Thursday, November 26, 2020

Thanks, Giving

 Thanksgiving has been called a “uniquely American” holiday —and so, even in a year in which there has been an unprecedented amount of disruption, stress, discomfort, and loss—there remains so much for which to be thankful. 

I’m thankful that so many employers (still) voluntarily choose to offer a workplace retirement plan—and, particularly in this extraordinary year, that so many have remained committed to that promise.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I continue to be thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty and competing financial priorities, such as rising health care costs and college debt—and the consequences of the pandemic.

I’m thankful for the strong savings and investment behaviors emerging among younger workers—and for the innovations in plan design and employer support that foster them. I’m thankful that, as powerful as those mechanisms are in encouraging positive savings behavior, we continue to look for ways to improve and enhance their influence(s).

I’m thankful for qualified default investment alternatives that make it easy for participants to benefit from well-diversified and regularly rebalanced investment portfolios—and for the thoughtful and ongoing review of those options by prudent plan fiduciaries. I’m hopeful that the nuances of those glidepaths have been adequately explained to those who invest in them, and that those nearing retirement will be better served by those devices than many were a decade ago.

I’m thankful that so many workers, given an opportunity to participate, (still) do. I’m particularly thankful this year that so many were able to do so without taking advantage of the expanded access to those accounts via the provisions of the CARES Act.

I’m thankful that those on Capitol Hill were able to (mostly) set aside partisan differences long enough to pass the CARES act, including those expanded access provisions and the Payroll Protection Program, which likely helped many avoid having to tap into their retirement savings.

I’m thankful for the hard work of so many recordkeepers, TPAs, accountants, advisors and attorneys who—under strained and stressful conditions of their own—worked through and helped their plan sponsor clients and participants work through—the provisions and practical implications of the CARES Act (and just mere weeks after having done so for the SECURE Act).  

I’m thankful that figuring out ways to expand access to workplace retirement plans remains, even now, a bipartisan focus—even if the ways to address it aren’t always.

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

I’m thankful for the opportunity to acknowledge so many outstanding professionals in our industry through our Top Women Advisors, Top Young Retirement Plan Advisors (“Aces”), Top DC Wholesaler (Advisor Allies), and Top DC Advisor Team lists. I am thankful for the blue-ribbon panels of judges that volunteer their time, perspective and expertise to those evaluations.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that so many, particularly those among our membership, take the time and energy to provide that input.

I’m thankful to be part of a team that champions retirement savings—and to be a part of helping improve and enhance that system.

I’m thankful for all of you who have supported—and I hope benefited from—our various conferences, education programs and communications throughout the year—particularly in a year like this, when it has been so difficult to undertake, and participate in, those activities. I’m hopeful that at some point in the near future we’ll be able to do so… together.

I’m thankful for the involvement, engagement, and commitment of our various member committees that magnify and enhance the quality and impact of our events, education, and advocacy efforts.

I’m thankful for the constant—and enthusiastic—support of our event sponsors and advertisers—again, particularly in a year when so many adjustments have had to be made.

I’m thankful for the warmth, engagement and encouragement with which readers and members, both old and new, continue to embrace the work we do here.

I’m thankful for the team here at NAPA, ASPPA, NTSA, ASEA, PSCA (and the American Retirement Association, generally, as well as all the sister associations), and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

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

Wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

Saturday, November 21, 2020

Game Changers or (Just) Rearrangers?

 In these extraordinary times, there’s a lot of change in the mix—and new legislative and regulatory developments that could be “game changers”—or perhaps not-so-much.

Even in the most normal of times, it’s customary for businesses in evaluating future prospects to consider/identify elements under a “SWOT” analysis: strengths, weaknesses, opportunities or threats—and the recent Summit Insider gave us a chance to see what is on advisor minds now—and for the days ahead.

For this year’s Summit Insider, we asked respondents[i] to weigh in on how they saw various portents of change: as a game changer, for good or ill, something about which much ado had been made without justification (those that are mere “rearrangers”)—or was it simply too soon to say? 

Here’s what they thought about: 

1. MEPs/PEPs (Multiple Employer Plans/Pooled Employer Plans)

40% - Too Soon to Say

38% - Positive Game Changer

20% - Much Ado About Not Much

12% - Negative Game Changer

Arguably one of the most-anticipated changes from the SECURE Act was the advent of (truly) “open” multiple employer plans (MEPs), rebranded and somewhat refined to what the legislation calls pooled employer plans, or “PEPs.” Long championed as a means to help close the coverage gap, particularly among smaller employers, by providing certain structural and cost efficiencies of scale—there are some details yet to be worked out by regulators (they aren’t effective until Jan. 1, 2021). 

