Friday, December 23, 2011

SURVEY SAYS…

One of the things I enjoyed most about writing/publishing NewsDash over a 16-year span (12 years at PLANSPONSOR, and four before that as an internal email) was doing a weekly survey – on a wide variety of topics, both serious – and not-so-serious.

My favorite of the “regular” surveys (and there weren’t many that repeated, even over all that time) was the annual survey of holiday movies. And while there were certain perennial favorites, it seemed like every year there was a real “battle” for the top slot among readers.

As for this year – well, the survey was admittedly a bit ad hoc – but the results were just as fun. So, here’s the top 5:

Christmas Vacation (26.1%)

It’s a Wonderful Life (15.2%)

Elf (13.0%)

How the Grinch Stole Christmas (4.3%)

A Charlie Brown Christmas (4.3%)


…asked to choose a second favorite, It’s a Wonderful Life and Elf tied for first, with 14% of the vote.

You can check out the NewsDash survey from 2010 at http://www.plansponsor.com/SURVEY_SAYS_What_is_Your_Favorite_Holiday_Movie_2010.aspx

Thanks to all who participated in this survey… and to all a good night! Check back here in 2012 for new blog posts…

Wednesday, December 21, 2011

Naughty? Or Nice?

Editor’s Note: There’s so much going on in the world of retirement saving and investing that I never feel the need (or feel like I have the opportunity) to recycle old columns – but this one has a certain “evergreen” consistency of message that always seems appropriate – particularly at this time of year.

A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site.

This was a Web site that purported to offer a real-time assessment of your "naughty or nice" status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole. But nothing ever had the impact of that Web site - if not on their behaviors (they're kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.


Naughty Behaviors?

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit.

Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don't change their behaviors in any meaningful way.

Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids' behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

--------------------------------------------------------------------------------
The Naughty or Nice site is STILL online (at http://www.claus.com/naughtyornice/index.php.htm ). An improved site and much better internet connection speeds produce a lightning fast response – more’s the pity. I used to like the sense that someone was actually going to the list, and having to check it twice!

Sunday, October 30, 2011

Thanks Giving

After a dozen years here at PLANSPONSOR, effective November 1, I have joined the Employee Benefit Research Institute (EBRI) in Washington, D.C., as Director, Education and External Relations, and Co-Director of the EBRI Center for Research on Retirement Income.

I have long had a strong personal and professional admiration for the work that EBRI does in helping provide our industry with valuable and objective information and am thrilled to be able to be part of those efforts at this critical juncture.

It has been my great privilege over this past decade and change to share with you some of my thoughts and observations in this space. You have been generous both with your comments and commentary on those musings, as well as our publications overall.

While it’s not quite Thanksgiving, I thought I would dedicate this final “IMHO” to sharing some of the things for which I’m thankful:

I’m thankful that the vast majority of plan sponsors continued to support their workplace retirement programs with the same match and options as they had in previous years—and that so many of those who had to cut back in prior years still seem committed to restoring those original levels.

I’m thankful that participants, by and large, hung in there with their commitment to retirement savings, despite the lingering economic uncertainty. I’m especially thankful that many who saw their balances reduced by market volatility and, in some cases, a reduction in their employer match were willing and able to fill those gaps, in most cases by increasing their personal deferrals.

I’m thankful that most workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms in place to help them save and invest better than they might otherwise.

I’m thankful for the time, cost, and effort employers expend each year on health-care coverage for their workforce—and continue to do so, despite the uncertainties still attendant with health-care legislation.


I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that that input continues to be shared broadly in open forums. I’m thankful that so many in our industry take the time to provide that input.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different from when most initially decided to offer these programs.

I’m thankful that plan sponsors will soon have better access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as some fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants and are now trying to figure out how to do it.

I’m thankful that the “plot” to kill the 401(k)…hasn’t…yet.

I’m thankful that we might—finally—be ready to have a national, adult conversation about retirement income and entitlement programs.

I’m thankful to have been given an opportunity to be part of something great here at PLANSPONSOR; to have seen a little internal e-mail publication called “NewsDash” come to reach—and touch—the lives of nearly 70,000 readers worldwide. I’m thankful to have been able, in some small way, to make a difference—and to have before me a marvelous opportunity to continue to do so.

I'm thankful for the warmth with which readers, both old and new, have embraced me and the work we do here. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the years. I’m thankful for the constant—and enthusiastic—support of our advertisers throughout good times—and not-so-good times.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts over the years—and for the ongoing support and appreciation of readers like you.

Thank you!

Nevin E. Adams, JD

My new email is nadams@ebri.org.

Sunday, October 23, 2011

Lessened, Learned?

When I’m talking to plan sponsors (and advisers) about the challenges of being an ERISA fiduciary, I’m generally inclined to emphasize the awesome responsibilities that come with the “assignment”: the impact exerted on participant retirement savings; the admonition to ensure that fees paid by, and services rendered to, the plan are reasonable; the implications of the prudent expert rule; and the liability (and personal liability, at that), not only for your own acts, but for the acts of your co-fiduciaries (and hence an urgency around knowing who those co-fiduciaries are). I’m inclined to talk about the limitations of ERISA 404(c) in providing a shield against all that potential liability.

I’ll remind them that the Labor Department considers them responsible for all participant-directed investments outside 404(c)’s provisions, and note how frequently participant directions tend to fall outside those provisions. I’ll tell them how important it is to read the plan document, and to make sure the plan is operated according to its terms. I will remind them that the power to appoint members to the plan committee has been found to extend fiduciary liability to those who do the appointing, and I will, from time to time, remind them that company stock has been called “the most dangerous plan investment,” in no small part because a group of 401(k) participants is a class-action litigant’s dream team.

And then we get a court decision like the 2nd Circuit’s recent holding in Gray v. Citigroup, Inc., and I wonder if I understand ERISA at all.

The Case

Gray is a “stock drop” case (see 2nd “Circuit Affirms Dismissal of Citigroup Stock Drop Charges”), brought on behalf of Citigroup participants whose 401(k) balances were invested in the stock of their employer, stock that dropped precipitously in value in the wake of the 2008 financial crisis, in response to the collapse of the subprime mortgage market. As is common in such cases, the participant-plaintiffs alleged that the stock was retained as a plan investment option after it was no longer prudent to do so, and that those on, and who appointed, the plan investment committee were not only in a position to know that, but to know that well before the stock tumbled in value.

However, the 2nd Circuit noted—and supported—the determination of the lower court that “defendants had no discretion whatsoever to eliminate Citigroup stock as an investment option, and defendants were not acting as fiduciaries to the extent that they maintained Citigroup stock as an investment option.” Moreover, it noted—and supported the District Court’s determination that “even if defendants did have discretion to eliminate Citigroup stock, they were entitled to a presumption that investment in the stock, in accordance with the Plans’ terms, was prudent….”

Now, how is it that the plan’s committee had “no discretion whatsoever” to deal with the company stock investment? Quite simply, because the plan document called for that as an investment option.1 That’s right, apparently the court felt that the plan fiduciaries had no choice in deciding to keep that option in the plan and available because, to put it simply, “the plan document made them do it.”2

Presumption of Prudence

As for the alternative argument, the “presumption of prudence”? Well, it’s come up before in Moench v. Robertson, a 3rd Circuit decision not only cited here, but subsequently adopted by other courts. In Moench, the 3rd Circuit found that a plan sponsor that offered stock as an investment in an Employee Stock Ownership Plan (ESOP) was entitled to a presumption of prudence.3 Moench is an older case (1995), and from a time when suits based on employer stock investments were less prevalent than today.

