Saturday, December 30, 2006

Principle Difference

As the nation mourns the passing of former President Ford this weekend, it’s been interesting to think back on that period. Most of the coverage seems to run in the vein of “He deserves more credit than history has given him”—a nice way of saying that history really hasn’t given him much credit. That’s not unusual, of course. People are often not fully appreciated until well after they have passed from this mortal coil—and the dividends of presidential policies are often long-term investments. One thing he’s not often noted for—but that we in this business benefit from every day—is his signing of the Employee Retirement Income Security Act of 1974 (ERISA), less than a month after taking office.

I wasn’t paying much attention to such matters in 1974. I was more focused on beginning my college education (and paying for same), and worrying how my dating life was going to survive having to pay 55 cents/gallon for gasoline (but relieved I no longer had to wait in line to do so). As presidents frequently are, Gerald Ford was portrayed by the media as a bumbler of sorts. One of our most athletic presidents, he had the temerity to engage in active sports such as skiing—and its companion activity, falling—in front of cameras. For those less prone to watch the nightly news, Chevy Chase, the then-hot ticket on the newly launched Saturday Night Live, transformed his “skill” for falling in front of the cameras into a weekly parody of President Ford during the 1976 presidential race. When press reports emerged quoting former President Lyndon Johnson’s comment that Gerald Ford had played too much football without a helmet—well, we all got the “joke.”

President Ford’s 895-day term as president is perhaps most noted for his pardon of his predecessor. A controversial decision, to say the least, and one that may well have cost him the 1976 presidential election, it still strikes me as one of those tough, principled decisions that we expect our nation’s leaders to make at critical junctures in history. It was, however, a decision that I think Gerald Ford was able to make for the simple reason that he had spent a lifetime establishing a reputation for personal and professional integrity. There may well have been those who suspected a quid pro quo—but while those notions fit nicely amidst concerns of a Watergate conspiracy, those suspicions simply didn’t hold water when applied to Gerald Ford (imagine if Spiro Agnew had granted that pardon).

Not that Gerald Ford was a saint, by any means. Recent reports suggest that his pardon of Richard Nixon may have had personal, as well as professional, motivations; and his decision to release criticisms of the current Administration’s polices—but only after his death—certainly lends a human “pallor” to his reputation, IMHO.

Still, President Gerald Ford lent his reputation and his integrity to a decision that his country needed—at a time when we needed it most.

- Nevin E. Adams

Saturday, December 23, 2006

Deal or No Deal?

Deals like the one announced on Friday by The 401(k) Company, Nationwide, and Schwab are the kind of thing that gives advisers—and plan sponsors—heartburn. Not that one in particular, I should hasten to add—one could have the same queasiness about the recent Great-West/US Bank deal (see Great-West Sweeps Up More 401(k) Business), the sale of Southeastern Employee Benefit Services (see First Charter Lets Go of Recordkeeping Unit), or just about any structural change at a 401(k) recordkeeper.

The reasons for that angst are obvious, I would suspect. Change—even change for the better—is frequently disruptive to the human psyche. Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit—places where we know what to expect and, roughly anyway, when to expect it. And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.

There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; or even when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps especially disruptive when the change is thrust on the plan by forces outside of its control or instigation. Particularly because, IMHO, that kind of change calls for at least a passing review of what the change means to the plan.

Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors (and trust me, when a local provider engages in a big financial transaction, the media will cover it, and participants WILL ask). On the other hand, changes that are merely structural in nature can be a big yawn—and changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as you might think (though not as common as the post-announcement press releases would have you believe, either).

Regardless of whether the change appears to be good, bad, or inconsequential on its face, you need to ask—and get an answer to—the question “What does this mean to us?”

And the question only you can answer—“What are you going to do about it?”

- Nevin E. Adams

Saturday, December 16, 2006

Naughty or Nice?

A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site that purported to offer a real-time assessment of their “naughty or nice” status. Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole.

But nothing ever had the impact of that Web site – if not on their behaviors (they’re kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a “believer,” my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he’d find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they’ll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit. Not that they actually believe in a retirement version of St. Nick, but that’s essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their “naughty” behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don’t change their behaviors in any meaningful way.

Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids’ behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by “helpers” like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

- Nevin Adams

P.S. The Naughty or Nice site is still online at

Sunday, December 10, 2006

Taking "Sides"

I was trolling around on the Internet last weekend, when I saw a story titled “The Downsides to Your 401(k).” Needless to say, I was intrigued by the headline (I’m sure that was the intention), which turned out to be a lead-in to an interview with Editor Ray Hennessey.

