Data "Points"

Replacement “Window”

2012-01-22T18:24:00.001-05:00

There is an old adage that cautions about the consequences “when you assume…”

And yet, the business of retirement planning is replete with any number of so-called “common wisdom” rules of thumb. Doubtless many have well-intentioned origins – to make complicated concepts easier to grasp, and thus to address.

One of the more pervasive notions is that a realistic target for retirement savings can be determined by accumulating a sum that will provide an income stream equal to a percentage of one’s pre-retirement earnings – a sum that is generally expressed as 70-80% of what you earn prior to retirement. This starting point - generally called
a "replacement ratio" - includes any number of imbedded assumptions, perhaps most significantly that the individual will need to spend less post-retirement, generally understood to be on things such as taxes, housing, and various work-related expenses (including saving for retirement).

Moreover, the replacement rate approach represents, at best, an indirect approach in evaluating whether retired workers can maintain their standard of living in retirement – because what matters is not how much you have to spend, but how much you need to spend. A recent research report sponsored by the Society of Actuaries’ Pension Section, “Moving Beyond the Limitations of Traditional Replacement Rates”, also highlights the limitations of relying on replacement rates. A recent paper published by the Center for Retirement Research at Boston College (“How Much to Save for a Secure Retirement”) acknowledges that “the most direct approach would be a comparison of household consumption while working with consumption after retirement” – before launching into a discussion that instead draws on a relatively simplistic series of assumptions , not the least of which is that the goal of retirement saving is a replacement rate of 80-percent of one’s pre-retirement income.

The problem is that these assumptions are just that – and, as a result, in some cases that 80% will be more than is required – and for some it will, unfortunately, be less. Furthermore, most of the assumptions underpinning such replacement ratio targets are implicitly using a 50 percent probability of success.

Additionally, these replacement rate models tend to ignore one – or more – of the most important retirement risks; investment risk, longevity risk, and risk of potentially catastrophic health care costs.

The reality is that there is no “correct” single replacement rate, but the factors that undermine those simplistic rules of thumb are quantifiable. Those factors, and the importance of probabilities in retirement planning are detailed in “Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates (EBRI Issue Brief No. 297).

After all, it isn’t what you have accumulated at retirement that matters, it’s how much you have left at the end of it.

- Nevin E. Adams, JD

'Under' Covered?

2012-01-15T17:28:00.001-05:00

One of the more pervasive statistics bandied around about the voluntary retirement system is that only about half of working Americans are covered by a workplace retirement plan.

It’s a data point that is widely and openly presented as fact—not only by those inclined to dismiss the current system as inadequate, but even by some of its most ardent champions, who see that result as a call to action for expanded access to these programs.

There’s only one problem: It doesn’t tell the whole story.

A 2011 EBRI report found that in 2010, 77.6 million workers worked for an employer/union that did not sponsor a retirement plan and 91.0 million workers did not participate in a plan. However, focusing in on employees who did not work for an employer that sponsored a plan, 9.0 million were self‐employed.

Of the remaining 68.5 million:

• 6.2 million were under the age of 21, and
• 3.7 million were age 65 or older.
• 32.0 million (approximately) were not full‐time, full‐year workers, and
• 17.2 million had annual earnings of less than $10,000.

Now, admittedly, many of these workers would fall into several of these categories simultaneously (they might, for instance be under age 21, make less than $10,000 in annual earnings, and not be a full‐time, full‐year worker).

But if you adjust these numbers so that only workers who work full-time, full‐year, make $10,000 or more in annual earnings, and work for an employer with 50 or more employees, only 17.4 million workers (or 26.7 percent) would be included among those working for an employer that did not sponsor a plan.

Of course, another way to look at this last number is that 73.3 percent of these workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2010.

And that’s a lot more than 50 percent.

- Nevin E. Adams, JD

Pension Penchants

2012-01-10T07:36:00.002-05:00

On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.”

The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.

Among the insights/observations shared in the session:

• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.

• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.

• In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.

• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.

• Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.

• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.

• Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.

• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.

• Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.

• People make rational decisions, but they also tend to be inefficient about those decisions.

• Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.

• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.

• Health care costs impact certainty/predictability of benefit programs and individual savings rates.

• It’s not how much you have at retirement, it’s how much you have at the end of retirement.

• Guaranteed returns are very expensive.

• The better we understand retirement risks, the better we’ll be able to mitigate them.

• Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.

• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.

• Predictability is a key factor in employer decision-making on retirement plan designs.

• Regulations tend to be “one size fits all,” but employers are not, and vary greatly.

• “If you tell employers they can never take it out, they will never put it in.”

• Providing lifetime income in a low interest rate environment is very expensive.

• Employers care about retirement income—don’t drive them away from providing these programs.

• Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.

- Nevin E. Adams, JD

Conversation "Starters"

2012-01-02T09:56:00.003-05:00

While the headlines out of our nation’s capital are driven by talk of the looming budget crisis, concerns about the sluggish economy, and the impending 2012 elections, discussions about retirement, retirement savings, and ways to improve retirement savings have been the order of the day here in Washington.

The Women’s Institute for a Secure Retirement (WISER) recently convened its Annual Women’s Retirement Symposium, with a focus of the future of retirement (broadly defined) and the specific implications for women (who live longer, are frequently paid less than men, and whose working careers often include family interruptions in pay and savings). EBRI data surfaced in a number of presentations throughout the event, including references to gender participation rates (see http://www.ebri.org/pdf/FFE.192.21Mar11.RCS-Gender.Final.pdf, http://www.ebri.org/files/FS4_RCS11_Gender_FINAL.pdf), as well as differences in retirement confidence, and men’s and women’s response to opportunities such as the catch-up contribution.

Among information shared by those at the conference:

* American women are marrying and having children later.
* The longevity gap with men has shrunk – from eight years to five years.
* There is no gender gap in access to retirement savings plans, or in participation in those plans.
* Women tend to save at higher rates than men, though men have larger average account balances.
* Social Security provides half of women’s retirement income, but only a third of men’s.
* Only 11% of young women are confident of their ability to prepare/save for retirement.
* The top suggestion across all age demographics: provide motivation to learn about saving/investing for retirement, and make the topic easier to understand (41 percent of 20-somethings).
* Younger women were more likely to go to family/friends for investment help (those in their 40s were more likely to rely on a financial adviser)—but only 8 percent are actually talking about saving/investing with those friends/family.
* Most disabilities don’t occur at work.
* The leading cause of disability in the United States is arthritis.
* Healthcare costs impact certainty/predictability of benefit programs as well as individual savings rates.

All in all, the likelihood of significant change in the short term seems unlikely, with legislators and regulators hemmed in by budgetary constraints and concerns about the impact of change on private-sector hiring. However, today’s discussions could well set the stage for future change.

SURVEY SAYS…

2011-12-23T11:38:00.003-05:00

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…

Naughty? Or Nice?

2011-12-21T08:40:00.002-05:00

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!

Thanks Giving

2011-10-30T00:32:00.002-04:00

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.

Lessened, Learned?

2011-10-23T14:14:00.003-04:00

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:

IMHO: Catching Your Drift

2011-10-16T01:35:00.002-04:00

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 .

The IKEA “Experience”

2011-10-09T11:19:00.002-04:00

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).

“Nigh” Five

2011-10-02T21:51:00.003-04:00

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

“Better” Business

2011-09-25T17:38:00.003-04:00

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

IMHO: Working “Outs”?

2011-09-18T15:27:00.003-04:00

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.

“Back” Pay?

2011-09-11T22:26:00.004-04:00

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

Best for Success

2011-09-06T06:32:00.003-04:00

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

Hurricane Forces

2011-08-27T07:37:00.002-04:00

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

“Checking” Accounts

2011-08-21T22:14:00.002-04:00

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

Decision “Points”

2011-08-14T14:00:00.004-04:00

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

“Fifth” Avenues

2011-08-07T12:57:00.003-04:00

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

“Free” Ride?

2011-07-31T09:09:00.003-04:00

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”).

Savings “Bonds”

2011-07-24T14:39:00.004-04:00

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”

“Much” Ado

2011-07-17T14:13:00.003-04:00

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

“Starting” Points

2011-07-10T09:15:00.004-04:00

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."

'Free' Wills

2011-07-04T13:26:00.004-04:00

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.

=======================================================

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

Graduation “Exhortations”

2011-06-26T11:29:00.002-04:00

This past week, my son graduated from high school. It was a big deal for our family, as any graduation would be. However, this was in some ways a particularly special night, since my son is our youngest, and thus—well, it will be our last high school graduation (until grandchildren come along, anyway). The weather chased us inside for the ceremony, which also afforded us one more time to walk the halls that my kids had gotten so familiar with (and which still seem like a maze to me).

Mostly, it was an occasion to look back one more time before turning our attention to the future. For me, it was a chance to look back and try to bring to mind my own high school graduation—and all the things that have happened in my life since then.

So, for my son—and all the other graduates out there—here are some things I wish I had known when I was your age:

If you don’t speak up, people will assume you’re happy with the way things are.

If you don’t love yourself, nobody else will.

If you wouldn’t want your mother to learn about it, don’t do it.

Paying the minimum due on your credit cards is dumb.

High school ISN’T the best time in your life.

Never miss a chance to tell someone “thank you.”

You’ll fall in love more than once—or at least think you have.

Never assume that your employer (or your boss) is looking out for your best interests.

You can be liked AND respected.

Sometimes the questions are complicated and the answers—aren’t.

Hug your parents—often.

Know at least a little about sports and the weather.

“What do you think?” is a great response when you don’t know the answer.

The hardest thing to do is quit while you’re ahead.

The second hardest thing to do is to keep your mouth shut.

Never assume that “senior management” knows what they’re doing.

“Have you been working out?” is the best thing you can say to someone. The second best is, “Have you lost weight?”

People notice people who don’t swear.

Breaking up IS hard to do.

Listen.

Smile.

Read.

That 401(k) match is not “free” money—but it doesn’t cost you anything.

Start saving for retirement—now!

—Nevin E. Adams, JD

All for One?

2011-06-19T15:37:00.003-04:00

The underlying theme of last week’s PLANSPONSOR National Conference was “measuring up,” a reference not only to the need to measure the performance and outputs of a retirement plan’s designs, but also to the opportunity to increase and enhance it in the process.

Of late, fees are very much on everyone’s mind, as we all prepare for a new series of plan, and ultimately, participant, disclosures. Just ahead of those disclosures, the industry has launched a new generation of plan fee benchmarking services. Each looks at different things, each has its own set of weightings and assumptions, and each draws from a different source.

But for my money, here are 10 things you should know about any service that purports to help you benchmark your plan:

What is the source of the database that serves as a point of comparison?

Is the database itself large enough to be relevant? Does it include relevant points of comparison with your program in terms of plan size, industry, and/or geographic location?

How old is the data on which comparisons are made?

Is the data on which comparisons are made accurate?

Are the comparisons valid? Do they offer an apples-to-apples comparison?

What assumptions are incorporated in the results?

How are the results of the comparison scored?

What are the credentials of the firm/principals behind the service and/or methodology?

Is the benchmark itself relevant to your needs? Does the comparison help you improve your program?

Is the fee paid for the benchmarking service reasonable, and in the best interests of participants?

There are, admittedly, any number of measures of success for a retirement plan—and while some may be “better” than others, and some surely easier to establish, in my experience, the mere process of measuring brings benefits.

That said, there was a moment at last week’s conference where one of our speakers asked a telling question: not if attendees benchmarked their programs (a surprising number were doing so), nor if they were benchmarking against a variety of criteria (most of those in attendance had moved well beyond the standard of “participation rate” as a metric).

No, the question that gave me pause—as well as a good number of the attendees—was, If the individual members of your retirement plan committee were asked “What do you benchmark your plan against?” what would they say?

Because, if you don’t agree on that answer, the rest of the questions may not matter.

—Nevin E. Adams, JD

You may find useful the cover story of the June issue of PLANSPONSOR, which deals with this new generation of fee benchmarking services, HERE

Chances Are…

2011-06-12T09:32:00.005-04:00

I’ve long adhered to the wisdom of having a “Plan B,” a fallback position if the things you hope will work out—don’t. Now, sometimes those fallbacks aren’t completely well-formed (ask my wife), but to my way of thinking, assuming that everything will work out “according to plan” is just tempting fate.

When it comes to saving for retirement—or, more accurately, to having enough saved for retirement—workers have long had a set of “Plan Bs,” though not always completely well-formed, to put it mildly. They have assumed that if they weren’t saving enough at present, they would “catch up” by saving more “later”; they have assumed market returns to grow their accounts that defied reality (if not common sense); and some have gone so far as to assume they had a pension coming in situations where it was clear that no such safety net would be present.1

And then, this past week, a study published by the Employee Benefit Research Institute (EBRI) threw cold water on what has, IMHO, been a “best case” assumption by a growing number of workers: that they would close any retirement savings gap…by simply working longer (see Delaying Retirement no Guarantee of Being Able to Afford Retirement).

Now, real-world data has shown (and shown for some time now) that the median retirement age for Americans is not even as old 65 (it’s been 62). Still, the headline to the EBRI press release conveyed a much starker message: “Delaying Retirement Past 65 No Guarantee of Households Being Able to Afford Retirement.” In fact, the study says that, even if a worker delays his or her retirement into their 80s, “there is still a chance the household will be “at risk” of running short of money in retirement.”2

Well, the truth is, there’s also a chance that a meteor will land on your head on the way to work—though it’s a small one. And though actuarial tables and the like purport to provide some kind of statistical certainty to an assessment of how long we’ll have on this “mortal coil,” the reality is more complicated. People defy those odds every day, both by living well beyond projected life expectancies, and sometimes by—well, life is sometimes shorter than we think it will be.

That said, EBRI noted that how workers fare financially after retirement is directly tied to three factors: their salary level at retirement, how long they work beyond 65, and how much they save in a defined contribution retirement plan during their working lifetime. In fact, the EBRI researchers cited that “a major factor that makes a difference” in their ability to meet basic and uninsured health-care costs in retirement is “whether they are still participating in a defined contribution plan after the age of 65.” The researchers said that factor “makes at least a 10 percentage point difference” in the majority of the retirement age/income combinations.3 In fact, for those “Generation X” workers, those who have been—and continue—saving in a defined contribution account could basically decrease their “at risk” probability by a third.

Ultimately, the research should remind us of a couple of things, IMHO: first, that the assumption that we’ll be able to work past “normal” retirement age is just that—an assumption. Second, and more important, that even if that assumption pans out, it cannot be assumed that that, in and of itself, will prove to be sufficient.

But finally, and I think most important, is that one thing individuals can exercise some control over in the “here and now” is their current—and continued—participation in defined contribution plans. And that’s also something that can directly—and significantly—improve their chances of a financially viable retirement.

—Nevin E. Adams, JD

The EBRI Issue Brief is HERE

1 Indeed, those are all assumptions that, dutifully plugged into a retirement planning calculator, can “solve” many projected retirement savings gaps. However, human nature (and the markets) being what they are, in real life, they tend to be little more than wishful thinking.

2Admittedly, determinations of retirement security are best done at an individual level, though our industry (and those who occasionally write about it) is frequently inclined to take the easy way around these issues. But, as the EBRI researchers noted, “a retirement target based on averages (such as average life expectancy, average investment experience, average health care expenditures in retirement) would, in essence, provide the appropriate target only if one was willing to settle for a retirement planning procedure with approximately a 50 percent “failure” rate.” In other words, as the researchers noted, “the problem with using a 50 percent probability of success, of course, is that the household is in a position where they will “run short of money” in retirement one chance out of two”—a clear problem if you happen to be one of those who run short.

3 Now, you can’t make those kinds of projections without some assumptions, and EBRI has outlined a number that it made in its calculations, not insignificantly that there is no job change and/or disability prior to age 64, that wage growth continues at average national wage growth after age 64, that contribution acceleration stops at age 65, and that Social Security is deferred until the earlier of retirement age or 70, among other things. That said, the researchers cautioned that “[g]iven the paucity of data with respect to many wage and benefit conditions for workers beyond age 65, several assumptions with little empirical verification were needed to produce the initial results. In most cases, the assumptions made were optimistic in terms of their impact on the value of deferring retirement age. Therefore, the percentages of households with adequate retirement income...should be seen as a best-case estimate, especially at the more advanced retirement ages.” To their credit, the EBRI researchers upgraded their modeling to take into account recent trends in automatic enrollment, contribution acceleration, and target-date fund defaults.

Commit, Meant

2011-06-05T20:10:00.001-04:00

Much to my surprise, my son went to prom this weekend.

Now, I realize that a lot of kids go to prom—and I also realize that more don’t go than is generally appreciated by those who do. But my son, who at present isn’t in a relationship (and certainly not one serious enough to make prom attendance a “requirement”), has long been of the mindset that prom was just a lot of “bother,” and an expensive bother at that.

Having committed himself to this event, however, we of course had to contend with all those things that constitute that “bother”: renting a tux, selecting flowers for his date, etc. Later there emerged items like the expectations around the table at which (and with whom) he and his date would sit and the gathering(s) beforehand—and afterwards. For the very most part, he dealt with each new “decision” calmly, though as time went on, you could see him taking deep breaths as he contemplated just how much more of this “bother” he would have to endure (girls seem to have a lot more tolerance, if not enthusiasm, for the social “nuances” of such occasions). As for his Dad, I wondered if he would have gone along with the idea in the first place had he known just how “complicated” the process would become.