More recently, such cases have become nearly as routine as a 100-point drop in the Dow, and the judicial system, honoring precedent, and what it has chosen to view as a Congressional endorsement for employer stock investment in these programs, has led a growing number of jurisdictions to summarily (if not peremptorily) dismiss many of these actions. Indeed, when all is said and done, it now seems as though the courts are comfortable imposing a less stringent review of the decision to invest in employer stock than in any other investment on the retirement plan menu.4

Moreover, for those that have, since Enron anyway, worried about the potentially conflicting duties owed by certain committee members to shareholders and plan participants, the 2nd Circuit provided a moment of unexpected “clarity,” resolving with a pen stroke a dilemma that has concerned plan fiduciaries for at least the past decade by declaring, “We also hold that defendants did not have an affirmative duty to disclose to plan participants non-public information regarding the expected performance of Citigroup stock….”

Ironically, it was this very 2nd Circuit that, just a few years ago, called to mind the notion that ERISA’s fiduciary standards of conduct are “the highest known to the law.”

Perhaps they still are, but, IMHO, this decision serves only to lessen that standard.

—Nevin E. Adams, JD

Footnotes:

1 More specifically, the 2nd Circuit noted that “[a] person is only subject to these fiduciary duties ‘to the extent’ that the person, among other things, ‘exercises any discretionary authority or discretionary control respecting management of such plan’ or ‘has any discretionary authority or discretionary responsibility in the administration of such plan.’” And then it went on to decide that the plan fiduciary’s obligation to honor the terms of the plan document effectively displaced that discretionary authority.

2 “When, as here, plan documents define an EIAP as ‘comprised of shares of” employer stock, and authorize the holding of ‘cash and short-term investments’ only to facilitate the ‘orderly purchase’ of more company stock, the fiduciary is given little discretion to alter the composition of investments.”

3 More than a year ago, I noted that “in effect, this ‘presumption of prudence’ seems to have become a magic talisman against which no claim of malfeasance can be successfully alleged, much less established, simply because the courts have discovered (a cynic might say created) a presumption that holding employer stock is appropriate.” (see “IMHO: Prudent Mien?”).

4 One needn’t read between the lines here. In the court’s own words, “We reject plaintiffs’ argument—endorsed by the dissent—that we should analyze the decision to offer the Stock Fund as we would a fiduciary’s decision to offer any other investment option. We agree with the Sixth and Ninth Circuits that were it otherwise, fiduciaries would be equally vulnerable to suit either for not selling if they adhered to the plan’s terms and the company stock decreased in value, or for deviating from the plan by selling if the stock later increased in value.” (In the court’s defense, plan sponsors have, in fact, been sued for selling stock that later increased in value in a couple of rare situations.)

The 2nd Circuit’s decision is available HERE.

You might also find the amicus brief filed by the Department of Labor instructive HERE:

Sunday, October 16, 2011

IMHO: Catching Your Drift

I recently found myself driving in an unfamiliar city without the aid of a GPS (global positioning system).

Sadly, I had become so accustomed to having that device available, I hadn’t even taken the time to print out instructions from any of the usual Internet sources, and while there were maps in the vehicle, none were of the area in question. That didn’t matter, I told myself—because I had made that drive before, had a pretty good idea of where I needed to be and, armed with a pretty reliable memory for such things, I set out with only a little trepidation.

Just about the time I was getting pretty confident in my ability to navigate without all the high-tech “crutches,” I was thrown a series of curves. The primary route was closed due to construction, the rerouting didn’t seem to take into account where I was trying to get to, an unexpected one-way street suddenly emerged going the “wrong” way, and then I found myself directed onto a parkway whose designers had apparently never contemplated the need of a misdirected driver to pull off and turn around.


In just a matter of minutes, I went from coasting along cool and confident to a state of growing concern (it felt suspiciously like panic) as I began to be drawn what I was sure was miles off my designed course, and heading further away all the time.

Then I remembered that I DID have a GPS on my phone. One that, admittedly, lacked the calm, reassuring voice of the more traditional version giving me step-by-step directions, but it was something. However, it wasn’t the ability of the device to offer routing instructions that I found most useful—the screen was too small (and my need to watch traffic too great) to do much with that feature.

The feature that saved me that day was the blue dot—that element of the GPS that, with a simple touch, will show where you are. That information, presented on the map of my surroundings, allowed me to not only find where I was, but to then visualize where I needed to be and begin heading in that direction. Oh, I missed a turn or two after that, but thanks to that locator “dot,” I quickly saw when I made those mistakes and was able to remedy them before going miles out of my way.

Most participants don’t set out on their retirement savings journey with a confident sense that they know where they are going, much less any real sense of how to get there. Nonetheless, by the time they sit through an education session (or two), make their way through the attendant materials, and try to complete the requisite enrollment forms, they may well feel that they are heading in the right direction.

And then, something happens—it doesn’t have to be an “event” like the financial crisis of 2008 (though it can be); sometimes it’s as simple as just not having had the time to pay attention to your account while the market decides to go on a losing (or winning) streak, or it can simply be a result of the preoccupations that come with those ordinary, but often unplanned, changes in your daily (and financial) life. It can be any of a series of things that pop up just about the time you think you have nothing but smooth sailing ahead; the things that crop up to suddenly “close for construction” the path you had thought you’d be able to follow for a long and uneventful journey.

At times like that—and, arguably, at any time—it’s important for participants—and plan sponsors—to have some kind of idea not only of where they want to be, but where they are relative to that destination.

Because, after all, it’s a lot easier to stay—and get back—on track the sooner you find out you’ve begun to drift from it.

—Nevin E. Adams, JD .

Sunday, October 09, 2011

The IKEA “Experience”

We spent some time this past weekend getting my eldest daughter squared away in her new apartment. It’s her first, and as with nearly all first apartments, there is a lot you need to get that you never needed in your room at home or in your dorm away at college. So we headed out to IKEA.

Those who have never had occasion to visit an IKEA store should check it out at least once. They are mammoth stores—big on the outside and seemingly even more massive on the inside. It’s the kind of store you can easily get lost in (not to worry, they have their own food court inside), and yet it’s very hard to simply get from point A to point B, even if you know what you want to buy. About the only way to get through the store is to wander along the winding path the IKEA folks have constructed that takes you—literally—through every display imaginable.1

But the really interesting thing about the IKEA shopping process is that you not only have to find what you want, you must write down the part number(s), and—at the end of your journey through this mammoth store—you must assemble the requisite pieces/boxes in the warehouse.2 You not only have to make sure that you have each of your purchases, you frequently have to make sure that you have all the (separate) boxes into which your purchase has been divided. Ironically, the consummation of that IKEA shopping experience is that you get to go home and put your purchases together.


Now, I’ve never met anyone who didn’t like the IKEA “experience.” Oh, some might not care for the quality of the furniture, or the selection—and surely I’m not the only one who wonders why I have to do all the work (I understand that it’s supposed to be cheaper, but I haven’t found it to be cheap). But it’s not for those in a hurry, and at the end of the night, I kept feeling like I should be able to present someone else with the bill!

As I was loading up the family van with our purchases, I wondered if this is how participants feel about the current structure of our voluntary savings system: one (still) fraught with a mind-numbing array of choices that have to be assembled at the point of enrollment by participants who want to do the right thing(s), but who find themselves stuck trying to follow an instruction manual they don’t quite understand, surrounded by people who seem to get it (but probably don’t, either), only to find themselves at the checkout counter wondering if they do, in fact, have everything they need—only to then have to go home and put it together themselves.

And I wonder if, when they tally up that bill, they too will observe that it’s probably supposed to be cheaper that way—but find that it’s not exactly cheap.

—Nevin E. Adams, JD

1 This turns out to be an interesting way to create the kind of “impulse” purchasing that most retail stores only have positioned at the checkout counter, as one continually wanders past interesting things that you hadn’t even thought you needed. On the other hand, the maps posted along the way that purport to show you where you are were not exactly reassuring to those in a hurry.

2 A place reminiscent of that last scene in “Raiders of the Lost Ark” (albeit with numbered shelves and aisles).

Sunday, October 02, 2011

“Nigh” Five

A few weeks back, I offered some notions about what the next five years will bring in terms of industry trends (see “IMHO: Fifth ‘Avenues’”). However, in preparing for our recent PLANADVISER National Conference, I came up with five more.

