay taxes now than they may be in the future. Bottom line, I understand the appeal of the Roth IRA. I just don’t get why we need to clutter up the 401(k).

Let’s be honest here. The folks most likely to benefit from the Roth 401(k) (other than a myriad of personal finance columnists) are, quite simply, those who are better-off financially. Not that I am against benefits for this group (I am, and hope to remain, among this constituency). However, given how many arcane rules and strictures exist in qualified plans to prevent them from benefiting unduly at the expense of the plan, the Roth 401(k) strikes me as peculiarly targeted.

It’s not exactly a "giveaway" for the rich, who won’t be able to contribute more to the Roth 401(k) and their pre-tax account than they previously could to the pre-tax account alone. Indeed, proponents claim the Roth 401(k) gives highly-compensated executives who were beginning to look askance at their need for a tax-deferred savings vehicle a new reason to support the workplace program. There’s nothing that precludes the non-highly compensated individuals from taking advantage of the convenience of the account in their 401(k), after all, nor are employers even obligated to offer the option to participants. Those worried about that burgeoning federal deficit may even draw comfort from the fact that the Roth 401(k) is a projected money maker (the US government gets tax revenues now, rather than later).

Like self-directed brokerage accounts, it will no doubt find an enthusiastic constituency among some professional service firms and for a handful of executives across a broader spectrum of employers (unlike those self-directed brokerage accounts, however, the costs will likely be born by the entire plan, not just those who avail themselves of the option). And like those accounts, many of those who will benefit most, and who will be most intrigued, will have availed themselves of the services of a financial advisor. My best guess is that one will be hard-pressed to find a provider who will not offer the capability - and, having spent some amount of time and energy building the facility, we can count on a steady promotional drumbeat extolling the virtues of the additional flexibility.

Still, at its best, the Roth 401(k) seems a dalliance for those the federal government generally deems too wealthy for such deference, IMHO. Moreover, it will be expensive to develop, complicated to explain, and at least marginally problematic to administer.

At a time when our industry is clamoring for greater simplicity - when the current complexity of choices already stymies the participation of so many – additional cost and complexity is surely the last thing we need.


- Nevin Adams

Monday, October 10, 2005

Fly “Buy”

Last week, in Washington, DC, a couple of senators that most of you may never have heard of brought a rush to pension “reform” to a screeching halt – and may have killed it for this session. Senator Mike DeWine (R-Ohio), along with Senator Barbara Mikulski (D-Maryland), used a procedure that allows individual senators to stop legislation from advancing to the full Senate. The bill, co-sponsored by Senator Charles Grassley (R-Iowa), contains a number of pension reform provisions, including increasing the insurance premiums paid by defined benefit plans, expanding and enhancing funding level disclosures, changing some of the rules on how funding levels are determined, making it easier for companies to contribute more to those plans, and imposing tighter requirements on underfunded plans to address the situation.

Senators DeWine and Mikulski took issue with a particular provision in the bill – one that would have assessed higher funding requirements on pension plans based on the credit rating of the firm, rather than on the funded level of the pension plan – a determination that DeWine, at least, saw having a negative impact on steel and auto companies out of proportion to their actual commitment to their pension plans. Earlier in the week, Senator John Cornyn (R-Texas) also took steps to block consideration, though his concerns revolved around some of the special protections the bill provides airlines in bankruptcy regarding their pension funding. He was also expressing the concerns of his constituency – in this case American Airlines and Continental Airlines – who are trying to compete with airlines that would benefit financially from the law’s provisions.

Considering the number and state of the growing number of private pension plans being dumped on the Pension Benefit Guaranty Corporation these days, it is hard to argue against the need for serious reforms. It seems logical to increase insurance premiums in this environment, and if the proposal would nearly double them – well, they haven’t been increased in more than 20 years. It seems similarly evident that changes are called for in how funded status is determined, and we surely need a better system for knowing that a plan is in trouble, and responding, than is currently deployed. Given the complicated nature of these calculations (which, IMHO, are still largely projections based on assumptions predicated on best guesses about events a generation in the future), I think one could well argue that a determination based on a firm’s credit rating says more about the ability to sustain that obligation than the need to do so. Similarly, a determination based solely on the current projected funded status says more about current assumptions than it does a firm’s commitment to fulfilling those promises (this is the presumption contained in a comparable pension reform bill in the House of Representatives). Surely the best answer is a common sense evaluation that considers both funded status and credit rating – and we can certainly hope that, should the Senate bill proceed, this would be incorporated as part of the reconciliation with the House version.

There seems, however, to be this notion in the Senate that the airline industry – more accurately, certain carriers in that industry – are entitled to a special dispensation from these obligations. The Senate bill would give those troubled airlines twice as long (14 years) to fix their pension funding problems as any other industry. This concern is no doubt driven by a sense that the industry faces a unique set of challenges, that those airlines are truly committed to fixing the funding issues, and that failing sufficient time to do so, they will simply dump those massively underfunded obligations on the PBGC.

All of this may be valid – but, given these airlines’ track record, I cannot imagine how any credence can be given to the view that giving them more time does anything more than postpone the inevitable. Consider the actions of United and its unions earlier this year in trying to pull one over on the pension system (see IMHO: Left Holding the Bag?), their last (successful) attempt to buy some more time (see IMHO: Wait Loss), or even their response to the September 11 terrorist attacks (see IMHO: The Aftermath). Yet here we are again, according certain players in a specific industry a “gimme” that will no doubt come home to roost in the next 24 months – with interest.