Setting up a retirement plan is not, generally speaking, a front-burner item for most employers, particularly among those at the smaller end of the market. They have their hands full just staying in business and making a profit. It’s not that establishing a workplace retirement plan is a “bother” exactly, but it’s one of those decisions that brings with it a series of other, related decisions—decisions
that have to be made not just once, but reviewed and remade on an ongoing basis. In my experience, this is not always fully appreciated by employers (many of whom it would seem would really just like to set it (up) and forget it). Little wonder, then, that those who work with them to help them fulfill those responsibilities and make those decisions frequently wind up feeling like some kind of glorified “nag,” constantly prodding and reminding plan fiduciaries of the things to which they need to attend.

Ultimately, the decisions required for my son’s prom could only be postponed and/or ignored for so long. At a certain point, it was simply too late to worry any more about tux and/or tie color, corsages, and/or driving arrangements. And, as it turned out, doubtless in no small part because there was a date certain, all of the necessary decisions got made in time (though a couple seemed more or less ad hoc and at the last minute).

For plan sponsors, the issues are generally more complex: Suboptimal fund menus can live on almost indefinitely, plan design changes can nearly always be put off in perpetuity, and as for fee and/or provider reviews—well, unless there’s a fire, the intermittent “smoke” is fairly easily ignored. There is, after all, no prom night, no single date on the calendar by which everything needs to be in order. Plan sponsors inclined to put off till another day those hard and/or complicated decisions can often do so (and do so often).

However, those who choose not to “bother” with such decisions probably shouldn’t have bothered with setting up the plan in the first place.

—Nevin E. Adams, JD

London “Bridges”

2011-05-29T07:56:00.005-04:00

I was in London for a few days last week, and while it afforded a good opportunity to visit with a number of providers in the European retirement plan market, the primary purpose of my trip was to acknowledge the fund manager and consultant standouts recognized by PLANSPONSOR Europe (which has just celebrated its one-year anniversary).

The luncheon itself was fascinating: As is often the case with such gatherings here, many of the attendees were well-acquainted with each other, a number had common employment histories and, as in the U.S., even those who worked for competing firms at the moment seemed to sense that it could change at any time.

Once we got past the potential impact of the latest Icelandic volcanic ash cloud, the traffic disruptions attendant with President Obama’s visit (which, of course, had been impacted by the latest Icelandic volcanic ash cloud), and the beautiful weather (which, fortunately, was apparently completely unaffected by the latest Icelandic volcanic ash cloud), the discussion turned to “shop.”

The group had some interesting questions for me:

Why are American pensions so heavily invested in stocks?

For the record, this audience apparently felt that a 60/40 allocation to stocks/bonds was the mirror image of a prudent allocation. Of course, every fund is different, and every fund’s allocation is different. I mentioned that I thought that, certainly over the long haul, American pensions have likely benefited more than they have suffered from their exposure to equities. However, regardless of the realities, I know that those who make those decisions believe that. One of the consultants at my table asked a corollary to the first question: why more American pensions haven’t adopted a stronger LDI (liability-driven investment) focus.

To that, I offered three observations: First, I think most American plan sponsors still believe they can, in fact, do “better” by pursuing alpha. Second, while I think most American plan sponsors who have given some thought to LDI are intrigued with the concept, they aren’t quite convinced that the “theory” will work in reality. But finally, I sense that more have embraced the concept than is probably appreciated, albeit in baby steps (purists will, of course, argue that incremental adoption can actually serve to undermine the effectiveness, but…).

Are target-date funds now totally discredited?

The question was actually posed in a way that suggested that, whether they were or not, they should be. That said, my short answer here was, absolutely not; that while 2008 had certainly shaken some, the rebound in the markets seemed to have taken much of the edge from that issue. I noted that while I’ve seen data that suggest some are more interested in something other than a pure “date-based” allocation approach, and that, while there is more discussion around the whole “to versus through” retirement date design, my sense was that most providers hadn’t made significant shifts to their approach (or assumptions), and that few plan sponsors (and no participants) had made any changes in their target-date fund, or allocations to that suite.

In sum, I told this audience that I thought that the market rebound had given our industry a second chance on target-date designs—but that I wasn’t sure anyone was taking advantage of that, sadly.

Why are Americans so opposed to annuities?

I told the audience that I have, on more than one occasion, noted that if we could figure out how we taught participants that annuities were “bad,” and could deploy that to teach them how retirement savings were good, we’d be on to something. That said, I still think that there is a behavioral issue here—one that makes individuals reluctant to hand over a large pot of money today to someone else (particularly a large, faceless institution) so that they can have little pieces of that returned to them over a long period of time. That the annuity ostensibly is expensive, that the individual may lack trust in the institution to which they are expected to hand over a life’s savings, that they can’t access those funds in an emergency—those are also legitimate issues.

All that notwithstanding, I think things could change—and perhaps change dramatically—if American plan sponsors were, in any credible way, encouraged to connect this post-employment investment decision to their workplace retirement plans. The reality today is that most plan sponsors see this as an extension, rather than a reduction, of liability (and with reason, IMHO); there is a palpable sense that product development is still ongoing (and that the best model isn’t yet on the market); and beyond that, we all know that the Labor Department is evaluating alternatives/approaches as well.

In sum, employers have no compelling reason to jump in here, alongside several key indicators that suggest doing so could be expensive and/or premature. Consequently, they are inclined to wait—and until that dynamic changes, it seems unlikely that participants will be overcoming their current reluctance, either.

Lessons Learned

Asked to share insights on “lessons learned” by the American pension system, I noted a couple. First off, I noted that I thought we had never helped workers appreciate the value of a pension, and that, certainly from a financial standpoint, employers had probably never fully appreciated what it would take to fulfill that promise. Moreover, that we were only just beginning to focus on helping workers appreciate what it would take to provide a lifetime of post-retirement income—and that, for some, that message would come too late to be of value. That whereas workers once blithely assumed that the market would “fix” their savings shortfalls, today’s most common unrealistic assumption was that they would simply be able to work longer (this, by the way, is a problem of a different ilk for employers in the UK, who might actually have to provide that employment).

One lesson that I thought we were only recently beginning to “get” was that, if retirement security is going to rely on a defined contribution system—particularly one where “defaults” are driving utilization—you can’t be coy about what it’s going to take. And defaulting people into these programs at contribution levels that don’t even maximize the match, much less come close to what needs to be saved to achieve financial security in retirement—well, that is literally setting people up…to fail.

—Nevin E. Adams, JD

Loan Arranging

2011-05-22T11:05:00.004-04:00

The headlines last week were all about how new legislation had been introduced to cut down on the “leakage” from 401(k) plans.

That leakage, roughly defined as pulling money out of retirement savings before retirement, has been a concern of many for some time. About once a year, someone puts out a report about the number of outstanding loans from these programs and/or the uptick in hardship withdrawals (see IMHO: Double Dipping) ; and, from 2008, see IMHO: Safety “Net”). Not surprisingly, with the sluggish U.S. economy and the so-called jobless recovery, people seem to be dipping into these accounts at higher rates. And yet, for all the hyperbole around such things, the actual rate seems to be pretty consistent (allowing for differences in the data samplings).

That said, last week, Senators Herb Kohl (D-Wisconsin) and Mike Enzi (R-Wyoming) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (the SEAL Act), which, among other things, was designed to “[limit] the most 401(k) loan practices that provide easy access to retirement funds but adds costs and fees to pension plans” (see “Legislation Aims to SEAL 401(k) ‘Leakage’”).

From the bill’s summary, the only real “limitation” on loans was capping the number outstanding at any one time to…three. Beyond that, it gave participants longer to stave off having an outstanding loan turned into a “deemed distribution” (a euphemistic term for treating that loan you previously took out as a distribution and subjecting it to income taxation), and it allows participants to continue making contributions after taking a hardship (the current six-month restriction being a vestige of the sense that if you could afford to keep contributing after taking a hardship, you really weren’t in a hardship situation). The SEAL act would ban 401(k) loan debit cards—but did anyone ever think THAT was a good idea?

Now, I’m sure that keeping those repayment windows open longer will compound someone’s recordkeeping headaches, but it seems to me a reasonable means of giving participants time to restore that money to their retirement accounts, rather than simply forking over a big chunk of it to the IRS. Moreover, I think we all know that a properly administered hardship request can alleviate the hardship without imposing a six-month “penalty” on retirement savings (and matching contributions). As for “only” letting participants have three loans out at one time—well, IMHO, that’s hardly a limit at all.

In fact, headlines notwithstanding, the bill might have been more accurately (if less acronymically melodic) titled the “Making It Easier for Participants To Repay Outstanding Loans and Keep Saving” bill.

All in all, the legislation may or may not actually forestall 401(k) leakage, but IMHO, it’s certainly a plumber’s helper.

—Nevin E. Adams, JD

Change Parse

2011-05-15T09:09:00.002-04:00

Three things every adviser (and provider) wishes plan sponsors understood about recordkeeping conversions:

Everybody wants to change providers on January 1. Everybody can’t.

If your plan year end is December 31 (and it is, for the vast majority of plans), there are some real benefits to making a provider change at that point in time. Plan reporting—both participant and regulatory (Form 5500)—is quite simply neater when you finish the reporting year at the same time you conclude your arrangements with a provider. Anything else is going to require someone somewhere to “splice” together reports at some point. Doing so doesn’t have to be a big deal—but it can be “awkward.”

There are some reasons not to make those kinds of changes at year-end, of course. First off, there’s generally quite a queue wanting to do so. You may well be able to get in that queue, but your new provider will likely have their hands full with a lot of plans just like yours. More significantly, your soon-to-be-ex provider likely will as well—and guess who is likely to get the most/best attention?

Bear in mind also that a 1/1 change means that a lot of the preparation, review, and/or testing—not to mention participant communications—will happen during a time of the year when people are generally more inclined to be worrying about other things.

Your provider search will take longer than you think.

Human beings are, generally speaking, poor judges of time requirements, particularly on things they don’t have a lot experience with (like provider searches) and that require the involvement/input of committees (like provider searches). We tend to assume that we’ll have more time available for such things than actually winds up being the case, and we tend to assume that such things will take less time than they actually do. We also tend to make those types of assumptions about the participation of other members of the team. It’s not just that those assumptions tend to be optimistic, it’s that, all too frequently, they are wildly optimistic.

Your provider and/or adviser will likely make a good faith effort to provide a timetable of events, and will likely take pains to emphasize to you the amount of time it will take to actually conduct this process. Doubtless they will remind you—and remind you more than once—just how important it is that you make the time commitment—and deadlines—noted in that timetable.

My advice: Take whatever timetable they give you—and double it.

A big part of the reason your provider search will take longer than you think…is you.

Conversions generally involve providers—both new and soon-to-be-ex—and frequently involve an adviser in addition to the members of the employer team. Every one of these parties is, generally speaking, highly motivated to see the conversion take place. Now, one could argue that you, the plan sponsor, who set all this in motion, has as much motivation as anyone. However, the reality is that, unless you have some SERIOUS servicing issues, your motivation for change is probably somewhat less than the others.

Change, after all, is generally disruptive. A change of providers inevitably brings with it additional work, greater time commitments, and what sometimes feels like an incessant series of questions about things to which you never previously gave much thought. Moreover, you’ll have to think about how to communicate this change to your participants—and deal with the inevitable flurry of questions from THEM about how to do things to which THEY never previously gave much thought.

However, these realities are generally not top of mind when we enter into discussions about making a provider change. So, while the search is generally set forth on a wave of optimism and hope, it can, before long, find itself bogged down in the inevitable administrative minutia that consumes so much of a plan sponsor’s time. And the longer it takes, the worse it can become.

So, considering those issues, what should a plan sponsor thinking about making a provider change do? Well, I would suggest you start early, allow plenty of time for slippage in schedule, and be open to the possibility of making a mid-year change instead.

—Nevin E. Adams, JD

Out of Proportion

2011-05-08T19:40:00.002-04:00

Without question the retirement plan industry has prospered from the long-standing practice of relying heavily – and in some situations, completely - on asset-based fees.

Now, you can certainly argue that that has resulted in plans paying for services they would not otherwise have engaged, and that it has, in some cases, led to plans paying more than they might if they had been more cognizant of the dollars expended. Indeed, one can argue that the imbedding of those fees inside the fund structure has made it easy, perhaps too easy, for the industry to collect its tolls without drawing the kind of scrutiny they were entitled to.

On the other hand, that structure has made it easier for the industry to provide a broad-based level of sophisticated services to plans of all sizes, and has doubtless made it possible for plans to contemplate hiring an adviser that, regardless of the need and/or benefit, would otherwise have been discouraged by an explicit charge for those services.

That said, there are some issues attendant with the current asset-based fee structure that, IMHO, bear discussion:

Asset-based fees go up – pretty much all the time.

For most of the existence of the 401(k), the markets have been fairly good, and as they say, a rising tide lifts all boats. In this particular case, rising markets have also meant rising fees. Proportionately rising fees, of course, but rising fees nonetheless. That, in turn, has meant that those who make their living off asset-based fees have seen some pretty nice pay increases over time – without necessarily having to do anything more or different to “earn” them. Even in bad markets, the steady flow of contributions has cushioned the blow that might otherwise have tamped them down.

Asset-based fees go down when the work – and risks – go up.

One of the great ironies of asset-based fees is that they do sometimes go down, and at the most “inconvenient” times. One need look back only as far as the fourth quarter of 2008 to remember a precipitous decline in asset values – and asset-value-based fees - at the very same time that many noted a steep increase in the “care and feeding” of plan sponsors and participants who had been shaken by what was happening to their retirement plans (not to mention their plans for retirement). Of course, it would probably be viewed as unseemly (at best) to raise your fees during such times – but that is when your work, and your risks, are generally rising.

The bigger your balance, the more you pay.

Admittedly, when you’re talking about fees based on assets, it makes sense that the more assets you have, the more fees you pay. Perhaps that makes a modicum of sense when you are talking about things like investment management (even then, it seems to me that those with large balances are carrying an ironically disproportionate, albeit proportionate amount of the fees). As “industry insiders”, we all know this – indeed, some go so far as to see a more high-minded result; the “rich” underwriting the costs of the less rich, if you will.

On the other hand, it’s not just the rich that have larger balances – frequently those are the balances of lower-income workers who have, nonetheless, been long-time diligent savers. So, said another way, it’s older, longer-tenured workers are underwriting the costs of the folks who have just joined the plan.

Different funds “share” differently

We all know that different types (and brands) of mutual funds charge different fees. What is less obvious to many plan sponsors is that different types (and brands) of mutual funds provide different amounts of revenue sharing. It is not atypical for a plan sponsor to sit down with a recordkeeper, to figure out what the recordkeeping charges will be, to determine what the aggregate amount of the revenue-sharing rebates will be, and then to determine how to manage the difference. But if some funds provide higher levels of revenue-sharing, then the participants investing in those funds are, effectively, shouldering a larger proportion of the administrative costs of the plan.

There are administrative ways to “level” these fee allocations, but many plan sponsors aren’t even aware that this has crept in.

Out of “sight” IS out of mind.

To me the biggest issue with those “imbedded” asset-based fees is that you never really see how much actual money you’re paying. Oh, it’s not like the fees aren’t “disclosed”, and it’s not as though it’s rocket science to figure it out, at least at a high level. But most plan sponsors are lured into what I consider to be the faux comparisons of basis points, rather than actually stopping to figure out what 100 basis points times the assets in a particular fund actually adds up to – and who gets how much for what.

The reality of our world is that a large, and growing number, of retirement plan advisers are already “fee for service”, and the fee disclosure regulations are widely seen as accelerating that trend.

That said, our industry has gotten comfortable, some even complacent, with a fee system structure that tends to raise, not lower, fees over time, a system that apportions fees on a basis that often has little to do with the costs of providing the services it supports, and one that tends to obscure the real costs of the services they ostensibly underwrite.

The current structure may have been “convenient” – but just because it’s “proportionate”, doesn’t mean it’s always fair.

- Nevin E. Adams, JD

The Enemy of the Good?

2011-04-30T23:59:00.003-04:00

Over the past couple of years 401(k) evaluation service BrightScope has made quite a splash.

Early on, most folks I spoke with were quite keen on what was being undertaken by the firm. 401(k) fees were unfortunately still mystery meat to many plan sponsors, and thus a service that purported to help them make sense - not only of what they paid, but how it compared to other programs - looked to be a godsend.

As time has worn on, there have been questions and concerns. The data that underlaid Brightscope’s computations was drawn from government files – and while that made it “official”, it apparently didn’t always mean it was accurate, and it surely didn’t make it timely (though the latter is getting better all the time). Moreover, BrightScope employs a proprietary methodology that relies on certain weightings and assumptions that not everyone would agree with – but then, it’s a proprietary methodology, after all. If you don’t like it, or don’t think it does a fair job of representing the real situation, one has only to say so.

What made them different, at least at the outset, was that they went public with that information – and by public, we mean all the way to retail participants - with data for a vast number of plans, and with a good deal of press coverage, to boot.
That created a modest amount of consternation for some plan sponsors and advisers – not because they had a problem (though some surely did), but because the data presented to the public about their plan and its relative competitiveness vis-à-vis other programs (particularly on the sensitive issue of fees) was, as noted above, incomplete, inaccurate, and/or out of date. None of which the BrightScope folks contested, by the way. But in the couple of conversations I have had with them on the subject, their response has been “if our data is wrong, tell us and we’ll fix it.”