More recently, MEPs have found themselves in the crosshairs of litigators who allege that, despite those efficiency claims, some providers have charged that some have charged excessive fees and not fulfilled their fiduciary obligations. All of which may, despite a minority view as a game changer, left a slim plurality calling it “too soon to say.”  

2. DOL’s Fiduciary Reproposal

37% - Too Soon to Say

26% - Much Ado About Not Much

26% - Positive Game Changer

11% - Negative Game Changer

Perhaps no regulatory undertaking in recent memory has occupied the focus of advisors—and advisor organizations—as the reconsiderations of the fiduciary rule. First in 2011, and then again in 2015, the Labor Department saw fit to reconfigure both ERISA’s fiduciary standard, the conditions under which a prohibited transaction exemption would be granted, and the type of retirement accounts to which those standards would be applied. 

Ultimately upended by the Fifth Circuit Court of Appeals with the plaintiffs’ challenge led by a legal team led by the man who would eventually become Secretary of Labor of an administration that would repropose a different version—one that, unsurprisingly, struck advocates of the prior administration’s efforts as “inadequate” to say the least. Regardless, the proposal, which by title anyway, purports to be “Improving Investment Advice for Workers & Retirees,” not only “restored” the 1975 five-part test’s standards on the conditions for advice to constitute “investment advice,” as well as a new prohibited transaction exemption allowing investment advice fiduciaries under ERISA to receive compensation, including as a result of advice to roll over assets from a plan to an IRA.

Whatever lies ahead for the proposal in the comment period and reconsideration—it’s doubtful that it would last long in its current form following a change in administrations. That, if nothing else, might explain the stance of respondents to this year’s Summit Insider—a plurality of which say it’s “too soon to say” what kind of impact it might have—or if it comes to life at all.

3. SECURE Act’s Expansion of Retirement Income Safe Harbor

54% - Positive Game Changer

27% - Too Soon to Say

15% - Much Ado About Not Much

3% - Negative Game Changer 

Among its many changes, the SECURE Act contains three sections that, taken together, are expected to have a positive impact on the provision of retirement income products in defined contribution plans: the reporting of a monthly lifetime income amount on participant statements, allowing for the portability of “in-plan” lifetime income benefits, and an expansion of the safe harbor for the prudent selection of lifetime income providers. 

The first is already in place among many providers (albeit not necessarily using the DOL’s proscribed method), the second kicks in only after an in-plan option is in place—but the third—additional insulation against what many see as the biggest stumbling block to plan sponsor adoption of these options—well, could that be a game-changer? Summit Insiders seem to think so.

4. E-delivery 

86% - Positive Game Changer

4% - Much Ado About Not Much

3% - Too Soon to Say

1% - Negative Game Changer

When the Labor Department unveiled the final e-delivery rule in May, it was the culmination of years of hard work of advocacy. The timing was precipitous, coming in the midst of the COVID crisis that separated so many workers—and recordkeepers—from their offices. That timing may slow the full impact out of the blocks, but over a decade the Labor Department anticipated that the new safe harbor will save plans approximately $3.2 billion net, annualized to $349 million per year (using a 3% discount rate)—money that could well be better spent on retirement savings. That has the makings of a positive game changer—and that seems to be just how the Summit Insiders see it.

6. Printing/Showing Lifetime Income Disclosures on Statements 

52% - Positive Game Changer

26% - Much Ado About Not Much

15% - Too Soon to Say

6% - Negative Game Changer 

We’ve already noted the three lifetime income enhancements in the SECURE Act, and if this one is already in play with many recordkeepers (and therefore, perhaps explains why a quarter of Summit Insider respondents say it’s “not much”), it’s potential to help shift the focus from accumulation to decumulation is largely unquestioned. 

Of course it remains to be seen what might emerge when the (still) interim final rule is finalized—and what changes recordkeepers that have already made the move to produce such illustrations on their own might have to embrace, and when. Still, there’s something to be said for consistency of approach—and universality of availability. 

Said another way—it’s “show” time.

- Nevin E. Adams, JD

[i] Who Are the Summit Insiders?

Just over 400 advisor and home office “attendees” of the 2020 NAPA 401(k) Cyber Summit responded to this year’s Summit Insider. Just under a third (32%) had been a retirement plan advisor for more than 20 years, and a quarter had been for 15-20 years. There were, however, 14% who had less than 5 years experience in that role, and a nearly equal number (13%) that had been in the role for 5-10 years. 