The private pension system needs some reforms – and some help. But I, for one, am sick of being “played” by these airlines as some kind of financial patsy. The sooner the Congress stands up to this kind of financial blackmail, the better.

Sunday, October 02, 2005

An Unnatural Disaster

There are few things more unseemly than watching an elected official pander to his or her constituency – unless it’s an elected official who has made a political misstep trying desperately to get back on the right side of the issue. Far be it from me to disparage the motivations of all the political responses to the devastation of Hurricane Katrina – but surely some were of dubious origins.

There were, of course, many well-intentioned and truly helpful responses, and surely Katrina – and more significantly, the flooding that followed – was a disaster of historic proportions, at least on an aggregate level. Still, I was stunned to watch the Internal Revenue Service and Department of Labor jump into assistance mode, dramatically lowering barriers to the withdrawal of retirement savings in response. With the stroke of a pen, they qualified distributions in the impacted area as hardships, waived the 10% early withdrawal penalty, waived the 20% withholding requirement (but not the eventual payment of taxes – who are we kidding?), doubled the maximum amount available for a plan loan (to $100,000), and liberalized the repayment schedule on those loans.

No doubt the extent and expeditious nature of the relief will be appreciated by those in the disaster area, and certainly there are those who desperately need the help. Moreover, unlike the mammoth amounts of government aid and assistance already targeted for the area, this relief is funded by the very pockets of those impacted by the disaster.

Of course, while the breadth of the disaster may have been historic, the depth wasn’t, at least not on an individual basis. Was the loss of a Jefferson City Parish home any more devastating to its owners than one flattened by Hurricane Frances a year ago? What about that tornado that touched down in Illinois last May? The ones burned to the ground by wildfires in California? The fact is, on an individual level, there is no difference in result.

Sadly, in its effort to respond compassionately to the tragedy of the situation, the Bush Administration has, IMHO, opened a potential Pandora’s Box. For just as surely as Katrina’s devastation wrought severe hardships, distributions related to dealing with that kind of life-altering event are entitled to hardship status. But so are those wildfires in California, that tornado in Kansas, that flood in Kentucky.

It’s hard to question the desire to allow those in desperate need to tap all available financial resources to restore their lives, even at the risk of placing their eventual retirement at risk. However, it would be the epitome of shameless political pandering to treat only those in Katrina’s path with that kind of deference, while ignoring those so similarly impacted in other geographic areas (many of whom, it should be added, will receive no assistance other than personal resources).

Personally, I think it was a mistake to liberalize the loan limits, to waive the hardship penalty, and to suspend the 20% withholding. These limits serve a real purpose, and they have been in place for a long time and through many disasters. Having lowered the bar, it seems to me that the Administration has, pardon the reference, opened the floodgates.

- Nevin Adams

Sunday, September 25, 2005

When the Levee Breaks

Like much of the nation over the past couple of weeks, I have been tracking the events along the Gulf Coast with much interest. I’ve never lived close enough to the coasts that tend to fall prey to such calamities to have experienced their wrath directly – though I was close enough to brush some 70 mph winds from the last bits of Hugo in the early nineties. Unlike tornados, which seem to come from nowhere and disappear almost as quickly, hurricanes take time to build and to strike – and their destruction is likewise spread out over a much wider area and timeframe than most natural disasters.

Katrina was a different kind of disaster, of course. By now we’ve no doubt become mini-geographical “experts” on the unusual topography of New Orleans. More than that, the impacted area was unusually urban, which not only revealed a new class of disaster victims (and found them clustered in high concentration), it likely facilitated the subsequent coverage of their plight. Moreover, unlike prior hurricane coverage (was it just last year that Florida was forced to contend with FOUR?), the worst of Katrina’s damage unfolded after she passed (unless, of course, you were in some parts of Mississippi, which the media seems to find less newsworthy than the debacle in the Big Easy). Imagine the result if Katrina had hit New Orleans head on, as some models had projected fairly late in the process.

It is exactly that presumed ability to see “it” coming that has engendered so much criticism after the fact, of course. For all the much-vaunted disaster preparedness of the city of New Orleans, the state of Louisiana, and the federal government, when push came to shove, too many seemed to either have their hand out, or their fingers pointing (some, of course, had both). All in all, it was a shameful display, and stood in sharp contrast to the way the people of this nation have traditionally responded to times of trial.

Unfortunately, those of us in the business of serving retirement plans have our own Hurricane Katrina – the retirement of American workers. Like Katrina, our pending calamitous event is projected to hit an extraordinarily large proportion of the population at about the same time. Yes, we’ve been able to see it coming for a long time, and while we’ve developed countless versions of plans to avoid that potential disaster, one can hardly stave off a certain sense that when ours makes “landfall,” the results could make the situation in New Orleans appear mild by comparison.

The picture draws to mind the lyrics from the Led Zeppelin song (I know they didn’t write it, but it’s the version I know), “When the Levee Breaks”:

“If it keeps on rainin', levee's goin' to break,
When the levee breaks I'll have no place to stay.”


Here’s hoping we are able to do something about it before it’s too late.

- Nevin Adams editors@plansponsor.com

Sunday, September 18, 2005

“Short” Comings?

As the recent bankruptcies of Delta and Northwest Airlines remind us, pensions are a precarious business. Once again, we - and most particularly, the employees of those airlines - are presented with the stark reality that pension promises made in better times are frequently no more secure than the financial wherewithal of the institution that, once upon a time, made them. One can certainly have some sympathy for the individuals who have made an employment commitment predicated on those promises, most particularly for those who have already entered retirement.