Last week BrightScope turned its attention to financial advisers with its BrightScope Advisor Pages; not to rank them or rate them (though who would be surprised to see that come to the fore one day – particularly since there are already placeholders for “qualifications”, “experience”, and “conduct” on the new adviser tool), but rather to provide information to the public. Data that, like the retirement plan information noted above, wasn’t in one place, wasn’t easy to find, and surely isn’t easy to understand for many. And then, as it had with the retirement plan analytics information that launched the firm, it rolled its adviser database out – to everyone.

Well, advisers are sensitive about such things (with good reason), and a number have already checked out the database and found “issues.” Mike Alfred, co-founder and CEO of BrightScope told me last week that “…many of the “errors” we’re being accused of are really just issues with the advisor’s ADV or U-4 which they did not notice until it was published in this format”. And, as was the case with the retirement plan filings, Mike noted that “Once we get the updated information from a public filing, we will always move quickly to have it updated on the site because our foremost concern is having accurate data”.

Of course, I’m guessing that getting “updated information from a public filing” isn’t an overnight process, and Mike acknowledged that the BrightScope team has been “slammed by a very large volume of incoming requests to claim the Advisor Pages profile as well as general messages of both support and dismay.” More troubling have been the published reports and emails from advisers who say they’ve been told they will have to pay to have their information corrected (or at least strongly encouraged to do so), though Alfred dismissed that as “totally untrue.”

Still, the public release of data that may be old, inaccurate, and/or outdated is surely cause for some concern, and hopefully speedy remediation by BrightScope, where appropriate.

After all, Voltaire once famously said that the perfect is the enemy of the good. But IMHO, the real enemy of the good is more often “not ready yet”.

- Nevin E. Adams, JD

“Smoke” Signals

2011-04-24T00:29:00.004-04:00

Plan sponsors spend a lot of time wondering—and worrying—about the “right” way to do things. They rely on the guidance of experts, the insights of publications like ours, the black—though often gray—letter of the law, and sometimes they must rely on the occasionally contradictory adjudications of the courts.

Those contradictions have been much in evidence in the series of 401(k) revenue-sharing lawsuits, which, IMHO, continue to suffer from what seems to be a confusing “flexibility” in judicial discernment regarding the standards of fiduciary responsibility and application of ERISA’s 404(c) safe harbors. In fact, it is only a matter of time until some plan sponsor somewhere files an injury claim for whiplash incurred from simply trying to keep up with the direction of these decisions.

The most recent example was the case of Gerald George vs. Kraft Foods Global (see Appellate Court Sends Back Kraft Fee Case), a case the 7th U.S. Circuit Court of Appeals remanded (albeit in a split 2-1 decision) for further deliberation to a District Court—which had already determined that there was no issue presented that required a formal adjudication, while granting the employer-defendant’s motion for summary judgment (see Kraft Excessive Fee Case Thrown Out).

That District Court, which relied heavily on the decision of this same federal appellate court ruling in Hecker v. Deere & Co., reasoned that ERISA requires only that fiduciaries use a “reasoned decisionmaking process” that utilizes the appropriate methods to decide on a proper course of action in running a plan, and that in continuing to employ its current recordkeeper (Hewitt Associates) , the Kraft fiduciaries were under no obligation “to scour the market” for the cheapest fund or service provider (see “Reasonable Redoubts”).

However, in the recent appellate decision, we find that, since hiring Hewitt in 1995, the plan’s fiduciaries had not solicited competitive bids from other recordkeepers—a finding that raised my eyebrows, as it doubtless would most retirement professionals. Now, one should always be careful in reading judicial explanations of the facts on which they based their decisions as a complete picture, but this court said that the defendants “…emphasized that they engaged several independent consultants for advice as to the reasonableness of Hewitt’s fee and argued that in doing so they satisfied their duty to ensure that Hewitt’s fees were reasonable”—a statement that the appellate court juxtaposed against a statement that, over a 10-year period, “fees paid to Hewitt ranged between $43 and $65 per participant per year.”

The implication seemed to be that casual conversations with “independent consultants” were no replacement for a full-blown competitive bidding process—and the fee trend, lacking context, was an eye-opener as well. But the District Court outlined a series of plan changes and negotiations over that time period that painted a very different picture and were anything but “casual.” True, one might well wonder why a full RFP wasn’t issued, but the District Court opinion paints a picture of lots of merger-related plan changes; an active discussion, review, and comparison of fees; alongside a pattern of negotiation that both reduced fees and/or expanded services over the period in question. In sum, the picture painted by the lower court’s opinion was the kind of thing you might expect to come from a full competitive bid without the time, pain, and—yes—expense of undertaking it. And, yes, it was documented.

That said, the appellate court found error in the District Court’s dismissal based on a finding that the “defendants satisfied their duty of prudence by relying on the advice of their consultants”, going on to note that “although the fact that defendants engaged consultants and relied on their advice with respect to Hewitt’s fee is certainly evidence of prudence, it is not sufficient to entitle defendants to judgment as a matter of law” (1).

Ultimately, while some commentators have painted this opinion as a reversal of fortunes for employers in these cases, I am disinclined to see it that way. Rather, to my reading, you have a court that sees just enough smoke2 to wonder if there might be a fire; a large plan that went a decade without a formal RFP3. Determining not that not doing so was inherently imprudent4—but that making that determination would require a more complete airing of the facts.

—Nevin E. Adams, JD

1 In explaining its determination, the court cited Donovan v. Cunningham, 716 F.2d 1455, 1474 (5th Cir. 1983) (stating that “[a]n independent appraisal is not a magic wand that fiduciaries may simply waive over a transaction to ensure that their responsibilities are fulfilled”).

2 There were also issues raised about the use of two different accounting structures in two different plans for its company stock funds, and questions about how float was accounted for, in addition to questions about the use of actively managed funds. In fact, considering the volume of the opinion dedicated to it, the company stock accounting may well have been the most compelling triable issue of fact for the appellate court.

3 The appellate court also took issue with the District Court’s dismissal of testimony by an expert witness by the plaintiffs. According to the appellate court, Lawrence R. Johnson reviewed the process that defendants followed when they extended Hewitt’s contract and opined that defendants acted imprudently by extending the contract without first soliciting bids from other recordkeepers. The District Court found his expertise was limited to mid-size plans and dismissed it, while the appellate court said that “defendants have not pointed to any differences between the recordkeeping needs of mid-sized and large plans that would make experience with mid-sized plans an insufficient qualification for rendering an opinion about the recordkeeping needs of a large plan.”

4 In a “spirited” dissent, Judge Richard D. Cudahy, who characterized the lawsuit as an “implausible class action based on nitpicking with respect to perfectly legitimate practices of the fiduciaries,” noted that “[i]f plaintiffs can find one ‘expert’ who will testify that the fee is too high, must there be a trial? Here, the trustees have a relationship with Hewitt going back fifteen years. They have a good sense of the dimensions of the job and Hewitt’s performance in carrying it out. Must they substitute any lower bidder that happens along?”

Rest “Room”

2011-04-17T14:09:00.004-04:00

It should come as no surprise that the vast majority of plan sponsors who have adopted automatic enrollment have chosen to default that initial deferral at 3% of pay. No, that’s not the level at which most plans match deferrals, and it’s certainly not a level of deferral likely to produce sufficient retirement savings. It is, however, the starting deferral rate attributed to such programs under the auto-enroll safe harbor provisions in the Pension Protection Act (PPA). Coincidence? I think not.

Ironically, that same safe harbor provision requires that employers either go back and automatically enroll all eligible participants (giving them the ability to opt-out), or be able to establish that they did at some point (see “The Pension Protection Act: This Changes Everything”). Most providers, certainly pre-PPA, were unable to provide the requisite proof of those prior enrollments—and thus it would seem that most employers seeking the protections of that auto-enroll safe harbor would have re-enrolled all eligibles; and yet, surveys (including PLANSPONSOR’s own DC Survey) routinely show that only about one in three employers do so. In fact, twice as many choose to implement automatic enrollment only for new hires (see “IMHO: A Prospective Perspective”).

Now, when you look at the former finding and compare it to the latter, you can only draw one of two conclusions: either that most plan sponsor adoptees of automatic enrollment aren’t interested in obtaining the protections afforded by the PPA’s safe harbor, or they don’t understand that their approach doesn’t qualify.

There’s nothing wrong with opting to embrace automatic enrollment at a point in time and only applying that to employees hired after that date. Sure, you won’t garner the benefits of the PPA safe harbor, but most plan sponsors probably don’t “need” that (though they might well want it). Moreover, there are some very real financial consequences associated with automatic enrollment—survey after survey shows that very nearly every employee who is automatically enrolled stays in the plan. Depending on your match and current participation levels, that can add up to a lot of additional contribution dollars.

Oddly, as real as that financial impact is, that’s not the reason I most often hear from plan sponsors. Instead, they are (still) more inclined to suggest that the longer-tenured workers have had—and rebuffed—their opportunity to participate in the plan. Many plan sponsors remain worried that these longer-tenured workers will consider such “un-permissioned” actions to be some kind of personal affront. And yet, five years after the passage of the PPA, all I ever seem to hear are stories about how those more-seasoned employees are appreciative, even thankful, for finally being enrolled in the plan. It’s as though they heard the messages all those years, knew they should be doing something about retirement, but didn’t quite know how to get started.

There’s another interesting finding from PLANSPONSOR’s DC Survey, and it has held true for several years running. Asked about their motivation for adopting automatic enrollment, the vast majority—nearly two-thirds, in fact—say, “Our organization wanted to be more proactive in helping employees save.”

Perhaps it’s now a good time to help the rest of them.

—Nevin E. Adams, JD

Expert Opinions

2011-04-10T16:00:00.002-04:00

I learned a long time ago that when it comes to things like automobile maintenance, home repair, or gardening, I’m better off hiring an expert. Now, I have friends who derive great pleasure from things like “puttering around” in the backyard, who relish the accomplishment of laying down their own carpet or wallpapering a bathroom, who derive great satisfaction from installing their own car stereo or home entertainment center. But as for me, I’m happy to support our nation’s economy by paying someone who actually knows how to do such things. It’s not that I CAN’T do those things, mind you—it’s just that they take time I don’t have to do things I’m not good at for a final result with which I am never completely satisfied.

And, if I’m honest, because I don’t like those tasks, I put off doing them—as long as humanly possible.

One of the most common information requests I get from advisers is help in proving to sceptical plan sponsors that they should hire an adviser. While I don’t always know the particulars, the vast majority of these situations don’t arise where an adviser is already involved. Rather, these tend to be situations in which the plan sponsor has not previously hired an adviser and is questioning why he or she needs to undertake that additional expense to do something they (still) feel perfectly capable of doing themselves.

In truth, by the time you take into account the types of programs many providers now make available, with screened investment menus, pre-packaged investment policy statements, automatic enrollment and contribution acceleration campaigns, not to mention an expanding array of qualified default investment alternative (QDIA) choices and materials that tout the support of a large, sophisticated financial institution, you can hardly fault a plan sponsor for wondering why he or she needs an adviser.

To me, the reason is simple: because, while a plan sponsor probably can fulfill his/her fiduciary duties without the assistance of an independent financial adviser, IMHO, left to their own devices, they are, quite simply, less likely to do so. They are more likely (perhaps much more likely) to be beholden to a limited investment menu and “standard” fee structures, less likely to have regular and productive investment committee meetings, less likely to renegotiate their current arrangements on a regular basis, less likely to undertake needed change, and far less likely to exercise the discipline of a consistent process in doing so. Like those “distasteful” household chores, even among the most committed plan sponsors, these complicated decisions tend to drift to the back burner of life.

Hiring an adviser is no panacea for a plan sponsor who is not willing to own up to its fiduciary obligations—but, with the right adviser, that decision can go a long way toward helping ensure that those fiduciary obligations are met.

—Nevin E. Adams, JD

Mixed Messages

2011-04-03T13:11:00.003-04:00

We had wrapped up a very successful half-day adviser event ahead of our annual Awards for Excellence dinner last week. As we closed up the session, a co-worker of mine commented to me as an aside, “Nobody ever told me I needed to be saving 12% before.”

Now, this co-worker has nothing to do with our magazines, or the content that fills our Web sites and newsletters. He just happens to work at a company that, among other things, publishes information about retirement plans. He’s a participant in our benefit plans, of course—and so he has probably been exposed to all the same types of education and savings materials as anyone (perhaps more). He’s a smart guy (he’s pursuing his MBA at night), tech-savvy, and he pays attention. And yet, it wasn’t till he was effectively sitting there as a fly on the wall in a room full of the nation’s best retirement plan advisers that he overheard someone put forth a specific savings-target figure.

Now, like any good plan sponsor, I can explain that. I don’t know his individual financial circumstances (I’d have to “work” even to find out how much he’s saving at present), have no idea when he plans to retire, and can’t possibly guess at the viability of Social Security or other resources at that date. He may marry “well,” he may have a rich uncle—heck, he might even win the Lottery. I can tell you that his employer offers a solid 401(k) plan, with a robust investment menu (reviewed on a regular basis with our financial adviser), a generous match, access to both managed accounts and target-date funds, and the opportunity for him to sit down with a financial adviser (paid for by his employer, I might add) or get a consult via the phone, as well as through an assortment of Web-based tools. Looking over the plan’s structure, administration, and fees, it’s hard not to feel that (in the words of the Lone Ranger), “Our work here is done.”

Except, of course, it obviously isn’t.

Now, I don’t know that 12% is the right answer in his individual case. For all I know, that’s still not going to be “enough”—or, based on the combined results of the aforementioned individual circumstances yet to be discerned, it might be way too much. Obviously, there are many logistical impediments to us divining with precision what the “right” amount is for every individual situation (including our own).

That said, IMHO, any number of plan design features convey a different message to participants. A significant number of plans still don’t provide for an automatic (or even immediate) enrollment. Those who do generally default employees into these programs at a mere 3% of pay, which, in most plans, isn’t even enough to qualify for the full match. Many plans match those deferrals only up to 6% (or less), auto-accelerate at just 1% increments, and—if we’re rigidly adhering to the outline provided in the Pension Protection Act—probably cap those automatically accelerated deferrals at 10% of pay.

We all know that the motivations for those plan designs are nearly as varied as the plans that employ them: They represent the plan sponsor’s sense of a competitive benefit structure, they match the expectations of their current workforce, or perhaps they are simply what the employer can afford at any particular time. Yet, we all see evidence every day that participants read into these structures a kind of “code” that these are the “right” answers to provide them with a financially secure retirement, rather than representing decisions made for reasons that, while generally sound, are completely unrelated to ensuring individual retirement security.

We’ve long held off giving people a specific target for savings, for a host of real and legitimate reasons. I wonder if the time hasn’t come to put a target out there for participants—one that might not be precisely the “right” number for every individual situation, but one that will give them something to aim for, rather than continue to duck the issue and hope for the best.

It’s a message that I think participants are ready for—and there’s no time like the present.

—Nevin E. Adams, JD

Comparison “Points”

2011-03-27T17:33:00.003-04:00

Every year about this time, we get reports from firms that purport to tell us how much time is spent in preparations for the NCAA basketball tournament—and, no, not by the teams and coaches. The “studies” (ironically, they’re always put out by firms that are in the business of helping people find jobs) generally make some assumptions about the amount of time people spend on the workplace pools as well as how many people will participate, and their compensation levels, and—voila—the productive time ostensibly “lost” to these activities. Now, they make a lot of assumptions to get to that result, including the assumption that, but for these pools, people would be doing nothing but working. But the results give journalists something easy—and “fun”—to write about, and the rest of us to read and talk about (some day someone should do a study on how much time and money is wasted writing and reading about those “studies”).

Our lives are filled with such reports: perhaps valid points that are, like it or not, supported by data that is—well, let’s just say it’s “squishy.” These reports are designed to provide some interesting if “low hanging” fruit for media coverage—and it works. The sponsoring firm gets some free press, the journalist gets some easy copy, and the reader—well, you get some interesting, if not completely meaningful, information.

And our industry is no exception. Here are some of the industry “data points” that, IMHO, are things we probably shouldn’t care about.

How the tiny minority of participants who realign their balances in any given month choose to do so.

Let’s face it, in any given month—heck, in any give YEAR—only the tiniest numerical sliver of retirement plan participants make a change in how their accounts are invested. Those who do could be doing so for any number of reasons, but inevitably those who do seem to be selling—and buying—the wrong things at the wrong time, fleeing stocks when the market takes a tumble and buying at the peak. And yes, it’s hard to avoid a certain “can you believe these idiots?” undercurrent in reporting on these movements.

Sure, highlighting the missteps of the few can provide fodder for reinforcing positive long-term investing messages. But the vast majority of participants never—ever—touch their balances.

Not that we should be wholly comfortable with that.

The investment performance of defined benefit versus defined contribution plans.

Every so often, a report comes out that reminds us that defined benefit plans turn in a better performance than defined contribution plans. What we’re apparently supposed to draw from that is that DB plans are better-managed in terms of asset allocation by professionals, better able to negotiate lower fees than their DC counterparts, and generally provide a better return on investment. In other words, DB plans are “better.”