There was an interesting pull quote designed to further whet the interest of the casual reader: "If your company goes belly-up, you're left with a lot of company match that you thought was automatic money, (and now) it's gone."

Well, right off the bat, I’m thinking the real downside in this article is its portrayal of the truth—after all, a company’s bankruptcy doesn’t put the match at risk. So, I read on.

Turns out, the pull quote was lifted out of context. The words were accurately quoted, but were presented without the benefit of an introductory sentence that clarified that the match put at risk was a match made in company stock. A situation that Hennessey said occurs “often.” Well, it’s common enough in large companies, of course, but a relative rarity elsewhere (the last statistics I recall seeing on that phenomenon indicated that something like 16% of plans offered it as an option, and I suspect that fewer mandate the match in that currency). And, of course, since the Enron implosion, a growing number of those firms have made it easier for workers to shift money from that investment on their own—and the Pension Protection Act contains provisions designed to deal with the rest.

Another downside: The fees companies charge to manage retirement accounts are “often” too high. Okay, I get fees as an issue. But “often” too high? Is it the same “often” as the company stock match? Are they “too” high relative to what you’d pay for buying similar funds in a retail IRA? What is too high, anyway?

The remaining downsides struck me as a bit contradictory; first, that you’re “forced to choose from the funds that your company decides to participate in”—a menu that might not be sufficiently diverse. The other, that “lots of times” there are too many funds to choose from.

Now, I suppose that having one’s choices limited would feel like a disadvantage to some, even being forced to choose from a menu that has, at least ostensibly, been selected and reviewed by a prudent expert (or one who has enlisted the services of same). I’m not sure how that squares with having too many options to choose among (though with an industry average of nearly 20 options to choose from, there’s certainly merit in a concern about too many). However, I suspect the point would be that you can have too many, and still not access to the one (or two) you want. However, it is a perspective that seems very much less in vogue these days, as participants and plan sponsors alike warm to the allure of lifestyle funds and managed accounts.

Ultimately, the article concludes that one should consider both the good and the bad about their 401(k): “Familiarize yourself with your fund options and the fees involved. Know your investments. After all, it's your future.”

On that, at least, we can agree.

- Nevin Adams

The article is online (for the moment at least) HERE

Saturday, December 02, 2006

"Reasonable" Doubts

We got yet another call for 401(k) fee transparency last week. The latest – a report from the Government Accountability Office (GAO) at the behest of Congressman George Miller (D-California) – painted a relatively bleak picture of both the impact of fees on retirement savings, and on the ability of plan participants (not to mention plan sponsors and government regulators) to discern what they are paying for. Before the week was out, the Investment Company Institute (ICI) had published a report with a similar focus – but with a much different conclusion.

For the most part, the GAO report didn’t plow any new ground. In fact, IMHO, any self-respecting retirement plan professional could have written the report (or at least bulleted its conclusions) in their sleep. The bottom line: Fees can have a huge impact on retirement savings, but few seem to know what fees they are paying, and they have to work hard to know what little they do know. In contrast, the ICI report conveyed the kind of calm, reassuring perspective on mutual fund investment by 401(k) plans that one would expect from the mutual fund industry’s chief lobbying group. But I would sum it up as follows: Compared with retail mutual fund investors, 401(k) plan participants are getting a good deal.

Plan fiduciaries are, of course, charged with ensuring that both the fees AND THE SERVICES PROVIDED (emphasis mine) are reasonable. I know of no way to fulfill that obligation without a complete understanding of the services you are receiving, and the price you are paying for them. Unfortunately, we live in a world where the vast majority of fees paid by retirement plan participants are funded from a single fee source – the imbedded expense ratios of mutual funds. At some level, most of us can, with at least some effort, as the GAO report notes, know how much we are paying. And, with the assistance and complicity of providers and fund complexes, we can – again, with some effort – discern how much money is going to whom, and for what purpose(s).

Fees, like death and taxes, are a given in the world of retirement plan savings (believe if or not, one of the “key findings” in the ICI report was this little factoid: “Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services”). Furthermore, despite a growing interest in, and awareness of, the need for transparency in such matters, we still seem to be a long way from the solution – perhaps even in terms of deciding what the problem is that we are trying to solve.

