Saturday, November 26, 2005

Less is More

Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

In the second in a series, IMHO offers another non-automatic alternative to help involve and engage participants. As always, I would appreciate your reactions, comments, and suggestions.

(2) More is Less – Put that Fund Menu on a Diet

Remember the first time you walked into Starbucks looking for coffee? Well, I do – and I was awfully glad that the line was so long that I had a chance to try and figure out something to order without sounding like a total idiot. I’m sure you’ve seen those studies about participant choice and inertia – the studies about how people given 24 jellies to choose from chose to buy none, while those with a mere six flavors were significantly more likely to actually buy one.

Then there was that study by Columbia University’s Sheena Iyengar in cooperation with The Vanguard Center for Retirement Research – research that found that, on average, every additional 10 investment choices cut participation rates by 2%. Those researchers noted that, while an employee with five funds in his or her plan has a predicted participation rate of 72%, one with 35 funds in the plan has a predicted participation rate of just 67.5% (in another interesting irony, the more options, the more likely participants were to invest in company stock).

We’re never surprised when we see the results of those kinds of surveys because - whether it was that first step through the door at Starbucks, maybe that first childhood trip to Baskin-oviRobbins 31 Flavors, or maybe even the first time you made fund selections for YOUR 401(k) – we all know that it’s harder to pick from among a large number of choices than from a smaller list, and we all know that it’s even harder when the choice has a significant financial impact.

Despite that, for the past 20 years, the average 401(k) menu has steadily expanded to a point where PLANSPONSOR’s 2005 Defined Contribution Services Survey found that the average number of investment options is 19! Think about it: Think about what that means in terms of the number of prospectuses they must be given, the length of the enrollment form, the sheer amount of time that it takes a voice-response unit to repeat the choices….What has happened to your ability to discuss those kinds of fund menus in those brief enrollment meeting windows? Are all those participants unable/unwilling to get engaged in making fund choices – or, in our exuberance for beefing up fund menus, have we made the process so complicated that only a true investment geek is able – or inclined - to do so?

I realize that less isn’t necessarily more when it comes to selling your services – in fact, it will generally work to your benefit to be able to present a robust menu of choices to your plan sponsor clients, and it should. But dumping an exhaustive menu on most plan participants isn’t doing them any favors, IMHO – even with the able assistance of the best advisor in the world.

- Nevin Adams


MORE on the participant inertia study at

Too Many Fund Choices Can Drive Away Participants at

A contrary view – researchers who say the average 401(k) menu today isn’t broad enough at

Sunday, November 20, 2005

Participant Directives - I

Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

For the next several weeks, IMHO will focus on some non-automatic alternatives. As always, I would appreciate your reactions, comments, and suggestions:

(1) Make employees fill out and return their enrollment forms.

There was a time when participants’ contributing to a retirement plan was a means of enhancing a retirement that was primarily funded by a traditional pension plan and Social Security – a time when the so-called three-legged stool of retirement security actually had three legs. Now, of course, things are different, and while savings remains – and should remain - a voluntary action, there is no reason that we have to let employees simply ignore the option.

And yet, in many – if not most – companies these days, we let new employees do just that. Typically, on that first day the employee is given a stack of information and forms to complete – W4s, health-care forms, emergency numbers, etc. Most of that information must be provided immediately, while others must follow shortly thereafter. However, generally speaking, the 401(k) enrollment form isn’t treated with the same level of urgency. In face, particularly since they frequently aren’t eligible to participate right away, we simply tell them to take the information home, and when they have to turn it in. Sometimes they are scheduled for an enrollment meeting. But if they don’t turn in the form, that’s the end of it. And in a time when the industry keeps pushing plan sponsors to embrace automatic enrollment – where they must take on the responsibility for picking a deferral amount AND accept fiduciary accountability for deciding where to invest those deferrals – I am amazed at how many firms have never just made people turn back in the signed form.