But those who get to that result generally do so by sampling against a finite number of plans, and sampling matters (sampling ALWAYS matters). Plan size is a factor, of course, but while a defined benefit plan is ostensibly a single pool of money being managed to obtain a certain aggregate objective, a defined contribution plan is an aggregation of individually managed objectives. Now, I’m not saying that all, or even most of, those individually directed DC plan allocations are as well-designed or maintained as that put in place by a DB investment committee, but unless your defined benefit plan has a single participant, those programs have completely different objectives and timeframes. You might as well be comparing a sports car to a Hummer; which is “better” depends on the distance, the terrain, the length of time you have to complete the journey – oh, and how much fuel you have.

That said, in 2009, guess which did “better”?

That “average” 401(k) balance.

If there is one number I wish our industry would quit publishing, it’s the average 401(k) balance. As noted above, “averages” have their limitations, but the variations in this particular average are enough to make one’s head spin. Here you have participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. But in preparing this number, we slop them all together and create—mush.

Worse than mush, actually. That number is never “enough” to provide anything remotely resembling an adequate source of retirement income, a point that is reiterated somewhat incessantly (and without the caveats about what it is an average of) in the press. I’ll allow that some of the permutations of this calculation—such as when we see that average by age demographic—can be instructive for longer-term trends, though my strong preference is for a median reading, but an average 401(k) balance is akin to an average reviewer rating on Amazon.com. It’s mathematically accurate—and completely useless.

IMHO, averages often obscure as much as they reveal—and this average does so more than most.

—Nevin E. Adams, JD

See “DB Returns Beat DC Returns Through 2008”

http://www.plansponsor.com/IMHO_Goal_Lines.aspx

Court Costs

2011-03-20T23:23:00.002-04:00

Last week brought to light an aspect of 401(k) litigation that doesn’t generally get a lot of coverage—and the participant-plaintiff was presented with a $50,000 bill.

Now, at some level, this case was “just” another stock drop suit where some kinds of accounting issues contributed to a sudden (and ostensibly unexpected) drop in the price of company shares, including those held in the company’s 401(k) plan.1 These types of cases have cropped up one after another in the wake of the market downturn, and while the fact patterns behind the drop in share price vary slightly, the suits themselves allege pretty much the same thing: The plan fiduciaries kept the stock as a plan investment after it was no longer prudent to do so; to wit—after it suffered a precipitous drop in value.

Most of these cases don’t seem to get very far, the courts either deferring to a “presumption of prudence” (see “IMHO: Prudent Mien?” or, as in this case, finding that ERISA 404(c)’s safe harbor provided shelter (see”Court Gives Baxter 404(c) Protection in Stock Drop Suit”).

What’s interesting to me about this case isn’t that it is a stock drop suit, not that the judge found 404(c) applicability as a shield (honestly, I’m not “getting it” in this case), and certainly not that the employer prevailed (that seems a pretty common result in stock drop cases). No, what I found interesting—and what one would hope that plaintiffs who get lured to these actions in the future might want to keep in mind—is that they might lose more than just their day in court.

Not that it was an all-out victory for the defendants. Sure, they’ll get $50,000 from the participant-plaintiff, but they had asked for roughly $500,000—and that didn’t include attorney fees! But in this case, after spending some time discussing whether such awards could be made and on what grounds, Judge Gottschall decided that such fee awards were allowed—and then proceeded to pick apart the itemized requests for reimbursements with the fine-tooth comb of someone auditing a business expense reimbursement request (disallowing most for either a lack of specificity or an inability to document the origins of the expense).

Regardless, I found the list of expenses to be eye-opening2, and while the defendants may well have had other resources to tap to cover them, it was a stark reminder of just how expensive litigation can be, how much court costs, even when you win.

But maybe there’d be less of that if those who set such things in motion had to spend some of THEIR money when they’re wrong.

—Nevin E. Adams, JD

1 Specifically, U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois granted the assessment of some $50,000 in costs associated with the litigation against David E. Rogers, who filed the suit against Baxter International in 2004. The suit, rejected by this same judge in 2010, alleged that Baxter continued offering company stock in its 401(k) plan after it was no longer prudent to do so (specifically, after its stock twice took tumbles after the reporting of disappointing earnings results, one involving fraud at a Brazilian subsidiary). Judge Gottschall ultimately dismissed the suit because she found that the employer qualified for protection under ERISA 404(c)’s safe harbor (see “Court Gives Baxter 404(c) Protection in Stock Drop Suit”).

2 From Baxter and former Baxter CEO Harry Kraemer:

(1) $23,163.44 for transcripts and video recordings of court hearings and depositions,
(2) $6,956.60 for photocopying court documents and preparation materials for depositions,
(3) $112,648.13 for exemplification and copying costs incurred in connection with responding to discovery requests (including nearly $78,500 in fees paid to an “e-discovery vendor” to process data into a readable format that could be reviewed and produced to plaintiff, as well as $15,000 spent digitalizing documents that existed in hardcopy format—at a rate the court said was about twice as expensive as simply copying them),
(4) $163,474.09 for the cost of computerized legal research.

From former Baxter CFO Brian Anderson:

(1) $4,070.95 for transcripts,
(2) $10,673.10 for photocopying,
(3) $2,687.04 for exemplification of trial exhibits,
(4) $173,150.00 for expert-witness expenses (apparently without providing any supporting documentation, so it was rejected).

“Conversation” Starters

2011-03-13T22:00:00.004-04:00

There’s been a lot of talk coming from Washington of late about the need to have “an adult conversation” with the American people.

That conversation ostensibly includes discussion around the need to make changes to how this country spends its money and/or how much it needs to fund that spending. Almost certainly that “adult” conversation means decreasing entitlement benefits and/or increasing the tax “contributions” we make to fund those entitlement benefits. The politicians wonder if we’re ready for it; personally, I think the politicians are the only ones who aren’t.

Still, when someone talks about the need for an “adult” conversation, what they mean is that we need to talk about things you’d probably just as soon not think about, much less talk about. Those are generally serious topics with painful choices.

Regardless, we’re only just beginning to have those “adult conversations” with retirement plan participants. Sure, we talk about the need to save as much as they can, beginning as soon as they can—but still, for the very most part, the goals (and goal line) are vague and ambiguous. Here’s the adult conversation I think we should be having:

1. Social Security won’t be as much as you think it will be.

The Social Security Administration notes that for a worker retiring at age 66 in 2011, that maximum benefit amount is $2,366 per month, a figure based on earnings at the maximum taxable amount for EVERY year after age 21. In other words, that’s probably more than most of us would get. Note that the maximum benefit depends on the age a worker chooses to retire, among other things1. And that, of course, assumes that the current questions regarding Social Security’s longer-term financial viability are addressed, and/or that current benefit levels aren’t reduced.

In sum, the odds that you’ll get that current maximum aren’t large—and the odds that current benefits will be reduced seem pretty good.

2. Everybody doesn’t have a pension, and you probably don’t.

Now, by “pension” I mean the traditional defined benefit pension plan; one that, in the private sector anyway, was largely employer funded. According to EBRI, in 2008, 31% of all private-sector workers participated only in a 401(k)-type defined contribution plan, and 3% participated only in a defined benefit pension plan, while 12% were covered by both. So, only about 15% of private-sector workers were covered by a pension plan (coverage is much more common in the public sector).

The rest? Well, they didn’t have any kind of workplace retirement plan.

Despite this, studies pop up every so often that indicate that a remarkably large number of workers think they DO have a pension. Where do you fall out?

3. You won’t be able to work as long as you think you will.

According to the U.S. Census Bureau, the average retirement age in America is 62 (the average length of retirement is 18 years). Several years back, McKinsey & Co. did a survey and found that while nearly half of baby boomers expect to work past 65, only 13% of current retirees surveyed actually worked past that age. Forty percent of current retirees were forced to stop working earlier than they had planned (being laid-off was the most common reason, and the survey was taken well before the recent downturn). The average age when current retirees left the workforce, according to McKinsey: 59.

Think you’ll work past 65?2 You may, but perhaps not in the job you think.

4. You aren’t saving enough. That goes double if you’ve been automatically enrolled in your retirement savings plan.

How much you need to save is, of course, a matter of personal circumstances and even preference. It’s also impacted by things like the amount of support provided by Social Security, how old you are when you retire, and more importantly how—and how long—you live after you quit working. That said, if you’re only saving up to the level of the employer match (at least at most companies), and you don’t have a pension (see above), then it’s likely you’re not going to have enough saved at retirement to last you through your retirement. In fact, many workers don’t even save to the level necessary to receive the maximum employer match.

As for those who are automatically enrolled, they typically start their savings at a much lower rate than those who have taken the time to fill out an enrollment form. So you’ll have even less.

As for how much you need, last year a study by Hewitt Associates (now Aon Hewitt) said that the average U.S. employee would need 15.7 times their final pay in retirement resources to maintain their current standard of living during retirement.

How much do—and will—you have?

There you have it: the makings of an adult conversation with American workers. Have you had it with the participants you work with?

—Nevin E. Adams, JD

1 Not that Social Security isn’t an important source of retirement income. The biggest source of retirement income for Americans has been Social Security, and many older Americans (age 65 or older) rely entirely on their monthly Social Security checks. According to the Employee Benefit Research Institute (EBRI), in 2009, Social Security accounted for 49.0% of elderly women's income, compared with 35.9% of elderly men’s income. Compare that to pensions and annuities, which in 2009 accounted for 21.2% of elderly men's income, compared with 16.6% of elderly women’s. MORE at http://www.ebri.org/pdf/FFE176.30Sept10.IncEld-Gndr.Final.pdf

2 One of the most common responses of workers who know—or suspect—they haven’t saved enough is to assume that they’ll just keep working a few years longer. After all, these days most of us have jobs that can be done well beyond the traditional retirement age. And would that we could: working, and saving, five years longer will “cure” a surprising number of inadequate retirement savings situations.

Underlying Assumptions

2011-03-06T16:53:00.003-05:00

Last week the Government Accountability Office (GAO) issued two reports focused on 401(k) plans: one on target-date funds, the other on potential conflicts of interest. As seems to be its custom in such reports, the GAO communicates its conclusion in the titles: “Key Information on Target Date Funds as Default Investments Should Be Provided to Plan Sponsors and Participants” and “Improved Regulation Could Better Protect Participants from Conflicts of Interest”—and, IMHO, there’s little controversy in those statements.

The reports themselves offer a great informational primer on target-date fund designs and issues (you’d be surprised how many plan sponsors still don’t quite grasp the concept of “glide path”) as well as the fee structures and revenue-sharing components that underlie the 401(k) retirement savings system. Both reports acknowledge that efforts are already under way to remedy the shortfalls the reports identified in both, while at the same time promoting solutions to those shortfalls that may not be cost/impact-justified.

As you peruse the target-date fund report (see “GAO Urges More Help with TDFs for Plan Sponsors”), you’re struck once again by the wide variety of answers to the question, “What is an appropriate asset allocation for participants at retirement age?” much less the assumptions that underpin it. One might well expect to find different assumptions regarding the markets, investment classes, and how the latter will respond to the former over the course of decades—and, in fact, these assumptions lie at the core of the target-date fund glide path and design. One might well expect (though many apparently didn’t) that those differences of opinion would translate into very real differences in asset allocation, even at retirement age.

There are, however, assumptions imbedded in these TDF approaches that, IMHO, are not nearly as well-communicated and/or understood by plan sponsors; assumptions that are predicated on certain participant behaviors that, in the words of the GAO report, “may not match what many participants actually do.” There is the assumption about what participants will do at the target date—either transfer those assets to another vehicle or retain their investment in the TDF.

This, of course, is the essence of the “to versus through” debate that has, since the 2008 financial crisis, drawn increasing scrutiny, if only because, IMHO, most plan sponsors (and plan participants) assumed that their target-date fund investment was designed to take them TO that date, not beyond it. Of course, that assumption bears within it another assumption: that the participant has managed to achieve a certain level of savings accumulation. Many haven’t, of course, and this knowledge underlies the assumption of those who employ the “through” approach to TDF designs, assuming that a longer equity exposure will serve to shore up that shortfall. Which, by the way, is another assumption imbedded in the “through” designs—that the participant will leave the money invested in that TDF (if not the plan itself) past their projected date of retirement.

Moreover, even the “to” TDF camp tends to assume that participants will buy an annuity at retirement, though they frequently don’t.

The GAO report noted that each of the eight TDF managers it contacted “considered contribution rates in establishing its asset allocation strategy,” noting that “some explicitly noted that these assumptions did not match the general pattern of contribution rates.” It will surprise few to learn that their assumptions were generally higher, but that they “hoped that rates will increase as workers adjust to DC plans serving as the sole employer-based retirement account,” according to the GAO report.

And, of course, since a growing number of participants were defaulted into TDFs to begin with, nobody has any real idea if they will behave the way participants have historically or not.

That said, the GAO has recommended that the Employee Benefits Security Administration (EBSA) (1) amend the QDIA regulations such that fiduciaries are required to document whether factors beyond age or retirement date are relevant, (2) provide guidance to plan fiduciaries on the limitations of benchmarks on those funds, and (3) expand participant TDF disclosures to provide information regarding the assumptions concerning participant contribution and withdrawal intentions. EBSA was at least open to the first two (though not commenting directly, since they are currently in the process of recrafting those regulations), though it resisted the last as being a “very complicated and subjective undertaking which could affect a plan sponsor’s decision to offer any target date fund option(s),” according to EBSA’s response to the GAO report.

But, IMHO, if that gives a plan sponsor pause in offering a particular option—well, perhaps it should.

—Nevin E, Adams, JD

See also “IMHO: When You Assume…”

The GAO target-date fund report is at http://www.gao.gov/new.items/d11118.pdf

Hire Powers

2011-02-27T17:04:00.003-05:00

One of the first things you learn in any kind of ERISA primer is that, as a fiduciary, you are expected to conduct yourself either as if you are an expert, or hire someone to help you who is. This so-called “prudent expert” rule is, of course, a significantly higher standard than the one applied to mere common- law fiduciaries—in fact, it is generally described as the highest legal standard. Of course, plan sponsors have long relied on the help of experts—attorneys, third-party administrators, investment managers, and recordkeepers—if only because so much of what a plan sponsor must do in operating their retirement program requires their active involvement.

Not so retirement plan advisers, who, for many plan sponsors, remain something of an optional enhancement to their program. That said, in an environment that remains a legislative, regulatory, and operational thicket for even the most active and engaged plan sponsor, it is a plan option that is rapidly becoming standard equipment. Well-intentioned as such hires often are, they can be done for the wrong reasons. In the February issue of PLANSPONSOR, we asked previous winners of our Retirement Plan Adviser of the Year how plan sponsors can find the “right” adviser.

Today I’d like to turn that around. How can you, as an adviser, get connected with plan sponsors that will not only hire you, but will allow you to do your very best work for them, and for their plan participants?

Start with your friends and/or professional associations. Long a primary source of business for the advisers in our special “panel,” this is now the only channel for many of them. Now, for plan sponsors, this gives them the benefit of a personal reference from a colleague who knows and has perhaps already worked with you. But it also turns out to be a good way for you to “vet” the plan sponsor for a good philosophical fit.

Give them a chance to see you in action. It’s one thing to meet them at the Rotary Club, perhaps even better when you share some kind of board affiliation, but more and more advisers offer local seminars on topics of interest to plan sponsors. It gives you a chance to demonstrate your expertise—and you’ll get a chance to do so in front of potential clients who, by their attendance, have already expressed a more-than-passing interest in the topic.

Don’t be shy about references. This is admittedly a sensitive issue for advisers. After all, having spent a lot of time, energy, and money to develop those relationships, the last thing you want is to put those in the hands of folks who might try to steal them from you. But the top advisers I spoke with didn’t “hide” those references behind a “furnished upon request” curtain. For them, it was a statement of confidence not only in their ability to retain those relationships regardless of a potential “poaching,” but also a testament to the scope of their expertise and the tenure over which those relationships had been developed.

Be clear and concise about your fees. The regulatory winds are making this less of an issue than it once was, but it remains a way to distinguish yourself and your services from those who are less serious about working with retirement plans. I often tell plan sponsors that a good adviser will nearly always be able to save their plan money—though I also caution them that if saving money is their primary motivation, they are likely going to be disappointed.

Be able to demonstrate your commitment. Plan sponsors are increasingly wary of recordkeepers teetering on the brink of “exiting the business,” but when it comes to retirement plan advisers, the worry is that, for you, retirement plans are just a “hobby.” There are any number of ways to do it, but having the answers to the questions below will put your practice in the appropriate light.

Don’t take the relationship for granted. Like any relationship, things change and needs evolve—and that’s true for your relationship with a plan sponsor plan as well as the plan sponsor. Birds of a feather flock together, and ultimately you can really only do your best work if you are working with plan sponsors who are not only committed to their plan, but are open to, and supportive of, your recommendations to make it better.

But IMHO, if they are interested in hiring you as a retirement plan adviser—well, that’s a good sign.

—Nevin E. Adams, JD
You can read the article from PLANSPONSOR magazine here

How to prove your commitment to the retirement plan business.