I would suggest that we’re trying to make sure that relatively unsophisticated participants aren’t being ripped off by a system that has been afforded certain privileges to, at least ostensibly, help them. Secondly, we’re trying to arm and/or inform those charged with overseeing those programs – plan sponsors, advisers, and yes, even regulators – with the information they need to provide effective oversight. Finally – and while this goal is perhaps less explicit, it seems most important – I believe we are finally creeping up on the ability to articulate what the “right” answer is when it comes to determining what is “reasonable.”

It’s not likely to be easy, however. Consider that one of the tools referenced in the GAO report was the Department of Labor’s Fee Disclosure Form, and you need look no further than this multi-page template to gain a sense for the challenge confronting this effort – not just to identify the charges, but to understand their applicability to an individual plan – and to be able to compare them against competing platforms and fee structures.

It will take more than mere transparency to get there, of course, but we’ll never know if they are reasonable if we don’t know what those fees are in the first place. It’s the difference between an assurance that fees are reasonable – and having reasonable doubts.

- Nevin E. Adams

The GAO report is online at

The ICI report is online at

The DOL Fee Disclosure form is online at

Editor’s Note: Some interesting excerpts from the GAO report:

In fiscal year 2005, Labor received only 10 inquiries or complaints related to 401(k) fees.

Labor officials told us that it is difficult to discern whether a fee is reasonable or not on its face, and therefore, investigators rarely initiate an investigation into a fee’s reasonableness.

Labor’s most recent in-depth review of fees identified some plans with high fees but determined that they were not unreasonable or in violation of ERISA.

In some cases, Labor did determine that participants were paying high fees. It referred these cases—which included insurance products and international equity funds—to a fee expert from academia for further analysis to determine if the fees were unreasonably high. The expert determined that the fees were high, but not unreasonable.

Saturday, November 18, 2006

Thanks Giving

Like many of you perhaps, I suddenly realized this past week that this week is Thanksgiving.

For me, 2006 has been an extraordinary year on fronts both personal and professional: turning 50, the death of my father, my 20th wedding anniversary, sending our first kid off to college, #2 turning 16, PLANSPONSOR’s first industry conference, a new adviser magazine…oh, and a little piece of legislation called the Pension Protection Act.

Still, as I sit here today preparing to pick my mother up at the airport for her first Thanksgiving visit with us in the northeast – and look ahead to picking up my eldest at college next week – I’m struck by just how much there is to be thankful for.

First and foremost, I’m thankful for a loving and patient family – who must all too frequently endure the intrusions of my career-long passion for this field into our daily lives.

I’m thankful for the home I have found at PLANSPONSOR, and the warmth with which its loyal readers have embraced me, as well as the many who have “discovered” us during the past seven years, and for all of you who have supported – and I hope benefited from – our various programs and communications throughout the year.

I’m thankful for the ability to make a positive contribution to the efforts of plan sponsors, advisers, and others who share my passion for the important work we do in helping provide for the retirement security of others. I’m thankful that so many gifted professionals have committed themselves to being part of the solution to these issues.

I’m also thankful for having found – so early in my working life – an area about which I could care so deeply, and which provides so much fulfillment, personally and professionally.

Finally, I’m thankful for the protections our democratic form of government affords us all; for the courage and selflessness of those, past and present, who have been willing to make the ultimate sacrifice to preserve those freedoms; and for the grace of a benevolent God in giving us all so much for which to be thankful at this special time of year.

- Nevin Adams

Saturday, November 11, 2006

"Wonder" Land

However you feel about the results of last week’s elections, there’s little disputing that things are going to be different in Washington. Amazingly, though perhaps not surprisingly, I’m already getting invitations to presentations, or offers to send me assessments, on what all this change will mean for benefit programs generally, and retirement savings specifically.

My initial reaction was a bit like when I walked into the mall last weekend and was confronted with Christmas displays – it’s too soon for this!

I doubt that many went to the polls with pensions on their minds (even those of us who make our living supporting them), and with the ink on the Pension Protection Act of 2006 still damp, one is tempted to think that we have all the regulatory help we’ll need until after the next election – at least.

