Saturday, October 12, 2019

A Bitter Pill?

I’ve never had very healthy eating habits – even as a child.

And while this wasn’t a concern of mine at the time, my parents were quite insistent that either I start taking vitamins or improve my eating habits. Figuring that it was the lesser of two “evils,” I went for the pill.

Well, until I saw THE PILL.

Mind you, this was no kid-friendly Flintstones chewable – no, it was some big, ugly black monstrosity – a real “horse pill.”  And just looking at it I was sure that there was no way it could possibly make it down my poor 5-year old throat (I wasn’t altogether sure it would even fit in my mouth).

However, and despite my vehement protestations, my parents were determined that I would ingest it. And, for the next 15 minutes or so (it felt like forever) I was as close to being waterboarded as I will ever want to be – as my parents proceeded to hold me down, tilt my head, and attempt to flush the pill down my throat with copious amounts of water. But sure enough – and as I had tried to tell them, that darned pill just wouldn’t go down. 

I wonder sometimes if that isn’t how workers view the admonitions about how much they are supposed to be saving, and/or how much they are supposed to have accumulated in order to retire. And, as if that weren’t overwhelming enough, there are a handful of ginormous projections about how much more you’ll need to take care of health care expenses.

How much? Well, Milliman projects that a healthy 65-year-old couple[i]retiring in 2019 is projected to spend $369,000 in today’s dollars ($551,000 in future dollars) on health care over their lifetime. Fidelity puts the number for a 65-year-old couple at $285,000 in health care and medical expenses throughout retirement, up from $280,000 in 2018. The Employee Benefit Research Institute (EBRI) says that some couples could need as much as $400,000. You get the picture.

That’s no small thing – particularly when survey after survey suggests that it’s health care costs that loom largest as a concern – not just for those for whom retirement awaits, but for those already in retirement (who, most surveys still find to be pretty comfortable with their other retirement expenses).

Several weeks back I stumbled across an interesting report aptly titled “A New Way to Calculate Retirement Health Care Costs.” The report, authored by T. Rowe Price’s Sudipto Banerjee, acknowledges that while health care costs are a significant retirement expense, it may be more practical to look at health care as an annual expense incurred over the 20-30 years you’ll actually incur those expenses, rather than as a lump sum.

The paper offers an eye-opener that says that if you were to view that $150/month cable bill as a retirement lump sum, you’d want to have $86,000 set aside.

Closer to the subject of retirement, the paper takes the example of a 65-year-old couple – a couple that has saved $400,000, and now has a combined monthly Social Security benefit of $2,000. How are they going to afford that $300,000 for health care costs? Well, as Banerjee points out, that $2,000/month Social Security benefit actually (with a 2% annual cost-of-living adjustment), that adds up to approximately $583,000 in Social Security benefits in the next 20 years.[ii]

Let’s face it, the costs of health care in retirement – or retirement overall – can look like a big pill to swallow as a lump sum – but it can go down a lot easier when you can take it in smaller pieces.[iii]   

- Nevin E. Adams, JD

[i]Of course, those are averages – and for some context, you might check out “Why an Average 401(k) Balance Doesn’t ‘Mean’ Much.” 

[ii]It’s not just that that approach puts things in an apples-to-apples light – the paper explains that since fixed monthly premiums make up the bulk of annual costs, most of those costs are predictable – and can be budgeted, and paid for, from monthly income. It’s the out-of-pocket expenses that can vary widely, from month to month and from individual to individual.

[iii]Oddly, my parents never thought to cut that pill into smaller pieces. And I certainly wasn’t going to suggest it…

Saturday, October 05, 2019

What’s Holding Back Financial Wellness?

Financial wellness – it remains a hot topic among advisors – but among plan sponsors?

For all the coverage that the subject engenders – and it’s considerable in this space – it’s not unusual to find awareness gaps among plan sponsors, with perspectives ranging from ignorance to ambivalence to downright skepticism.

About a year ago, the Employee Benefit Research Institute (EBRI) conducted a survey of 250 large employers. At the time, the report claimed that while many employers were interested in offering financial wellness programs to their employees, there didn’t appear to be a consensus on the approach.

So, what’s changed in in the past year? Well, as it turns out, not much.

Once again EBRI surveyed large plan sponsors – this time in June 2019, the online survey of 248 full-time benefits decision-makers from companies with at least 500 employees (17% had more than 10,000). Last year’s survey canvassed employers with an “expressed interest in financial wellness initiatives” – and the 2019 version also notes that a “key criterion for participating in the survey was that employer respondents were screened to ensure that had some interest in offering financial wellness initiatives.”