Everybody isn’t going to do automatic enrollment.

Without question, automatic enrollment has done much to shore up the retirement savings rates of American workers. For plan sponsors and participants alike, the efficacy of an approach that doesn’t require participants to complete an enrollment form, deliberate over investment choices, set upon a desired rate of savings, or even darken the door of an education meeting has done much to get tens of thousands of workers off on the right retirement savings foot. And, for the vast majority of workers, the ability to do the right thing without doing anything at all has not only been well-received, but much appreciated as well.

Not that automatic enrollment as outlined by the Pension Protection Act (PPA) doesn’t have its shortcomings. Arguably, the 3% starting deferral rate outlined in the PPA—and still adopted by the vast majority of plans—is better suited to avoid creating a financial burden on workers than to ensuring an adequate level of retirement savings; and some workers, in taking the “easy” path cleared by automatic enrollment, wind up saving at lower rates than they would likely choose for themselves had they only taken the time to actually fill out an enrollment form (see “IMHO: ‘Starting’ Points”).

But at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach. Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination tests have since found the solace required in adopting a safe harbor design. But for many, perhaps most these days, it’s all about economics; simply said, the more participants, the more matching dollars—and considering the potential number of additional participants, those matching dollars could be significant, or significant “enough” in the current economic environment.

PLANSPONSOR’s annual Defined Contribution Survey has, for the past several years, shown a flat or flattening adoption rate for automatic enrollment. There’s no reason to think this will change in the short term.

Everybody who does automatic enrollment isn’t going to do it for everybody.

Among the PPA’s provisions is a safe harbor for those adopting automatic enrolment—a safe harbor that effectively provides plan sponsors with protection identical to that afforded under ERISA 404(c ), so long as certain conditions are met. Among those conditions is that all eligible participants be automatically enrolled and/or given the chance to opt out.

And yet, PLANSPONSOR’s annual Defined Contribution Survey has found, for several years running, that two-thirds of plan sponsors that have embraced automatic enrollment have done so only for newer hires (see “IMHO: A Prospective Perspective”). Anecdotally, plan sponsors are reluctant to “disturb” workers who, at least in theory, have previously been afforded the opportunity to participate and decided not to. Some are hesitant to “insult their intelligence” by doing so, and for others, it’s just the economic dilemma posed above. The PPA doesn’t mandate going back to older workers, of course—but plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have. There is also, of course, the issue of a plan design that, at least on the surface, is more attentive to the financial security of shorter-tenured workers.

Still, the current—and apparently persistent trend—is to adopt this feature prospectively, and it will likely take an improved economy—or perhaps litigation—to change that dynamic.

Roth 401(k)s are going to continue to gain ground.


The advantages of tax-deferred savings have long been part-and-parcel of the pitch behind 401(k) plans. The notion is simple: defer paying taxes on your savings now, and they’ll add up faster, further fueled by the tax-deferred accumulation of earnings on those balances. And then, the logic goes, you pay taxes on those monies as you withdraw them—years from now—and at rates that, post-retirement, will be lower.

Plan sponsors have long been reluctant to push Roth 401(k)s; their pay-it-now concept on taxes at odds with the traditional tax deferral mantra, and their benefits often seen as skewed toward more highly compensated workers.

However, these days, it’s hard to find someone willing to predict lower taxes in the future, even post-retirement. Moreover, today’s younger (and not-so-highly compensated) workers may very well be paying the lowest tax rates they will ever experience.

To date, most surveys indicate that the participant take-up rate on Roth 401(k)s remains modest, something on the order of what self-directed brokerage accounts have garnered (and in many cases, appealing to the same audience). However, the preliminary results of PLANSPONSOR’s annual Defined Contribution Survey suggest that Roth 401(k)s are cropping up on a surprising number of plan menus. It’s a trend that, IMHO, bears watching.

Plan sponsors will (continue to) measure plan success on things (they think) they can control.

Plan sponsors have long measured the success of their defined contribution plans by the rate of participation in the plan. More than just providing a sense of interest and/or the success of inspiring enrollment meetings, the rate of participation, certainly by non-highly compensated workers, has a significant impact on the plan’s ability not only to pass nondiscrimination tests, but to allow highly compensated workers to defer at meaningful rates. However, in an era of automatic enrollment and safe harbor plan designs, the value of this metric has been muted or, in many cases, eliminated.

There is, however, a growing discussion among providers that plan sponsors should begin—and in some cases, are beginning—to consider other metrics: things like rates of deferral, diversity of asset allocation, and even adequacy of retirement income. That they are now able to consider such a shift in focus is a testament to a new and exciting generation of tools now available from the provider community, and they may well foreshadow a time in the not-too-distant future where those perspectives are shared with participants who may, for example, increase their current rate of deferral to ensure a higher level of retirement income, or adjust their asset allocation to preserve portfolio gains as they near retirement.

However, it’s not clear to me that plan sponsors will choose to benchmark their plans on criteria that is so individualized and so far outside their control to influence. Consider that about two-thirds of plan sponsors today still benchmark based on participation, and half that number examine deferral rates within various employee groups. These measures may not provide a picture of what the plan will yield in terms of its ultimate goal, but they are indicative of things a plan sponsor can control or influence with plan design, and—for the foreseeable future, anyway—I’m guessing they will continue to be the measures of choice.

Plan sponsors want good retirement outcomes for participants—but don’t feel it is their responsibility to ensure them.

Under the auspices of “best practices” and armed with some of the aforementioned benchmarking measures, some claim that fulfilling the plan fiduciary’s responsibility to act in the interests of plan participants extends to ensuring a good result. Of course, some plan sponsors are reluctant to know the results of that benchmarking for just that reason: that, once apprised of those results, they will one day be held to account for them.

Unlikely as that seems to me, one should never underestimate the creativity of the plaintiff’s bar. The reality is that a voluntary savings system needs goals, and I think participants would save better if they understood more. It also seems to me that plan sponsors who know more about what is going on in their plan might do a better job as well.

—Nevin E. Adams, JD

Sunday, September 25, 2011

“Better” Business

There was another judicial decision in another revenue-sharing case earlier this month—and another victory for a plan sponsor.

The case was Loomis v. Exelon (see Another Plan Sponsor Win on Revenue-Sharing), a case argued before the 7th U.S. Circuit Court of Appeals, which had previously weighed in on the case that appears to be setting the tone in most of these cases, “Hecker v. Deere & Co.” Hecker, as you may recall, involved a situation with a large, multi-billion-dollar plan that offered its participants access to a couple of dozen funds from a single provider alongside a self-directed brokerage window that afforded access to funds beyond that. The 7th Circuit dismissed that challenge, finding that the competitive forces of the market were sufficient to ensure reasonable fee levels for the specific funds on the menu, and that, if the participants felt otherwise, they could always pursue other options via the brokerage window.

In Exelon, there was no brokerage window, though there were 32 fund options, mostly (24) mutual funds—mutual funds that were retail-class funds. Once again, the 7th Circuit noted that “all of these funds were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition,” and restated its holding in Hecker that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.” And then the court launched off into what, IMHO, was an odd juxtaposition of the benefits of those retail funds against “institutional” funds, which it claimed don’t offer the same level of liquidity, transparency, and ability to benchmark against comparable investments. Really? Have they never heard of an “I” share?


I once opined that, based on the Hecker decision, I would advise plan sponsors to give “participants LOTS of fund choices —via a brokerage window if possible—and I would make sure that there were at least some low-cost fund choices available via that window,” and that, among other things, I wouldn't concern myself “overly much with the fees paid by the plan/participants—so long as those fees were paid via mutual fund expense ratios that are the same as those paid by investors in the retail market” (see IMHO: “‘Winning’ Ways?” ). It was a tongue-in-cheek remark, of course, but the Hecker decision struck me as heavily dependent on free-market principles: Participants weren’t forced to put money in the plan, those who chose to do so weren’t forced into any particular option, and the fees associated with those options were, almost by definition, reasonable since they were subject to free and fair market forces.