Earlier in my career, I worked for an employer that was very supportive of the efforts of a certain large charitable organization. I was never sure whether the tactics employed to engage workers in supporting that program financially were the brainchild of that organization or my employer – but I can promise you, they were effective. Rumors abounded that failing to contribute the proper amount could slow one’s career advancement – and there were many stories of people “called in” to explain their lack of support. But, IMHO, one of the most effective tactics employed was the year we were required to turn in those pledge cards to our supervisor. Now, as a supervisor, I cared not a bit about someone’s charitable inclinations – but it became part of my job to make sure that all the cards were turned in by the deadline, and that the contributions were recorded. And, as silly a use of my time as it seemed, I did it (after all, I had heard the same stories).

I’ve little doubt that the requirement to turn those pledge cards over to a supervisor, coupled with the aforementioned paranoia about career advancement, had an impact on the success of those campaigns – certainly in contrast with prior campaigns where we could just stick the cards in an anonymous letter to personnel. But beyond that, I am sure there are some who, under the prior system, intended to fill out the card – but just never got around to it. However, the new system meant that they could look forward to “gentle” reminders from their boss (who, I should add, was getting “gentle” reminders from his boss) until they acted on those intentions.

There’s actually been a study on the impact of making participants turn in their enrollment forms. Called “active enrollment,” researchers noted that three months after hire, 401(k) plan participation was 28% higher among those required to turn in the forms, compared to those at firms with more traditional enrollment practices. And while automatic enrollment has registered higher results, active enrollment achieves them without imposing additional fiduciary responsibility on the plan sponsor – other than to simply do for the 401(k) form what they already do for other forms. Beyond that, since many automatic enrollment programs use a fairly low default rate (generally 2% or 3%), and one that is lower than most participants choose when they actually take the time to fill out an enrollment form, automatic enrollment can actually result in a savings rate lower than might otherwise be the case (at least one study has shown that, over time, average deferral rates actually declined as more and more participants simply let the automatic enrollment process take over and, as a result, more “participants” deferred at those lower rates).

While automatic enrollment does work to get workers participating who might otherwise not, the decision brings with it some fairly significant fiduciary concerns for plan sponsors that adopt it. It “works” by not involving the participant – and one could argue that that isn’t working at all. Certainly not when a process as simple as making sure that enrollment form is turned in helps keep the participant involved – without forcing additional fiduciary responsibility on the plan sponsor.

- Nevin Adams

MORE on active enrollment at and

Sunday, November 13, 2005

(Not) Getting It

Many in the provider community appear to have given up on participants, and you see study after study purporting to document the futility of the cause. Studies that show employees don’t participate when they could, studies that show that participants don’t save enough when they participate – that show that they don’t invest “properly” when they do participate – that they don’t know a bond fund from a bond issue. In fact, as an industry we’ve become so convinced that participants can’t do it properly – or at least have no interest in doing it properly – that we have crafted a whole set of solutions that require no participant involvement whatsoever, other than to provide the funding.

There is a point to be drawn from these studies, of course, and there clearly is a challenge looming, even if we once thought that all we had to do was conduct a few enrollment meetings, hand out several hundred thousand prospectuses, and provide a Web site link to turn participants into savvy and enthusiastic retirement investors. “If you build it they will come” is a “Field of Dreams,” not a strategy for retirement education.

I will concede that there is a group of hardcore non-participants who have no interest in saving or investing those savings. But my sense is that that only accounts for 15-20% of workers, not the 80-85% that many now seem to place in that category.

Think that making retirement savings decisions is tough? Consider that we ask the very same group of people who struggle with retirement decisions to choose a health-care option. To assist them in their understanding, we use acronyms like HMO, PPO, PPS – casually toss around terms like co-pays, out-of-network – and distribute explanatory materials that make most mutual fund prospectuses look clean and simple. Struggling to communicate these concepts with a less-than-technically astute workforce? Years before we were inclined to dispense with paper forms on the 401(k), we insisted that workers enroll in these programs online or via the phone – AND we make people go through this same harrowing process every year.

Now, every employee’s health-care choices aren’t that complicated – but the ones that involve employee contributions frequently are (remember that we only started giving workers the ability to make investment choices after we starting funding the programs with their money). Don’t tell me that people understand the health-care system any better than they do mutual fund investments – and don’t tell me that they are any more excited at the prospect of open enrollment than they are at sitting down with their retirement plan enrollment kit. And yet, year after year – every year – those same workers who don’t “get” retirement savings choices dutifully complete those health-care enrollment forms (IMHO, the large number of younger workers who fail to enroll for health-care coverage aren’t just confident of their health – they’re probably confused by the options).