Their target markets were similarly diverse. About a quarter each targeted plans with less than $5 million in assets, between $5 million and $10 million, and between $10 million and $25 million. The remaining quarter were divided between market segments ranging from $25 million to more than $41 billion in assets.    

Saturday, November 14, 2020

5 Steps to Cyber Security

Recent reports of 401(k) thefts and an ongoing concern about cybersecurity (should) have everybody on the alert. Here’s some things you, your plan sponsor clients, and their participants should check out—now.

Find Your Account(s)

It may have been a while since you checked out your 401(k) balance—indeed, many may not have ever  checked it out online. Start by tracking down the website, your user id, your password. If you haven’t done so in a while, you may have lost those credentials—or your access may have been disabled. Even if those credentials are still valid, it’s probably a good time to change them. Make sure you remember those account(s) at previous employers’ 401(k)s that you may have left “behind.” 

Oh, and it will be less frustrating if you don’t do this on the weekend. In my experience, few offer customer service support then, and if you need help getting on, you’ll need some help.

You might also find that it’s a good time to consolidate those 401(k) accounts so that your “check up” can be a bit less burdensome in the future.

Make Sure ‘They’ Can Find You, Too

Addresses change, phone numbers too. You’ll want to make sure that your contact information is up to date. That old work email address probably doesn’t work anymore, either—make sure those “old” 401(k) accounts know where you are.

Change the ‘Locks’

Chances are the last time you logged into your 401(k) account, you were told to come up with a password that was a combination of so many letters and characters you lost count. You may have been prompted to come up with answers to a handful of seemingly random “security” questions (what was  your first concert, after all?). You may have been asked if you wanted something called “multi-factor” authentication (for example, you might be asked to enter a code that is sent to a phone or email account that you have previously authorized). And, if you logged in from a different device (smartphone, or even a different browser), you may well have been asked to confirm that as well.

Frustrating as that series of hurdles can be if you are in a hurry, they’re all designed to stop, or at least slow, someone hacking your account. So, change your password regularly, use a password manager to help you keep up with passwords no human brain could possibly be expected to retain, and definitely go with multi-factor—because when someone who isn’t you accesses your account, you want to know it before  they get in. 

Check Your Beneficiaries

One of the most common areas overlooked is that of beneficiaries—the folks that you want to receive your account balance if you’re no longer “here” the receive them. This is so critical that the Plan Sponsor Council of America focused its recent 401(k) Day campaign on the topic. 

The default assumption if you’re married is your spouse (if you want to designate someone else you’ll need their acquiescence), but—like addresses, spouses have been known to change, children have been known to come along, children have been known to marry individuals that wouldn’t be your first choice, and life situations change. I actually had a situation where my beneficiary designation was (apparently) “lost” during a provider change.  

You’ll want to make sure that who’s on record as your beneficiary is current because things change—and the plan administrator will almost certainly distribute benefits to the person(s) you’ve designated—regardless of “circumstances.” 

Get a ‘Ready’ Read

Oh, and while you’re at it—you might want to check out your retirement readiness—how much you’ll need to retire comfortably, and how close your savings and other assets are to making that a reality. 

That might, in turn, not only provide you with good insights as to how much you need to be setting aside—but provide a sense of comfort as you work with your advisor/investment professional. 

It’s important that your savings be secure, after all—but ultimately you need them to be… enough.

- Nevin E. Adams, JD

Tuesday, November 03, 2020

Polling "Places"

If you have turned on a TV, walked by a radio, driven down a residential street, or answered a phone (or more likely let it go unanswered) in the past month, you will, of course, be aware that our nation will officially go to the polls today. 

Of course, our nation has been “going” to the polls—or at least casting votes—for several weeks now. And while some states (and voters) have done so in elections past, a combination of factors (not the least, concerns about the current pandemic) means that the process of voting, like so much of our lives this year, is going to be “unprecedented,” both in terms of the breadth and volume of votes cast prior to election “day”—and perhaps on that day itself.

And yes, it’s been a particularly nasty—one feels compelled to say “unprecedented”—election cycle. 

