Sunday, September 25, 2005

When the Levee Breaks

Like much of the nation over the past couple of weeks, I have been tracking the events along the Gulf Coast with much interest. I’ve never lived close enough to the coasts that tend to fall prey to such calamities to have experienced their wrath directly – though I was close enough to brush some 70 mph winds from the last bits of Hugo in the early nineties. Unlike tornados, which seem to come from nowhere and disappear almost as quickly, hurricanes take time to build and to strike – and their destruction is likewise spread out over a much wider area and timeframe than most natural disasters.

Katrina was a different kind of disaster, of course. By now we’ve no doubt become mini-geographical “experts” on the unusual topography of New Orleans. More than that, the impacted area was unusually urban, which not only revealed a new class of disaster victims (and found them clustered in high concentration), it likely facilitated the subsequent coverage of their plight. Moreover, unlike prior hurricane coverage (was it just last year that Florida was forced to contend with FOUR?), the worst of Katrina’s damage unfolded after she passed (unless, of course, you were in some parts of Mississippi, which the media seems to find less newsworthy than the debacle in the Big Easy). Imagine the result if Katrina had hit New Orleans head on, as some models had projected fairly late in the process.

It is exactly that presumed ability to see “it” coming that has engendered so much criticism after the fact, of course. For all the much-vaunted disaster preparedness of the city of New Orleans, the state of Louisiana, and the federal government, when push came to shove, too many seemed to either have their hand out, or their fingers pointing (some, of course, had both). All in all, it was a shameful display, and stood in sharp contrast to the way the people of this nation have traditionally responded to times of trial.

Unfortunately, those of us in the business of serving retirement plans have our own Hurricane Katrina – the retirement of American workers. Like Katrina, our pending calamitous event is projected to hit an extraordinarily large proportion of the population at about the same time. Yes, we’ve been able to see it coming for a long time, and while we’ve developed countless versions of plans to avoid that potential disaster, one can hardly stave off a certain sense that when ours makes “landfall,” the results could make the situation in New Orleans appear mild by comparison.

The picture draws to mind the lyrics from the Led Zeppelin song (I know they didn’t write it, but it’s the version I know), “When the Levee Breaks”:

“If it keeps on rainin', levee's goin' to break,
When the levee breaks I'll have no place to stay.”

Here’s hoping we are able to do something about it before it’s too late.

- Nevin Adams

Sunday, September 18, 2005

“Short” Comings?

As the recent bankruptcies of Delta and Northwest Airlines remind us, pensions are a precarious business. Once again, we - and most particularly, the employees of those airlines - are presented with the stark reality that pension promises made in better times are frequently no more secure than the financial wherewithal of the institution that, once upon a time, made them. One can certainly have some sympathy for the individuals who have made an employment commitment predicated on those promises, most particularly for those who have already entered retirement.

The signs of danger are all around us, and not just in private industry. By now, we are all well aware of the “perfect” storm’s combination of slumping asset values, the burgeoning pension obligations of early and accelerated retirements, and the exaggerated impact of historically low interest rates that result in even higher projected pension liabilities. We are frequently reminded of the “sorry” state of pension funding in this country – which is to say, anything less than an ability to come up with 90% of the total projected pension liabilities on a moment’s notice (that’s the kind of math that bankers like). Little wonder that there is a growing hue and cry to shore up those funding gaps – and they deserve attention, IMHO, though too often the headlines convey a sense of imminent demise when the perceived shortfall is largely a function of projections based on estimates predicated on assumptions that may never come to pass. Still, as some have all too regularly evidenced, today’s underfunded pension can be tomorrow’s Pension Benefit Guaranty Corporation (PBGC) obligation.

Pensions, of course, aren’t predicated on worker retirement lifestyle aspirations, they are generally a function of pre-retirement pay. We don’t ask pensioners how they would like their funds invested, nor do we consult with them on the timing of asset allocation rebalancing. Rather, it is done for them, generally with the assistance of experts. Those enamored of this approach point to automatic enrollment, contribution acceleration, and lifestyle funds as the “DB-ification” of defined contribution plans – the purported wisdom of bringing to bear on the DC side the approach that has long been true on the defined benefit side.

I don’t much care for the “DB-ification” analogy, if for no other reason than it tends to gloss over the reality that, with DB plans, we also didn’t ask workers to make direct monetary contributions. There may be something to draw from that comparison, but I’m not sure it has anything to do with doing things “for” participants. On the defined contribution side, we tend to worry about the disappointing rates of participation, the tepid rates of deferral, and the inattentiveness to prudent asset allocation – and most of the recent focus has been concentrated on ways to remedy these shortcomings. At some level, we all know that those elements are important because in combination they will eventually add up to a retirement nest egg.

But the DB-ification focus that workers need to adopt, IMHO, is a working awareness of just how underfunded their personal pension account is. Would that most were “only” 70% funded - the level at which many pension fund officials are pilloried - because I suspect that most defined contribution-reliant retirements are more like 30% funded, or even less. We’re well past the time when we should be aware of those personal funding “gaps.” We may well worry about the long-term financial viability of the PBGC and all these troubled airline pension plans. But who will pick up the shortfalls of all those failed personal pension plans?

I think we all know the answer to that.

- Nevin Adams

Sunday, September 11, 2005

IMHO: 'Expert' Opinions

There’s a commercial that seems to run pretty regularly these days that features a concerned looking man on the phone with his physician. In short order it becomes apparent that the physician is talking his patient through the intricacies of a surgical procedure, right down to telling the would-be patient where HE will need to make the incision. At that point, the understandably nervous man says, “Shouldn’t you be doing this?”

No doubt to the chagrin of whoever put that commercial together, I can’t recall the sponsoring organization. However, its message certainly resonates with any financial advisor who has been asked to justify his/her role in helping workers make financial decisions.