The signs of danger are all around us, and not just in private industry. By now, we are all well aware of the “perfect” storm’s combination of slumping asset values, the burgeoning pension obligations of early and accelerated retirements, and the exaggerated impact of historically low interest rates that result in even higher projected pension liabilities. We are frequently reminded of the “sorry” state of pension funding in this country – which is to say, anything less than an ability to come up with 90% of the total projected pension liabilities on a moment’s notice (that’s the kind of math that bankers like). Little wonder that there is a growing hue and cry to shore up those funding gaps – and they deserve attention, IMHO, though too often the headlines convey a sense of imminent demise when the perceived shortfall is largely a function of projections based on estimates predicated on assumptions that may never come to pass. Still, as some have all too regularly evidenced, today’s underfunded pension can be tomorrow’s Pension Benefit Guaranty Corporation (PBGC) obligation.

Pensions, of course, aren’t predicated on worker retirement lifestyle aspirations, they are generally a function of pre-retirement pay. We don’t ask pensioners how they would like their funds invested, nor do we consult with them on the timing of asset allocation rebalancing. Rather, it is done for them, generally with the assistance of experts. Those enamored of this approach point to automatic enrollment, contribution acceleration, and lifestyle funds as the “DB-ification” of defined contribution plans – the purported wisdom of bringing to bear on the DC side the approach that has long been true on the defined benefit side.

I don’t much care for the “DB-ification” analogy, if for no other reason than it tends to gloss over the reality that, with DB plans, we also didn’t ask workers to make direct monetary contributions. There may be something to draw from that comparison, but I’m not sure it has anything to do with doing things “for” participants. On the defined contribution side, we tend to worry about the disappointing rates of participation, the tepid rates of deferral, and the inattentiveness to prudent asset allocation – and most of the recent focus has been concentrated on ways to remedy these shortcomings. At some level, we all know that those elements are important because in combination they will eventually add up to a retirement nest egg.

But the DB-ification focus that workers need to adopt, IMHO, is a working awareness of just how underfunded their personal pension account is. Would that most were “only” 70% funded - the level at which many pension fund officials are pilloried - because I suspect that most defined contribution-reliant retirements are more like 30% funded, or even less. We’re well past the time when we should be aware of those personal funding “gaps.” We may well worry about the long-term financial viability of the PBGC and all these troubled airline pension plans. But who will pick up the shortfalls of all those failed personal pension plans?

I think we all know the answer to that.

- Nevin Adams editors@plansponsor.com

Sunday, September 11, 2005

IMHO: 'Expert' Opinions

There’s a commercial that seems to run pretty regularly these days that features a concerned looking man on the phone with his physician. In short order it becomes apparent that the physician is talking his patient through the intricacies of a surgical procedure, right down to telling the would-be patient where HE will need to make the incision. At that point, the understandably nervous man says, “Shouldn’t you be doing this?”

No doubt to the chagrin of whoever put that commercial together, I can’t recall the sponsoring organization. However, its message certainly resonates with any financial advisor who has been asked to justify his/her role in helping workers make financial decisions.

Much as I relish that commercial message, however, I’ve never been keen on a broad-based application of those types of analogies. Like, “You wouldn’t think of doing your own plumbing, why should you try to do your own portfolio management?” Or, “You have a mechanic to work on your car, why wouldn’t you have a professional work on your financial plan?” There is a certain clarity to those arguments – goodness knows, the days when I might even think about tinkering under the hood of my car are far gone.

On the other hand, if I had to contemplate taking my car to the mechanic every quarter, I’d get a new car (and maybe a new mechanic). Similarly, I’ll happily enlist the services of a qualified plumber when the situation requires it – but as any weekend visit to the Home Depot will attest, there are a fair number of “do-it-yourselfers” willing and/or able to undertake those types of projects (some that, no doubt, result in an even bigger project for the professionals). In sum, most of us – for a variety of reasons – do still engage in modest attempts to attend to those little household projects. None of which, as best I can determine, has diminished the role for professionals such as mechanics and plumbers in our society, certainly not on major projects.

Still, the undercurrent in many of the “automatic” solutions touted today seems to be predicated on the ability to avoid “troubling” the participant with any involvement in decisions involving the investment of their retirement portfolio, to shelter them from needing to make a decision regarding the appropriate level of savings, to shield them from the inconvenience of completing an enrollment form. An approach that seems destined, IMHO, to create a generation of savers who will barely be aware of how much they are saving, much less how it is invested. A “generation” of do-it-for-me savers that won’t have a clue if there is a problem, much less who to call if a problem emerges. Much as I might not want to deal with a major automotive disaster, I’d rather be alerted to the prospect when I still have a chance to remedy the situation. I may not relish the prospect of summoning an expensive plumber, but I’ve learned the limits of my expertise in such matters (and mastered the location of the main water shutoff, just in case).

Certainly, automatic alternatives have a place, but when it comes to financial planning, I think “automatic solutions” should be considered an oxymoron. Ultimately, I don’t need to be a plumber to replace a faucet, but having at least made the attempt, I can perhaps better appreciate the advantages of choosing to do so. Advisors should appreciate the assistance that such tools afford their education efforts – but never assume that an automatically enrolled participant is an effectively engaged participant.

- Nevin Adams editors@plansponsor.com

Sunday, September 04, 2005

The Best Test

The pages of PLANSPONSOR magazine frequently chronicle the impending onslaught of change and its implications for plan sponsors, and we also hope we provide readers a forward-thinking perspective on trends and opportunities, as well as threats. A constant theme in these pages, certainly over the past five years, has been not only the high standard to which fiduciaries are held in their actions, but also the difficulties associated with living up to that standard.