That same court was similarly inclined here—and, if you can’t embrace the rationale, one can at least appreciate the consistency.

More than that, in this case, the 7th Circuit noted that Exelon had no real motivation to put “bad” fund options on the retirement plan menu. “[T]here is no reason to think that Exelon chose these funds to enrich itself at participants’ expense. To the contrary, Exelon had (and has) every reason to use competition in the market for fund management to drive down the expenses charged to participants, because the larger participants’ net gains, the better Exelon’s pension plan is. That enables Exelon to recruit better workers, or reduce wages and pension contributions without making the total package of compensation (wages plus fringe benefits) less attractive. Competition thus assists both employers and employees, as Hecker observed.”

The question here isn’t whether Exelon, or any employer, reaps personal benefit from the plan, or how it is structured. Employers do, of course, reap the recruiting/retention benefits of providing a robust and competitive package of benefits, alongside certain tax benefits—though, in my experience, these pale in comparison to the investment of time, money, and effort required. The decision to offer a plan, like the decision to participate, is voluntary. Bad law and intrusive regulation can weigh on the former, and poor plan design and lax administration can surely restrain the latter.

ERISA fiduciaries are, however, not merely expected to offer a “competitive” program, nor is it enough to simply steer clear of arrangements that enrich their bottom line at the expense of participants. Rather, every plan decision is supposed to be not just in the interests, but in the BEST interests, of participants, and from the perspective—or with the assistance—of experts in the field.

That test may, of course, be satisfied by merely offering access to the same types of investments available to retail investors, but, IMHO, that doesn’t mean we shouldn’t expect—better.

Nevin E. Adams, JD

Sunday, September 18, 2011

IMHO: Working “Outs”?

Last week the Senate Finance Committee held a hearing on “promoting retirement security.”

While options were presented to improve things (see “Industry Groups Urge No Changes to Retirement Savings Tax Advantages”), the discussion quickly veered toward a debate on whether and how well—or poorly—the current system is working.

That said, listening to the witnesses,1 one might well have thought they were discussing completely different systems—from one that is striking a good balance between incentivizing employers and encouraging participants to one that is all about providing tax benefits for saving to those who don’t require such enticements; from one that is putting too much responsibility on individual savers to one that has managed to, on a voluntary basis, draw the support of roughly eight in 10 workers. One that has failed, and seems unlikely to ever deliver a real retirement income solution—or one that has the potential to make that a reality.

Metrics Systems

As always, the devil is in the details—and perhaps in the definitions underlying those details. As the Employee Benefit Research Institute’s (EBRI) Dr. Jack VanDerhei pointed out in testimony submitted for the hearing, “Unfortunately, the ‘success’ of these plans issometimes measured by metrics that are not at all relevant to the potential for defined contribution plans to provide a significant portion of a worker’s pre‐retirement income.” Among those metrics, VanDerhei cited such things as the “average” 401(k) balance and what it would provide in retirement income (with no adjustment for the reality that many, if not most, of the participants in the denominator of that calculation are years, if not decades, away from retirement age), and even the focus on what the average balance is for workers nearing retirement age—but only applying that calculation to the 401(k) balance with the employee’s current employer.2


Judy Miller, Chief of Actuarial Issues/Director of Retirement Policy, American Society of Pension Professionals and Actuaries, outlined several “myths” in her testimony, including the notion that the current tax incentives are dramatically tilted toward upper-income workers,3 that those incentives cost the government money (there is a cost to the government’s deferral of taxation, of course, but the government does get its money eventually, albeit generally outside the government’s projection windows), and that only about half of working Americans have access to a workplace retirement plan. Miller noted the Bureau of Labor Statistics (BLS) found that 78% of all full-time civilian workers had access to retirement benefits at work, with 84% of those workers participating in these arrangements—a far cry from the “common wisdom” that too many in our industry still parrot.4

In fact, the devil in that particular statistic depends on whom you want to include as the “relevant” workforce—or perhaps the point you want to make.

There are some things we do know. First, given the opportunity, the vast majority of workers save for retirement via their workplace retirement plan, and that, outside those structures, they don’t. We know that the vast majority of workers that are automatically enrolled in such programs stay enrolled, that most who have their rate of savings automatically increased leave those increases in place. We know that workers whose deferral rates are set by default don’t change those defaults. We know that workers tend to save at the level of the employer match, when a matching contribution is available. We also have, thanks to EBRI, an emerging body of evidence that the current structures can produce, alongside Social Security, reasonable levels of retirement income.

We also know that most employers that offer a workplace retirement plan contribute something of value to those plans: an employer contribution, a matching contribution, and/or the time/expense of running the plan—or more than one of the foregoing. Moreover, there is strong anecdotal evidence that, lacking the incentives of the current tax structures, fewer employers will offer—or support—those programs than do at present.

Therefore, based on what we do know, it would seem that we should (1) to continue to encourage the establishment of defaults high enough to better ensure a satisfying outcome without undermining participation, and (2) to provide for systems that will move those default savings thresholds higher over time.

More importantly, IMHO, we should do everything we can to encourage more employers to offer, and to continue to offer, these programs.

Nevin E. Adams, JD

1 Arguably, the best days of our current voluntary savings structures are ahead of us, but the sheer data on retirement savings accumulations in defined contribution plans and individual retirement accounts are impressive. During the hearing, Senator Orrin Hatch (R-Utah) noted that “more money has been set aside for retirement in defined contribution plans and IRAs than in Social Security.” Hatch said, “The Social Security Trust Fund holds $2.6 trillion in Treasury securities. But private, employer-based defined contribution plans hold $4.7 trillion. And IRAs hold even more: $4.9 trillion.”

2 For a broader discussion on this topic, see also “IMHO: Comparison ‘Points’

3 In her testimony, ASPPA’s Miller noted that households with incomes of less than $50,000 pay only about 8% of all income taxes, but receive 30% of the defined contribution plan tax incentives. Households with less than $100,000 in AGI pay about 26% of income taxes, but receive about 62% of the defined contribution plan tax incentives.

4 EBRI’s Jack VanDerhei offers an insightful analysis of these numbers in Appendix B of his testimony. I commend it to your review.

Sunday, September 11, 2011

“Back” Pay?

During last week’s GOP presidential candidate debate, Texas Governor Rick Perry grabbed headlines by reaffirming his position that Social Security is a “Ponzi scheme.”

Pundits were quick to jump on the comment, apparently believing that such rhetoric will “spook” the electorate (specifically older and independent voters) and ultimately make Perry unelectable, while purists were quick to point out the distinctions between the operation and intent of the two approaches, apparently believing that the technical distinction would matter (to anyone besides purists).

True, a Ponzi scheme, such as the one Bernie Madoff ran, as well as Charles Ponzi’s original design, is positioned as an investment. Investors hand over money to someone, believing that their money will be invested and grow. Instead, the scheme “runner” generally pays off longer-term participants with money invested by newer investors. Sooner or later, there are not enough new investors to fulfill those expectations and the whole thing blows up—though, depending on the sales skills of the Ponzi purveyor (and the expectations of the investors), it can run for years.

Technically speaking, Social Security is not an investment program. Despite those individual withholding statements provided occasionally by the Social Security Administration, nobody has a Social Security “account” into which all those years of FICA withholdings (not to mention the employer contributions) are deposited. People who see those Social Security checks in retirement as a return of the money they put in (with interest) are, IMHO, misguided (at best), though politicians have long found it in their interest for workers to see a link between the two.