What percent of your firm’s revenue is from retirement plan consulting?
How long have you been servicing retirement plan clients? Can this be documented?
What recognition have you achieved from independent sources that establishes your expertise and credibility?
How many retirement plan clients are handled by the team that will work on a prospective client’s plan? Does that team have individuals with different specialties?
How many different vendors do you work with for their existing clients?
Can you document ways in which you have helped clients through DoL audits, IRS audits, voluntary compliance issues, partial plan termination determinations, plan mergers or spin offs, plan terminations, and corrective contributions?
How—and how often—do you inform clients of regulatory changes and updates?

Source: Chad Larsen, Moreton Retirement Partners

Expectations Set

2011-02-20T15:12:00.004-05:00

Thousands of protestors took to the streets this past week—in Wisconsin.

They were protesting legislation that would restrict the scope of collective bargaining power, while at the same time requiring public-sector workers to pay more for their pensions and health care. Last week, reportedly 40% of Madison, Wisconsin, schoolteachers called in sick (ostensibly they were in attendance at the state capital, and by appearances bringing some of the student body with them). The protestors (at least the ones on camera) drew comparisons to their actions with those taken recently by those in Egypt protesting for freedom and a democratic system of government.

But to my eyes, it looked more like Greece.

Don’t get me wrong. The Wisconsin protests were boisterous but appeared to be peaceful, and I’ve heard no reports of the kind of violence and arson that accompanied the protests in Greece a year ago (see Grecian Formula).

But in Wisconsin, as in Greece, a big issue is pensions and benefits1; more specifically, that certain promises had been made to workers by a government that said it was no longer able to meet those obligations, certainly not on the original terms.

During the Greek protests, I was hard-pressed to find anyone sympathetic to their cause. Most had read with some incredulity coverage of the sanctioned state retirement age (61, though reports said many retired as early as 53), and considering the enormous financial straits of that nation, most seemed to think the protestors needed to be reintroduced to reality. Of course, I wasn’t talking to any Greek nationals about this—just associates in this country and others who are living with (and within) a completely different set of economic and retirement expectations.

Which brings us back to Wisconsin—or New Jersey, or California, or Ohio, or perhaps even your town. Doubtless some of those protesting workers are overpaid and underworked, as in any workplace, but surely most are undertaking to do an honest day’s work for a fair amount of pay and benefits. These people are, as President Obama said recently, our friends and neighbors. Heck, in my case, they are also family members. And I can promise you that the teachers and/or police officers in my family are NOT overpaid.

On the other hand, I have plenty of friends and family in the private sector who have lost their jobs through no fault of their own, and had to figure out a way to make ends meet without the protection of tenure, or the safety net of a pension or retiree medical coverage. They weren’t overpaid before they lost that job, and they surely weren’t afterwards. Many who still have jobs have had to absorb pay and/or benefit cuts (or had those cut into by higher prices and co-pays). They have had their pensions frozen, if they ever had one at all, and not a few saw their 401(k) match suspended over the past couple of years. Many haven’t seen a “regular” cost-of-living increase capable of keeping up with the increases in the cost of living in a very long time.

They are, quite simply, living with (and within) what appear to be a completely different set of economic and retirement expectations than those now in, and descending upon, the Wisconsin capital.

And, as a result, I can’t help but wonder if they’ll be sympathetic.

—Nevin E. Adams, JD

See also “IMHO: Promises Premises” at

1 Some might argue that the real issue in Wisconsin is proposed changes in collective bargaining rights rather than pensions, but at issue, among other things, is the right to collectively bargain for wages, pensions, and benefits, so….

Service Charges

2011-02-13T14:48:00.003-05:00

As Valentine’s Day looms, you have perhaps seen those increasingly ubiquitous advertisements for a certain online florist.

Now, I’ve used that particular service on many an occasion over the past several years; they are not only convenient, they deliver a quality product, and on time (yes, some “assembly” is required). In sum, I’ve used them before and will doubtless use them again.

That said, if you’ve been lured to their Web site by their ads touting a dozen roses for $19.99—well, let’s just say you could be in for a surprise. See, that advertised price doesn’t include a vase (well, not a pretty one, anyway), the delivery charge (which, depending on when you want it delivered, adds another 50%, or more, to the price), not to mention the standard “care & handling” charge of $3 (regardless of when you want it delivered). A guaranteed morning delivery on Valentine’s Day is another $15. Oh, and if you’ve procrastinated until the last week or so, you’ll find an additional $9.99 charge for “guaranteed Valentine’s Day delivery.” In sum, depending on when you get around to ordering those $20 roses, you could easily wind up spending three or four times that amount (but, hey—what’s it worth to you to stay in your sweetheart’s good graces?). And, most of that disclosure doesn’t happen until the screen right before you place your order.1

Of late, I have been talking about 2011 as “the year of disclosure.” It’s the year when I think most plan sponsors will begin really looking at those new 5500 disclosures, perhaps alongside those newly minted 408(b)2 disclosures (or would have until Friday’s announcement from the Labor Department that the deadline was being pushed back six months (see “EBSA Sets New 408(b)(2) Deadline for January 2012”).
Additionally, the issue of participant fee disclosure is back on the table, an outcome that will surely heighten the focus of plan sponsors on the issue.

The question, of course, is what will plan sponsors DO in response? For years now, there has been an undercurrent of thought that, once they saw what they were paying (and to whom), plan sponsors would rise up and demand change and/or a change in providers. Advisers would lead this charge, armed with these expanded disclosures, and the federal government would even play a role by not only mandating these disclosures, but providing plan fiduciaries with some “sticks” to spur compliance by reluctant providers (personally, I’d just find some new providers, but…). Indeed, all of this is being brought to bear at the same time, and the prospects for expanded, if not enhanced, disclosures seem bright.

Interestingly enough, these disclosures don’t really change the obligations or responsibility of plan fiduciaries to ensure that the fees paid and services rendered to the plan are reasonable. Indeed, most of the burden for disclosure falls on those who provide services to the plan, not the plan sponsor. That said, once the plan sponsor/fiduciary is apprised of such things in black and white (not to mention the Labor Department via the Form 5500), IMHO, it will be a lot harder to profess ignorance of such things.

Ultimately, I think those who provide services to these plans will be more thoughtful about the services they offer and what (and how) they charge for those services, and surely some will decide to no longer offer those services in this market and/or at those prices. Surely it will be easier—at least eventually—for advisers to help plan sponsors make apples-to-apples comparisons of services and costs, to make a more thoughtful—and prudent—determination.

That doesn’t mean that plan sponsors will act on that information. But then, if the process of disclosure has the kind of antiseptic effect we might hope it could have on the business of fees charged, then it’s entirely possible they won’t have to.

—Nevin E. Adams, JD

1 However startled one might be by the additional service charges on that online flower order, odds are your local florist charges about the same thing for the total package (with fewer options), perhaps without detailing the “extras.”

“Money Back” Guarantees

2011-02-06T10:44:00.001-05:00

We’re seeing a renewed focus on retirement income of late, and for good reason.

Most participants seem barely able (or willing) to deal with the most rudimentary decisions about saving, much less investing those savings; and while the industry has developed tools and approaches to better their odds, IMHO, those challenges pale before that of crafting a workable, widely accepted, and readily implemented retirement income solution.

Not that retirement income solutions don’t exist for participants. Setting aside the long-standing availability (and viability) of “traditional” annuities, over the past several years, a number of innovative solutions have been brought to market. Indeed, by my count, three more were introduced just last week.

Clearly the market for such offerings is large, and getting larger by the day—and yet, despite a great deal of time, energy, expense, and focus, well, let’s just say that plan sponsors (still) seem as confused by the variety of choices in that arena as they were (mostly) oblivious to the distinctions in target-date fund structures. And, quite frankly, they’re sceptical (if not downright cynical) in a way that they never were—but should have been, IMHO—about the ability of a fund complex to craft an investment allocation perfectly aligned with the needs of an individual’s retirement date.

Most trying to “solve” the retirement income problem presume that we already have a workable, viable product available—we need only figure out better ways to get participants into “it”. As a consequence, legislators (and some product providers) talk about things like “auto” annuitizing—the implementation of an annuity default for distributions to overcome resistance—while academics are inclined to focus on behavioral finance design modifications: better ways to “frame” or position the option, to “nudge” participants to make the “better” decision.

At its simplest, an annuity is nothing more than an investor handing over money (or a stream of money) to an entity that promises, at some point in the future, to return it to the investor, ostensibly with some kind of return, above and beyond whatever fees are taken. Consequently, at least in theory, a participant who has spent their working career saving for retirement should be able to take those savings and hand them to an entity that can return it over time as a retirement paycheck.

But that remains a big step of faith for most, particularly in the wake of the financial crisis. After all, who CAN, or should, you trust with that much money—literally your life’s savings?

Don’t get me wrong—I’m encouraged by the new product developments, the interest of regulators in helping lay out a better course, the suggestions and insights of the academic community in fostering better plan designs, and the willingness of plan sponsors to keep an open mind.

But ultimately, when it comes to spurring the widespread interest of participants, IMHO, the best product design will be one that offers them a “get your money back” guarantee (1).

—Nevin E. Adams, JD

(1) Editor’s Note: Let me attempt to stave off correspondence from the American Council of Life Insurers who, the last time I penned a column suggesting that participants might be a bit queasy about the notion of converting their savings into an annuity, wrote to assure me (and presumably all of us) that “The five trillion dollar life insurance industry, which alone can provide annuity contracts, remains a pillar of the nation’s financial system. While the effect of the nation’s economic downturn has been widespread, not one annuity owner has missed receiving annuity payments.”

Making a List

2011-01-30T09:56:00.003-05:00

Believe it or not, PLANADVISER Magazine is five years old this year.

As such, we wanted to commemorate our fifth anniversary by recognizing as “legends” five individuals who had made a “significant personal impact to the retirement plan industry and the advisers who support it”.

Now, perhaps you think that would be easy—but I can promise you it’s harder than it looks. And over the past several weeks we have gone through our list—moving some off, bringing others on, and “sleeping on it” more nights than you might think.

First off, we limited the list to five individuals (for five years), and we also tried to focus in on the past five years. Limiting the list to five was hard enough (certainly once we got started), but trying to focus in on the period since we launched the magazine created an even more daunting task. Sure, it was “only” five years ago, but it’s amazing how much has happened during that time. That was the year the Pension Protection Act was signed into law, after all, not to mention the year that the first wave of revenue-sharing lawsuits was filed, and the year that the Securities and Exchange Commission (SEC), responding in the aftermath of the mutual fund trading scandal, introduced rule 22c-2. In fact, the cover story of the first issue of PLANADVISER was titled simply, “Now What?”.

When it came to compiling that list, however, while some names were, IMHO, obvious,
some were perhaps “too” obvious. There are those who have had an impact, albeit a controversial one, while others have arguably had an impact, but one that is softer, quieter, or perhaps simply not as pervasive as others.

The discipline of a finite list forces you to make tough choices, but it also inevitably leaves you wanting to create a list that is longer, and perhaps more inclusive, if only to give full recognition to the many professionals who have had—and continue to have—that “significant personal impact.” That said, we have chosen five individuals.

They come up in conversation with advisers all the time, and for good reason.
They are people we have watched and are watching—and people who bear watching in the years to come.

They are, quite simply, legends—and on Tuesday we’ll “introduce” them to you.

—Nevin E. Adams, JD

The PLANADVISER “legends” will be featured in the fifth anniversary issue of PLANADVISER and will be honored at our annual Awards for Excellence celebration in New York City on March 24. At that event, along with sister publication PLANSPONSOR, we will also be honoring our Retirement Plan Advisers and Adviser Teams of the Year, as well as our Plan Sponsors of the Year, as well as other retirement industry luminaries.

Warning “Labels”

2011-01-23T11:41:00.002-05:00

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”).

Group “Think”

2011-01-16T20:21:00.003-05:00

Somewhere over the course of your academic or professional career, I’m sure you’ve been exposed to a group exercise dealing with being stranded in an inhospitable place (the moon, or maybe a deserted island) with a limited amount of supplies, and a limited amount of time to choose from those supplies to ensure your survival.

In these exercises, you’re asked to make those picks as an individual exercise, and then put together with a group to make group choices. Not only are the group choices generally different, they are nearly always “better” (more likely to ensure survival) than those made by individuals. The point of the exercise is, of course, that we make better decisions working together as a team than we do trying to make them on our own—and it generally works out that way.

Sure, that may work in hypothetical situations where none of the group members has any particular expertise. But if I’ve crash-landed on the moon, and there’s a trained astronaut in the group—well, let’s just say you’re probably better off following their lead than putting things up for a vote.

That said, to me, the point of that exercise isn’t necessarily that group decisions are better than individuals’—they frequently aren’t, IMHO—but that groups we are part of make different decisions than we might as individuals.

Now, sometimes that inures to our benefit. There is certainly value in a collective experience/perspective, and there is an important collaborative element in just being able to bounce ideas off other people. Moreover, there are times when individual members of the group have knowledge and/or expertise that everyone doesn’t have. And let’s face it—plan sponsors make a lot of individual decisions, but even relatively small employers are inclined to rely on the collective experience of a group when it comes to making plan design and investment decisions. That’s supposed to make for better decisions but, as any retirement plan adviser can attest, not always.

Behavioral finance purports to explain why people make the financial choices they do, choices that are frequently at odds with what “rational” decisionmaking would support. In recent years, a lot of attention and focus have been directed toward behavioral finance, particularly as it applies to participant decisionmaking or the lack thereof (in fact, thus far most of those behavioral finance-oriented solutions – automatic enrollment, contribution acceleration, QDIAs - have been directed not toward helping participants make better choices, but rather toward making better choices for the participants).

In fact, in the cover story of the January issue of PLANSPONSOR, Gary Mottola, Associate Director of Investor Education at the Washington-based Financial Industry Regulatory Authority (FINRA), observes: “Plan sponsors are very aware of the biases that affect individuals, but I do not think a lot of sponsors are aware of these biases” that can affect them. Plan sponsors make most of their decisions in groups and committees, so they are vulnerable to both group and individual biases.”

What kinds of biases? Well, there are things like “shared-information bias,” where groups tend to focus on things of common knowledge/interest, even if it isn’t the most pertinent/critical. My favorite is “group polarization,” which speaks to a group’s tendency to make more-extreme decisions—both in cautious and risky directions—than individuals. In essence, the group tends to reinforce its own prejudices—and then some.

Even the best committees can make bad decisions, not because they aren’t well-intentioned, or even well-equipped to make complex financial decisions, but because they may make decisions based on dynamics of which they aren’t even aware.

What’s ironic, IMHO, is how intertwined the acknowledgement of such behaviors has become in thoughtful plan designs—and yet how infrequently we acknowledge their impact on those who make the complex financial decisions that affect the participant decisions.

- Nevin E. Adams, JD

Check out “Misbehavioral Finance”

What Lies Ahead - Part 2

2011-01-09T10:03:00.003-05:00

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is the second part of our look at the trends that were on our mind this past year—and those just over the horizon.

Stop Gaps: Closing the Pension Funding Gap

What we said last year: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.

Where we are: For the very most part, little has changed. Pension funding remains a challenge, with the funding gap seemingly constantly buffeted between the ups and downs of the markets and interest rates, despite the conscientious efforts of most plan sponsors to keep up with ever-tightening funding requirements.

What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector, while in the public sector, financial pressures seem likely to result in a different future solution for newer hires. Sound familiar?

Conflicts of Interests—Advice Regulations

What we said: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.

Where we are: Well, we now have those regulations—a proposed final version, anyway. For the most part, they seem to have restored and shored the status quo. Not that that’s a bad thing.

What’s ahead: The final proposed regulations will, likely, become the final regulations, at least in the important areas. The big change in advice seems more likely to emerge from a different direction—the recently proposed regulations on the definition of a fiduciary, not so much because it will change the rules on advice, but because the controversy on advice has largely revolved around trying to avoid becoming a fiduciary while offering advice (and getting paid for doing so). And it seems likely that if the proposed fiduciary regulations become law, the advice net some have tried so hard to become ensnared in will, quite simply, be inescapable.

Tax Treatment—Paying Now or Paying Later

Where we are: For years, much of the impetus for the growth in tax-deferred savings plans has been the premise that one’s taxes and/or income would be lower in one’s retirement future. Those prospects no longer seem quite so certain, and new Roth provisions for workplace retirement plans offer today’s retirement savers a different kind of choice. That, coupled with a unique window of opportunity to convert tax-deferred balances (albeit at a price), has some seeing the benefits of tax-deferred saving in a whole new light.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Of course, the impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts (well, it was looming when I wrote this). Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

—Nevin E. Adams, JD

Editor’s Note: If you missed it, you can check out the rest of the list HERE

What Lies Ahead

2011-01-01T22:41:00.003-05:00

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is a look at the trends that were on our mind this past year—and those just over the horizon.

Doctor Bill? "Curing" Health Care?

What we said: It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.

Where we are: Given the legislative hurdles that the Patient Protection and Affordable Healthcare Act (PPACA) faced a year ago, it still seems amazing that the legislation passed. Of course, the dominant majorities in Congress that were necessary to carry that off are no more (some would argue in no small part because of their role in passing the legislation), legal challenges have been filed by roughly half the states, and the newly resurgent Republicans in Congress are threatening to “repeal and replace.”

What’s ahead: Common wisdom is that the legal challenges will fall short, and that President Obama’s certain veto of any attempt to repeal (much less replace) the legislation will keep those efforts at bay as well. Those in support of the legislation continue to believe that the American public will eventually warm to the idea (in fairness, many already do), while those opposed find vindication in the results of the recent mid-term elections. My guess is that we will still be talking about this a year from now—and that the issue will loom large in the 2012 election cycle.