Plan sponsors understandably rely on experts to assist them in their Herculean task, and ERISA contemplates that reality. Unfortunately for plan sponsors, the standards in selecting and monitoring, on an ongoing basis, the skills and actions of those experts can be almost as daunting as the underlying activities themselves.

In the midst of these challenging times, financial advisors have become a ubiquitous element in many markets. Absent their presence, many small-plan sponsors might still lack access to a respectably priced retirement plan, and the in-person delivery of education and advice to plan sponsors certainly would suffer across the board. Providers also benefit from the cost-effective delivery of services to places that are far-flung, and perhaps ill-served by distant call center support.

Unfortunately, plan sponsors have little to go on in evaluating a financial advisor before the fact. The geographic diversity that is their strength also serves to thwart a ready assessment of their skills. Their service is delivered to a finite group of plan sponsors, rendering statistical evaluations challenging at best. Over the years, plan sponsors have repeatedly asked me for recommendations on financial advisors but, up until recently, I’ve been hard-pressed to provide any suggestions.

A year ago, PLANSPONSOR announced its inaugural Retirement Plan Advisor of the Year award. That award was designed to recognize “the contributions of the nation’s best financial advisors in helping make retirement security a reality for workers across the nation.” While we looked to experience, commitment to the business, education, and employer referrals, at the outset, we wanted the award to focus on objective criteria that made an impact on ensuring retirement security. More specifically, we looked for evidence of increased participation rates, enhanced rates of participant deferrals, improved asset allocations, and either reduced fees or expanded service levels—the criteria that have, for years, been most highly sought by plan sponsor respondents to our Defined Contribution Survey.

During the course of the RPA evaluations, we were impressed by stories of plan participation rates that jump 20% to 30% in a six-month period; participants that have, in many cases for the first time, “rational” asset allocation choices; investment committee members who, for the first time, not only regularly attended investment review meetings, but also looked forward to them; and the extraordinary measures taken by advisors to ensure that even relatively small 401(k) plans gain an audience with the heads of mutual fund complexes tainted by the trading scandal. Ultimately, more than 200 advisors nationwide were nominated. A listing of the 25 “Most Successful” advisors in the November issue of PLANSPONSOR represented nearly $45 billion assets under advisement.

Moreover, our experiences there taught us also that even the best advisors—and perhaps especially the best advisors—not only rely on our publications to do so, but also are always looking to keep those skills honed. Earlier this year, we launched the PLANSPONSOR Institute (www.plansponsorinstitute.com) and, now, nearly 170 financial advisors, and sales and servicing professionals have attained the PLANSPONSOR Retirement Professional (PRP) designation (a listing is online at www.plansponsor.com/prp). Now, thanks to that program, when plan sponsors ask about financial advisors, we can offer a resource.

On September 6 - 401(k) Day - we launch our second annual RPA award and, once again, seek your help in identifying the best and brightest in the space—because, in the final analysis, the best test of a financial advisor’s skills is the way in which he or she helps you fulfill your responsibilities to your participants.

—Nevin Adams

Editor’s Note: The nomination form for the Retirement Plan Advisor of the Year is online at www.plansponsor.com/survey/ra2005/index.jsp

Sunday, August 28, 2005

Off Putting?

Last week Fidelity Investments put out the results of a “survey” about people’s attitudes toward saving and retirement (see One Third of Workers Delaying Retirement). The headline – basically that a third of respondents were putting off retirement – was no big surprise. It is perhaps a sign of the times that people, particularly those nearing retirement, now speak with disarming regularity about their intention to stay in the workforce beyond the ages typically associated with “retiring.” Certainly, a growing number of us (including those on both sides of this newsletter) toil at professions that can, from a physical standpoint anyway, be pursued just as well at 70 or 75 as they can at 55 (whether we will be permitted to do so is another subject altogether).

Nor were the reasons for pushing back retirement earth-shattering; more than half (55%) said it was because they hadn’t saved enough, while roughly a third said they were planning to do so to maintain their employer-sponsored health coverage, and another third said they started saving too late (which no doubt includes some of those who hadn’t saved enough, since the totals add to more than 100%).

No, what struck me as “odd” was the fact that there were workers in the 25-40 age bracket who were also already talking about pushing back retirement. Now, their reasons were different – being more inclined to cite the financial burden of paying for a child’s college expenses than the “poor investment choices” and “market fluctuations” of their workplace seniors as a contributing factor, for example.

Now, these kinds of surveys are notoriously bad predictors of future events – after all, some of those 25-year-olds probably don’t even HAVE kids yet. Moreover, we have no way to know that, save for an interviewer’s query, whether thoughts of retirement had ever actually previously flitted across their mental radar screens, or if they had given it any more thought than a five-second response to a direct question.

Still, whatever their focus or reasons, I find the notion that those at that stage of their work cycle are, even for a moment, contemplating that eventuality encouraging – and the notion that they are already considering having to postpone it, disheartening.

- Nevin Adams

Monday, August 22, 2005

A Hallmark Holiday?

I’ve always had a certain ambivalence about what are generally termed “Hallmark holidays.” You know the ones I’m talking about – the ones that seem crafted for the sole purpose of generating sales for greeting card sellers. Of course, after a while you no longer question their existence – and if one still struggles to remember exactly when “Grandparent’s Day” is, well, we’ve pretty much got Mother’s Day, Father’s Day, and Valentine’s Day down to a science.