That said, IMHO, most Americans don’t “pay into” Social Security because we expect that we’ll receive those benefits; we do so because it is required by law. Whatever that system’s historic success, and the dependence of the nation’s retirees on its benefits, I think most in my generation—and certainly those in my children’s—have doubts as to its long-term financial sustainability. Adjustments have been made over time to address those potential shortfalls—the retirement age has been lifted, the taxes withheld from current pay to fund that system have been increased, the benefits eventually paid from that system have been subjected to taxation (effectively reducing benefits)—and these days, most honest politicians will admit that those same kinds of changes will be required again to avert a future crisis.

Moreover, that payroll tax “holiday” that we took for the past year—and that President Obama has now proposed to extend—is, whatever its benefit to the nation’s sluggish economy, money that is effectively being “diverted” from the Social Security trust fund (as in many American households, retirement savings apparently must take a back-seat to the here-and-now).

Whatever you want to call it, to my eyes, Social Security is basically a societal retirement income insurance policy. Those FICA withholdings are premiums and, depending on our life circumstances, we may or may not collect on it. One thing is for sure, however: Whether it’s for life insurance, car insurance, or Social Security, when we make those payments, we expect that we will receive the benefit(s) for which we contracted. Older workers are, naturally, counting on receiving those benefits—because they have been told they can expect them by a reliable source, because they have spent a lifetime dutifully making those payments, and because they have seen their elders do the same. But whatever label you may put on it, the reality of Social Security is that many of yesterday’s (and today’s) recipients have received benefits far in excess of what they put in, and many, perhaps most, of tomorrow’s recipients will never get theirs “back.”

Is Social Security a “Ponzi scheme”? Perhaps not, but its current design and operation still rely on assumptions and structures that share striking similarities.

A Ponzi scheme needs faith and trust of its investors to be sustained. Ultimately, so will Social Security.

—Nevin E. Adams, JD

Tuesday, September 06, 2011

Best for Success

Today PLANSPONSOR opens nominations for our Retirement Plan Adviser of the Year awards.

Each year we receive a number of inquiries from advisers and plan sponsors about the awards, and many of these fall into a category I tend to think of as “exploratory”—feelers as to what we are looking for.

At its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed from when we first launched the award in 2005: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education. Since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

A Different World

The world has, of course, undergone much change since we first launched those awards, and advisers now have an expanded array of tools at their disposal to make those results a reality—legislatively sanctioned automatic enrollment, contribution-acceleration designs, qualified default investment alternatives, and a broadly greater emphasis on transparency and disclosure of fees. These steps have been good for our industry, great for participant retirement security and, IMHO, have served to raise the bar for our award at the same time.

So, what will we be looking for this year? Well, there are many attributes that can make for a good adviser, or an adviser that is good for a particular plan. But when it comes to choosing an adviser or adviser team that stands apart from the rest, that not only sets an example, but a standard for the industry, I look for advisers that:

Have established measures and benchmarks for plan success. Those benchmarks should include the measures noted above: participation, deferral rates, asset allocation. If an adviser can’t tell me what those targets are and how your plan stands in relation to those targets, IMHO, they are using the “wrong” benchmarks. I’m also interested in advisers who not only use those as a matter of course in running their business, but who develop them in partnership with their plan sponsor clients—and who regularly and routinely communicate those results.


Fully and freely disclose their compensation. I’m frankly a lot less concerned with how advisers get paid than that their plan sponsor clients know what they are paying for those services.

Work at staying current on trends, regulations, and product offerings. The best advisers read, attend conferences and/or informational webcasts, have attained (and maintained) applicable designations, and commit to a regular course of continuing education during the course of the year. This business is constantly changing; if your adviser is not constantly learning, you are being left behind.

Encourage and inspire their clients. Client referrals have always been a key element in our award, and as the overall quantitative standards rise, the significance of the qualitative element afforded by client references (and award nominations) will almost certainly increase. How often does your adviser talk with you? How often do they visit? How—and how often—do they communicate with you regarding regulatory and legislative changes? Do you feel like they know what’s going on – or are you generally the one to break the news to your adviser?

Are willing to accept fiduciary status with the plans they serve. This is an area our judges have debated vigorously over the years. I’ll admit some great advisers have been blocked from accepting fiduciary status by forces they don’t control. I’m not (yet) saying you have to be willing to accept fiduciary status in order to get my vote, but it’s a factor—and, IMHO, an increasingly important one.

That’s what I’m looking for—and looking forward to acknowledging—this year. If your adviser – or adviser team – is worthy of that recognition, I hope you will take the time to nominate them today!

You can nominate an adviser for PLANSPONSOR’s Retirement Plan Adviser of the Year, or Retirement Plan Adviser Team of the Year at https://www.research.net/s/5XYL2KR

Saturday, August 27, 2011

Hurricane Forces

It’s been a stressful week—and it’s not over yet.

Over the past 10 days, I’ve managed to survive three college move-ins, an earthquake in our nation’s capital and—with a little luck—a hurricane bearing down on the Northeast even as I write this column.

Now, I know it’s summer—Labor Day is only a week off—and there’s a lot looming over our industry’s head, but the fact is, I am—perhaps like many of you—having trouble focusing on anything other than Hurricane Irene.

See, we live in a neighborhood that seems particularly prone to losing power, and we’re frequently the last in our town to have it restored—and that’s when we don’t have a hurricane sweeping the Eastern seaboard!

It’s bad enough to be without power for several days, but the last time it happened, it was accompanied by some significant rainfall, and we quickly found out (the hard way) that the sump pump that normally keeps that extra water from pouring into our basement requires electricity to function. Fortunately, we were able to borrow a neighbor’s generator before things got too out of hand, and once we were past that crisis, I determined never to go through that again. Figuring that a small portable generator was a prudent investment, I did a little online shopping, decided I knew NOTHING about portable generators, made a mental note to go back to it when I had time to deal with it… and never did.

Now, life throws a lot of curve balls at you—and forces of nature, more often than not, simply happen with little, if any warning. Hurricanes, on the other hand, you tend to see a long way off. Oh, there’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, like with Hurricane Katrina, the real impact is what happens afterward.

But still, hurricanes don’t generally spring up out of nowhere the way that tornadoes (or earthquakes) do. Incredibly, these massive storms with 100+ mile-per-hour winds seem to creep slowly toward land (with the relentless determination of a zombie in a George Romero classic) over a series of days.

In theory, that provides you with time to prepare—but, this week anyway, it mostly seems to have provided time to wonder why I didn’t do more.

I suppose a lot of participants are going to look back at our working lives that way as they near the threshold of retirement. They’ll remember the admonitions about saving sooner, saving more, the importance of regular, prudent reallocations of investment portfolios. Sure, you can find yourself forced suddenly into an unplanned retirement, but most have plenty of time; not only to see it coming, but to do something about it.

But only if they choose to do so before their retirement storm makes landfall.

—Nevin E. Adams, JD

Sunday, August 21, 2011

“Checking” Accounts

I finally got to the dentist last week.

Don’t get me wrong, I like my dentist. The folks there are more than nice, they treat you like an adult (even when you clearly haven’t flossed since your last visit), and they outline options in a way that feels like you actually have a choice (including my personal favorite, “If it’s not bothering you, do nothing”).

That said, it had been a ridiculously long time since I had been there. Honestly, I knew it had been a while, but when my dentist pulled out his (detailed) record of my last visit—well, let’s just say I couldn’t believe it had been that long. In fact, I think if I had known how long it had been before I went, I might well have postponed it again, if only to spare myself the embarrassment.

Fortunately, despite my extended hiatus, things were in pretty good shape. Sure, the cleaning was more painful than it might have been, but overall, things were better than I had a right to expect.

After the market tumult of the past several weeks, I’m sure there are a lot of plan participants who are nervous about the state of their retirement savings accounts, and perhaps rightly so. I’m betting that, for most, it’s been longer than they think since they checked those accounts—and despite the recent headlines, those accounts may be in better shape than they expect.

The mantra in such times is, inevitably, “stay the course”—wise counsel in most situations, particularly since the impulse in such times is often action that one comes to regret in the fullness of time. However, for some, just sitting still and “taking” what the markets choose to inflict on your retirement savings can be excruciating.