Fertile ‘Grounds’?

And yet, even among a group that would seem to be fertile ground for these programs:
  • Only about half report currently offering financial wellness initiatives (about the same as a year ago) – and though 20% say they are actively implementing and 29% interested in doing so – that’s also about the same as a year ago.
  • Only one in four (23%) have created a score or metric. 
  • Only a third (32%) have done a financial wellness needs assessment
Moreover, making a business case to management surged as a challenge for the programs, cited by 42% of respondents from 24% in last year’s survey. Little wonder since “Lack of Ability/Data to Quantify Value Added of the Initiatives” was cited as a top challenge by 41% of respondents, compared with 25% a year ago. And then there was “Lack of Staff Resources to Coordinate/Market Benefits” – cited by 43% of respondents, versus 27% in 2018.

Ultimately, there’s (still) apparently no real consensus around the definition of financial wellbeing; about a third defined it as (just) having access to assistance and resources that enable good financial decisions, about one in five (21%) defined it as (just) being equipped to achieve retirement security through planning and savings. Only 3 in 10 defined it as (actually) being comfortable or financially secure overall.

Of course, some of that (apparent) ambivalence might be explained by the reality that 29% of respondents describe their level of concern about employees’ financial well-being as “low” (another 49% say they have a “moderate” level of concern).

Or perhaps it’s the reality that while two-thirds (68%) of employers said that more than half of their employees were eligible for the financial wellness initiatives provided, only one-third (36%) of employers thought that a majority of their employees would actually make use of the benefits.

In fact, the top two challenges in offering financial wellness benefits were a lack of interest among employees (38%, compared with 43% a year ago), and complexity of the programs. This year the survey took that complexity question and found that while (just) 31% were concerned about the programs being complex for employees that utilize them – most of the concern had to do with complexity for the employer; just over a quarter (27%) cited complexity in implementing programs, and another quarter (25%) cited complexity in choosing the programs. Employers, it seems – even those with a propensity to consider these offerings – (still) find the (potential) complexity daunting.

Don’t get me wrong. The logic behind these programs is pretty straightforward; it’s about staving off bad financial health, which contributes to (and/or causes) a bevy of workplace woes: stress, which can lead to things like lower productivity; bad health and higher absenteeism; and even a greater inclination toward workplace theft, not to mention deferred retirements by workers who tend to be higher paid and have higher health care costs. It’s a here-and-now focus that speaks to the bottom line, even if the modest amount of academic research on the subject still struggles to make a quantifiable case.

But, at least in the EBRI survey results, it seems as though even the most engaged plan sponsors still don’t quite get it.
And until they do, they won’t.

- Nevin E. Adams, JD
See also: “What Plan Sponsors Want to Know About Financial Wellness,” “Building a Bottom Line on Financial Wellness,” and “8 Things to Know About the State of Financial Wellness.”

Saturday, September 28, 2019

5 Things Plan Sponsors (Still) Screw Up

Plan sponsors have a lot of responsibilities and often rely on others to help them keep their plan operating in accordance with the law. And yet, even with the most attentive plan sponsors, mistakes (still) occur. Here’s a list of some of the most common missteps:

1. Not using the plan’s definition of compensation correctly for all deferrals and allocations.

The term “compensation” has several different applications in qualified retirement plan operations, depending on the particular compliance goal. For example, a plan may use one definition of compensation to allocate employer contributions and a separate, distinct one for testing whether employee salary deferrals are nondiscriminatory. Note that one of the top plan compliance concerns identified by the IRS is a failure to identify and apply the correct definition of compensation in a particular scenario.

Note that while plans often use different definitions of compensation for different purposes, it’s important to apply the proper definition for deferrals, allocations and testing. A plan’s compensation definition must satisfy rules for determining the amount of contributions.
You should review the plan document definition of compensation used for determining elective deferrals, employer nonelective and matching contributions, maximum annual additions and top-heavy minimum contributions. Review the plan election forms to determine if they're consistent with plan terms.

2. Not following the terms of the plan document regarding the administration of loan provisions (maximum amounts, repayment schedules, etc.) or hardship withdrawals.

Plan documents routinely provide that hardship distributions can only be obtained for certain very specific reasons, and that participants first avail themselves of all other sources of financing before applying for hardship distributions (these conditions often are incorporated directly from the requirements of the law). Similarly, loans are permissible from these programs only when they comply with certain standards regarding the amount, purpose, and repayment terms.

Failure to ensure that these legal requirements are met can, of course, most obviously result in a distribution not authorized under the terms of the plan document—and, since these types of distributions are frequently quickly spent by participants (and thus not readily recoverable), it can be complicated and time-consuming to set the situation right.

