Saturday, May 30, 2009

Clock Work?

In recent weeks, those favoring a government solution to the issue of retirement security/savings have championed the soundness of Social Security. Despite (or perhaps because of) a recent Trustees report that revealed that the markets had taken a toll on Social Security’s finances, Alicia Munnell, director of the Center for Retirement Research, noted, “The system has enough money to pay full benefits for decades, although for a few years less than previously reported because of the financial/economic crisis.” And so it has.

The same thing is true of the nation’s private pension plan insurer, the Pension Benefit Guaranty Corporation (PBGC), and in fact that point was made repeatedly by Charles Millard, the former director of that agency, as he was repeatedly questioned about the wisdom of championing a new, although hardly radical, IMHO, asset allocation shift that would have resulted in an asset allocation of 45% in fixed-income, 45% in equities, and 10% to alternative investment classes. The agency's previous policy set an equity investment target of just 15-25%, although the actual level of equity investments was 28% at the end of fiscal 2007, and 30% at April 30 (see “PBGC Funding Gap Ballooning as Plan Terminations Increase”).

That shift has reportedly been halted, at least for the moment, ostensibly because of questions about contacts that Millard had with money managers hired to implement the policies (see “Solis Asks PBGC To Halt New Investment Strategy”), but IMHO, the real “problem” was its move away from a predominantly fixed-income-oriented portfolio.

So, here we have two enormous bodies of capital—both run by the federal government; both tasked with making periodic payments stretching over decades; each with what, IMHO, seems to be an extraordinary reliance on fixed-income investments.

Now, don’t get me wrong—I completely understand the importance of preserving capital (particularly these days), and I’m hugely appreciative of any expression of fiscal restraint on the behalf of the federal government (particularly these days).

Still, despite the acknowledged purpose of these enormous pools of capital—to provide retired workers with a reliable stream of income—most of that “purpose” is still decades away. That’s the good news. On the other hand, we know that both systems, left unchanged, will not have enough money to fulfill the obligations they now have on their plate (much less those that have yet to manifest themselves), based on the current projections.

And yet, with lots of time to go, and huge obligations to be met, it looks as though the federal government is, effectively, trying to run out the clock.

That, of course, is a perfectly viable strategy if the game is almost over, or if you are sitting on a very comfortable lead. On the other hand, the sports world is full of situations where a team went into a “stall” too early, only to lose that lead—and the game.

It would be a mistake of mythic proportion to try to invest our way out of the deficits currently confronting these systems, any more than an individual participant should aspire to compensate for a career of under-saving by betting everything on risky investments.

However, I’m having a hard time understanding how the government’s unwillingness to adopt even the most modest asset allocation reforms will do anything to mitigate the situation—and may well be exacerbating the problem. And when that clock runs out, we’ll all lose.

—Nevin E. Adams, JD

Sunday, May 24, 2009

“End” Points?

Several years back, after a day of meetings in Manhattan, I caught the train home. I wound up on one of those “milk run” trains that makes every stop along the way—and, trust me, there are a lot of stops between Manhattan and “home.” To make a long story short, I decided to take a short nap…and woke up just as the train was pulling away from my station.

It wasn’t a big “miss,” mind you. But that 15-minute nap cost me about two hours of time and a lot of aggravation…and, of course, it could have been a lot worse.

It seems that many things long taken for granted in our business are today being subjected to a whole new level of scrutiny, including the very efficacy of the 401(k). The most recent “target” is, of course, target-date funds—and the examiners no less than the U.S. Senate, the Securities and Exchange Commission, and the Department of Labor (see More Details Given on EBSA/SEC Hearing on Target-dates , Senate Committee Takes Aim at Target-Dates) .

That examination is not necessarily a bad thing, of course. The reality is that these offerings have quickly become a de facto investment solution for the nation’s prime retirement savings alternative, and in the past couple of years received nothing less than the official sanction of the DoL itself (at the instigation of Congress via the Pension Protection Act). That said, these solutions have benefited hugely from their simplicity. What is sold is the concept: professional money management, monitored and rebalanced over time. And to some extent, that is also what is bought.

What’s Being Bought

However, IMHO, there is something else that is being bought, if only implicitly—the ability to not have to worry about saving for retirement(1).

With target-date solutions, and more specifically with target-date solutions as part of an automatic-enrollment strategy, we’ve been able to set aside many of the messages we once viewed as essential to participant/investor education. We no longer have to teach participants about the importance of asset allocation, the wisdom of “not putting all your eggs in one basket” (quite the contrary, in fact), nor the need to keep an eye on your investments and to regularly rebalance. The message today is, tell us your birth date and “we’ll take care of all that.” And so we have.

