Sunday, August 28, 2005

Off Putting?

Last week Fidelity Investments put out the results of a “survey” about people’s attitudes toward saving and retirement (see One Third of Workers Delaying Retirement). The headline – basically that a third of respondents were putting off retirement – was no big surprise. It is perhaps a sign of the times that people, particularly those nearing retirement, now speak with disarming regularity about their intention to stay in the workforce beyond the ages typically associated with “retiring.” Certainly, a growing number of us (including those on both sides of this newsletter) toil at professions that can, from a physical standpoint anyway, be pursued just as well at 70 or 75 as they can at 55 (whether we will be permitted to do so is another subject altogether).

Nor were the reasons for pushing back retirement earth-shattering; more than half (55%) said it was because they hadn’t saved enough, while roughly a third said they were planning to do so to maintain their employer-sponsored health coverage, and another third said they started saving too late (which no doubt includes some of those who hadn’t saved enough, since the totals add to more than 100%).

No, what struck me as “odd” was the fact that there were workers in the 25-40 age bracket who were also already talking about pushing back retirement. Now, their reasons were different – being more inclined to cite the financial burden of paying for a child’s college expenses than the “poor investment choices” and “market fluctuations” of their workplace seniors as a contributing factor, for example.

Now, these kinds of surveys are notoriously bad predictors of future events – after all, some of those 25-year-olds probably don’t even HAVE kids yet. Moreover, we have no way to know that, save for an interviewer’s query, whether thoughts of retirement had ever actually previously flitted across their mental radar screens, or if they had given it any more thought than a five-second response to a direct question.

Still, whatever their focus or reasons, I find the notion that those at that stage of their work cycle are, even for a moment, contemplating that eventuality encouraging – and the notion that they are already considering having to postpone it, disheartening.

- Nevin Adams

Monday, August 22, 2005

A Hallmark Holiday?

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.

Regardless, I’ve never really been comfortable with ones like Secretary’s Day (now Administrative Professionals Day) and Bosses’ Day. I remember once, years ago, when I was part of a large department that had many “admins,” all with overlapping coverage responsibilities. The fact was, none of them could remotely have been considered to be anything like a “secretary” to me, or any one manager in particular. To me, they were simply part of the team that, like the rest of us, had a job to do, and did it. That didn’t mean we could ignore Administrative Professionals Day, of course. But since there were so many of them, and since we didn’t want to upset the apple cart, the department decided to get everyone the same, relatively innocuous IMHO, “gift.” All of which led me, in a moment of frustration with the process, to wonder aloud why we even had to bother.

At that point, a good friend and co-manager reminded me, “Because, even if we should be thinking about it every day of the year, it gives us an opportunity on that one day, anyway, to pay attention to people we often take for granted.” A point that was driven home to me again on Administrative Professionals Day that year when three separate admins sought me out to thank me for that gift that I had thought was “relatively innocuous.”

For the past several years, the day after Labor Day has been designated 401(k) Day (aside from the traditional association of the day with labor/workers, the Employee Retirement Income Security Act (ERISA) was signed into law by then-President Ford on the day after Labor Day, 1974). For much of my professional career, 401(k) Day has seemed like one of those “Hallmark holidays.” Not that you’ll find greeting cards for the occasion at the mall this weekend – you might have seen a note from the Profit-Sharing 401(k) Council about it but, ultimately, your mind was on other things (like planning what you were going to do on the long Labor Day weekend).

Readers of this publication are all too aware of the challenges that confront our nation’s retirement savings system. At times that familiarity 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 that 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. Let’s take advantage of the “occasion.”

- Nevin Adams

Thanks to the Profit-Sharing 401(k) Council (and a number of sponsoring organizations), we have access to some special materials to accompany the event. You can find them online at

Sunday, August 14, 2005

'Style Conscious

We all know that one of the hardest decisions for most plan participants is choosing how to invest their retirement savings. These days a widely touted solution is the asset allocation fund, or the lifestyle fund (I’ll use the terms interchangeably here, but there are differences) - an option that allows a participant to make a single investment choice: a fund pre-mixed to match an asset allocation deemed appropriate for a particular risk tolerance and/or retirement date. Not only have these options increasingly been promoted to participants – they have also become the solution du jour as a default fund choice for plan sponsors, particularly when combined with automatic enrollment.

