Sunday, January 23, 2011

Warning “Labels”

Litigation—or more accurately, the fear of litigation—frequently serves to put us on notice. It’s why we find labels on hair dryers cautioning against bathtub use, why hemorrhoid cream comes with an admonition that it is not to be taken internally, why that fast food coffee cup is emblazoned with a note that the contents are, in fact, “hot.” And yet, we know that as silly as these warnings seem, somewhere along the line either someone actually engaged in the activity in question, or some corporate attorney was afraid that they might.

There’s something of that concern still lingering around the target-date fund concept. Many participant-investors (and not a few plan sponsor fiduciaries) were caught unawares in 2008 when the hugely popular 401(k) investment option turned out to be as varied and unique in approach and assumptions as its marketing materials doubtless claimed it would be. Regardless, many plan sponsors—and probably most retirement plan participants—glossed over those differences, doubtless focusing instead on the message that this was an investment option managed by professionals who not only knew what they were doing, but could be trusted to keep an eye on things while we went about our daily lives.

Having learned the hard way that those structural differences exist, our industry—and those who regulate it—has spent the past two years trying to figure out how best to avoid a recurrence of the surprise, if not the result, from those designs. After a lot of discussion and several regulatory and legislative hearings, last November the Employee Benefits Security Administration (EBSA) issued a proposal to enhance the disclosure of these offerings (see “EBSA Unveils Target-Date Disclosure Proposal”), shortly after the Securities and Exchange Commission (SEC) issued its own ideas. IMHO, the latter was a pretty modest effort; the former—well, let’s just say it struck me as a lot of information to share with a participant who, in all likelihood, probably didn’t actively make the investment choice in the first place.1


I’ve always found the issue of participant disclosure to be a tough one. Participants clearly need all the help they can get in terms of better understanding and preparing for their retirement. On the other hand, it seems that the more paper we present to them, the less inclined they are to pay any attention to it.

However extraordinary the events that culminated in the target-date “surprise,” and however complicit participants (and plan sponsors) may have been in ignoring the information they may have had access to, it would be unconscionable not to try and prevent a recurrence. That said, IMHO, the situation won’t be resolved by a lot of legalese, even if offset by colorful charts—and I’d advise caution in trying to squeeze too many complicated concepts into the disclosure, however well-intentioned or valid. I’ve no objection to providing that information (and more) to participants who request it, nor do I mind them being told such things are available as part of a general communication. But it seems to me that imposing such materials en masse will only serve to deter a better understanding—and doesn’t that defeat the purpose?

Asset allocation funds generally, and target-date funds in particular, have, IMHO, been a godsend for participants who know they ought to save but lack the knowledge, interest, or time to make sound investment decisions. That said, most of the investors who seem to have been blind-sided appear to have been caught off guard by one simple factor: How much of the fund was invested in stocks at the projected retirement date, a date that, in most cases was part of the name of the fund? What people tell you (at least with 20/20 hindsight) is that if they had only known that their 2010 fund had so much money invested in stocks, they would have made a different, and ostensibly better, choice.

Consequently, I wonder if we couldn’t just give the vast majority all the “heads up” they need by a simple notation as to the allocation to stocks, bonds, and cash at the projected retirement date. It’s a solution that surely lacks “nuance,” but I suspect that participants inclined to pay attention to such things would glean what they need to know to avoid being caught off guard again; and those who don’t will almost certainly not read the types of disclosures currently under contemplation. It’s a recommendation already encompassed in the proposals, but one that IMHO is quickly being obscured by the “kitchen sink” approach so often attendant with legal disclosures.

I’ve often thought (and said) that many of the disclosures in our lives are written “by the lawyers, for the lawyers.” This time, wouldn’t it be nice if we had one that was designed to be read and understood by the rest of us?

—Nevin E. Adams, JD

1 In fact, in a recent letter to the Employee Benefits Security Administration (EBSA) commenting on the proposal, the SPARK Institute expressed concern that some of the proposed target-date fund disclosures would be over participants’ heads (see “SPARK Calls for Simplification of Target-Date Disclosure Rules”), and ERIC President Mark Ugoretz cautioned that “[i]nundating participants with excessive information has serious consequences; too often it results in participants simply ignoring critical information that is overcome by excessive data” (see “ERIC Calls for Balance in TDF Disclosures”).

In contrast, in its comments on proposed target-date fund disclosure regulations, the American Society of Pension Professionals and Actuaries (ASPPA) and the National Association of Independent Retirement Plan Advisors (NAIRPA) suggested additional disclosures—including a focus on the impact of taking a lump-sum distribution, and a statement as to the potential impact of disparate ages between spouses (see “ASPPA Suggests Additional Target-Date Fund Disclosures”).

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