Personally, I’m not expecting much out of this Congress, certainly not on pensions (does anyone really think that the momentary comity displayed for the television cameras will last?). We can probably “thank” the airline industry’s pension funding crisis for forcing the issue this past term, but higher interest rates and new pension accounting regulations from the Financial Accounting Standards Board (FASB) will likely grease the skids with no further legislative impetus. For defined contribution plans, there’s little question that the PPA sets a lot of interesting trends in motion – and much of that can proceed without the assistance of Congress. Moreover, if the removal of EGTRRA’s sunset dates doesn’t actually create true “permanence,” it nonetheless, for the time being, removes the ability of Congress to simply allow distasteful (to some) tax breaks to expire. Advice? Well, that was one of the more controversial aspects of the PPA legislatively – and it’s pretty clear that that is one area in which controversy, and just a bit of confusion, remains. I’m not at all sure that that will be resolved in the near term, but one never knows.

Not that a little inaction from Congress would be a bad thing. Most of us will have our hands full assimilating, explaining, and implementing the new provisions of the PPA until well past the 2008 elections. In addition to the Department of Labor’s newly minted proposals on Qualified Default Investment Alternatives, we have yet to see some of the details that will be required to fulfill some new reporting obligations, including quarterly benefit statements, and things like the Roth 401(k) may have a broader appeal now that the EGTRRA sunset has been removed.

But, as we lumber toward our next Presidential election, I wouldn’t be surprised if some began to wonder aloud if automatic enrollment might not be better deployed as a mandatory enrollment – after all, why leave “bad” behaviors to chance? Nor would I be surprised to hear legislators beginning to talk not about the disappointing participation rates of the 44% of working Americans who have the chance to participate, but about why the other 56% don’t have the same opportunity. After all, all taxpayers are, in a sense, subsidizing the programs of the 44% (similar arguments have been made about employer-sponsored health-care programs already, by the way). Could you envision a sort of uber-Social Security program that mandated worker (and perhaps employer) contributions that go into a private account? Maybe not in that particular format today – but there are elements in that design that could garner bipartisan support, IMHO. What might that mean for retirement security? For your retirement business security?

It’s not too early to start wondering – after all, 2008 is just around the corner.

- Nevin E. Adams

Saturday, November 04, 2006

Election Nearing

If you have turned on a TV, walked by a radio, or driven down a residential street in the past month, you will, of course, be aware that our nation will go to the polls tomorrow. 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.

Ultimately, of course, these strident pleas represent attempts not only to persuade, but to overcome the historic inertia of the American citizenry, particularly in one of these so-called “off-year” elections. Those of us who struggle to get workers to properly prepare for their own personal retirement security can surely appreciate the challenge, if not the consequences.

However ill we may be of the discourse, there is little argument that this election, more than most, will have a dramatic impact not only on the next two years, but on the 2008 presidential election campaign that is already underway. The political pundits have it all figured out, of course—but they’ve been wrong before. Political punditry spends a lot of time looking back over its shoulders at the past, but as any mutual fund investor knows (or should know), “past performance is no guarantee of future results.” Indeed, whether it is because, 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 on the upswing. And, if the last several elections have taught us nothing else, we now know that votes—even a single vote—can matter.

The nation is not so cleanly demarcated into “blue” and “red” as pundits would have us believe, though we surely have our differences, IMHO. I suspect at most levels the voting public is not as polarized in their opinions as those running for political office seem to think. Frequently, that means that we must indeed opt for “the lesser of two evils,” but at least we have a choice—and unlike the brave Iraqis who walked to the polls last December to exercise a right to which they were long-deprived, we can do so without fear of assassination or retribution.

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 also a privilege—and a responsibility.

- Nevin Adams

Sunday, October 29, 2006

"Shop" Talk

This past weekend was Parent’s Weekend at the college where my eldest has now been in residence for the last two months. We’d had a great weekend, but as we went to check out of the hotel, I noticed that the final charges were considerably more than the rate we had been quoted when we made our reservations. Setting aside for the moment concerns that my 14-year-old had discovered the wonders of pay-per-view, closer scrutiny yielded the number I had anticipated—our room charge. But also included in the charges I was now expected to pay were a room tax, a city tax, and an occupancy sales tax.

I suppose one could hardly fault the hotel for those additional charges – they had, after all, provided the room and facilities to my family for the agreed upon rate. I’ll bet that somewhere on their Web site, or perhaps even on the form I signed at registration, the existence of these additional taxes was acknowledged. However, I’m reasonably certain that the hotel was happy to have me think I was getting the base rate when making my booking decision. And, when all was said and done, I’m assuming that comparable hotels in the vicinity had comparable (if not identical) taxes.