In that regard, I recently came across this: 

“Certainly, politics has never been a pretty business, but I doubt that I would get much argument in stating that this particular political season has been as nasty, vitriolic, and personal as any in recent memory—including not a few of those ads where the candidate’s visage appears to say that he or she “approved this message.” Like a couple of bickering siblings, both sides protest either that they didn’t start it, or that it is the other side’s fault. Lowered to levels of political discourse that once would have gotten your mouth washed out with soap, the verbal free-for-all threatens to obfuscate not only the real issues in this election, but the truth itself. We’re all sick and tired of it—even when they’re dishing the dirt on the candidate we’re hoping is forced to slink off the public stage in disgrace come Tuesday.”

While the sentiment is real and current, I actually wrote those words nearly 15 years ago, just ahead of the 2006 mid-terms. I wouldn’t say that things haven’t gotten (even) worse since then, but I was surprised at how apropos those words remain even in the context of the election before us. 

Indeed, while much is made of what appears to be an extraordinary level of polarization in perspectives, the pernicious influences of social media, and the pervasive editorializing of the “news,” it remains my sense that our nation is not so cleanly demarcated into “blue” and “red” as pundits would have us believe. Moreover, while we surely have our individual differences, I suspect at most levels the voting public is not as polarized in their opinions on key issues as are the individuals seeking their vote, or the process that produces those individuals. 

The issues that confront our industry—and the nation’s retirement—important though they surely are, are unlikely to be the issues that motivate your choices on the ballot this year. That said, it’s worth remembering that elections matter there as well—that the “sweep” of control often creates the biggest issues for retirement policy, be it the tumult of the Tax Reform Act of 1986, the flirtation with Rothification, the ardor for financial transaction taxes that make no allowance for retirement savings, and “equalization” of tax treatment that might well discourage plan formation. And just how powerful bipartisanship (still) can be in terms of producing thoughtful, meaningful legislation like the SECURE Act.   

As I write these  words, it’s hard to imagine that we’ll know how it will all turn out by Election Day’s close. The good news, whether it be a result, or in spite of, the current level of vitriol, the American public’s interest in expressing its opinion by actually taking the time to go to the polls—or in pursuing an absentee ballot—appears to be surging. Elections do have consequences, after all—and, if the last several elections have taught us nothing else, we now know that votes—even a single vote—can matter.

Here’s hoping that—whatever your position on the issues—you take the time to vote this election. It is not only a right, after all, it is a privilege—and a responsibility. 

And let’s hope that those that find themselves in office as a result conduct themselves accordingly.

- Nevin E. Adams, JD

Saturday, October 31, 2020

3 Things That (Seem to) Scare Plan Sponsors

 Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. And sometimes it’s just a good time to think about the things that give us pause—that cause a chill to run down our spine. 

In that category, here are three things to ponder…

Getting Sued

Plan sponsors will often mention their fear of getting sued (actually, their advisors frequently broach the topic), and little wonder. The headlines are (still) full of multi-million dollar lawsuits against multi-billion dollar plans—the pandemic has, if anything, seemed to accelerate the pace. If relatively few seem to actually get to a judge (and those that do have—to date—largely been decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are evolving as well.

It's not that the fear is unfounded—plan fiduciaries certainly can be sued, and that includes responsibility for the acts of co-fiduciaries, and liability that is personal, to boot (see 7 Things an ERISA Fiduciary Should Know).

Of course, most plan sponsors won’t ever get sued, much less get into trouble with regulators. And those who do are much more likely to drift into trouble for things like late deposit of contributions, errors in nondiscrimination testing, or not following the terms of the plan.

Still worried about getting sued? As one famous ERISA attorney once told me, you might as well worry about getting hit by a meteor. Unless, of course, you have more than $1 billion in plan assets.


In fairness, it’s not ESG—environmental, social & governance—investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns as to their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers want these options, particularly younger workers. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among defined contribution plans has been tepid—and the take-up rate among participants even lower. Fewer than 3% of plans offer an ESG option, according to the 62nd annual Plan Sponsor Council of America survey, and less than 0.2% of plan assets have been invested in those options. 

Many think the hesitancy comes from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least discouraging the discouraging), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then in June, noting its concern “that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan,” the Labor Department proposed a new rule to “clarify” things.

Now the rule itself is pretty standard stuff—but the Labor Department wrapped that in about 60 pages worth of preamble and impact analysis that conveyed what many (including this writer) saw as a clear sense of skepticism about the prudence of those options, or at least a concern that plan fiduciaries might be inclined to lower the prudence bar in order to accommodate the inclusion of these options. And if there was any doubt as to the concerns of the Trump administration, the rule specifically calls out ESG as unsuitable as a focus in qualified default investment alternatives (QDIA) (not that I am aware of any that have yet taken that step, and perhaps the rule was intended to forestall that). All this at a time when the Labor Department has made a series of (allegedly separate and unrelated) inquiries to both plan sponsors and RIAs about their current  processes regarding ESG consideration and review.