What hasn’t garnered the same level of attention is a potential irony regarding these funds. These very same funds that purport to make investment choices so much easier for participants, might actually present plan sponsors (and thus advisors) with a more difficult decision, IMHO.

Consider that in choosing these funds, you have the very same fiduciary standards for due diligence in fund selection that you have with any other investment option. However, many of these don’t have a three-year track record, nor is there any kind of qualitative rating, such as the ubiquitous “star” ratings. Moreover, even those with track records lack a consistent benchmark against which to evaluate their performance.

Sure, many of the fund providers have crafted synthetic benchmarks against which their offerings can be compared – but there is no consensus on what an "appropriate" asset allocation mix is for different target dates, either in terms of how much of each asset class, or even in terms of how much should be invested in stocks versus bonds, much less how much should be in what kinds of stocks. In sum, to the extent they exist at all, their benchmarks exist only against what the provider claims is an appropriate mix.

Fees are still all over the place - some charge a "wrap" on top of the underlying funds, and while others don’t, some take advantage of the opportunity to cobble together relatively high-priced retail share classes under the lifestyle umbrella, while for some their very point of differentiation lies in the exotic (and expensive) asset classes they incorporate in their model. More fundamentally, some rely on models comprised solely of proprietary offerings, while others eschew that approach totally, and others rely on a mix.

Aside from all of those challenges, the ultimate irony – particularly in this day of burgeoning fund menus - is that a plan sponsor who wishes to include a lifestyle offering on their plan menu will likely have a choice of just one lifestyle fund family.

Of course, these obstacles will almost certainly be less of an issue over time, as the market matures and the application of lifestyle funds expands. Still, IMHO, plan sponsors who embrace the logic and simplicity of a lifestyle offering need to realize that they have their work cut out for them.

- Nevin Adams

Sunday, August 07, 2005

Advice "Price"

The headlines of late have nearly all been about the impact on pension plan funding, but legislation affecting investment advice has also managed to piggyback its way back into two of the most recent bills – one sponsored by Congressman John Boehner (R-Ohio), who chairs the House Education and the Workforce Committee, and the other crafted by Senator Max Baucus (D-North Dakota) and Senator Chuck Grassley (R-Iowa), who heads the Senate Finance Committee. Both have cleared their respective committees, and while their future is not yet certain – both are dominated by complicated funding considerations for defined benefit pension plans, and neither is exactly in sync with reforms already put forth by the Bush Administration – it is interesting (IMHO) that both contain provisions regarding investment advice.

For years I have watched providers struggle to offer only education and not advice, watched employers try desperately not to take on additional fiduciary responsibilities, and witnessed any number of financial advisors (and/or the firms they were associated with) trying to make sure that nobody confused their role in serving the plan with serving the plan as a fiduciary. For the most part, the losers in such machinations were participants, who couldn’t care less about whether someone was a fiduciary or not, much less whether what they were offering was education or advice. All those participants wanted – and every financial advisor worth his or her salt knows this – was to glean some idea of “what they should do” with that complicated investment menu.

Not that all these parties didn’t want to help participants with that decision, quite the contrary. But ERISA, in its attempt to protect participants from the unscrupulous designs of conflicted advice, has made it nearly impossible for the systems that compensate advisors to work. Simply stated, it is a prohibited transaction to offer advice (more accurately to offer advice that is paid for) on investments from which you are compensated differently – not just situations where fund complex A offers a more lucrative revenue-sharing arrangement than fund complex B, but where an equity fund in complex A offers a more lucrative arrangement than a money market fund in the same complex (there are ways to deal with this, of course – “fee leveling” and/or the use of a “fee only” model for these services are two fairly common structures).

What we do know is this: Participants generally like the idea of getting investment advice, and advisors are (for the very most part) well-positioned and inclined to fill this need. Moreover, plan sponsors are increasingly predisposed to make these services available, for a variety of reasons. In PLANSPONSOR’s 2004 Defined Contribution Survey, nearly half of the respondents had already embraced some form of participant-level advice - a number that seems likely to increase over time, regardless of pending legislation. Still, reservations remain – and for many, the decision to offer investment advice remains both an extra expense, and an additional risk, for the employer.

Legislation that offers some much-needed clarity for a much-needed service would be much-welcomed.