Oh – and don’t forget that we now have some updated final regulations on hardship distribution and conditions.

3. Not depositing contributions on a timely basis

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. More significantly, a delay in contribution deposits is also one of the most common flags that an employer is in financial trouble – and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

4. Failing to obtain spousal consent.

The IRS has long noted that a common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse.

This often happens when the sponsor’s HR accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently got married – or remarried). The failure to provide proper spousal consent is an operational qualification mistake that could cause the plan to lose its tax-qualified status.

5. Paying expenses from the plan that are not eligible to be paid from plan assets.

Plan sponsors are frequently interested in what expenses can be paid from plan assets. It’s important to keep in mind, however, that the first step in that determination involves making sure that the plan document actually allows the payment of any expenses from plan assets.

Assuming that the plan allows it, the Department of Labor has divided plan expenses into two types: so-called “settlor expenses,” which must be borne by the employer; and administrative expenses, which – if they are reasonable – may be paid from plan assets. In general, settlor expenses include the cost of any services provided to establish, terminate, or design the plan. These are the types of services that generally are seen as benefiting the employer, rather than the plan beneficiaries.

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, or providing plan information to participants.
ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law – and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

Oh – and if you’re not “familiar with such matters” – or aren’t certain of that status – it’s a good idea – one might even say “prudent” – to engage the help and support of someone who is.

p.s.: Oh, and when a mistake does occur, check out the IRS Fix-It Guide at

- Nevin E. Adams, JD

Saturday, September 21, 2019

"Make" Shift

Financial literacy has long been touted as something of a “silver bullet” in helping workers make better financial decisions – and now there’s a call to make it a mandatory employment offering. 

Now, we all know that lots of workers get their first (and for many only) exposure to financial markets via their workplace retirement plan. Ditto their only education about investing, diversification, or even mutual funds. Little wonder that those who are tasked with delivering those lessons have long championed the need for some basic level of financial education in school curricula.

The issue was most recently raised earlier this year in a paper titled “Defined Contribution Plans and the Challenge of Financial Illiteracy.” Authored by Jill Fisch of the University of Pennsylvania Law School, as well as financial literacy icon Annamaria Lusardi and Andrea Hasler from George Washington University School of Business, the paper compares the relative financial acumen of what it terms “workplace-only” investors with active investors.

The report notes that the former (some 28% of the investor group) only have investments through an employer-sponsored plan, the latter have private retirement accounts that they have set up themselves and/or other investments. Arguably, and as the paper acknowledges, some of those in the latter group may well have begun their investment experience in workplace plan, but have now rolled those investments into an IRA (the paper says that about half of this group have both a self-directed account and “other financial investments”).

Mandate State?

It’s this combination – what they claim are big gaps in financial literacy coupled with a reliance on a defined contribution-oriented retirement system that is so dependent on individual choices – that has now led these academics to call on for a mandate on employers to fill the gap with financial literacy programs.

Specifically, they propose that employers be required to provide a self-assessment “enabling their employees to measure their financial knowledge and capability.” They suggest that the Labor Department “could introduce minimum requirements as to what should be included in a program to provide the working knowledge and skills necessary to navigate the defined contribution system” – requirements that could, they note, “include both specific information about the 401(k) plan, the investment options contained in that plan, and the process of saving and investing for retirement,” but that could also “extend to more general components of personal financial decision-making that contribute to an employee’s financial well-being.”

‘Big’ Deal

I think it’s fair to say that there are lots of retirement plan savers who aren’t very investment savvy, though I’ve a sense that the academics are overly broad in their characterizations, and perhaps lack a full appreciation for the education that is currently provided in the context of workplace plans. Further, for their assessment of financial literacy (more precisely, the lack thereof), they rely on the responses to a “big three” set of questions. 

Now, those “big three” questions have been utilized in academic circles for years as an assessment as to whether an individual is financially literate or not. I’ll accept at face value the belief of gifted individuals who have studied the subject of financial literacy in far more detail, and with more expertise in such matters than I, that a correct response to those questions constitutes a level of literacy in financial matters.

I’m happy to say that I have, for years, been able to accurately answer those “big three” questions that purport to provide an accurate gauge of financial literacy[i] – but to this day I am unable to articulate exactly how those specific knowledges would help me answer the questions that seem most pertinent to achieving retirement financial security; notably how much should I save, how should I invest those savings, when should I rebalance, and – ultimately – how (and when) do I draw down those savings in retirement.