Regardless, I’ve never really been comfortable with ones like Secretary’s Day (now Administrative Professionals Day) and Bosses’ Day. I remember once, years ago, when I was part of a large department that had many “admins,” all with overlapping coverage responsibilities. The fact was, none of them could remotely have been considered to be anything like a “secretary” to me, or any one manager in particular. To me, they were simply part of the team that, like the rest of us, had a job to do, and did it. That didn’t mean we could ignore Administrative Professionals Day, of course. But since there were so many of them, and since we didn’t want to upset the apple cart, the department decided to get everyone the same, relatively innocuous IMHO, “gift.” All of which led me, in a moment of frustration with the process, to wonder aloud why we even had to bother.

At that point, a good friend and co-manager reminded me, “Because, even if we should be thinking about it every day of the year, it gives us an opportunity on that one day, anyway, to pay attention to people we often take for granted.” A point that was driven home to me again on Administrative Professionals Day that year when three separate admins sought me out to thank me for that gift that I had thought was “relatively innocuous.”

For the past several years, the day after Labor Day has been designated 401(k) Day (aside from the traditional association of the day with labor/workers, the Employee Retirement Income Security Act (ERISA) was signed into law by then-President Ford on the day after Labor Day, 1974). For much of my professional career, 401(k) Day has seemed like one of those “Hallmark holidays.” Not that you’ll find greeting cards for the occasion at the mall this weekend – you might have seen a note from the Profit-Sharing 401(k) Council about it but, ultimately, your mind was on other things (like planning what you were going to do on the long Labor Day weekend).

Readers of this publication are all too aware of the challenges that confront our nation’s retirement savings system. At times that familiarity perhaps makes it too easy to dismiss the opportunity that an occasion like 401(k) Day represents. Sure, we’re talking about these issues every day – but as that friend reminded me long ago, even a Hallmark holiday can provide an opportunity to pay attention to the people – and things – we often take for granted. Let’s take advantage of the “occasion.”

- Nevin Adams editors@plansponsor.com

Thanks to the Profit-Sharing 401(k) Council (and a number of sponsoring organizations), we have access to some special materials to accompany the event. You can find them online at http://www.401kday.org/

Sunday, August 14, 2005

'Style Conscious

We all know that one of the hardest decisions for most plan participants is choosing how to invest their retirement savings. These days a widely touted solution is the asset allocation fund, or the lifestyle fund (I’ll use the terms interchangeably here, but there are differences) - an option that allows a participant to make a single investment choice: a fund pre-mixed to match an asset allocation deemed appropriate for a particular risk tolerance and/or retirement date. Not only have these options increasingly been promoted to participants – they have also become the solution du jour as a default fund choice for plan sponsors, particularly when combined with automatic enrollment.

What hasn’t garnered the same level of attention is a potential irony regarding these funds. These very same funds that purport to make investment choices so much easier for participants, might actually present plan sponsors (and thus advisors) with a more difficult decision, IMHO.

Consider that in choosing these funds, you have the very same fiduciary standards for due diligence in fund selection that you have with any other investment option. However, many of these don’t have a three-year track record, nor is there any kind of qualitative rating, such as the ubiquitous “star” ratings. Moreover, even those with track records lack a consistent benchmark against which to evaluate their performance.

Sure, many of the fund providers have crafted synthetic benchmarks against which their offerings can be compared – but there is no consensus on what an "appropriate" asset allocation mix is for different target dates, either in terms of how much of each asset class, or even in terms of how much should be invested in stocks versus bonds, much less how much should be in what kinds of stocks. In sum, to the extent they exist at all, their benchmarks exist only against what the provider claims is an appropriate mix.

Fees are still all over the place - some charge a "wrap" on top of the underlying funds, and while others don’t, some take advantage of the opportunity to cobble together relatively high-priced retail share classes under the lifestyle umbrella, while for some their very point of differentiation lies in the exotic (and expensive) asset classes they incorporate in their model. More fundamentally, some rely on models comprised solely of proprietary offerings, while others eschew that approach totally, and others rely on a mix.

Aside from all of those challenges, the ultimate irony – particularly in this day of burgeoning fund menus - is that a plan sponsor who wishes to include a lifestyle offering on their plan menu will likely have a choice of just one lifestyle fund family.

Of course, these obstacles will almost certainly be less of an issue over time, as the market matures and the application of lifestyle funds expands. Still, IMHO, plan sponsors who embrace the logic and simplicity of a lifestyle offering need to realize that they have their work cut out for them.

- Nevin Adams

Sunday, August 07, 2005

Advice "Price"

The headlines of late have nearly all been about the impact on pension plan funding, but legislation affecting investment advice has also managed to piggyback its way back into two of the most recent bills – one sponsored by Congressman John Boehner (R-Ohio), who chairs the House Education and the Workforce Committee, and the other crafted by Senator Max Baucus (D-North Dakota) and Senator Chuck Grassley (R-Iowa), who heads the Senate Finance Committee. Both have cleared their respective committees, and while their future is not yet certain – both are dominated by complicated funding considerations for defined benefit pension plans, and neither is exactly in sync with reforms already put forth by the Bush Administration – it is interesting (IMHO) that both contain provisions regarding investment advice.

For years I have watched providers struggle to offer only education and not advice, watched employers try desperately not to take on additional fiduciary responsibilities, and witnessed any number of financial advisors (and/or the firms they were associated with) trying to make sure that nobody confused their role in serving the plan with serving the plan as a fiduciary. For the most part, the losers in such machinations were participants, who couldn’t care less about whether someone was a fiduciary or not, much less whether what they were offering was education or advice. All those participants wanted – and every financial advisor worth his or her salt knows this – was to glean some idea of “what they should do” with that complicated investment menu.