As one might expect in view of the billions of dollars (already) committed to ESG—not to mention its increasing prominence in the focus of a growing number of investment managers—that rule drew a ton  (more than 8,000) of comments (most critical), but is now back for review at the Office of Management and Budget (OMB) in a timeframe so short as to suggest to many that it didn’t undergo much change. 

All of which arguably leaves plan sponsors contemplating a shift to ESG with a great deal of uncertainty. They may not be “scared,” but one can certainly understand a bit of apprehension.

Lifetime Income Options

Speaking of apprehension, while defined contribution plan fiduciaries aren’t exactly scared  of retirement income, DC plans have long eschewed providing those options. There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). 

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when defined benefit pension  plan participants have a choice, they opt for the lump sum

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under defined contribution plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

Don’t get me wrong—there are plenty of things for ERISA fiduciaries to be worried about. The standards to which their conduct must comply are “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—even though it may be “scary” from time to time…

- Nevin E. Adams, JD

Saturday, October 24, 2020

The Enemy of the ‘Good’

A reader recently commented, “Nevin: You are continually berating those who question various aspects of 401(k) plans as if the current structure is ‘perfect.’ It isn’t.”

That comment was inspired by a recent column of mine critical of a proposal rumored to be under contemplation by the Biden campaign—one that would “trade” the current tax preferences of 401(k) deferrals for a flat government tax credit. It’s a proposal that is intended to direct more of the same amount of government expenditure (when the government doesn’t take money from your pay, it’s considered an expense) to lower income individuals, in that a flat dollar credit would ostensibly be worth more to lower income individuals than the deferral of taxes under the current system. 

Now that reader went on to offer a comment in support of that intent, explaining that “…one of the biggest challenges we face is getting lower paid people to participate. Credits will give bigger benefits to these people, and maybe, just maybe, spur increased participation,” closing by challenging me to “…work to make 401(k) plans BETTER, and not simply berate those who challenge the current system. It ain’t perfect, my friend. Far from it.”

Now, as it so happens I know this particular reader. And so I know that he cares deeply about retirement savings and retirement savers, that he’s one of the many out there who are truly working every day to make things “better.” 

That said, if he read my criticism of this proposal to be an assertion that the current system has no faults or shortcomings—well, that wasn’t my point. I have never said the current system was perfect, and in fact, dedicate any number of these columns to highlighting needs/opportunity to make it better.

Beyond that, my experience has been that when those kind of assertions are published[i] (even as an “op-ed”) by a reputable news organization—well, left unchallenged, the assertions are often assumed to be accurate. Indeed, every time something like this makes its way into circulation, I will hear from a half dozen different advisors (or more) telling me that the article has been passed on to them by plan sponsor clients (or participants), looking for comment, or response (and often asking me for assistance in that regard). Indeed, those are the kind of things that tend to get routed to those in academia and on Capitol Hill by those who see it as an affirmation of their notion that the current system is inadequate or biased in favor of the well-off. 

However, it’s one thing to press for change, but something else altogether to do so without fully thinking through (or at least acknowledging) the potential implications of that change—what are generously referred to as the “unintended” consequences, but sometimes seem more a willful and deliberate disregard. In this particular case a federal tax credit at the expense of having a workplace savings plan or an employer match doesn’t seem like a good trade-off to me. Moreover, making broad generalizations about fees (that don't seem supported by data) to justify a call for undermining valuable support for participants and employers doesn’t strike me as being a well-reasoned argument for change/improvement. 

To me the biggest shortfall of the current system is that too many working Americans don’t have the opportunity to take advantage of it. Oh, there are plans that still pay too much in fees, that either don’t avail themselves of the services of a plan advisor, or rely on the counsel of one that isn’t qualified, plans run by fiduciaries who either aren’t aware of that responsibility or fail to fulfill it. The system, in total, isn’t perfect—but those who pick at those imperfections to justify its wholesale demise should be challenged and held to account for misstatements and exaggerations, and they should be willing—and able—to consider and respond to questions—and data—about the ripple effect of unintended consequences. 

Never forget that “perfect” is often the enemy of the good. 

- Nevin E. Adams, JD

[i] Warning: I’ve been at any number of symposiums or roundtables—and even read the occasional op-ed—where the words of a well-intentioned industry leader are served up as an “admission” of failure of the current system. 