In a similar fashion, mutual fund investors have no doubt become a bit desensitized to the disclosure of fees. We talk about investment management fees as a proxy for what we are paying for the actual management of money, but at the same time realize that there are other charges, such as 12b-1s, that go to cover certain required administrative costs of running and maintaining the fund. And, for the most part, we assume that most funds that have comparable administrative structures also have comparable cost structures. We may even assume, as I did with my hotel bill, that those costs aren’t even fees, but simply a recovery of costs.

Well, disclosure isn’t necessarily clarity, and last week we were reminded that there frequently is more than meets the eye even with so-called disclosure. The latest “disclosure,” of course, is the revelations slowly emerging from an SEC investigation into the business practices of some fund company administrators in dealing with the fund complexes (for more details, see here). While in most respects, it may not be as monetarily significant, or perhaps not quite as pernicious as the mutual fund trading scandal, it is, nevertheless, one more not-so-shining example of what greed, coupled with an “excess” of funds available to fuel those vices, can yield.

For years, retirement plan investors have been willing to fork over billions of dollars in fees to the mutual fund industry. In turn, we have benefited from professional money management, call-center support, 24/7 access to our accounts via the Internet, the flexibility of daily valuation, the convenience of daily liquidity, and, in many cases, the support of financial professionals to help guide us in the management of our retirement savings accounts. Many of those services have been funded, in whole or significant part, by so-called revenue-sharing arrangements. However, IMHO, many of these mutual fund complexes have either forgotten—or have chosen to deliberately ignore—their obligation to the investing public.

I, for one, am sick and tired of having to fork over redemption fees self-righteously imposed by firms that not so long ago saw fit to profit richly from illicit and profitable arrangements they deliberately struck. I’m weary of 12b-1 fees ostensibly imposed to benefit investors with lower fees resulting from broader fund distributions—but that somehow never seem to achieve that result no matter how broad that dissemination. I’m tired of the oligopolistic mentality that sets a “fair” fee based on whatever the plurality of similarly situated mutual funds already get away with; I’m disgusted with the insidious development of special share classes designed to cloak retail pricing in what appears to be an institutional wrapper, and the sense that investors shouldn’t be troubled with a full, transparent disclosure not only as to how much money is being taken from their accounts, but to what ends, and what parties, it is being directed.

Normally, of course, we don’t seek to delve deep into the product profitability of every dollar we spend. I may have qualms about oil company profitability as I fill my tank—and I may well wonder at the expense of a bag of popcorn at the local cinema—but ultimately, as a consumer, if I believe I am being taken advantage of, I shop somewhere else. A mechanic that appears to gouge me on a simple repair will lose my business forever; a roofer, after repeated attempts to remedy a leaky roof, may gain my ire and a call to the Better Business Bureau.

In recent times, the investment industry has conducted itself in such a way as to not only jeopardize the trust of the investing public, but to suggest that it doesn’t really “get” what the big deal is. Maybe if we started shopping somewhere else, they would.

- Nevin Adams

Saturday, October 21, 2006

Fear of Filings

Last week, the elementary schools in Attleboro, Massachusetts, gained a bit of notoriety for their decision to ban kids from playing tag (more specifically, any unsupervised “chase” game). They weren’t the first to do so, but headlines like “Tag, You’re Out!” are just too tempting for journalists to turn their backs on. And, let’s face it, the notion of tag being “outlawed” is the kind of “you’ve got to be kidding me” story that people will read.

The reason for the ban is simple: Recess is "a time when accidents can happen," was a quote attributed to Willett Elementary School Principal Gaylene Heppe, who approved the ban. Having had a dangerous encounter of my own on the school playground during sixth-grade recess (I still have the scars), I can attest to the veracity of the concern. Of course, no one really thinks this is about children’s safety. We all know – and, unfortunately, understand - that it’s about the lawsuits that such accidents will almost certainly engender.

The lunacy of our litigious society is hardly a new phenomenon, but it seems to me that we have entered a new phase. Where once we would have had some kid getting hurt playing tag, the school getting sued, and subsequently banning tag, now we have what is effectively a preemptive action. Like Pavlov’s dogs, as a society, we know what’s coming – and rather than wait for the worst to happen, we take preventive action. Now, there’s nothing wrong with that approach, of course. Properly focused, it’s productive, proactive – even prudent, if not just plain, old-fashioned common sense. But, in a time when the only limits to being sued are the imaginations of a creative litigator and a receptive judiciary, well, you wind up doing things like banning unsupervised tag.