Not that all these parties didn’t want to help participants with that decision, quite the contrary. But ERISA, in its attempt to protect participants from the unscrupulous designs of conflicted advice, has made it nearly impossible for the systems that compensate advisors to work. Simply stated, it is a prohibited transaction to offer advice (more accurately to offer advice that is paid for) on investments from which you are compensated differently – not just situations where fund complex A offers a more lucrative revenue-sharing arrangement than fund complex B, but where an equity fund in complex A offers a more lucrative arrangement than a money market fund in the same complex (there are ways to deal with this, of course – “fee leveling” and/or the use of a “fee only” model for these services are two fairly common structures).

What we do know is this: Participants generally like the idea of getting investment advice, and advisors are (for the very most part) well-positioned and inclined to fill this need. Moreover, plan sponsors are increasingly predisposed to make these services available, for a variety of reasons. In PLANSPONSOR’s 2004 Defined Contribution Survey, nearly half of the respondents had already embraced some form of participant-level advice - a number that seems likely to increase over time, regardless of pending legislation. Still, reservations remain – and for many, the decision to offer investment advice remains both an extra expense, and an additional risk, for the employer.

Legislation that offers some much-needed clarity for a much-needed service would be much-welcomed.

Sunday, July 31, 2005

Crying "Uncle"

Of late, the retirement-plan industry has been working overtime crafting product solutions that ostensibly help participants save, or save better, for retirement. But for my money, you don’t need to look any further than the statistics on distribution practices to realize just how ill-informed participants still are about basic financial principles.

I’ve had plenty of experts tell me that participants aren’t interested in making investment decisions, and one can certainly understand that there are situations where participants legitimately can’t afford to set aside money now for 30 years in the future when they’re struggling to put food on the table this week. But when industry data continues to show what participants do with those balances at termination – well, to me, that is the real sign of trouble. The most recent example was a study from Hewitt Associates that found that 45% of some 200,000 terminating participants took a cash distribution when they left their employer (about a third left it with their current plan, and about a quarter rolled it over).

Now, think about that for a second. By choosing to take that money now, they not only did serious damage to their retirement savings progress, they did so while handing over a sizeable chunk of change to Uncle Sam. That’s 20% on the front end, which you would expect would get some people’s attention – but that’s only a down payment for most. I’d say there’s a pretty good chance that most of these will wind up in the 28% bracket come tax time, not to mention the 10% penalty on pre-tax contributions and earnings (for those under age 59.5), not to mention state taxes. Let’s face it, by the time April 15 rolls around, I would suspect that many of those who took cash distributions are having to scramble to meet their obligation to Uncle Sam.

The real problem, IMHO, is that the distribution process is just about as complicated as the enrollment process at many plans. If you want to roll it to another plan, you have to find out all kinds of details about that receiving plan – account number, mailing address, etc. Granted, it’s not rocket science, but just think about the implications of getting some of that information wrong. If you want to roll into an IRA, the process is just as complicated. Leaving it in the old plan isn’t a universally available option – besides, particularly if the termination is involuntary, who wants to leave the money with “them?”

Oh, and don’t talk to me about “paperless.” Many of the so-called “paperless” rollovers touted by many aren’t really paperless at all – they still require that forms be completed and mailed where at some point in the future funds will be sold, and a physical check be cut and mailed, and reinvested days later. Why should that money be out of the market for a week or 10 days? Worse, even if one of the providers does offer a more-or-less paperless option, odds are the other side of the transaction won’t.

From time to time, lawmakers talk about solutions to this problem – solutions that, for the most part, have to do with making it more difficult for participants to access that money before retirement. To my way of thinking, that may solve that problem – but probably dampens participation rates going forward.

If we are serious about lowering cash-out rates, we’re going to need to make the process of rolling over easier – and we’re going to have to do a better job of talking about the here-and-now tax bite, as well as the long-term impact on retirement security.

- Nevin Adams

Sunday, July 24, 2005

Starting “Blocks”

It’s hard not to be impressed by the newfound enthusiasm for automatic enrollment features. After all, one of the greatest challenges to a reliance on participant-directed savings is - a lack of participant savings. Most surveys (including our own Defined Contribution Survey) indicate that only about 75% of those eligible to participate choose to do so at any level, but some of those – perhaps most of them – are not signing up because they either forget to or because they are simply stymied by the forms, the process, or the daunting list of investment choices. Automatic enrollment purports to help overcome those obstacles.

And so it seems to, based on any number of studies. The most recent was by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute. That report notes that, without automatic enrollment, 401(k) participation depends “strongly on age and income,” ranging from a low of 37% among young, lowest-income workers who are eligible to a high of 90% among the older, highest-income eligible workers. The study also found that the default rate of deferral, and the default investment fund(s), had a significant impact as well. The bottom line: Those who were disinclined to save on their own ended up being better prepared for retirement if the decision to save were made “for” them by automatic enrollment.

The fact is, we’ve made these programs too complicated for the average 401(k) participant. It’s ironic, having spent the past 30 years expanding the menu and beating them over the head with the intricacies of modern portfolio theory, only now to tout the “wisdom” of doing it for them.

However, automatic enrollment and lifestyle funds are not a panacea for all that ails our retirement savings system. Indeed, there appear to be some unintended consequences associated even with those programs. The EBRI/ICI study noted, for instance, that “the impact of automatic enrollment on higher-income groups is less dramatic and, in some cases, is reversed because workers in this group tend to have higher 401(k) participation rates.” In other words, since default contribution rates tend to be lower than higher-income workers choose on their own, automatic enrollment might actually put them at a disadvantage. Moreover, those same workers tend to invest in more aggressive investments than is typically the case through automatic enrollment – and thus, those same programs can tend to work against that group of workers.