There are two problems with that approach as I see it. The first is one of message—I think we may well have given a fair number of participants a message, if only subliminally, that they no longer need to worry about their retirement savings because we’ve attended to their retirement investing(2). That, of course, can be easily remedied—an effort that will doubtless be encouraged by the sustained market downturn and its impact on investors of all kinds. Still, for many, I’m sure the recent downturn has left them feeling the way I did as I watched the train pull away from my station.

The second problem is perhaps more insidious—and it is that “problem” that I suspect regulators will be trying to deal with next month. It is quite simply that, at the moment, we have lots of target-date funds on the market with nearly identical names—but very different philosophies. And, like it or not, in an age where we’re selling “don’t worry about it”— somebody has to.

Personally and professionally, I would hate to see us “fix” the problem by complicating the simplicity of a target-date choice. On the other hand, how can we continue to hold out a dozen different versions of the “right” asset allocation mix for a particular point in time without doing a better job of articulating that those differences exist, and explaining what those differences are?

What’s a Target-Date?

I’d start by explaining “target-date.” Once upon a time, the target-date was widely understood as being your retirement date, but more specifically, it was the date on which you would stop accumulating money for retirement and start drawing it down; and, yes, in most cases that was focused on the year in which the investor turned 65. Of course, these days, the definition of retirement is less precise; it’s not always 65, for one thing, and a growing number may leave a full-time career for a while and renter the workforce a couple of years later. Those kinds of changes, if not always in the control of the individual participant, are at least things that he or she is in a position to be aware of.

But for any number of target-date solution providers, the target-date in their fund family name is only a mile marker along the way, rather than the destination itself. They have developed strategies that ostensibly take the participant investor not only beyond that retirement date, but, in some cases, to the date upon which they leave this mortal coil.

Now, there’s nothing wrong with that as a strategy if the participant-investor understands that and appreciates what that means. On the other hand, if they think—as I am sure many do—that the target-date is the end, the point at which they are “done”— well, they could well wind up, as some surely have, being taken beyond their intended station—with no easy way to get back.

—Nevin E. Adams, JD

(1)I realize as well as anyone that you don’t invest your way to retirement security. But we also know that most participants tend to concentrate on the things they can’t influence (picking investment funds, market trends, the availability of a company match) rather than their rate of saving—ironically, the one thing that they can, subject to certain economic realities, control.

(2) While automatic-enrollment programs are clearly an effective means of getting workers to save for retirement, I’ve worried in this column previously that it might also insulate them from these issues (see IMHO: “Expert” Opinions).

Sunday, May 17, 2009

College 'Bound'

In just a couple of months, I will find myself in the unenviable financial position of having two children in college at the same time.

Now, if you have put—or helped put—your children through college in recent years, you’ll have an appreciation for the impact of that statement. If your kids are younger—or if kids are not yet part of your household budget—well, let me just say you don’t have nearly as much time to get ready as you think you do.

First off, you don’t really know how much it’s going to cost. There’s the whole private-versus-public decision (the costs of the latter will be heavily influenced by your current state of residence), and even that decision can be driven by the field of study your graduate chooses to undertake. Each school has different policies (and costs) about things like meal plans, student vehicles, and even how the dorms are furnished.

But the worst of the variables is the sheer annual increase in tuition. My eldest, who will be a senior in the fall, will be presented (well, technically, I will be presented) with a tuition bill that is roughly 20% higher than the one she got just a couple of years ago. Talk about your moving targets!

Now, I said the worst of the variables was the increase in tuition, but a close second has to be the bite the market has taken from the money we had set aside in their 529 college savings programs (see my 2003 column on the experience, “IMHO: College ‘Education’”). At one point, I had hoped that those investments—in target-date funds before target-dates were “cool”—would grow enough to make up for some of our late start in saving for college (braces first, you know?). Now—well, you know what’s happened there. Despite that, I’m proud to say that the family CFO (and that’s not me) has figured out ways to increase our 529 savings without dipping into the retirement fund(s).

Savings Parallels

Still, as we’ve spent the past couple of months trying to figure out how we were going to pay for whatever college daughter No. 2 chose (and not a little time trying to prepare her for a financial fallback, just in case), I’ve seen any number of parallels between saving for college and saving for retirement.

There’s the uncertainty of the amount, the unknown impact of inflation and/or higher prices and, of course, the market’s “contribution.” As with retirement, there is a “target date” of sorts—one that can, at least in theory, be postponed, and one can certainly choose to adjust one’s choice(s) to accommodate financial realities as that date draws nigh. And, as with retirement, a lot of uncertain nights between the planning and the actualization of the event itself.