Much as I relish that commercial message, however, I’ve never been keen on a broad-based application of those types of analogies. Like, “You wouldn’t think of doing your own plumbing, why should you try to do your own portfolio management?” Or, “You have a mechanic to work on your car, why wouldn’t you have a professional work on your financial plan?” There is a certain clarity to those arguments – goodness knows, the days when I might even think about tinkering under the hood of my car are far gone.

On the other hand, if I had to contemplate taking my car to the mechanic every quarter, I’d get a new car (and maybe a new mechanic). Similarly, I’ll happily enlist the services of a qualified plumber when the situation requires it – but as any weekend visit to the Home Depot will attest, there are a fair number of “do-it-yourselfers” willing and/or able to undertake those types of projects (some that, no doubt, result in an even bigger project for the professionals). In sum, most of us – for a variety of reasons – do still engage in modest attempts to attend to those little household projects. None of which, as best I can determine, has diminished the role for professionals such as mechanics and plumbers in our society, certainly not on major projects.

Still, the undercurrent in many of the “automatic” solutions touted today seems to be predicated on the ability to avoid “troubling” the participant with any involvement in decisions involving the investment of their retirement portfolio, to shelter them from needing to make a decision regarding the appropriate level of savings, to shield them from the inconvenience of completing an enrollment form. An approach that seems destined, IMHO, to create a generation of savers who will barely be aware of how much they are saving, much less how it is invested. A “generation” of do-it-for-me savers that won’t have a clue if there is a problem, much less who to call if a problem emerges. Much as I might not want to deal with a major automotive disaster, I’d rather be alerted to the prospect when I still have a chance to remedy the situation. I may not relish the prospect of summoning an expensive plumber, but I’ve learned the limits of my expertise in such matters (and mastered the location of the main water shutoff, just in case).

Certainly, automatic alternatives have a place, but when it comes to financial planning, I think “automatic solutions” should be considered an oxymoron. Ultimately, I don’t need to be a plumber to replace a faucet, but having at least made the attempt, I can perhaps better appreciate the advantages of choosing to do so. Advisors should appreciate the assistance that such tools afford their education efforts – but never assume that an automatically enrolled participant is an effectively engaged participant.

- Nevin Adams

Sunday, September 04, 2005

The Best Test

The pages of PLANSPONSOR magazine frequently chronicle the impending onslaught of change and its implications for plan sponsors, and we also hope we provide readers a forward-thinking perspective on trends and opportunities, as well as threats. A constant theme in these pages, certainly over the past five years, has been not only the high standard to which fiduciaries are held in their actions, but also the difficulties associated with living up to that standard.

Plan sponsors understandably rely on experts to assist them in their Herculean task, and ERISA contemplates that reality. Unfortunately for plan sponsors, the standards in selecting and monitoring, on an ongoing basis, the skills and actions of those experts can be almost as daunting as the underlying activities themselves.

In the midst of these challenging times, financial advisors have become a ubiquitous element in many markets. Absent their presence, many small-plan sponsors might still lack access to a respectably priced retirement plan, and the in-person delivery of education and advice to plan sponsors certainly would suffer across the board. Providers also benefit from the cost-effective delivery of services to places that are far-flung, and perhaps ill-served by distant call center support.

Unfortunately, plan sponsors have little to go on in evaluating a financial advisor before the fact. The geographic diversity that is their strength also serves to thwart a ready assessment of their skills. Their service is delivered to a finite group of plan sponsors, rendering statistical evaluations challenging at best. Over the years, plan sponsors have repeatedly asked me for recommendations on financial advisors but, up until recently, I’ve been hard-pressed to provide any suggestions.

A year ago, PLANSPONSOR announced its inaugural Retirement Plan Advisor of the Year award. That award was designed to recognize “the contributions of the nation’s best financial advisors in helping make retirement security a reality for workers across the nation.” While we looked to experience, commitment to the business, education, and employer referrals, at the outset, we wanted the award to focus on objective criteria that made an impact on ensuring retirement security. More specifically, we looked for evidence of increased participation rates, enhanced rates of participant deferrals, improved asset allocations, and either reduced fees or expanded service levels—the criteria that have, for years, been most highly sought by plan sponsor respondents to our Defined Contribution Survey.

During the course of the RPA evaluations, we were impressed by stories of plan participation rates that jump 20% to 30% in a six-month period; participants that have, in many cases for the first time, “rational” asset allocation choices; investment committee members who, for the first time, not only regularly attended investment review meetings, but also looked forward to them; and the extraordinary measures taken by advisors to ensure that even relatively small 401(k) plans gain an audience with the heads of mutual fund complexes tainted by the trading scandal. Ultimately, more than 200 advisors nationwide were nominated. A listing of the 25 “Most Successful” advisors in the November issue of PLANSPONSOR represented nearly $45 billion assets under advisement.

Moreover, our experiences there taught us also that even the best advisors—and perhaps especially the best advisors—not only rely on our publications to do so, but also are always looking to keep those skills honed. Earlier this year, we launched the PLANSPONSOR Institute ( and, now, nearly 170 financial advisors, and sales and servicing professionals have attained the PLANSPONSOR Retirement Professional (PRP) designation (a listing is online at Now, thanks to that program, when plan sponsors ask about financial advisors, we can offer a resource.

On September 6 - 401(k) Day - we launch our second annual RPA award and, once again, seek your help in identifying the best and brightest in the space—because, in the final analysis, the best test of a financial advisor’s skills is the way in which he or she helps you fulfill your responsibilities to your participants.

—Nevin Adams

Editor’s Note: The nomination form for the Retirement Plan Advisor of the Year is online at