The mindset of retirement plan sponsors is not yet in that vein, so far as I am able to discern. In fact, in my experience, the fear of getting sued is perhaps the strongest consistent motivator of inertia in plan sponsor behaviors. Not that behavioral change is easy to accomplish – after all, when it comes to tough, complicated financial decisions with legal impact, plan sponsors are as inert as any participant.

Still, the fear of getting sued – or, as we tend to euphemistically refer to it, “fiduciary concerns” – remains one of the most frequently cited reasons for inaction. We tend to forgo offering investment advice to participants because we are afraid of getting sued, for instance – and we forestall implementing an investment policy statement – or taking a questionable fund off the menu – for much the same reason.

In fact, while fiduciary awareness is, IMHO, key to innovative, thoughtful plan designs, ironically, fiduciary concerns can be anathema to the same result. Fiduciary concerns are never all that far off a plan sponsor’s radar screen – but motivating good behaviors generally takes more than the fear of getting sued.

- Nevin Adams

Saturday, October 14, 2006

Losing Propositions

Last week, participants who had brought a company stock suit against their employer won a settlement. No real surprise there, you say? Well, actually, in approving the relatively modest $11 million settlement in the case of In re: Broadwing, Inc. ERISA Litigation, the court essentially said that plaintiffs should take the money and be glad they could get it—since their odds of winning (“prevailing on the merits” in legalspeak) were uncertain.*

Now, admittedly, that might be something of an overstatement. In approving the settlement, the court basically did what courts are supposed to do in approving a settlement—they ran down a checklist of things that purport to establish that the settlement is fair, particularly in a class action, where most of the plaintiffs aren’t in the courtroom. And one of the conclusions courts are basically required to draw in approving such settlements is that it represents the best deal for a plaintiff under the circumstances.

In Broadwing, the action was brought on behalf of some 5,000 participants, and it claimed that the defendants breached their ERISA fiduciary duties by failing to provide employees with information about the firm’s true financial condition. (This, of course, has become an investigation trigger for any firm that has any kind of earnings “surprise” or some suggestion of accounting mal- or misfeasance. And, for good measure, they also typically charge that participants were not adequately informed of the risks of investing in company stock.)

Still, despite the Enron debacle’s financial shenanigans, and the myriad headlines generated each and every time (including in PLANSPONSOR’s NewsDash) a plaintiff’s law firm initiates an “investigation” and then actually finds a plaintiff or two to represent the litigation class, most of these cases seem to wind up one of two ways—a settlement or a finding for the employer/defendant. In fact, in recent days, there have been a series of these cases that have not only gone to trial, but have wound up in the latter category (see “No Breach in Fiduciary Duties of Airlines’ Co. Stock Cases”). This trend was referenced in a recent $100 million settlement for AOL TimeWarner participants (see “Court OKs $100M AOL Time Warner 401(k) Suit Settlement”).

Despite what, IMHO, is a reasonably rational application of fiduciary law in these cases, I’m not sure that plans with company stock investments can afford to be complacent. Their presence on a retirement plan menu draws a disproportionate, if not downright imprudent, interest from participants—not to mention litigators. There are costs to litigation that go well beyond lawyers’ fees**; the distraction from the business of making money, most obviously—and even winning can be losing on the PR front.

And, as an old boss of mine used to remind me, “You can spend a lot of money in court being right.”

- Nevin Adams

* "Several district court decisions favor the possibility of establishing liability in cases alleging fiduciary breaches concerning holdings of risky company stock in individual retirement accounts, however, few of these cases reached the stage of a decision based on the merits." - In re: Broadwing, Inc. ERISA Litigation

** Not that one should begrudge professionals being fairly compensated for their expertise, but roughly 23% of the $11,000,000 Broadwing settlement will go to plaintiff’s counsel. Now, since contingent-fee cases routinely take a third of the settlement, one could certainly find that 23% is reasonable. However, that would leave, as best as I can estimate, only about $1,700 each for the roughly 5,000 participants.

Saturday, October 07, 2006

"Chill" Pill?

Last week, another court rejected claims that a cash balance plan was age discriminatory (see “Cash Balance Plan Not in Breach of Age Discrimination Laws”), though you could perhaps be excused for not noticing that result. In fact, my guess is that a random sampling of the adviser universe would reveal two things about cash balance plans: first, a great ignorance about what they are and how they work (see links below); and second, a general sense that they represent an illegal plan design.