To Do List

Here are some things participants can do while waiting for things to turn around—things they may have been putting off:

Get started on rebalancing by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren't realizing those as-yet-unrealized losses.

Increase current deferral rates. When you think about just how much cheaper those retirement plan investments are now, it's hard to pass up that kind of bargain. More so if you aren't yet saving at the maximum level of the match.

Consider automated rebalancing. Most providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with investment elections. It's a good way to keep things in balance without having to worry (or remember) about the best time to do so.

—Nevin E. Adams, JD

Sunday, August 14, 2011

Decision “Points”

I have watched with increasing interest the growing furor over the Department of Labor’s proposed new fiduciary definition. My first impressions of the proposal were positive: generally speaking, IMHO, the more people who work with ERISA plans that conduct themselves as ERISA fiduciaries, the better. The notion that broadening that standard would serve to “run off” those not as committed to this business bothered me not at all.

However, and as is often the case with new regulations, areas of concern began to pop up. Those involved with the valuation of privately held stock in Employee Stock Ownership Plans (ESOPs) were initially most strident, though the work they do has a tremendous impact on thousands of employer and employee accounts. More recently, and of more interest to many advisers, the Department of Labor’s temerity in bringing IRA accounts under the ERISA fiduciary umbrella has drawn fire from “more than three thousand advisers,” according to the Financial Services Institute (FSI), which has led that charge. Indeed, having despaired of getting the ear of the Department of Labor, FSI says those letters have been directed to the White House itself. On Friday, The Wall Street Journal dedicated space on its editorial page to the issue (the author was opposed to the proposal).


Meanwhile, at a hearing at the House Subcommittee on Health, Employment, Labor, and Pensions last month, lawmakers on both sides of the aisle pressed Phyllis Borzi, Assistant Secretary of Labor and head of the Employee Benefits Security Administration (EBSA), to rethink the proposal, citing concerns that it cuts too broadly and that it could extract a financial toll as yet undetermined by the regulator (see Borzi Makes Case for Fiduciary Definition Change). And yet, by all accounts, at this point DoL remains unwilling to budge.

One ought not be too surprised, I suppose, at those lobbying so fiercely to preserve the status quo. For good or ill, this industry has grown up around the so-called five-part test for an ERISA fiduciary. Entire business practices and means of conducting business have been constructed with an eye toward avoiding becoming ensnared in ERISA’s web. Moreover, the compensation strictures imposed by ERISA would be problematic, at best, for many of those who currently serve the IRA market—even if a growing percentage of those assets have grown under ERISA’s auspices. Still, there’s an irony in the vehemence with which they protest the potential loss of valued counsel by investors—even as they refuse to embrace a standard that would require them to put the interests of those investors ahead of their own.

Proponents (and here I’m not just talking about the DoL) are nearly as unseemly in their rigid adherence to imposing change, ostensibly to protect investors who have had their retirement savings plundered by advisers operating outside ERISA’s strictures. For proof, they trot out, among other things, a dated study that claims to have discovered, based on a very limited sampling, that pension consultants might have a conflict of interest that could affect the advice they provide to plan sponsors. Or, one is tempted to add, they might not (see “IMHO: ‘Might’ Makes Right”). In Congressional testimony, Secretary Borzi cited research that purports to demonstrate a negative impact from potential conflicts of interest by the adviser, only to acknowledge “that none of this research evidence necessarily demonstrates abuse.”

Worse, while they acknowledge that the proposal in its current form might be poorly crafted to deal with certain specific issues, they seem to expect the industry to “trust” them to fix those problems after the regulation is issued via interpretative guidance, the issuance of prohibitive transaction exemptions, or the like.

Without doubt, ERISA’s fiduciary definition was crafted at a very different time, and the industry has undergone much change in the interim. One can understand the reluctance to embrace change that might transform a casual comment about a fund into a fiduciary obligation, and the hesitancy to extend ERISA’s reach to the individual IRA market. On the other hand, particularly when one considers how much of those funds originated under ERISA’s shield, the irony of withdrawing those protections at retirement—and at a point when those balances might be large enough to attract the attention of the unscrupulous—is, to my eyes anyway, striking.

The retirement industry (in large part) says it wants more time, thought, and analysis devoted to this proposal—and the Labor Department claims it continues to do just that.

It is hard to escape, however, a sense that the proposal’s opponents really just want it to go away—while for proponents, the decision has already been made.

—Nevin E. Adams, JD

Sunday, August 07, 2011

“Fifth” Avenues

The year we began publishing PLANADVISER was a big year in many ways for me – it marked my twentieth wedding anniversary, it was the year my father passed away, the year my eldest went off to college for the first time, and also the year that “catch-up contributions” became an item of more-than-passing interest to me.

In recent weeks, I’ve had occasion to think back on those past five years, and all that has transpired – the Pension Protection Act, QDIAs. the back-and-forth on fiduciary advisers, the first wave (and subsequent flurry) of revenue-sharing lawsuits, the growing emphasis on transparency and disclosure, the growth – and questions about – target-date funds, the “normalization” of a fiduciary role for retirement plan advisers, and more recently, the back-and-forth on an expanded fiduciary definition. Like many of you, I can still recall the tumultuous news of September 2008 – all hitting during our PLANADVISER National Conference that year.

While it’s fun and interesting to look back at what’s gone on the past several years – to imagine what might have been, and perhaps to rue what has, it’s clear that we’ve all come a long way over the past five years - and little question that we have an interesting road ahead as well.


Here are five things I think we can count on for the next five years:

Participant fee disclosure won’t matter.

Let’s face it; most participants don’t do anything with their retirement accounts. Most never realign balances, most don’t ever change the amount they defer, and – thankfully, most leave those accounts alone at times when we’re all worried that they will not. I’m betting, for all the angst about participant fee disclosures, most won’t read them – and even fewer will do anything in response. With luck, by the time they get those disclosures, they won’t feel the need.

Plan sponsor fee disclosure will matter.

It’s no easy thing for a plan sponsor to up and change providers. All other things being equal, most would rather crawl over hot coals than deal with all the additional work (and decisions) attendant with those changes. That said, once fee disclosures become more public, and, shall we say, “systematic” – well, I expect plan sponsors will have a lot of “help” reviewing the information. While I don’t expect a massive surge in provider changes, I think it’s fair to say that a lot of “haggling” will take place.

Advisers that work with ERISA plans will need to be ERISA fiduciaries.

Arguably it’s already tough to win a piece of ERISA business against an adviser willing to claim fiduciary status. But I think we’ve already passed the tipping point, and if market forces weren’t sufficiently persuasive, the regulators now seem determined to press the issue.

We’ll come to regret our complacency about target-date fund designs.

In the aftermath of the 2008 financial crisis, much was made of the variations in target-date glide paths, the disparity in assumptions that resulted in wildly different results for those just a couple of years away from retirement. Since then, the markets have repaired much of that damage, but little appears to have been done in terms of rethinking the assumptions and structures of those funds. More troubling is how little movement has since been apparent among plans that felt burned, but ostensibly were ignorant (willfully or otherwise) of those differences in 2008.

Retirement income will (still) be the big thing we all say needs to be solved that (still) isn’t.

Mark Twain once famously remarked that “everyone talks about the weather, but nobody does anything about it.” Well, you can’t say that people haven’t been doing things about retirement income. In fact, there have been some pretty remarkable developments over the past couple of years. The Obama Administration has certainly tried to jumpstart the discussion, if not adoption of such designs. A truly comprehensive safe harbor could be a game-changer here – but I’m guessing that there won’t be a target-date “simple” solution here. Not that there should be …

- Nevin E. Adams, JD

Sunday, July 31, 2011

“Free” Ride?

I was late to the NetFlix game—switching over only when my local Blockbuster closed its doors. Honestly, I was more than a little skeptical about paying to rent movies while spending most of the month waiting for the mail carrier to shuffle things back and forth.