Fee Fie? Revenue-Sharing Litigation

What we said: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.

Where we are: No smoking gun yet, but four years in, a number of the cases have settled, another group has been dismissed and, by my count, only one has been fully adjudicated (and that in favor of the plaintiffs). The courts are split on the issues, and many have been willing to extend plan fiduciaries the benefit of the doubt, so long as participants had the ability to make their own investment choices. As litigation worries go, this brand drew the highest level of concern in PLANSPONSOR’s annual Defined Contribution Survey—but it wasn’t much. As for that much-anticipated “second generation” of lawsuits? Well, somewhat surprisingly, it has yet to materialize.

What’s ahead: This year the Form 5500 took a big first step in prompting a new level of fee disclosures, and the near-final proposed regulations on 408(b)2 should carry that one step further. The Labor Department continues to challenge the courts’ generous application of ERISA 404(c)’s shield—and has gone so far as to make its point clearer on the application of 404(c) with the addition of language in the recently proposed participant fee-disclosure regulations. Many seem to think that more disclosure—and the more public disclosure in the form of Form 5500—will simply serve to provide the plaintiffs’ bar with fuel for the fire, while others believe that more, and more consistent, disclosure will make it easier for fiduciaries to know what they are paying and if it is reasonable. My guess is that both will turn out to be correct.

Auto-Premonition—Doing It for Participants

What we said: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be “over” as a trend. Look for it to pick up the pace again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).

Where we are: Well, in many respects, it was déjà vu all over again—with a sluggish economy doubtless contributing (no pun intended) to another flat year for automatic enrollment adoption rates. Still, while the overall adoption rate in PLANSPONSOR’s annual Defined Contribution Survey was slightly lower this year, there was a discernable uptick in adoption at the largest programs—even if small and micro plans showed no change at all. That said, the primary motivation this year, as it has been the past two, has been to be more proactive in helping workers save, and there’s every indication that it will remain so in the future.

What’s ahead: I’m sure plans will continue to adopt the design—for all the right reasons—but it is hard to see anything leading to any kind of major acceleration in the trend in the short term.

Default Lines—Targeting Target-Dates

What we said: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here and, with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it,” somebody has to.

Where we are: Much of the “damage” from 2008 has been restored, providers have taken pains to ensure that buyers understand their underlying glide path assumptions (certainly those having to do with equity allocations at age 65), and regulatory bodies have taken some baby steps in helping individual investors better understand these offerings. All in all, the storm seems, for the very most part, to have passed.

What’s ahead: More and better disclosures, a growing interest in offerings that take more into account than mere retirement date (including managed accounts), and more discussion around the importance of open architecture solutions and concerns about the (lack of) ERISA fiduciary status for the providers who bundle their own offerings together. But as for real change—failing another sharp stumble in the markets—most seem to be content with the way things are.

Next up: Pension Funding, Advice, and the Roth 401(k)

Naughty or Nice?

2010-12-19T09:28:00.004-05:00

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 that purported to offer a real-time assessment of their "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!

- Nevin E. Adams, JD
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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!

The Measure of the Plan

2010-12-11T15:04:00.003-05:00

Not so long ago, plan sponsors gauged the success of their defined contribution offerings by a single metric: participation rate. It’s not that they didn’t pay attention to other criteria, but participation rate is objective, easy to calculate, and, certainly for a voluntary savings program, it’s not an inappropriate gauge of the program’s perceived value.

Over the past couple of years, a growing number of plan providers have brought to market a new set of plan diagnostic measures, measures that not only show individual and plan balances, but also project those balances out to an estimate of what those balances will provide in retirement income, or presented as a measure of retirement readiness—compared with an established level of income replacement.

It’s not a new idea, of course. Heck, there has even been legislation introduced to place—on participant statements—a projection as to what the participant’s monthly retirement income would be. Meanwhile, despite long-standing fears that participants, confronted with the stark realities of their savings situation, would abandon the cause, the realities seem to be quite different. One might well expect the providers touting such wares to extol the virtues of the approach (and they do), but I have yet to meet a plan sponsor who had adopted these enhanced gauges of retirement readiness who said it had had a negative impact.

That said, there are still many plan sponsors that have not yet taken that step. At the PLANSPONSOR National Conference this past June, I asked the audience of some 200-plus plan sponsors if they had established any kind of target replacement ratio as part of their program design. While the survey sampling was admittedly unscientific (though I would suspect skewered toward more-active, involved, engaged plan sponsors) a whopping 78% said “no.” Just one in 10 said yes, while the remaining 12% responded “not explicitly, but it’s in the back of our minds.” (1)

Based on that result, I wasn’t too surprised that just 28% said their participants will be able to retire comfortably, while 43% said “maybe” (the polling was anonymous). (2)

Now, most of us have a hard enough time answering that comfortable retirement question for our individual situation, much less an entire employee populationbut I was struck by how many of those in that particular attendance didn’t even seem to have a rough notion in the back of their mind. As I explored that poll result with the audience, a couple of themes emerged: First, plan sponsors only know so much about an individual participant’s lifestyle, sources of income, and/or plans for retirement, and generally don’t have the time or inclination to know any of that, anyway. Second, these are voluntary programs, and while plan sponsors take seriously their responsibility to see that they are well, reasonably, and efficiently run, most don’t see it as their responsibility to make sure that participants are doing what they need to do (in fairness, most plan sponsors have their hands full just trying to make sure that THEY are doing what they need to do).

In casual conversations with plan sponsors about these types of programs and their reluctance to embrace them, it isn’t the cost or complexity that holds them back, nor is it concern about the response of newly enlightened participant-savers. Rather, it’s an underlying concern that, once those retirement replacement goals have been established at a plan committee level, and once those readiness results are presented in black and white (or multi-color) to plan fiduciaries, they could be held accountable for the results and/or shortfalls. Ignorance, to some it seems, is not only bliss, it’s a litigation shield.

Personally, I think plan sponsors already carry burdens and responsibilities beyond what many, perhaps most, are compensated for (and some beyond what they are aware). That said, it seems to me that presenting plan participants with specific information about their retirement savings situation, coupled with the kinds of diagnostic tools that accompany most of these offerings (not to mention the counsel of a trusted adviser) not only serves to help them make better decisions sooner, it effectively undermines their ability to later turn on the plan fiduciaries and try to hold them accountable for the participant’s results.

Now, some might argue that sponsoring these programs with no specific goal in mind is not much better than participants who save with no goal or focus to those efforts. Others would go so far as to suggest that failing to administer these programs with those kinds of specific goals in mind runs afoul of ERISA’s fiduciary charge.

For me, it’s not about measuring your program—it’s about seeing how your program measures up.

—Nevin E. Adams, JD ,

(1) While I don’t have a correlation between the responses and the program designs represented, it seems fair to say that many were in the DC-only camp.
(2) As for the rest of the responses, 16% said “no,” 10% were “not sure,” and 3% said “I’ve no idea.”

Fiscal Therapy?

2010-12-05T12:58:00.003-05:00

This week I will undergo one of those “you’re getting older” physicals. This has been scheduled for about six months now (yes, that’s how long it takes to get in for a physical these days)—and I have dreaded it, more or less consistently (and, more recently, constantly) ever since the appointment was made.

I know that I’m eating too much of the wrong things, and not exercising enough (at all?)—and while I sincerely meant to alter some of those behaviors over the past six months, other things have taken priority. What remains to be seen is what my doctor will see/say—and what, if any, lifestyle changes lie ahead.

In random conversations over the past several weeks, it was easy to find people who were supportive of the need to do something about the yawing federal deficit, and even easier to find folks who had problems with one—or more—of the recommendations of the so-called Deficit Commission that were made formal last week. Like my trip to the doctor, we all knew that we had some fiscal behavioral imbalances that needed to be addressed—we just didn’t know how painful the cure might be1.

Retirement Plans

Those in our industry were primarily focused on two things: the reduction of tax-favored treatment for benefits (impacting both workplace retirement and health benefits) and changes to Social Security. The latter drew a lot of focus and angst though, at least as I read them, they seemed relatively modest, certainly compared with the 1983 moves (though, make no mistake—in my reading, a large number of decidedly middle-income workers will pay much more and get less in benefits under the proposal).

My issues with the proposed Social Security reform were that they ultimately seemed to be just one more step down the path of institutionalizing it as a kind of uber-welfare program, rather than one that retains at least a modest cognizance of individual contributions to the system. But the real pushback on Social Security reform seemed mostly of the type that has staved off serious discussion for decades 2; to wit, the program is not REALLY in trouble, because it can keep paying benefits for a long time with no changes at all (clearly Social Security isn’t hemmed in by the accounting rules that have been brought to bear on the funding premises of defined benefit pension programs).

Regardless of this proposal’s fate (or its inevitable progeny), sooner or later we all know that the “normal” retirement age will be lifted, the rate of FICA tax withholding imposed will be raised, and more of the benefits paid will be taxed. Like my exercise regimen, the longer we put that off, the bigger the changes will have to be.

The implications for workplace benefit programs that would be sheared of much of their current tax-advantage are more complex. Now, I’ve certainly had in mind the tax preferences accorded my pre-tax contributions when I make them (and the future of tax rates as I begin to slide some into my Roth account)—and, if I’m reading the recommendation correctly (and there’s less than a paragraph of the 66-page report devoted to this3), the individual limitations would still allow most workers to save at the pace they do at present (there’s also a call for an expansion of the Savers’ Credit in the report).

The presumption by some industry advocates was that once the tax preferences for employers sponsoring the programs were removed, employers would no longer sponsor the programs. Also, that the aforementioned change, along with the limitation of tax preferences for individual savings to the lower of $20,000 or 20% of income would, in the words of the American Society of Pension Professionals and Actuaries (ASPPA), “effectively eliminate employer sponsored profit-sharing plans, shifting responsibility for retirement savings to workers.”

Indeed, one has to wonder: If the federal tax incentives for sponsoring workplace retirement (and health care) programs were removed, would employers still sponsor the programs?

The answer to that question is key because, while some of the changes advocated by the proposal might have unforeseen consequences 4, I’m reasonably certain that if employers don’t continue to sponsor these programs, private retirement savings will almost certainly go on a crash diet.

—Nevin E, Adams, JD

1 On an unrelated note, the editor in me was completely perturbed by the Commission report’s misspelling of “Pension Benefit Guarantee Corporation” (it’s “Guaranty”). Perhaps a Freudian slip?

2 Many opponents this time around claimed that, since Social Security doesn’t technically contribute to the deficit, it shouldn’t have been on the table for consideration by this particular commission.

3 You can read the report at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

4 In all likelihood, this effort was doomed from the beginning. The problem it is trying to solve—a $13 TRILLION deficit—is daunting both in its size and scope. Not that the proposal claims to solve the whole problem; rather, it just takes a good “whack” at it (a whack in this case being $4 trillion in savings, through 2020). To get to that result, the proposal cuts a broad swathe through the nation’s tax system and structure; calls for caps, though not cuts, in discretionary spending (albeit at 2011 levels and not until 2012); calls for a near doubling in the federal gasoline tax; and a three-year freeze (though again, no cut) on federal worker pay, among other things.

Liability Driven?

2010-11-28T14:47:00.003-05:00

Having recently had a couple of new members join our 401(k) investment committee, I asked our investment adviser to conduct a briefing so that the new members – and those already serving on the committee – would have a better understanding of the responsibilities of being on that committee.

Most of that session focused on what was expected of them: the requirement to act solely in the interests of plan participants and beneficiaries, the importance of process (and documenting that process), and the implications of the prudent expert rule.

However, aside from the obvious motivations in helping my co-fiduciaries know what was expected of them1, at the conclusion of our session, I tried to summarize for our committee three things I think every investment committee member should know—and that, IMHO, kept top of mind, serve to keep an appropriate focus on those responsibilities:

You are an ERISA fiduciary.

Even as a small and relatively silent member of the committee, you direct and influence retirement plan money. I’m not saying that some crafty attorney couldn’t cobble together some kind of legal or practice exclusion that would technically suffice to erect some kind of legal shield—but I suspect that even that would be readily penetrated by a court2.

As an ERISA fiduciary, your liability is personal.

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Now, you can obtain insurance to protect against that personal liability—but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

You are responsible for the actions of other plan fiduciaries.

All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.

—Nevin E. Adams, JD

1 As an ERISA fiduciary, you are expected to act SOLELY in the interests of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them; to carry out those duties prudently (and by prudent, it is intended that you be a prudent expert); to follow the terms of the plan documents (unless inconsistent with ERISA); to diversifying plan investments (specifically with an eye toward minimizing the risk of large investment losses to the plan); and to ensure that the plan pays only reasonable plan expenses for the services it engages.

A couple of points of clarification: IMHO you can’t follow the terms of the plan documents if you haven’t read them, nor can you ensure that the plan pays only reasonable expenses if you don’t know what the plan is paying, or for what.

2 IMHO, “you don’t have to be a fiduciary to be on the investment committee” should be added to the list of great lies—like “the check is in the mail….”

Thanks Giving

2010-11-20T16:18:00.002-05:00

Thanksgiving has been called a “uniquely American” holiday, and one on which, IMHO, it is fitting to reflect on all we have to be thankful for.

Here's my list for 2010:

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 2009 made the commitment to restore some or all of it in 2010.

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—never more so than this year with the absorption and assimilation of requirements under the new health-care law.

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 than 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 a growing number of advisers—and the firms that employ them—are willing to accept responsibility as an ERISA fiduciary.

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 be part of a growing company in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference on a daily basis.

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 year. I’m thankful for the constant—and enthusiastic—support of our advertisers.

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—and for the ongoing support and appreciation of readers like you.

Thank you!

“Sure” Things

2010-11-13T11:12:00.003-05:00

In a very real sense, this has been a “rebuilding” year for many plan sponsors and participants: a time spent rebuilding account balances, resurrecting and/or reviving employer matching contributions, a time for shoring up participation rates, and—in some cases—restoring trust. The markets, overall, have been sympathetic to those causes, but in many respects, the still-soft economic trends doubtless weighed on the kinds of dramatic trend shifts that we have seen in recent years.

That said, only a quarter (24.9%) of some 6,000 plan sponsor respondents said that “all or nearly all” of their participants were deferring enough to take full advantage of the employer match, a reading that declines sharply with plan size. Additionally, participation rates were roughly flat with a year ago; with responding plans reporting a combined participation rate of 71.5%, compared with 72.3% a year ago. The median participation rate was also lower; 75.0% in 2010, compared with 78% in last year’s survey.

As for automatic enrollment, the 2010 trend line was mixed. While the overall adoption rate was slightly lower this year, there was a discernable uptick in adoption at the largest programs (62.7% in 2010, compared with 52.3% a year ago) and about a 10% increase in the number of mid-size and large programs—but small and micro plans showed no change at all. The overall pace of contribution acceleration—that process of providing for annual increases in the rate of deferral—slipped from a 15.5% adoption rate in 2009 to just one in 10 plans this year (though most of that decline came from the smallest plans). However, even the adoption rate at the largest plans was effectively flat from a year ago.

The number of plans not offering some form of financial/investment advice continued to shrink. In this year’s survey, fewer than one in four plan sponsors did not offer that support, though larger programs were more likely to eschew the option. Relying on a financial adviser outside the plan was the preference for 37.5% of this year’s respondents, though that option was significantly more appealing to micro and smaller employers. While there continued to be different trend lines in different market segments, there was a distinct and noticeable trend across market segments toward offering—and accepting—“help.”

But as I sorted through the results of our annual Defined Contribution Survey, the one thing that emerged as something of a theme across multiple categories was—a lack of clarity. Plan sponsor respondents—and I maintain that those who respond to our survey are some of the most knowledgeable and actively engaged in their responsibilities—expressed what I thought were relatively high levels of uncertainty around several key plan-design elements: fees, target-date glide paths, retirement-income offerings, the focus of their investment policy statements, and even the “best” option for a qualified default investment alternative (QDIA).

Now, that may simply be a reflection of the wide array of choices available, the pace of new product development, and the unsettling effects of volatile markets. In fact, it might even reflect a certain level of prudent humility on the part of serious plan fiduciaries, who are aware of just how much they don’t know in the midst of that change and turbulence and are willing to own up to that reality.

After all, as Mark Twain once said, “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

—Nevin E. Adams, JD

“After” Thoughts

2010-11-06T14:57:00.002-04:00

The morning after last week’s mid-term elections, a plan sponsor friend of mine called me up and asked me what I thought it all meant.

Still bleary-eyed from sitting up watching the returns pile in the night before, I immediately launched into what I felt was an insightful assessment of the mood of the electorate, the trends of various interest groups that had, at least according to exit polling, shifted allegiances since 2008, the influence of the Tea Party, and the historical context of the shifts.

After patiently listening to me ramble for several minutes, he finally interjected—“I mean, what does this mean for retirement plans.”

Well, IMHO, you can’t completely separate the two. By any measure, the results were historic; Democrats lost their so-called 60-vote “super majority” in the Senate and, more significantly, control of the House, and in numbers that outpaced 1994’s turnaround (though that election also gave Republicans control of the Senate). That will certainly slow, if not stop, the pace of legislative change coming out of Washington, and—based on the employers I have spoken with—that will almost certainly be a welcome respite.