I can’t say that workers understand those health-care options any more than they do those in that retirement-plan menu, or that they make good choices, but the take-up rate is significantly higher. Perhaps the reason is that the commitment is only for a year; perhaps because the need is “here and now,” not 40 years in the future. Maybe it’s as simple as the fact that you’re more likely to get a call from personnel if you haven’t turned in a health-care enrollment form than if you don’t return one for your 401(k), or maybe it’s because you only have a small window, once a year, to act on medical care enrollment. Maybe – and this may seem a bit counterintuitive – it’s because we make them sign up for the medical plan every year, rather than allowing them to “set it and forget it.” Maybe it’s because, in a dozen different ways, we send signals that retirement saving is optional.

Whatever the reason(s), IMHO, it suggests that the problem with retirement-plan participation isn’t that workers can’t, won’t, or don’t want to “get it.” If we can get them “involved” with making decisions like health care, surely we shouldn’t have to give up on retirement savings.
Next week: Some suggestions.

- Nevin Adams

Sunday, November 06, 2005

The Rest of the Story

On Friday, the Government Accountability Office, or GAO, issued a report reflecting its analysis of cash balance plans and their impact on worker pensions. Before turning to the results of that report, we should start with some basic points of understanding. Simply stated, cash balance programs are widely described as “hybrid” benefit plans – technically a defined benefit plan, but with many of the characteristics of defined contribution plans. Like DB plans, they are typically employer-funded and insured by the Pension Benefit Guaranty Corporation (PBGC). They are like DC plans in that the benefit is a function of interest credited to your account each year, there is generally a regular statement of your account, and there is a lump sum payment option. The GAO report acknowledged, “CB plans may provide more understandable benefits and larger accruals to workers earlier in their careers, advantages that may be appealing to a mobile workforce.” However, most of the controversy around these plans revolves not around the plan design per se, but around how companies with existing pension plans have converted to the cash balance design.

The headlines regarding the GAO report were fairly consistent: “Workers lose in cash balance plans,” “GAO: Pension Plan Switch Hurts Employees,” "Cash-Balance Pensions Criticized.” And in fact, the report did note that, in its comparison of a typical pension plan (which it termed a final average pay, or FAP) converted to a cash balance (CB) plan, more workers would have received greater benefits under the FAP than under the typical CB plan. Those comparisons are complicated, of course, a point acknowledged by the GAO, even if the mainstream press coverage didn’t.

The GAO noted that the effects of a conversion depend on a variety of factors, including "the generosity of the CB plan itself, transition provisions that might limit any adverse effects on current employees, and firm-specific employee demographics." The GAO went on to note that most plans it studied provided some form of transition provisions to mitigate the potential adverse effects of a conversion on workers’ expected benefits for at least some employees, and that nearly half (about 47%) of all conversions used some form of grandfathering that was applied to at least some of the employees in the former traditional DB plan. In other words, if employers had simply done a straight conversion from a traditional pension to a cash balance, most workers would have lost benefits – but most employers didn’t do a straight conversion. Realizing the impact, they took special steps to mitigate, if not eliminate, that potential shortfall.

What the GAO report also noted was that, under its simulations, vested workers under either a typical or equal cost CB plan still fare better than if the pension plan is terminated – and let’s face it, with all the uncertainty and expense of running a traditional pension plan (not to mention its lack of design appeal to many in today’s private sector workforce), eliminating the benefit altogether is an increasingly viable option for employers. Indeed, the GAO report noted the importance of striking “a crucial balance between protecting workers’ benefit expectations with unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system.”

Ultimately, what the GAO report tells us is this, IMHO: It tells us that conversions from a traditional pension to a cash balance plan can result in reduced benefits – but generally don’t because employers have taken steps to mitigate that impact, on their own and without legislative mandate. It tells us that having a cash balance plan benefit is better than having no benefit at all. And it tells us that there is a fine line between an honest evaluation of these programs and driving employers away from offering their benefits altogether.

- Nevin Adams

You can read more about the GAO report at