Saturday, May 02, 2009

Survival "Instincts"

Several years ago, I bought my Dad—one of the world’s most proficient worriers—a copy of the “Worst Case Scenario Survival Handbook.” I did it tongue-in-cheek, of course. After all, how many of us really need to know how to escape from a mountain lion, how to take a punch, or how to land a plane? Not that there aren’t times when that knowledge might come in handy, but let’s face it—the “worst” case rarely happens. On the other hand, if you’re prepared for the worst case, you’re generally better prepared to deal with the inevitable bumps and potholes along life’s road (in my Dad’s case, I worried only that I would provide him with NEW things to worry about…).

Lacking a politician’s motivations, I am disinclined to describe the events of the past several months as “worst case,” though there is no disputing that we are all working our way through a rough period. As a nation we have been in—and come through—rough periods before. Despite that, human beings seem inclined to see travails of the present as something new and different, unique and unprecedented. Perhaps we simply want to believe that we live in extraordinary times, though IMHO some are simply enamored of using the crisis of the moment to sell newspapers (or “solutions”). Regardless, I have always found those characterizations to be simplistic at best, and frequently born of an ignorance of history and economic cycles. On the other hand, once the crisis passes—and it always passes—then the voices of reason return, and we learn once again that history’s lessons were there all along.

In normal times, the market’s tumultuous path, a shaky economic underpinning, and looming budget deficits would doubtless converge to forestall any significant change in the status quo of workplace benefit programs. Changes in workforce benefits have traditionally been slow to come on line, reflecting the sensitivity of workers and employers alike to the delicate balance between cost and value, not to mention “promise” and practicality.

But these are not normal times, and, if rhetoric becomes reality, change could well be the order of the day, with the potential for seismic shifts in the responsibility, costs, and characteristics of benefits long associated with today’s workplace. Here, IMHO, are some things to keep an eye on:

The Silver Tsunami

Just over a year ago, the “moment” a generation of plan sponsors had been bracing for arrived, as Kathleen Casey-Kirschling, the nation's first Baby Boomer, became the first of her generation to receive a Social Security retirement benefit. Casey-Kirschling, who filed for benefits at the age of 62, was hardly a “typical” retiree, since she enjoyed coverage both from a defined benefit and defined contribution plan. Over the next two decades, nearly 80 million Americans will become eligible for Social Security retirement benefits, more than 10,000 per day on average, according to the Social Security Administration.

What that means, of course, is that the “pig in the python” imagery long associated with the retirement of the Baby Boomers is finally coming to fruition, calling into question the adequacy of private- and public-sector retirement solutions, as well the financial viability of Social Security itself. Even more so, this “sandwich generation” is increasingly finding itself pinched between calls to support both its parents and its children. It remains to be seen how we as a nation will respond—but the last time things reached a crisis level (1983), withholding taxes were hiked, “normal” retirement ages were pushed back (albeit gradually), and more of these “benefits” were subjected to taxation.

Pension Penchants

While the private sector has largely abandoned the defined benefit pension model (certainly as an ongoing concern), the public sector has embraced its pensions with a renewed vigor. Of course, that “split”—between a private sector that does not have a pension plan and a public sector that does (at least partially financed by taxes on that private sector)—sets the stage for a potential conflict down the road, a conflict that will only be exacerbated by headlines about looming pension funding shortfalls that could impose a higher obligation on taxpayers.

Return of Inflation

Regardless how you feel about the massive amounts of government spending proposed in recent weeks, it is hard to imagine that there would not be serious long-term ramifications on the inflation front. Some are old enough to remember inflation’s bite, the toll it extracts on living expenses. If inflation were to return, and perhaps return with a vengeance, that could affect interest rates, cost-of-living adjustments, pension funding ratios, and how far those retirement dollars will go.

Target Practices

It now seems hard to believe that, just two years ago some target-date fund providers were being accused of being too “traditional” in the construction of their glide paths. Certainly retirement plan investors who had been too conservative in their rate of savings deferrals appreciated the boost in projected accumulations that those equity-laden 2010 funds purported to deliver. Now, of course, things are seen through a different prism, though the risk of running out of money looms large—perhaps larger—still.

Timing, too, has dealt a potentially cruel hand to participants just ushered into a new generation of QDIA-compliant default designs just when that diversification might seem to work against them (at least in the short run). While the current tumult seems unlikely to do much more than temporarily stem the tide in favor of these options, it will surely give plan sponsors pause—and perhaps lead to a renewed appreciation of the very real differences in philosophy that underlie these glide path designs.

Retirement Income

Much of the focus of the past generation of retirement savings has been about accumulating enough. Plan sponsors had little motivation to think beyond a participant’s employment tenure (indeed, historically, there were some fairly significant “motivations” not to do so), and providers and advisers seemed content either to count on the strength of their service/brand to retain those assets, or to accept that traditional retirement income offerings, notably annuities, already existed.

Things have changed, of course. Rates of asset retention have generally not kept pace with expectations, annuities are frequently disparaged by participants (for reasons they are not always able to articulate), and plan sponsors are increasingly concerned that voluntary savings patterns won’t provide “enough” for retirement. Enter a new generation of retirement income solutions, increasingly “in plan,” or at least attached to the plan, which not only make it easier for participants, but also for plan sponsors to play a productive role in their selection.

Production and portability issues remain, of course. Retirement income is a sensitive subject, and determining the best vehicle to efficiently and effectively deliver it can be a complicated undertaking, fraught with new risks (or at least the perception of new risks). Still, without the proper attention, decades of frugal attention can be for naught.

The Volunteer State

It’s hard (though not impossible) to find someone willing to criticize program designs such as automatic enrollment, contribution acceleration, or qualified default investment alternative-eligible funds. Not only have these designs begun to help thousands of workers do the “right” things when it comes to saving for retirement, plan sponsors have, since the Pension Protection Act (PPA), had structure and sanction to act. Even critics had to admit that all an unwilling (or financially unable) participant had to do was “opt out.”

Voluntary remains the order of the day, even for the new automatic IRA designs recently touted by the Obama Administration (well, at least for workers—employers won’t have a choice, other than to offer that program or some kind of qualified plan).

Still, there seems to be a growing interest in underpinning the financial integrity of that system with a core level of mandatory withholdings, both from worker and employer; and a sense that “leakage” from things like in-service withdrawals and loans need to be plugged—and a notion that lump-sum options are better replaced with annuity streams, at least as a default.

Ultimately, of course, that could mean that our voluntary system will be converted into a mandatory approach. One in which employees would have to contribute a fixed amount/percentage, in which employers might be required to match, and from which workers would not be able to withdraw prior to retirement—and then only in some kind of periodic annuity.

It could happen—in fact, it might need to happen.

—Nevin E. Adams, JD


Editor’s Note: A somewhat modified version of the above appeared in the April issue of PLANSPONSOR magazine. You can check it out HERE

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