Many are inclined to harken back to the 1994 elections as a harbinger, recalling that after that turnabout, then-President Clinton and the Republican Congress managed to come together on several key initiatives, even as the nation entered a period of relative peace and prosperity. However, aside from the fact that, IMHO, those perspectives ignore many differences in approach between the two presidencies, they also gloss over the fairly nasty political period that followed the 1994 elections. It was, after all, a period that led to a number of high-profile conflicts, duelling press conferences, and that infamous (and in my estimation, overhyped) government “shut-down.” In sum, things finally settled down (well, except perhaps for “tiffs” like a presidential impeachment), but there was a lot of venom and acrimony in evidence for an extended period after the election. I think it would be naïve to expect any less/better from the current players (though I’m willing to be wrong).

The bottom line is, the House can pass legislation, but the Senate’s not likely to go along with it—nor would ditto any legislation that might manage to emerge from the Senate seem to have much chance of getting past the House. And that’s without even having to contemplate the power of a Presidential veto (particularly since there are no “veto proof” majorities in sight).

It’s not that the mid-term elections won’t have any impact on retirement plans. I fully expect the debate about Social Security reform to re-emerge, and changes there, though not likely in the next two years, will of necessity at some point have a ripple effect through all our retirement planning assumptions. I wouldn’t expect to see much happen with that automatic IRA legislation, certainly not with its employer mandates intact.

That said, our industry doesn’t need legislation to keep things stirred up. We’ll be busy worrying about disclosing fees, helping plan sponsors (and participants) understand those disclosures, and pondering just exactly what a new definition of fiduciary might mean, while regulatory deliberations about 12(b)1 and target-date funds will also be on the radar screen, and perhaps even retirement income.

Indeed, the regulatory change already in motion seems more than adequate to keep plan sponsors, advisers, attorneys—and journalists—plenty busy trying to sort it all out. In sum, I anticipate a lot of noise, a fair amount of activity, and not much forward motion in Washington for the next couple of years—though I am not sure that is a bad thing.

As always, we’ll worry a lot about matters in Washington; but IMHO, what happens outside of Washington is, more often than not, what matters.

—Nevin E. Adams, JD

Cost of Living "Adjustment"

2010-10-31T13:11:00.002-04:00

A couple of weeks back, the Social Security Administration announced that, for the second year in a row—but only for the second time since 1975—there would be no cost of living adjustment (COLA) for Social Security recipients.

Of course, this close to an election, it should come as no surprise that some went scurrying to introduce legislation that would provide some kind of supplemental funding to the nation’s seniors; similar actions were undertaken a year ago, ostensibly in the interests of economic stimulus, as well as the importance of supporting those on fixed incomes. But this election year is one unlike most, perhaps any, in our memory—and concerns about the federal budget deficit have, thus far, overcome the political class’s natural inclinations in such matters.

Whether or not you are on a fixed income, it’s hard to credibly argue that prices aren’t rising on everything from food to gasoline to utilities; from real estate taxes (those reassessments never come as rapidly when prices decline, do they?) to the monthly cable bill. That said, there is a formula on which things are based, one that has, perhaps more often than not, worked to the benefit of those drawing Social Security benefits. It is a formula that, in 2009, provided those beneficiaries with a 5.8% increase in benefits, the largest in a quarter century. That’s right—did YOU get a 5.8% increase in 2009?

Now, some of this is the timing in the formula, which considers the period from September of one year to the next. For example, in the year that provided a 5.8% increase, if the formula had been applied from December to December (rather than September to September), the COLA would have been 0.8%, not 5.8%. Some of it is because the COLA is calculated on an index that considers the purchases that current workers make, rather than retirees1. And yes, some of it is because the Social Security benefit is never adjusted downwards—even when there is a decline in the cost index it tracks2. In fact, the real reason that Social Security recipients/beneficiaries 3 aren’t getting a cost of living adjustment next year is not because prices haven’t gone up, but rather because prices haven’t yet risen above the level of September 2008 (remember $4/gallon gasoline?).

However, for retirees accustomed to an annual, upward adjustment in their benefits, the lack of an increase surely came as something of a shock4, particularly after politicians found a way to smooth it over the previous year (and may yet again).

The good news for Social Security beneficiaries is that, at least under current law, their annual benefits do not decrease and retain the potential to increase based on adjustments, however imperfect, in a designated cost of living index5. Certainly, in a time when many have been asked to absorb a cut in pay or lost their jobs completely, with a family to support, there are worse things than living on a “fixed” income.

Still, it should serve as a reminder to us all that planning for retirement should look beyond the income we happen to be drawing when we leave the workforce. After all, if the income we have at retirement isn’t enough to adjust to the costs of living in retirement - It might well cost us an adjustment in how, or how well, we live through retirement.

—Nevin E. Adams, JD

1 There were no automatic COLAs in Social Security until 1975 (see http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p1.html)

2 Consider that, if costs were adjusted for downward as well as upward moves, last year benefits would have been cut by 2.7%.

3 Disabled workers and their dependents account for 19% of total benefits paid, according to the Social Security Administration (see http://www.socialsecurity.gov/pressoffice/basicfact.htm).

4 I never cease to be amazed at what a high percentage of retirement income Social Security provides—not because it was designed that way, mind you, but rather because it remains relatively constant in an otherwise variable pooling of retirement income sources. The Social Security Administration notes that Social Security provided at least 50% of total income for just over half (52%) of aged beneficiary couples and 73% of aged non-married beneficiaries. Moreover, it was 90% or more of income for more than one in five aged beneficiary couples and 43% of aged non-married beneficiaries, though “total income” in this calculation excludes withdrawals from savings and non-annuitized IRAs or 401(k) plans. Overall, the Social Security Administration says that Social Security benefits represent about 40% of the income of the elderly.

5 More information about the COLA is at http://www.socialsecurity.gov/cola/2011/factsheet.htm. An interesting 2009 webcast on the subject titled “What Happened to My Social Security COLA?” is viewable at http://www.blip.tv/file/2629162, and a transcript is available at http://assets.aarp.org/rgcenter/ppi/econ-sec/transcript_forum_090921.pdf For more information on some of the alternative COLA indexes, the AARP Public Policy Institute has published a fact sheet on the consumer price index and how it impacts Social Security Benefits at http://assets.aarp.org/rgcenter/ppi/econ-sec/fs160.pdf

Interests "Bearing"

2010-10-23T16:17:00.005-04:00

Last week the Labor Department issued a proposal that would, by its reckoning, provide the first update to the definition of an ERISA fiduciary since shortly after the birth of the federal regulation (see DoL Broadens Fiduciary Net).

The move was much-anticipated and, in the eyes of many, long overdue. Clearly, the Labor Department wanted to narrow the exceptions to that definition (that were, somewhat ironically, put in place by the Labor Department of 1975) and, in the process, subject more advisers to ERISA’s fiduciary standards.

At a high level, the Labor Department is seeking to restore the two-part test for fiduciary status found in ERISA, one that was expanded to be a five-part test in the 1975 regulations. The proposal seeks to set aside the additional conditions that the advice be rendered “on a regular basis,” that the advice would serve as a “primary basis” for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, and that the advice be provided pursuant to a mutual understanding of the parties. Instead, the new proposal would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so, and receives payment (direct or indirect) for that advice.

The Implications

That change is almost certainly going to drive some of those advisers (and their sponsoring organizations) away from these programs, though I am hard-pressed to mourn that loss (the proposal left intact the exemption for education, and if those lines are easily crossed, by now surely we all know where they are). Those who remain may well charge more for their services in compensation for the extra exposure, certainly in the short run. However, those who do so will be competing against organizations and advisers that made that commitment years ago and who appear to be competing quite successfully already. Consequently, if the newly “converted” seek to profit by a rapid escalation of their fees, I suspect they won’t find that to be a successful strategy.

Those responsible for closely held stock valuations are most likely to feel some pain in the short run. After all, they have long enjoyed a special dispensation from fiduciary status At this writing, I’m not altogether sure how one conducts a security valuation that is exclusively in the interests of the plan participants and beneficiaries—but I’m no more comfortable with the notion of a valuation that ignores the impact that those valuations could have on the exposure of the plan that takes on those assets based on that valuation.

One of the most interesting aspects of the proposal was the Labor Department’s expressed interest in reconsidering its position that a recommendation to a plan participant to take a permissible plan distribution would not constitute investment advice, even when combined with a recommendation as to how the distribution should be invested. Said another way, the DoL is now willing to consider that such encouragement could constitute advice at a level sufficient to trigger ERISA fiduciary status. In announcing its interest, the DoL noted that “[c]oncerns have been expressed that, as a result of this position, plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests.” In fact, there has already been litigation involving rollover advice—and there are any number of stories out there about advisers persuading participants to take advantage of early withdrawal provisions and pull their money out of the plan to put it in their hands. Not that that couldn’t be advantageous for the participant—but shouldn’t the adviser encouraging them to pull money from ERISA’s environs be held to that same standard of care?

Of course, at this point, the proposal is just that—though it will be interesting to see the comments that are made on this new definition over the next 90 days (1).

As for where this takes us, it has not always been clear that all plan sponsors fully appreciated the significance of working with advisers willing to put plan and participant interests ahead of their own. But they should; and, IMHO, this proposal will improve the chances that they—and their participants—will benefit from that protection, whether they seek it or not.

—Nevin E. Adams, JD

(1)Comments on the proposal can be submitted electronically by e-mail to e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at http://www.regulations.gov.

Paper “Trail”

2010-10-16T16:11:00.004-04:00

Last week, the Department of Labor reissued its proposed regulation on participant fee disclosure.
Those familiar with the last proposal (put out by the prior Administration—see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”) will doubtless find this one to be a modest improvement (see “EBSA Releases Final 401(k) Fee Disclosure Rule”). Aside from the passage of time, this version incorporates additional input from the retirement plan community, financial services regulators, and even participant focus groups—most of it good, and all of it interesting.1

The rule itself is worth a read for, IMHO, it offers valuable insights not only into the suggestions made, but into the Labor Department’s reaction and response to those comments. As always, the devil lies in the final details, but one senses a strong interest in balancing the desire to give participants more information to make better decisions with the practical realities attendant in providing transparency and consistency of disclosure in an industry whose fee structure has become increasingly obtuse and intertwined.

That said, and while this is a marked improvement from the current state of affairs, IMHO, this regulation will still leave us a long way from producing what I think will actually show participants what they are paying for these retirement accounts.

Sure, they’ll get more frequent information on their investments, and sure, there will be more (and probably better) comparative information about those investments, both fees and performance. Yes, they will see fees expressed both as a percentage and as a dollar amount per $1,000 invested, and yes, they will get more information on account restrictions, annuity provisions, and revenue-sharing than many have probably ever received previously. And yet, for all this extra data that will be produced, provided, and distributed, I can’t quite shake the image of a participant’s eyes glazing over as they desperately try to make sense of what they have been given.

Of course, it’s possible that many won’t bother reading it at all, though a large part of the financial justification for these regulations is how much time the disclosures’ availability will spare participants searching for information about these investments. In fact, to my eye, perhaps one of the most significant revisions from the prior regulations was a reset in the estimation of just how many participants are expected to benefit from these reams of paper. The prior proposed regulation estimated that 29% of participants in these programs would realize some kind of time-savings, but the Labor Department, responding to a suggestion from a commentator, has upped that—to an eye-popping 70%-76%!2

Now, that determination isn’t, IMHO, essential to the importance of this effort. Personally, the 29% figure is much more in line with my experience, mostly because what I see, time and again, is that the more paper we sling at participants, the less attention they pay. And, make no mistake, with this new proposal, we will be slinging a lot more paper at participants, and more frequently. Despite the effort to alleviate the complexity of basis points and revenue-sharing, it’s hard to shake the sense that this well-intentioned effort will simply overwhelm participants, while at the same time placing a large and growing burden on the backs of those who must provide, administer, and explain it.

It’s clear to me that the information is needed, and as I read the proposal, it’s clear to me that the regulators have made a good-faith effort to strike a balance in providing it.

That said, I doubt very much that it will make much difference in participant behavior, nor am I optimistic that it will actually enlighten many, certainly not the three of four cited in the Labor Department’s projections. This is not a shortcoming of the DoL’s attempt here—frankly, in view of the tangled web that has become 401(k) retirement fee calculations, I think they are to be lauded for their vigorous and balanced efforts.

However, what participants really want and, IMHO, what they need to really understand what is going on here is to have that single figure on the statement—even if produced only once a year—that tells them what their retirement plan costs.

This new regulation may hasten that day’s arrival. But until it comes, I fear we may be doing little more than papering over the real problems.

—Nevin E. Adams, JD

1 There is another interesting inclusion in this proposal—one that has to do with disclosures, but perhaps not participant fee disclosures, per se. With this proposal, which merges the 404(c) disclosure regulations with those of non-404(c) plans, the Labor Department added a provision to the 404(c) regulation, stating plainly what those of us in the industry have long understood; that, even where ERISA 404(c) protection applies, it does not shield fiduciaries from the duty to prudently select and monitor investments. However, this statement was only referenced in the preamble to those regulations rather than in the body—and thus, some courts had seen fit to disregard its implication in a series of revenue-sharing suit dismissals (see “IMHO: Second Opinions"). That, of course, is fodder for another day.

2 The recommendation was based on a finding from the Employee Benefit Research Institute’s (EBRI) 2007 Retirement Confidence Survey, which indicated that 73% (plus or minus 3%) of workers saving for retirement used written materials received at work as a source of information when making retirement savings and investment decisions.

The regulation is online HERE

A fact sheet summary is online HERE

A model of the information chart is online HERE

“Pressure” Point

2010-10-09T14:42:00.002-04:00

Last week, I got an early morning call from my daughter. This, of course, is not an everyday occurrence, and since she had driven MY car to work that morning, it didn’t bode well as a start to the day for either of us.

Turns out, she had noticed an unusual warning light as she pulled into her workplace—and she had even taken the time to determine its meaning. The good news is, the light indicated nothing more serious than low pressure in one (or more) of the tires. Now, my vehicle routinely prompts me for certain scheduled maintenance visits—many of which I ignore/postpone since they seem mostly designed to keep me spending money at the dealer. Unfortunately, the last time this particular light came on, it was a somewhat belated acknowledgement that one of my tires was flat. Consequently, on this particular occasion, I immediately jumped to the conclusion that we were dealing with a flat tire.

By the time I got to the car (fortunately, it was sitting in a parking lot on a brilliant sunny morning and not along some busy highway in the rain), it was clear that my initial assumption was incorrect. Not only were none of the tires flat, they didn’t even look “low.” Nonetheless, I cautiously drove to the nearest gas station (at a speed commensurate with a fear that the tire would slip off the rim at any minute) and checked the tires. Working with a more precise measuring device than mere visualization, it seemed that one of the tires was “low.” Not critically low, mind you (in my estimation, anyway), but apparently low enough that the manufacturer thought it should be called to someone’s attention.

Initially, I was aggravated—after all, the owner’s manual didn’t specify at what level that indicator kicked on, and while the physical disruption to my day was minimal, the emotional toll was considerably higher. Ultimately, however, I felt pretty good about the whole thing—glad that it hadn’t turned out to be as bad as I had feared, glad that my daughter hadn’t been stranded in the middle of nowhere with a flat tire, and, yes, glad that I hadn’t been driving to work when that light came on. Personally, I think the manufacturer set the warning a little high—but then, I reminded myself, it was designed to alert you while there was still time to remedy the situation. And, while my morning had been somewhat disrupted, I kept thinking about the situation that warning averted (I tried not to think about the “discussions” I had with my kids just three weeks earlier about the importance of regularly checking the air pressure in their car’s tires).

These days, there are many measures of what we’ll need to enjoy a financially secure retirement. The problem, IMHO, is that the more precise those measures, the more obscure they are to the participants we expect to respond to them. You can quibble (and some do) about the need to garner savings sufficient to replace 70% or 80% of pre-retirement income. You can argue (and a growing number do) that Social Security shouldn’t be factored in, that retiree medical costs are too often given short shrift in projections, that inflation will reemerge with a vengeance (though I think most projection tools already provide a generous apportionment on that front), or that the inexorable application of regular, annual salary increases to those projections no longer comports with business realities.

You can argue, as some have (and do), that these projections are all wildly distorted as some kind of scare-mongering tactic by the money management industry to coerce the investing public into over-saving. Heck, you can even rationalize an aversion to undertaking these types of projections on the simple basis that there are far too many variables to consider to produce an accurate result.

Indeed, when it comes to retirement planning, IMHO, too many dismiss those warning signs of inadequate savings as idiot lights: an arbitrary setting by a product manufacturer that they can dismiss and/or defer until a time when it is more convenient for them to deal with it.

However, when it comes to trying to actually live in retirement on the funds we have been able to accumulate for that purpose, it seems to me that it’s better to err on the side of caution; to see the warning sign as an opportunity to do something small when it’s relatively easy—instead of being forced to do something hard when it’s not.

—Nevin E. Adams, JD

Scale "Model"

2010-10-02T21:22:00.003-04:00

I’ve long had an issue with weight scales, for the perhaps obvious reason that, these days, they frequently deliver a message I’d just as soon not receive. See, even when I’m feeling pretty good about the way I look and feel, those scales generally remind me that is at a weight that I know is not “appropriate” for my height.