As it turns out, my two daughters, through their hard work and effort (spurred by their mother’s constant pressure to complete the applications and essays, and doubtless aided by their father’s gene pool contribution) have both managed to obtain academic scholarships that have made it possible for them to attend colleges that would, in all likelihood, otherwise have been beyond our means.

Ultimately, while we had done the right things, the right way, we had perhaps not done enough, or done the right things the right way soon enough. And while our daughters would have been able to go to college—and good colleges—regardless, as a father, I’m thrilled that they’ve been able to pursue this education at the schools they chose. Still, with one more at home to clear that hurdle (just two years hence), it’s been something of a financial wake-up call, a real college “education.”

Many retirement savers—including this one—may well find themselves in the same boat one day. Having done the right things the right way(s) for a long time, they could nonetheless one day find themselves coming up short due to any number of circumstances beyond their immediate control—and some choices that aren’t. Ask any parent; time has a way of slipping away from us, and tomorrow is always closer than it seems.

—Nevin E. Adams, JD

Sunday, May 10, 2009

Poll Positions

There was an intriguing survey published last week, but one that, IMHO, generates as many questions as answers.

The online survey (accurately, if somewhat inelegantly, titled “Investors’ Beliefs about the Role of Target-Date Funds in Retirement Planning”—see Workers Might Have Wrong Idea about Target-Date Funds) captured the sense of 251 respondents, most (55%) of whom were earning less than $50,000/year, but many (75%) of whom were saving for retirement. A full third were age 55 or older, and none was younger than 25. Consequently, while we know nothing about how they are saving, or the size of the programs in which they participate, one might well expect that they have at least a passing familiarity with one of the most popular and powerful 401(k) investment tools—target-date funds.

Not so. Only 16% said they had even heard of target-date funds prior to reading the description in the survey, and apparently even among those, 63% weren’t able to explain the concept. From the response(s) shared (and there weren’t many), it seems that they “got” the date part, but tended to associate that with a maturation of that investment —worse, that on that date, a certain guarantee would be fulfilled.

The survey participants were shown a composite description of target-date funds, drawn from “the collateral of three leading providers,” and then were asked if target-dates promise anything. Presumably at least somewhat influenced by those provider descriptions(1), over half (61%) said yes. According to the survey’s authors, when asked what these offerings promised, 69% also got that wrong. Again, the response sampling provided was scant, but suggested that the individuals felt that the funds promised a certain level of financial security—despite market downturns.

That said, in other responses, most (62%) did NOT agree that the funds promised a guaranteed return, nor that those investments would grow faster than other investments (64.5%). A solid majority refused to believe that you would be able to save less in a target-date fund and still meet your retirement goals (70%), nor were they fooled into thinking that there was little or no chance that you would lose money before (76.9%) or after (76.1%) the target-date.

On the other hand, the flip side of those percentages—albeit a distinct minority of the total group—concurred (at least somewhat) with those errant propositions. And that, of course, is a cause for concern, if only because so many participants these days are choosing—or being defaulted into choosing—those target-date solutions(2).

Ultimately, however, as I looked over the survey results, I had to wonder: Were the respondents participants in a plan that offered a target-date option? Had they made, or been defaulted into, one of those options? Had they been ill-served by that decision? Do they think they have been ill-served?

Regardless, this survey, like all too many others, paints a picture of participant savers who doubtless need, and probably want, the kind of professional investment assistance that a target-date solution surely can provide. However, it also reveals a group of participant investors who are just ill-informed enough to fall prey to the bad counsel of unscrupulous advisers or to be disadvantaged by the indiscretions of inattentive plan fiduciaries.

We don’t need a survey to point that out to us, of course. But it doesn’t hurt to be reminded.

—Nevin E. Adams, JD


1 The excerpts, in case you were wondering, were:

“Take the guess work out of investing for retirement. Just decide when you want to retire, and we’ll pick the fund that’s the closest fit. A professional fund manager will keep that fund’s investments on target.”

“A target-date fund is a diversified portfolio of funds that offers all the benefits of asset allocation and active management. Just select your age, and we’ll do the rest.”

“You can get closer to achieving your retirement goals, with a little help from target-date funds.”

“We do the work. You do the retiring.”


2 Not that, IMHO, a lack of participant understanding or appreciation renders these investments inappropriate, certainly since most participants in the survey sampling seemed to understand the boundaries, even if they couldn’t (to the author’s satisfaction, anyway) articulate them.

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