The real challenge with automatic programs is also what makes them “work.” The original premise behind these programs was to get participants into the plan, at which point they would become engaged in the process once they had “skin in the game.” Except it doesn’t seem to work that way. Rather, those very same workers who couldn’t/wouldn’t fill out the form don’t seem to ever make any changes with their accounts. In that regard, of course, they are very much like the majority of plan participants (even the ones who did make the conscious effort to join the plan), but with a decided difference. They are saving at the default deferral rate, generally 2% or 3%, rather than the rate that typically draws most “active” participants, the rate at which their contributions are fully matched, which is often twice the default deferral rate.

More troubling still – there is at least one published study that indicates that, over time, the establishment of a default deferral rate seems to lower the overall rate of deferrals in the plan. Mostly, this seems to be a result of an increase in the number of workers who simply leave their choices in the hands of the default option. But it is hardly beyond the realm of reason to imagine a scenario where workers take the establishment of a default rate as being the “right” answer for them as well.

All in all, we need to remember that the results of automatic deferrals, however encouraging at the outset, should not be left unattended. An “automatic” deferral is a start, perhaps even a good start. It should not, however, be the end of the matter.

- Nevin Adams

Sunday, July 17, 2005

Redeeming Notions

Anyone who has driven our nation’s highways lately knows two things – gas prices are soaring, and there is a great disparity between what is being charged at different stations. In fact, knowing which stations offer the “best” (not that any of them are “good” these days) prices is the new home-field advantage, based on my recent vacation, where prices ranged as much as 23 cents/gallon in the space of less than five miles.

A similar scenario is beginning to emerge in the retirement plan market, this one triggered by the response of mutual fund firms to the mandates of the Securities and Exchange Commission – triggered by the mutual fund trading scandal. More accurately, the SEC has mandated that fund complexes either adopt a redemption fee (but not more than 2%) applied to sales of fund shares held less than seven calendar days, or determine that such a fee is “not necessary or appropriate” for the fund. In March, they also mandated that fund companies are to enter into written agreements with certain intermediaries (such as those recordkeepers/TPAs who maintain retirement plan participant records) to ensure that those redemption fee determinations are implemented; you may recall that at least one such retirement plan intermediary, Security Trust, was implicated in the first round of Spitzer charges (see STC Ex-Execs Hit With Criminal Charges; Regulators Force Dissolution at http://www.plansponsor.com/pi_type10/?RECORD_ID=23340).

The good news – sort of – is that the SEC backed off its initial mandate of a mandatory 2% redemption fee in every apparent short-term trading situation. The bad news – certainly for retirement plan recordkeepers – is that the current open-ended SEC directive seems to be creating a patchwork quilt of requirements from the fund complexes.

Plan sponsors have been slow to respond to the coming chaos, and recordkeepers, at least those who are not appended to a fund complex, seem to have been willing to adopt a wait-and-see approach (plan participants seem not to have a clue). Many, no doubt, have trusted that the industry would craft some sort of monitoring/accounting solution that would allow them to address the redemption fee issue. Unfortunately, the fund industry, left to its own devices, apparently isn’t waiting. Directives are already being issued from those complexes and, at least according to a recent report from McHenry Consulting, TPAs are beginning to take note (see Recordkeepers React to Expenses Associated With SEC Redemption Fee Rules at http://www.plansponsor.com/pi_type10/?RECORD_ID=30106). Some (notably Fidelity) have taken a particularly hard-line approach on the redemption fee issue, while even the more accommodating have issued requirements that are widely varied in the definition of amount and event(s). All in all, a potential nightmare for recordkeepers, plan sponsors, participants, and financial advisors alike.

There are alternatives, of course. The fund complexes could always determine that short-term trading isn’t a problem for fund shareholders, and thus not impose redemption fees at all. For the vast majority of funds traded in retirement plans, I think that is a plausible conclusion (the largest windfalls appear to lie in market-timing some international funds, or funds where there is a timing gap between a market valuation and fund valuation), though in the current environment, I can’t see fund boards coming to that conclusion.

Alternatively, the SEC is still soliciting feedback on its March proposal, and has specifically noted lingering questions on the use of first in, first out (FIFO) accounting in determining the holding period of the shares; a waiver for de minimis fees (say, $50 or less); application of such fees only on investor-initiated transactions; and a potential waiver for financial emergencies. The current rule, while imperfect, is not yet final, and advisors (and your partners and clients) can still weigh in.

The McHenry report suggests that that new level of awareness is leading a growing number of TPAs to consider mutual fund alternatives, alternatives that aren’t subject to the redemption fee directives, such as collective funds and exchange-traded funds. Certainly the application of redemption fees to participant accounts is, can be, and should be no less a factor in evaluating the appropriateness of an investment fund than the overall expense ratio. Even if plan sponsors have been slow to react to the potential for participant accounts being slammed with 200 basis point charges for inadvertent short-term trading activities, their participants surely won’t be.

- Nevin Adams

Note: The proposed final SEC rule is online at http://www.sec.gov/rules/final/ic-26782fr.pdf

You can comment on the rule at http://www.sec.gov/rules/proposed.shtml, or send an e-mail to rulecomments@sec.gov. You are asked to include File Number S7–11–04 on the subject line.

Friday, July 08, 2005

Bad Assumptions?