Over the years, I have rationalized that gap in any number of ways; that those scales are frequently inaccurate, that the definitions of “appropriate” are skewed, even that I’m wearing clothes (or shoes) at the moment that are throwing things off (hey, I’ve got pretty big feet). But since I know, deep down, that those are, after all, mere rationalizations for avoiding the truth, these days I pretty much just treat stepping on scales as I would stepping on a rusty nail—which is to say, I avoid them at all costs…at least until I manage to get back on a regular exercise regimen.

My sense has long been that that is how participants approach the issue of figuring out how much they need to save for retirement. It’s not that they don’t know they should know that number, and not always that they just don’t have time to deal with it. Mostly, they have a sense that the number will be larger than they would like it to be, and that, coupled with a sense that the savings they have accumulated will be smaller than it is “supposed” to be—well, let’s just say they don’t want to be reminded that their retirement plan health isn’t good.

There was some of that in the “National 401(k) Evaluation” published by Financial Engines (see Report Highlights Savings Gaps, Ways To Close Them). The report was, in fact, replete with signs that most participants in the sampling are not in very good shape when it comes to retirement, with roughly three-fourths not on track to replace 70% of their pre-retirement income at age 65. When you consider that about a third have badly allocated portfolios (the report somewhat euphemistically terms these “inefficient”), and that nearly 40% are not contributing enough to receive the full match—well, let’s just say that there are some obvious reasons for the gap.

IMHO, it’s more than a bit ironic that studies routinely show that participants who take the time to make that retirement assessment feel better—and are more confident—about their retirement preparations than those who don’t. Of course, it could be that the only ones taking the time to check things out are those who are already reasonably confident that they’ll get a good result; unfortunately, I don’t recall ever seeing a connection between pre-assessment confidence and post-assessment (nor, for that matter, do these confidence assessments typically correlate confidence with savings that justify that sentiment).

Still, I like to think that those who take the time to do the assessment find out that things are perhaps not as hopeless as they had thought—and that, following the assessment, they walk away with a specific action plan for either staying on track, or closing the gap between needs and reality.

Inside the Financial Engines report there are a couple of examples that illustrate the point. One is a 45-year-old participant making $50,000/year who currently has a $50,000 account balance and who is deferring 4% in a portfolio that is overly risky—a combination that the report says will leave him 27% below his idea goal (if the market performs “typically”). But the report notes that if this participant reallocates at an “appropriate” risk level, they can narrow the gap to 23%; if they do that AND save 2% more per year, they can cut the gap to 14%; and if they do both AND delay retirement two years—well, they’re on track. Or, this participant could simply save 8% more a year to achieve the same gap-closing result.

Now, like with my bathroom scale, you can quibble with the assumptions, but the important thing, IMHO, isn’t taking the time to figure out you have a gap—most of us probably have that sense before we ever sit down with our retirement plan statement. Rather, it’s the plan that comes out of that process—the plan that helps us get back where we need to be—that not only helps us feel better, but gives us a reason for that feeling. And, like that bathroom scale model, the longer you put that off, the longer that “recovery” will take – and the harder it will be.

—Nevin E. Adams, JD

Status Quo?

2010-09-26T19:14:00.003-04:00

Last week, during our PLANADVISER National Conference, I asked a panel of four plan sponsors if their current adviser was a fiduciary—and if that status mattered to them.

It’s not the first time I’ve asked that question; in fact, I have asked it of these plan sponsor panels at each of our four such conferences to date (although the plan sponsors were, of course, different). I ask it for one simple reason: While I sense a certain unanimity of opinion on the matter in retirement plan adviser circles, plan sponsors frequently have a more nuanced view.

Sure enough, this year a plan sponsor panelist not only said that his adviser wasn’t a fiduciary, but that he wasn’t at all sure why that mattered. In fact, he wondered aloud why an adviser would want to go to jail with him if something went awry.

Now, you could tell that many of the advisers in the room were surprised, perhaps stunned, by that statement. And yet, IMHO, that plan sponsor demonstrated what I felt was a pretty insightful appreciation for the litigation shield—or lack thereof—afforded him in hiring a fiduciary. For my money, far too many plan sponsors think that when they hire a plan adviser who is a fiduciary (or a provider who touts itself as a “co-fiduciary”), they have, in fact, supplanted their own fiduciary obligations to the program. But here was a plan sponsor who understood that if something “went wrong,” even if his adviser were a fiduciary, he was still on the hook.

That said, this plan sponsor’s answer was the kind of response that should surely give pause to an industry that spends so much time and energy “angsting” over the fiduciary issue.

The truth is, hiring a fiduciary is no magic talisman against litigation for the plan sponsor—and those who think (or who are mislead into thinking) so are ill-advised, to put it kindly. So why should fiduciary status matter?

Consider for a minute, when you bought your last car, who was that salesman looking out for—even as he ostensibly went to lobby his manager on your behalf? What about that clerk that was so helpful as you considered that PC or big-screen TV purchase? How about that commission-based realtor? Did they really have your best interests in mind?

Advisers that have adopted fiduciary status routinely talk about how their fee-for-service approach insulates them from bias in making fund recommendations; note that it allows them to bring THEIR very best judgment to the fore. What is, however, IMHO, too often glossed over is that it’s not just their best judgment, even an unbiased judgment, that is the essential benefit to hiring an ERISA fiduciary. Rather, it’s that judgment applied, and applied solely, in the best interests of the plan and its participants.

And that matters most—or, IMHO, should matter most—to those who are themselves charged with making decisions that adhere to those standards

—Nevin E. Adams, JD

IMHO: “Forever” More?

2010-09-19T19:38:00.004-04:00

Last week, the Treasury Department and Department of Labor held two days of joint hearings on the subject of retirement income (see Lifetime Income Hearing Witnesses Demand Fiduciary Shield).

There was discussion about the need for product design enhancement (though much of the focus seemed to be on better explaining what was already available); better (i.e. cheaper) pricing for the kinds of institutional purchases these plans might provide (though I’m hard-pressed to see how you get any kind of aggregation benefit in terms of product just because the buyers all work for the same employer); and the challenges of portability, both when a plan changes providers and a participant changes employers.

There was also talk about misunderstandings about annuities that no amount of communication or education seems able to dispel (my guess is the hearings won’t alter that dynamic, either), and there was concern about differences in gender-specific annuity tables (and, let’s be honest, gender-specific savings habits and longevity experiences). And, of course, there was a LOT of talk about things that would encourage employers to embrace these options as an integral element of their plan design. To my ears, those recommendations tended to fall into two basic themes: some kind of QDIA-like default safe harbor, and/or some kind of fiduciary safe harbor for annuity selection by the plan fiduciary.

IMHO, you can’t not address those concerns. While there are any number of operational impediments to incorporating a retirement-income option, I still find that the big challenge remains plan sponsors’ concern about being on the hook for a bad annuity provider choice—not today, or a year from now, or even 10 years from now, but forever. And while, as with investment advice, the Labor Department has tried to offer guidance in the interests of encouraging higher adoption rates, so far as I can tell, it hasn’t budged the needle at all.

I don’t fault the Labor Department for this; after all, there is a fine line between offering the level of protection that will actually change fiduciary behavior and just giving the store away. Clearly, the plan sponsor/fiduciary’s decision will have a significant impact not only on the choices available to, but the choices taken by, participants—and somebody knowledgeable needs to be accountable. That same rationale, though it’s often glossed over, is why the plan sponsor retains its customary level of prudent-expert responsibility for the choice of an investment advice provider, even if some protection is afforded them on the particulars of that advice; and why they are still on the hook for the prudent selection of a qualified default investment alternative (QDIA), even though they gain a great deal of protection from potential participant lawsuits so long as they comply with the safe harbor requirements.

That said, IMHO, there’s a world of difference between making a point-in-time choice of an advice or investment provider—a decision that can be monitored, reasonably readily benchmarked, and changed—and that involved in selecting a retirement-income option where the untangling can be considerably more “involved.”

It’s more than a little ironic that the very thing that makes it possible for those providers to offer those kinds of lifetime income guarantees also makes for a certain sense of irrevocability in the decision. Now, I realize that it doesn’t have to be irrevocable, certainly not in a forever sense (though there are generally financial penalties attendant with that decision). But that, I think, remains the real problem with annuity selection, not just for plan fiduciaries, but for plan participants as well. You not only have to weigh a lot of considerations that people generally aren’t comfortable weighing, you wind up making a call that seems like it not only has to be right for now, but “right” forever.

It is, quite simply, a decision that still seems perfectly suited to guarantee that no decision will be made for as long as it can possibly be postponed.

Ultimately, in fact, what we may need to help plan sponsors make these options more available is not a better way to help participants get into annuities—but a better way to help them get out.

—Nevin E. Adams, JD

Listening Post

2010-09-11T11:17:00.004-04:00

With our PLANADVISER National Conference just one week away, I found myself turning back to my notes from the PLANSPONSOR National Conference in June.

Some of these came from presentations, others originated from the audience, and still others arose in the dozens of side conversations at breaks and such in between the official conference sessions. Some, honestly, are something of a synergy among the three. See if they don’t get YOU thinking…

You may not be responsible for the outcomes of your retirement plan designs, but someone should be.

How you spend your weekend is a microcosm of retirement.

“Free money” isn’t.

Retirement income is a lot less of a problem when you have saved a pile of money.

You can lead a horse to water, after all—but you can’t make him think.

No one expects taxes to be lower in retirement any more.

Auto-enrollment is still viewed as a very paternalistic type of event.

When it comes to fee comparisons, eventually there will be better sources of information, but right now it’s still a bit mystical.

Providing revenue-sharing information to participants is like giving car keys and whiskey to teenage boys.

If you don’t know how much you’re paying, you can’t know if it’s reasonable.

You want your provider to be profitable, not go out of business.

Retirement income is a challenge to solve, not a product to build.

If you’re having trouble connecting with an employee group, find—or create—a missionary within that group.

When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they know enough—and usually chase returns.

While it’s a good idea to have fiduciary insurance in place to cover a loss, you should have a well-documented fiduciary process in place to avoid claims in the first place.

Now is a good time to renegotiate fees.

When advisers are examined, their plan clients usually are also.

Never ignore a letter from the IRS.

Left to their own devices, participants still don’t do anything.

Tax payers effectively subsidize the benefits of 401(k)s. Of course, they also subsidize the ability of many Americans to no longer pay federal income taxes.

A corollary: The tax benefits of 401(k)s are tiered toward those who actually pay taxes.

The best way to stay out of court is to avoid situations where participants lose money. The second best way is to have a well-documented prudent process.

Annuitization of defined contribution balances only makes sense if those balances are big enough to annuitize.

Some participants do opt out of automatic enrollment.

“Free money” is still a powerful incentive for participants.

The biggest mistake a plan fiduciary can make is not seeking the help of experts.

You can be in favor of fee disclosure and transparency and still think that legislation telling you how to do it is misguided.

The single most effective way for individuals to ensure that they have sufficient income in retirement is to accumulate more wealth; the amount of their savings before retirement defines their options in retirement.

I’m often asked how we come up with our conference and magazine topics, how we manage to keep our pulse not only on what’s coming down the road, but what people are focused on in the here and now.

The simple answer is—we listen. And when we listen, we all learn.

—Nevin E. Adams, JD

“Miss” Perceptions?

2010-08-28T21:56:00.006-04:00

Next week we will launch our eighth annual search for the nation’s best retirement plan advisers.

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

Well, at its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed at all 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. And, 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.

Now, we’ve always tried to be very transparent about the award, and the process that underlies the selection. That said, I know that some have questions—and perhaps misperceptions—about the award and how it is administered. So, based on conversations I have had with some of you over time, not to mention the general inquiries that emerge around an award that garners this much attention, here are five things you should know about PLANSPONSOR’s Retirement Plan Adviser of the Year award:

(1) It’s NOT a personality contest. Sure, advisers who are nominated by 30 of their closest friends and wholesalers stand out (though only after you’ve passed the quantitative round). But even then you get no extra points for having support in the “community.”

(2) You will have to provide actual data about the impact your firm is making on things that really matter. We look at participation rates, deferral increases, participant asset allocations, and even fee negotiations. And we will talk to your plan sponsor clients (and expect them to confirm your data). If you don’t have, or aren’t monitoring, those kinds of data, you probably aren’t ready for this award.

(3) Award semi-finalists and finalists are chosen based on a blind review of qualification data. Our process selects semi-finalists and finalists based solely on data and screened reference checks. Only after the finalists have been selected are their names known to the judges.

(4) Our judges sign nondisclosure agreements. Yes, we have judges for this award—judges who not only know the space, but know how to evaluate the data. Two of the five judges for each award are advisers; prior winners of the award, in fact. We have always thought their perspective was important as a “real world” check on the award criteria. That said, we understand that some advisers might be reluctant about sharing data about their practice1 with potential competitors—and our judges agree, in writing, to respect the confidentiality of that information.

(5) Those who don’t participate don’t win. It may be an honor “just to be nominated,” but those who don’t respond completely and accurately to the aforementioned requests for information don’t make it past the nomination round.

May the best adviser(s) win—and, based on our prior winners,they generally do.

—Nevin E. Adams, JD

Editor’s Note: Those who have additional questions should feel free to e-mail me at nevin.adams@assetinternational.com, or Alison Cooke-Mintzer at acooke@assetinternational.com

More background information on the award is available HERE
Additional information is available here

1 We’re not talking about client lists here; average rates of deferral and savings across your client base, your average client size, that kind of thing.

Double Dipping?

2010-08-22T18:24:00.005-04:00

Last week, Fidelity published some data from their quarterly analysis of participant activity.

For the very most part, the data (see Fidelity Finds Q2 Uptick in 401(k) Withdrawals) revealed what we have come to expect from such reviews: Participants continue to stay the course, deferral rates are largely unchanged (average was 8%), and more increased their rate of deferral (5.3%) than decreased it (2.9%) in the most recent quarter. Additionally, the balance recovery continues apace, with the average account balance up 15% (though for this good news, you have to reach for a year-over-year comparison, because Q2 figures to be a pretty rough one for participant accounts—down 7.6% in Fidelity’s database).

However, this report drew more than the customary amount of coverage for its finding that rates of hardship withdrawals and loans were higher—and by some measures, significantly higher—than they were a year ago.1

My initial reaction was that this latter finding was something of an outlier; after all, in recent weeks we have seen other, similar reports from other providers that indicate that withdrawal volumes were down, certainly compared with the dark early days of 2009. But then, this was more recent data, and with the report of weekly jobless claims back up to half a million, well, let’s just say that it didn’t require much imagination to see a link between more people out of work and an uptick in “premature” distributions.

But later, as I considered the data, the findings didn’t seem so out of line. While the Fidelity survey found that 11% of participants took out a loan this quarter (9% did a quarter earlier), neither the average initial loan amount ($8,650) nor the loan term (3.5 years) seemed out of line. The report did, however, contain at least two alarming statistics. First, 22% of participants recordkept by Fidelity now have an outstanding loan, and while that isn’t much beyond the one in five that did a year ago, it nonetheless represented a decade-long record for Fidelity’s database. Indeed, this was the item that most media outlets qravitated toward (based on the calls I got).

In fact, IMHO, a more troubling trend lies in the fact that nearly half (45%) of participants who took hardship withdrawals one year prior also took a hardship withdrawal in the 12-month period ending in the second quarter of this year.

While participant loans are (too) frequently touted as borrowing from yourself, they put the participant in the position of having to replace—on an after-tax basis—the contributions you’ve withdrawn and a rate of “return” in the form of interest on the loan. Still, at least you’re on a schedule to replace the money you’ve withdrawn.

Now, properly administered, it’s not easy to obtain a hardship withdrawal. You actually have to be experiencing a financial hardship, for one thing, and you often not only have to prove that, but also that you have exhausted other sources. Worse, that hardship withdrawal is reduced not only by the need to pay taxes on the pre-tax monies you’ve now tapped, you have to fork over another 10% as a penalty to Uncle Sam (unless, of course, you’re older than 59 ½). What that means, of course, is that what you think you are seeing isn’t exactly what you are going to “get.”2 In fact, it could easily be just half what the requesting participant might be expecting.

The reality is that people are surely hurting, and if the money they have set aside in their 401(k) helps them through this period, puts food on the table, or keeps the family in their home, that’s, IMHO, a good thing. After all, there’s not much point in taking out a loan when you don’t have a source of income to repay it.

But what concerns me about the trends in the Fidelity report, aside from the implications that so many are struggling financially, is that, in my experience, hardship withdrawals, unlike loans, are not only gone for a while, they are savings that are often “gone” forever.

—Nevin E. Adams, JD

1Loans initiated over the past 12 months grew to 11% of total active participants from about 9% one year prior. The portion of participants with loans outstanding also increased two full percentage points in the second quarter to 22%. The average initial loan amount as of the end of the second quarter was $8,650, with an average loan duration of three and half years, according to Fidelity.

According to Fidelity’s data, 62,000 of the participants recordkept by the firm initiated a hardship withdrawal in the second quarter, compared with 45,000 participants who did so the quarter before. As of the end of Q2, 2.2% of Fidelity’s active participants took a hardship withdrawal, compared with 2.0% a year earlier.

2 Those taxes aren’t always obvious at the point of distribution, unfortunately, but due at the individual’s next tax filing.