Saturday, August 01, 2009

“Talent” Ed

As a kid, I remember sitting in church listening to a sermon about what I have since come to know as the “parable of the talents,” found in the book of Matthew in the New Testament.

Now, for those of you who slept through those sermons, the story(1) is about a man who is going out of town and gives three of his servants different amounts of money to hold for him while he is gone. The first is given five “talents”(2), and on his master’s return, he proudly gives him back the five he was left with—and another five! The second servant, who was left with two, returns those to the returning master—and two more besides. Both of these servants are commended and given more responsibility.

However, the third servant, who was only entrusted with one talent, tells his returning master that, knowing his master was the demanding type, he opted instead to bury his talent, so that he could return it safely—which he does. For his conservatism, this poor guy is called wicked and lazy, has the one talent taken from him and given to the guy who already has 10, and gets tossed out on the street.

Now, in church this was supposed to illustrate the importance of using the talents endowed on you by the Almighty to their fullest. Years later, I saw this as some kind of capitalist saga (Matthew was a tax collector, after all). But I remember wondering—even as a small boy—what would have happened if one of the two “good and faithful” servants had lost some of that money. Surely the poor guy who managed to give back everything with which he had been entrusted would have looked pretty good by comparison.

Another Look?

The ERISA Advisory Council recently heard testimony about (among other things) stable value and retirement security—and yes, stable value as a QDIA default option (see “Prudential Calls for Stable Value Funds as QDIAs”). Now, in view of what has transpired over the past several months, it’s hardly surprising that people might want to take another look at a less volatile investment. On the other hand, well before we slid into the current market slump, I spoke with, and heard from, many plan sponsors who “got” the logic behind the asset allocated solutions sanctioned by the Department of Labor as a QDIA option—but really weren’t comfortable putting “other people’s money” in an option that could fluctuate in value (see “IMHO: Other People’s Money”). In fact, way back in 2007, only about a third of respondents to a NewsDash poll (albeit an unscientific sampling) said that stable value shouldn’t be accorded QDIA status, while nearly half were in favor of that proposition (see “SURVEY SAYS: Should There be a Stable Value QDIA?”).

Of course, that perspective was pretty roundly criticized at the time by the “experts” in the field, frequently in the kind of condescending tones reserved for those who question the science behind global warming claims. Indeed, much like the parable’s servant who sought to safeguard, rather than put at risk, his master’s money, those who pressed for its inclusion, were taken to task for having the temerity to suggest staying with a default that had long been in place without incident.

But from the beginning, plan sponsors realized that there was a downside to diversified investment solutions: They could lose value. And, while stable value investments have their share of problems, they seem to have—in a way that not all target-date funds have—delivered what people expected.

The Issues

Don’t get me wrong—I “get” the issues with stable value; the concerns about transparency, illiquidity, fees, even insurer risk. These need to be addressed. I also appreciate that much of the current discomfiture with target-dates will dissipate with the next market upturn (other than the whole “misunderstanding about how much would be invested in equities when a participant hit retirement age” thing). And I do believe that, over the long haul, a diversified solution doubtless serves the average participant “better.”

I appreciate that fiduciaries are expected to make the “right” decisions, even when they aren’t the easy ones, and that participants defaulted into funds of whatever ilk are generally free to change that at their discretion. Moreover, I understand and appreciate the value and importance of a diversified portfolio—and acknowledge that, just because the DoL didn’t include stable value in its list of “core” QDIA vehicles, plan sponsors are in no way precluded from having it on their menu, or using it as a default fund (many have, and haven’t changed—and now, IMHO, probably won’t, QDIA status notwithstanding).

Still, when it comes to retirement planning, I think there is something to be said for getting what you expect—and getting back what you put aside.

—Nevin E. Adams, JD

1 Matthew 25:14-30 (King James Version)

2 A unit of value, though this is said to be the origins of the word “talent” as a reference to a gift or skill

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