People who haven’t been saving the way they should got some good news recently – those fancy retirement savings calculators may have been exaggerating their retirement needs.

That, at least, was the assertion of a new report on retirement savings, which ran in the June issue of the Journal of Financial Planning, but which got picked up in the Wall Street Journal and The Associated Press (and that put it in a lot of newspapers). The study, by financial planner Ty Bernicke, claims that people spend less in retirement than they do prior to retirement – and that they spend less in retirement the older they get. Now, that isn’t all that radical a notion – for years planners have been telling us to plan on needing 70% of our pre-retirement income. But Bernicke, who cites data from the US Bureau of Labor's Consumer Expenditure Survey to make his point, takes issue with retirement planning calculators that push spending higher each year (by about 3%) just by keeping the current levels “even” with inflation. He also highlights statistics that suggest that workers spend less not because they have to, but just because they do, at least looking back over the past 20 years.

Bernicke’s study really only deals with that one aspect, of course – and by assuming that the spending assumptions are far too high, he is able to claim that we don’t need to have nearly as much set aside as most savings calculators claim. He calls his version “reality retirement planning.”

Well, assumptions, after all, are just that, and if the Federal Reserve with its near obsession with tracking inflation can’t predict that gauge with precision, I’m not sure that we should expect more from these calculators. But even if we spend less in retirement, what we spend money on is still subject to the vagaries of things like inflation. It’s also fine to say that Americans have tended to spend less in retirement, but the truth is that we also spend differently. Health care is perhaps the most obvious difference, and we all know that those costs have been moving well ahead of inflation in recent years. I don’t think it is beyond the realm of possibility to suggest that, as we get older, we may well be spending more on things whose costs will rise faster than that imbedded rate of inflation.

Not that I “buy” all the imbedded assumptions in these retirement calculators. That inflation assumption does more than influence the cost of living in retirement – generally, it also imputes a regular (and generally annual) rate of salary increase during one’s working career – and the projected rate of savings deferral (and employer match) is similarly “inflated” for workers who no longer receive those annual merit increases. On top of that, most calculators have a default rate of return that is wildly optimistic given most participant portfolio allocations. Mr. Bernicke may not have had issues with those “inflations” of the savings accumulation projections, but I think that may well be the greater flaw.

Speaking of assumptions, I was struck by the fact that, in Bernicke’s hypothetical example, a couple that retired (or wanted to) at age 55 already had accumulated an $800,000 balance in their 401(k) – a balance that continued to earn 8% for the next 30 years – supplemented by two social security checks (beginning at age 62) – subjected to a combined federal/state tax rate of less than 10%. With THOSE kinds of assumptions, no wonder spending isn’t a problem for his hypothetical would-be retirees.

Unfortunately, that “reality” still appears to be a fiction for many – who may well spend less in retirement, but not by choice.

- Nevin Adams

You can read the executive summary of Ty Bernicke's Reality Retirement Planning: A New Paradigm for an Old Science at http://www.fpanet.org/journal/articles/2005_Issues/jfp0605-art7.cfm

Tuesday, July 05, 2005

Generation "Gaps"

You may have missed it in your preparations for the long holiday weekend, but we crossed a milestone of sorts last Friday. That was the day on which people born on January 1, 1946, turned 59 ½. Yes, that means – and there was media coverage to that effect - that the very first of the Baby Boomers became eligible to make non-early penalty withdrawals from their retirement accounts.

Personally, I’m hoping that the coverage of that “event” was a function of a slow news day during the 24-hour news cycle. On the other hand, for people who have been waiting – and warning – about the onslaught of the Baby Boom retirements, that “pig in the python,” that “milestone” surely marks a point on that continuum (let’s hope that it doesn’t trigger a wave of withdrawal-related requests).

For years, our society has been enamored of the movements and behaviors of the so-called Baby Boomers, and given the demographics, that is perhaps understandable. On the other hand, those demographics have long been defined to include an incredibly broad swathe of the population – those born between 1946 and 1965. That’s nearly twice the span accorded to those in Generation X (1965 to 1976), for example – who, believe it or not, started turning FORTY this year (and there are about 50 million of that bloc).

I hate to break it to demographers and marketers alike, but Boomers are hardly a monolithic group. I’m what might affectionately be termed a “mid-range” Boomer. I wasn’t old enough to be protesting on college campuses in the 1960s, as were some who turned 59 ½ last week. Instead, my time on campus was spent worrying about how (if?) I would get a job in the aftermath of Gerald Ford’s “Whip Inflation Now” button campaign and Jimmy Carter’s stag-flationed malaise. I have a younger brother who snuck under the Boomer tent (at least according to demographers), but the 8.5 years that separate our births are a generational “chasm” at least as wide as that between me and any Gen Xer.

As a general rule, I abhor labels of any kind, though anyone who has ever been a kid knows that human beings seem genetically predisposed to affix them. My teenagers (and their friends) appear to rely on many of the same types of labels that every generation uses – geeks, nerds, sports, posers (one of my favorites), freaks….Notwithstanding those attempts, I’m no less family-oriented than a Gen Xer and, from what I have seen (popular characterizations notwithstanding), they are no less career-oriented. When all is said and done, these labels are simply shortcuts for dealing with people so that you don’t have to deal with people as individuals.

People, of course, defy ready labels, despite the constant push to box them in. It would, however, be a mistake of epic proportions to assume that the Baby Boomers, or any generational grouping for that matter, will approach retirement planning – or retirement – in a unitary fashion. All a generational label does – and it does this somewhat imprecisely – is hint at how long we have to get ready.