Those fears (along with concerns drawn from early stories about people being sent movies at the bottom of their list, rather than the newer, hotter releases) have turned out to be mostly a non-issue. More recently, I “discovered” the firm’s online library of free movies—and while I would say that most of them SHOULD be free (some you should be paid to sit through), I have enjoyed having that “extra” feature. Sure, there were times when the Internet delivery speed wasn’t optimal, or when a movie would time out a third of the way through, but heck, it was free.

Until, of course, NetFlix announced a change in pricing policy, a change that would cut the cost of the traditional movie rental service, but that would charge—and charge just as much—for the online movie library. Overnight transforming what had been a nice, free, additional service into—well, a pricey, sometimes erratic, delivery system of older, “b” movies. In short order, my willingness to calmly accept certain service “glitches” associated with a “free” service—well, let’s just say I have completely different expectations when I have to pay for it.


The retirement plan industry has long wondered—and worried—what participants would do if they knew how much they were paying for their 401(k)s. Despite the fact that most of those fees have long been disclosed in fund prospectuses, we’re generally inclined to think that most participants haven’t actually read those disclosures—and those who have probably didn’t understand them. That’s all supposed to change—or at least begin changing—with the participant-level fee disclosures slated to take hold next year.

Personally—and I know I’ll get some pushback on this—I’m disinclined to think it will make a big difference. After all, if there’s one thing that participants have demonstrated over the years it’s a strong and consistent propensity to gloss over (if not glaze over) big, complicated, legalistic disclosures. It doesn’t help that retirement plan fee calculations have become complicated structures, imbedded inside the net asset value of mutual funds, with revenue-sharing offsets of varying amounts (see “IMHO: Out of Proportion”), and most expressed in participant-unfriendly terms like “basis points,” or worse—“bips.”

I’m not optimistic about the new regulated disclosures—too much data, and not enough information, IMHO. That said, there are some new disclosures coming to market from the provider community ahead of those regulations that, IMHO, might actually help participants see—and understand—what they’re paying.

Of course, for most, the concern is not that participants will now know how much they are paying—but that some may, perhaps for the first time, realize that they ARE paying.1

—Nevin E. Adams, JD


1 Consider that a survey published earlier this year by AARP indicated that only a quarter of 401(k) participants realize they are paying fees (see “Most 401(k) Participants Not Aware of Fees They Pay”).

Sunday, July 24, 2011

Savings “Bonds”

In my experience, there are three major reasons that people save for retirement. There’s the lure of the “free money” represented by the employer match, the benefit in deferring the payment of taxes, and there’s the hopefully obvious benefit of helping make sure you have enough money set aside to provide a financially satisfying retirement. While one might hope that the last represents the dominant motivation for most, I suspect it’s almost incidental.

Anecdotal evidence would suggest that the match exerts a powerful influence on savings behaviors. Sure, any number of participant surveys emphasize its importance as a factor, but to my eyes, the most compelling evidence is the clustering of participant deferral rates—in plan after plan—at the level at which the employer has deigned to provide that financial incentive.

As for the tax advantages, outside of Warren Buffett, I can count on one hand the number of individuals of my acquaintance who feel they are “under-taxed.” More importantly, I can still remember the first time I had someone explain to me how not forking over a chunk of my hard-earned pay to Uncle Sam now made it possible for me to save more without actually reducing my take home pay. Moreover, how that “extra” savings, through accumulated earnings and the “magic of compounding,” could help my savings grow even more, and even faster.1 It was then—and remains, IMHO—a powerful incentive for individuals to save.


That said, of late, the taxation of these contributions—or perhaps, more accurately, the TIMING of the taxation of these contributions—has been much on the minds of those looking to solve the nation’s debt situation by raising revenue, most notably in the so-called “Gang of Six” proposal’s reported adoption of the National Commission on Fiscal Responsibility and Reform’s notion to cap annual “tax-preferred contributions to [the] lower of $20,000 or 20% of income” for 401(k)-type retirement plans.” This stands in sharp contrast to the current structure, where the limit on the combination of employee and employer contributions is the lesser of a dollar limit of at least $49,000 per year and 100% of an employee’s compensation.

Simplistically, it’s hard to imagine that many workers today are setting aside 20% of pay for retirement. Even someone who is deferring 6% and receiving a very generous dollar-for-dollar match would presumably still be well within the comfort zone of those new limits. The $20,000 cap is, of course, more problematic. Still, I’m sure that those who proposed that cap of $20,000—particularly when the current limit on pre-tax deferrals is $16,500, and the median deferral less than half that sum—think it won’t matter much to “regular” folks. At least they might have thought so, had they not paid mind to a recent analysis by the nonpartisan Employee Benefit Research Institute (EBRI), not just for the highly compensated, but for those who today may not be, but who would hit those limits during their later working years (see Capping Tax-Preferred 401(k) Contributions Would Hurt Workers ).

Indeed, when you examine EBRI’s projections, you begin to appreciate the truly insidious impact those kinds of limits would impose on savings over time—all to satisfy the kind of accounting gimmickry that allows lawmakers to claim they have saved the taxpayer money by generating revenue in the near-term while completely ignoring the long-term collections, and longer-term implications of such a shift in policy.2

A focus that IMHO is, as that old English proverb once cautioned, penny-wise—and pound foolish.

—Nevin E. Adams, JD

1 Of course, in those days, we were also being told that when we withdrew those funds, we’d likely pay taxes at a lower, post-retirement rate—a message that I’m betting has fallen by the wayside in most enrollment meetings these days.

2 For an expanded analysis of the impact, check out “ASPPA Speaks out against Retirement Measures in Budget Proposal”, as well as ASPPA’s report on “Retirement Savings and Tax Expenditure Estimates

Sunday, July 17, 2011

“Much” Ado


There were three big disclosure announcements last week. The first two were the pushback of the effective date for 408(b)(2) fee disclosures to April 1, 2012, from the previously announced effective date of January 1 of that year. In the same announcement, the Department of Labor also delayed the compliance date for the participant level fee disclosure regulation for most plans to May 31, 2012 (a month ago, the DoL had said that information would have to be made available no later than April 30)—which, from a practical standpoint, means that the information must be provided by August 14, 2012 (45 days after the end of the second quarter in which the initial disclosure is required)(see “Borzi Chats about Upcoming Definition of Fiduciary Rule”).

Those delays are, doubtless, of some relief to the provider community. They’re not pushed back far enough to significantly delay the beneficial impact of the disclosures (though this is not the first time they have been pushed back), but I’m sure even the best-prepared will appreciate a little extra breathing room.

But the more significant “announcement,” to my ears anyway, came on Friday, when Assistant Secretary of Labor Phyllis Borzi noted in an Employee Benefits Security Administration (EBSA) Web chat that the DoL was “considering, as part of the pension benefit statement regulatory initiative, requiring that pension benefit statements for defined contribution plans express the participant's ‘total accrued benefit’ in the form of a lump sum account balance and in the form of a lifetime income stream”

It’s not a new notion, of course. In fact, legislation has been introduced in Congress (twice) that would basically do the same thing (see “Retirement Income Disclosure Bill Makes a Comeback”). And while such a notion is fraught with potential problems (the assumptions, the presentation, and the caveats attendant with that presentation), I think it could be a real eye-opener for participants and plan sponsors alike. In fact, IMHO, it’s the kind of thing that could really make a difference in how people look at their retirement savings accounts.

Make no mistake, it’s going to be complicated. You can’t project retirement income from a couple of pieces of data (ostensibly current age, salary, and current 401(k) balance) without making several key assumptions. Moreover, I can’t imagine that it will be deemed sufficient to simply provide that number and, in a sentence or two, outline those assumptions. Rather, it’s entirely likely that the volume of disclosures accompanying the new piece of information will serve to obscure the impact.

Ultimately, it’s hard to know how good those disclosures will be and how much impact they will have—but, IMHO, if we expect participants to save enough, it seems well past time that we helped them know just how much “enough” is.