Saturday, October 17, 2020

What's 'Eating' 401(k) Haters?

 Another week, another Bloomberg op-ed bashing 401(k)s—but this time the target is fees—and advisors.

The most recent “shot” is found in an article[i] titled “401(k) Fees Are Eating Your Retirement Savings.” The author, one Ethan Schwartz,[ii] without citation (beyond “various estimates”), tosses out claims as to the “average” fees in 401(k)s (and we know the value of “average” in such matters), states that those fees are “much higher” for then claims to know of “annual expenses well under 0.1%, and often near zero, offered by widely available stock and bond index funds and ETFs in many flavors and stripes outside of 401(k)s”—and then does the math to show how much it all adds to individually, and then he extrapolates it to the whole universe of 401(k) savers to assert that “more than $20 billion annually” is being “taken” from the nest eggs of retirement savers.

Better still, he cites the example of a “close friend” who asked for his help—only to find that “the plan offers a menu of high-priced (and underperforming) actively managed vehicles. Its only index-tracking choices are expensive “collective investment trusts costing about 0.5% more than index mutual funds and ETFs.” Oh, and he also cites as “even more outrageous” the reality that those trusts allow for securities lending (which doesn’t cost the plan money, and in fact probably offsets fees with income).

As unlikely as his generalizations seem to match the 401(k)s I know, it’s impossible to pick apart his portrayal of facts because—the individual situation notwithstanding—they are gross generalities. Not that that dissuades him from offering a “solution”—to “simply eliminate 401(k) intermediaries,” and to “let American workers save for retirement using their choice of designated, IRA-like accounts offering the same, cheap index-tracking funds and ETFs available outside of retirement plans.”

Unlike the other proposals cheered of late, he’s willing to leave the “other incentives that encourage Americans to save through their 401(k)s” intact, “including preferential tax status, employer matching contributions and enrolling employees by default.” He touts as “added bonus,” that “employers would no longer have to spend time and money establishing and monitoring their own, costly 401(k) plans. And employees of small businesses would no longer face a cost disadvantage vis-à-vis the plans offered by large firms, as they do today.”

Now, he anticipates “howls of opposition from the investment management industry,” and—along with a perspective of the industry that seems woefully out of date, he cites the work of none other than Yale Law School professor Ian Ayres and University of Virginia law professor Quinn Curtis. You may remember these guys—and the “love letters” from Yale. Their academic pedigree notwithstanding, these are the guys who used outdated (and limited) Form 5500 data and questionable expense assumptions to make wild accusations about 401(k) fees and the plans that offered them. Accusations that, it bears reminding, were subsequently disavowed by Yale University’s Law School. 

In fact, actual fund data continues to show declining fees among 401(k) plans. It’s not that you can’t find outliers—perhaps even this writer’s colleagues’—but that’s clearly the exception, rather than the rule. In fact, the Investment Company Institute reports in “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2019” that 401(k) plan participants investing in equity mutual funds incurred an average expense ratio of 0.39% in 2019, compared with 0.42% in 2018 and 0.77% in 2000. 

Like so many others who opine from ivory towers far removed from the front lines of workplace retirement plans, this author blithely assumes that workers don’t need the education, encouragement and financial support of employers and advisors. He ignores (or perhaps is simply unaware) of the data that shows how workers of even relatively modest means are 12 times more likely to save in their workplace retirement plan than on their own.[iii]  

Today they’re also well-served by a growing number of automatic enrollment designs to help them get started, a steady increase in the default savings rate, and acceleration in that rate over time, not to mention the expanded availability and utilization of qualified default investment alternatives—enhanced designs that are not only continually finding their way “down market,” but that it seems fair to say are largely due to the involvement and engagement of those savings “eating” intermediaries he characterizes as “largely superfluous.”

What exactly is (still) “eating” 401(k) haters?

Why, instead of looking for ways to undermine a system that works, or pushing for incentives to extend those benefits to everyone—do they seem bound and determined to put those retirement savings on a “crash” diet?

- Nevin E. Adams, JD

[i] Bloomberg News editorials have been on something of a tear of late; you’ll also want to check out An Article that Doesn’t Make Much Sense and Chiseling Away at the 401(k)… 

[ii] According to Bloomberg, Schwartz has worked as an investment manager and financial services executive for 21 years. He was a special assistant to the deputy secretary of the Treasury in the Clinton administration.

[iii] Vanguard, How America Saves 2018 (DC plan participation), EBRI estimate based on 2014 IRS SOI tabulation (IRA-only participation).