The studies I have seen – and a point made by the authors of this proposal – suggest that timing is critical to retention. In other words, teaching someone about investments years before they actually have any investments probably won’t have much retentive impact. That’s why the best financial wellness programs are effective – because, rather than one-size-fits-all education, they focus on specific people and targeted groups of people who have specific needs – and do so in a manner proximate in time to either when those decisions must be made, or will have an impact.

It’s hard to argue that a greater focus on financial literacy wouldn’t be of some benefit – though I would say preferably sooner and more consistently than is likely in the employment context. That said, I’m skeptical about the impact of a financial literacy campaign mandate on employers. First off, the vast majority of employers who sponsor a plan already provide some level of education (does anyone not?), on their own, or with the assistance of a recordkeeper, TPA or advisor. A growing number are doing so with the broader emphasis on outcomes and financial wellness. The Labor Department might well be able to craft a more practical set of financial literacy guidelines than the academics, but I doubt it – and that’s assuming they’d even want the job.

Putting that obligation on employers ignores decades worth of experience that many, perhaps most, individuals don’t take full advantage of the education materials already furnished. Moreover that they appreciate – and in most ways and many cases are better served by the convenience of plan design solutions – like automatic enrollment and qualified default investment alternatives – that counter human misbehaviors and help even the financially literate make better choices than busy lives often allow.[ii] 

More significantly, I suspect that a financial literacy mandate on employers who sponsor plans would only mean fewer employers sponsoring plans – and that’s before we consider the potential for a brand new angle for the plaintiffs’ bar.

In sum, there seems little to be gained from a financial literacy mandate on employers. But it’s worth keeping in mind that those who currently participate in those employment-based retirement programs have something to lose.

- Nevin E. Adams, JD

[i]The Big Three
Consider that, even in making the case that there is a financial literacy gap, the academics rely on what they call the “Big Three” financial literacy questions, specifically:

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow?

A. More than $102, B. Exactly $102, C. Less than $102 

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?

A. More than today, B. Exactly the same, C. Less than today

3. Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” 
♦True ♦False

[ii]Those are mostly accumulation options, however. On the drawdown/withdrawal side, while there are certainly many alternatives, there is arguably still a gap.

Saturday, September 14, 2019

It's About Time

Most of the surveys and research in our industry focus on the shortcomings – a lack of savings, of diversity in investment, of failure to maximize the employer match, or to have access to the programs that support those opportunities. There is, however, a shortfall that doesn’t garner much attention.

I’m talking about time.

And while time is often treated as an “enemy” of retirement planning (sometimes under the “longevity” label), certainly when there is a concern about outliving one’s resources, or perhaps when too little time remains to make preparations, there is another aspect: a retirement cut short.   

This is heavy on my mind of late – not just because this week marks the anniversary of the Sept. 11 attacks, though that’s certainly a factor.

My recollections of that awful day notwithstanding, I’ve been particularly mindful of the untimely passing of three individuals of my acquaintance in recent weeks: a relative, a colleague, and an associate here. Two were not even thinking about retirement when their time came – one had been eagerly looking forward with anticipation to a retirement she’ll never have.

Now I’m not privy to the particulars of the financial plans of these individuals – the needs that their unexpected passing may present for others – or what steps, if any, they may have taken to ease the financial circumstances for those they left behind. I hope they had that opportunity, but know all too well that many don’t.

People die tragically and prematurely every day, of course. Most of them are unknown to us, and nearly all are unnamed to us. And as the recent mass shootings remind us, on any given day, any one of us could go to work, or to the store – and simply not come home.

Ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death –through faith, sacrifice and, with luck, sound financial planning. However, most don’t dwell on those realities, and that’s doubtless a good thing.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. In fact, surveyed workers increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls.

However, and perhaps particularly on this anniversary eve of the Sept. 11 attacks, it’s worth remembering that we don’t always have as much time as we might think – or want.

It’s time we did.

- Nevin E. Adams, JD

Saturday, September 07, 2019

How Gen Z's Retirement Will Be Different

Those “kids” who were just dropped off at college for the first time? By their sophomore year, their generation will constitute one-quarter of the U.S. population. How will their retirement be different?

That’s according to the authors of the so-called Mindset List – now housed at Marist College, having relocated from Beloitt College – has been published each August since 1998. Originally created as a reminder to faculty to be aware of dated references, the list provides a “look at the cultural touchstones that shape the lives of students entering college.” Not to mention those who will go on to be workers and – eventually – retirees.