—Nevin E. Adams, JD

Sunday, July 10, 2011

“Starting” Points

You may have missed it, but there was a bit of a “dust up” in our industry last week.

It started on July 7 when The Wall Street Journal ran a front-page story titled “401(k) Law Suppresses Saving for Retirement” (a story that is still, as I write on Saturday morning, on WSJ.com’s most popular listing). And, no, that article wasn’t talking about discrimination testing rules, the imposition of annual contribution limits, talk of a mandatory limit on loans, or the imposition of mandatory annuitization of distributions. Rather, it was talking about…automatic enrollment.

The report claimed that “40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily,” citing data from the Employee Benefit Research Institute (EBRI). The problem, according to the report, was that “[m]ore than two-thirds of companies set contribution rates at 3% of salary or less, unless an employee chooses otherwise.”

Well, duh. That, as they say, is the law.

EBRI quickly took issue with the WSJ’s characterizations, outlining in some detail the non-partisan group’s extensive history in examining these trends, and then noted that “The Wall Street Journal article reported only the most pessimistic set of assumptions,” failing to “cite any of the other 15 combinations of assumptions reported in the study” referenced in the report. More significantly, EBRI’s Jack VanDerhei commented later that same day that the WSJ managed to completely ignore the reality that automatic enrollment is “increasing savings for many more—especially the lowest-income 401(k) participants.”


Now, while EBRI was, IMHO, rightly miffed to see its data and analysis mis-, or perhaps less-than-fully, represented, the authors of the Pension Protection Act were no less maligned. The law was designed to help more employers make it easier for more employees to become participants, and for those participants to become more-effective retirement savers, and it seems to me that, in just about every way, it has been a huge success. Are there those who once might have filled out an enrollment form and opted for a higher rate of deferral (say to the full level of match) that now take the “easy” way and allow themselves to be automatically enrolled at the lower rate called for by the PPA? Absolutely. However, as the EBRI data show—and, for anyone paying attention, have shown for years now—the folks most likely to be disadvantaged by that choice are higher-income workers, most of whom, IMHO, should know better.

The simple math of automatic enrollment is that you get more people participating, albeit at lower rates (until design features like contribution acceleration kick in). Said another way, participation rates go up, and AVERAGE deferral rates dip—initially.1 Then, over time, as contribution-acceleration designs take hold, we’re likely to see those average deferral rates increase2. But for some, it will mean less savings, and for many, perhaps not savings enough.

There are, however, some things plan sponsors can do now to keep things moving in the right direction sooner:

Auto-enroll workers at higher rates, perhaps as high as the level at which they will receive the full company match. Sure, the Pension Protection Act calls for 3% as a minimum to be eligible for its safe harbor—but there’s no law/rule that says you can’t go higher.

Auto-enroll ALL workers, not just new hires. Since the PPA’s introduction, PLANSPONSOR’s DC Survey has consistently shown that two-thirds of employers adopting automatic enrollment do so on a PROSPECTIVE basis (see IMHO: A Prospective Perspective). Do you really care more for the people you just hired than those who have devoted years of loyal service?

Remind ALL participants of the importance of actively saving for retirement. It may be a bit counter-intuitive to try to reach automatically enrolled participants who didn’t even take the time/expend the energy to fill out an enrollment form, but it’s important. By most measures, workers who save only to the level of the company match won’t have saved enough to provide a financially secure retirement. However, a generation of participant behaviors suggests that they assume that saving to the level of the match is the “right” answer, and it’s likely that they will assume that the level of automatic enrollment established is “enough.” We all know better.

IMHO, automatic enrollment designs are, literally, a starting point—for plan sponsors and their soon-to-be participant savers alike (3).

Nevin E. Adams, JD

The WSJ article is online HERE. EBRI’s response is HERE

1 Complicating the picture is that the PPA took hold just ahead of an economic downturn that led a small, but noticeable, group of employers to reduce and/or suspend their match (and a not-so-small group to lay off lots of workers), while health-care costs continued to rise and, based on previous surveys, likely siphoned some participant contributions from retirement savings.

2 VanDerhei notes on EBRI’s blog that “[t]he other statistic attributed to EBRI dealt with the percentage of AE-eligible workers who would be expected to have larger tenure-specific worker contribution rates had they been VE-eligible instead. The simulation results we provided showed that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a VE plan, and that over time (as automatic escalation provisions took effect for some of the workers), that number would increase to 85 percent.”

3 This from a column I wrote about automatic enrollment designs in 2005: “...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, advisors should 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."

Monday, July 04, 2011

'Free' Wills

Editor's Note: No matter what else is going on in our lives this weekend, a student of history cannot help but be conscious of the boldness of the Declaration of Independence we celebrate today, and how dearly won its principles. There may be other ways to express it, but this weekend I'm going to draw on the perspectives expressed in a prior posting. Whether you remember it or not, I'm hoping you enjoy it - and take it to heart!

Over the weekend I reacquainted myself with that episode of the HBO miniseries “John Adams” titled “Independence.”

As a writer and editor, I watched with a special appreciation the part where Benjamin Franklin and John Adams are “tweaking” Thomas Jefferson’s draft – and the pain in the latter’s face as his “precisely chosen” words were modified. All in all, a modest sacrifice, to be sure. But I, for one, could feel his pain.

That said, anyone who has ever found their grand idea shackled to the deliberations of a committee, who has had to kowtow to the sensibilities of a recalcitrant compliance department, or who has simply suffered through the inevitable setbacks all-too-frequently attendant with human existence must have at least a modest appreciation for the trials that confronted not only that document’s authors, but those then living in these not-yet-united states.

Without question, 1776 is one of those turning points in history, not just for this nation but, in the course of time, for the world as well. And yet, from the perspective of those who, in 1776, put not only their property, but their lives on the line to achieve what we will commemorate this weekend, the prospects of success must surely have seemed unlikely.

Indeed, 1776 itself was full of disappointments for many supporting the cause of independence – and near disasters for George Washington’s Continental Army. One can garner a sense for the change in tide by noting that Thomas Paine in January of that year published “Common Sense”, but before the year was out had turned his pen to “The American Crisis”, fretting about “sunshine patriots” and in “times that try men’s souls.”

However, before the year was out, Washington’s troops would cross the Delaware under unimaginable conditions and win a stirring victory at Trenton, on their way to a series of impressive, but largely unappreciated victories against the British army in New Jersey. Not that the worst was behind them – less than a year later Washington’s troops would winter at Valley Forge. Independence may have been declared in 1776, but it was not won until 1781, and not official for two years more.

The point, of course, is that we have much to be thankful for this Independence Day; for those who had the courage to stand up for the principles and ideals on which this nation was founded, for those who were willing then to take up arms to defend those principles and ideals against overwhelming odds, and those who have done so to this day.

If we are to preserve those “unalienable rights” if we are to continue to enjoy the freedoms of “life, liberty and the pursuit of happiness”, we must remember that the truths so eloquently espoused in 1776 may indeed be self-evident, but dictators and tyrants from time immemorial have sought to vanquish them. It is easy to forget amongst the grilling, fireworks displays, and summer temperatures just how precious those rights are, and how rare still in this world.

This Independence Day we should remember that, “in the course of human events”, the battles that preserve those ideals for us and future generations are never really “won,” they must be fought for every day.

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Editor's Note: For those interested in learning more about the events noted above, I heartily recommend:

“1776” by David G. McCullough

“Washington’s Crossing” by David Hackett Fischer

“Almost A Miracle: The American Victory in the War of Independence” by John Ferling

“His Excellency: George Washington” by Joseph J. Ellis

For those who prefer a “lighter” read (a la historical fiction), check out:

“To Try Men's Souls: A Novel of George Washington and the Fight for American Freedom” by Newt Gingrich, William R. Forstchen, and Albert S. Hanser


Nevin E. Adams, JD