This fall’s college class of 2023 is the first class born in the 21st Century (2001) – and thus lack a personal memory of the September 11 attacks. According to the authors of the Mindset List:
  • This group has never used a floppy disk (heck, they’ve probably never even seen one, except at that “save” icon).
  • Their phone has always been able to take pictures.
  • They’ve always had Wikipedia as a resource.
  • Oklahoma City has always had a national memorial at its center.
  • As air travelers they’ve have always had to take off their shoes to get through security (well, unless they have TSA pre-check).
  • PayPal has always been an online option for purchasers.
  • There’s always been a headlines scrawl on TV.
  • They have always been able to fly Jet Blue.
  • Troy Aikman’s play calling has always been limited to the press booth.
  • They’ve never been able to watch Pittsburgh’s Steelers or Pirates play at Three Rivers Stadium.
  • Monica and Chandler from “Friends” have always been married (May 17, 2001).
Despite those differences, the class of 2023 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role Social Security will play, and – eventually – how and how fast to draw down those savings.

And yet, when it comes to retirement, the Class of 2023 also stands to have a different perspective. For them:
  • There have always been 401(k)s.
  • There has always been a Roth option available to them (401(k), 403(b) or IRA).
  • They’ve never had to sign up for their 401(k) plan (since, particularly among larger employers, their 401(k) automatically enrolls new hires).
  • They may never have to make an investment choice in their 401(k) plan. (Their 401(k) has long had a QDIA default option to go with that auto-enroll feature.)
  • They’ve always had access to target-date funds, managed accounts, or similar vehicle that automatically allocates (and, more significantly, re-allocates) their retirement investments.
  • They’ve always had fee information available to them about their 401(k). (It remains to be seen if they’ll understand it any better than their parents.)
  • There have always been plenty of free online calculators that allow them to figure out how much they need to save for a financially secure retirement (though they may not be any more inclined to do so than their parents).
  • They’ve always been able to view and transfer their balances online and on a daily basis (and so, of course, they mostly won’t).
  • They’ve always worried that Social Security wouldn’t be available to pay benefits. (In that, they’re much like their parents at their age.)
  • Many have never had to wait to be eligible to start saving in their 401(k). (Their parents typically had to wait a full year.)
But perhaps most importantly, they’ll have the advantage of time, a full career to save and build, to save at higher rates, and to invest more efficiently and effectively.

And, with luck, access to a trusted advisor to answer their questions along the way...

- Nevin E. Adams, JD

Saturday, August 31, 2019

A Hallmark Holiday?

I don’t know about you, but I’ve always had a certain ambivalence about what are generally termed “Hallmark holidays.”

You know the ones I’m talking about – the ones that seem crafted for the sole purpose of generating sales for greeting card sellers. Of course, after a while you no longer question their existence – and if one still struggles to remember exactly when “Grandparent’s Day” is, well, we’ve pretty much got Mother’s Day, Father’s Day, and Valentine’s Day down to a science (one that might not be on your calendar is National Slap Your Irritating Co-Worker Day, October 23). Indeed, these days there are months on the calendar devoted to a whole series of acknowledgements and remembrances.

There are also a number of occasions set aside to recognize the importance of saving (America Saves Week –February ), the importance of planning for retirement (National Retirement Planning Month – July, and National Retirement Planning Week – April), and the issue of retirement security generally (National Retirement Security Week – October). There’s even a National Financial Literacy Month (April) and National Financial Planning Month (October).

While I’ve had some involvement with most of those during my career (mainly to remind folks about their occurrence) and, sadly, for many those events are often dismissed as “Hallmark holidays” – even for those of us who have made a career-long commitment to helping improve the nation’s retirement prospects.

That said, one that has stuck with me – even prior to our affiliation with the Plan Sponsor Council of America – is 401(k) Day. This year it falls on Friday, September 6 – a date chosen in acknowledgement of the fact that, as retirement follows labor, this focus on retirement follows Labor Day (fans of history or trivia may appreciate that then-President Gerald Ford signed the Employee Retirement Income Security Act (ERISA) into law on the day after Labor Day, 1974).

Of course, these days the focus has broadened, and incorporates a focus on financial wellness ahead of retirement, as well as preparations for that time yet to come. Like retirement itself, the preparations are best attended to on an on-going basis, rather than a single date on the calendar.

Readers of this publication are all too aware of the challenges that confront our nation’s retirement savings system – widespread financial illiteracy, a persistent coverage gap, and looming shortfalls in the underpinnings of Social Security. That “familiarity” with these complex issues perhaps makes it too easy to dismiss the opportunity that an occasion like 401(k) Day represents.

Sure, we’re talking about these issues every day – but as a friend reminded me long ago, even a Hallmark holiday can provide an opportunity to pay attention to the people – and things – we often take for granted.

So, this year, let’s (all) take advantage of the “occasion” – all year long. You can find out how at

- Nevin E. Adams, JD