Over the past several years, the conversion – and litigation experience – of a single plan – IBM - has dominated the media’s coverage of these programs. Along the way, Congress has cut off funding for the Department of Labor to issue clarifying regulations on these programs (led by Congressman Bernie Saunders, I-Vermont, in whose state IBM is the largest employer), and the IRS quit issuing determination letters on these plans (basically an approval by the IRS that the plan document passes muster).

They continued to be adopted by employers, of course (see “One Bad Apple”), but it surely couldn’t have been easy given all the bad press regarding those programs. And most of that coverage centered around a single case: Cooper, et al. v. IBM Personal Pension Plan, a case brought in the U.S. District Court of Southern Illinois (see “Murphy’s Law: IBM Loses Cash Balance Ruling”) in 2003.

It’s not the only lawsuit that has been brought regarding cash balance plans – but, until recently, it was one of the very few in which plaintiffs’ counsel had actually been able to convince a court that the plans were illegal (and then only in the context of a conversion from an existing traditional defined benefit plan). And, despite a surprising number of cases in different jurisdictions that came to a completely different conclusion – at least one, Tootle v. ARINC Inc., came to a directly different result – the only one that “the media” seemed to care about was the IBM verdict – and they flogged it relentlessly, IMHO. Consequently, while some employers continued to embrace the cash balance concept, they doubtless did so with trepidation. Countless more - we’ll never know the full effect – employers and advisers likely drew their sense of things from the headlines and simply chose to avoid a potential headache. This “chilling effect” is, of course, exactly the result that cash balance opponents had in mind.

In recent weeks, the landscape has changed dramatically. The Pension Protection Act specifically clears up the age discrimination issue, at least on a prospective basis and, coincidentally, within days of that result, the IBM decision was reversed on appeal. Not that either of these results have been headline news in most cases (the headlines in the IBM case have largely been focused on the plaintiffs’ “determination” to carry their case to a higher court).

And not that cash balance plans are a panacea for what ails our current retirement savings system – but they offer a benefit accumulation that seems more portable than traditional pension plans and more consistent with the working patterns of today’s workforce, is supported by the Pension Benefit Guaranty Corporation (PBGC), and is typically employer-funded. The design is, generally speaking, more balance-sheet friendly than traditional pension plans, and its benefit to participants more readily grasped and communicated.

Automatic solutions alone aren’t likely to be enough to stave off the retirement savings crisis, and we’ll surely draw less support from traditional defined benefit plans in the future than we have heretofore (even for the minority that had that support to begin with). We need new solutions, and we need to consider old solutions in a new light.

What’s changed about cash balance plans? Not much. What’s changed about their viability as a plan design alternative? Quite a bit, I hope.

- Nevin Adams

For more on cash balance plans see:

Saturday, September 30, 2006

QDIA Essentials

There are many terrifying aspects of being a parent – but perhaps none as intellectually daunting as being asked to help with your children’s homework. See, even if you did well in school once upon a time – even if you can (or think you can) still remember how to solve a certain type of problem, the only way to “know” is to see if you have the “right” answer. And thank goodness, for parents (and, no doubt, students) everywhere, most math texts still carry the answers to the odd problems in the back.

Last week, the Department of Labor provided a similar service – the “right” answer to a dilemma that has plagued plan sponsors and advisers for many years: the choice of an appropriate investment fund for participants who fail to designate one. In announcing the proposed rules, the DOL threw its support behind this solution – a qualified default investment alternative - as a means to foster programs like automatic enrollment (particularly the new safe harbor version contained in the Pension Protection Act) that facilitate not only plan participation, but a better investment diversification by participants. And, to no one’s surprise, when it unveiled its proposal, the DOL formally sanctioned the use of asset allocation funds as default investment options in those circumstances. Moreover, while the DOL’s proposal sanctions the use of professionally managed asset allocation accounts, it leaves the choice of a particular product solution open, acknowledging the applicability of lifecycle funds as well as more traditional balanced funds and the more recently popularized “managed accounts.”

Not only did the DOL place its imprimatur on such designs, it also acknowledged the longstanding use of other options such as money market funds and stable value accounts. However, the DOL noted that “it is possible that at least some plan sponsors strongly prefer to use as default investments such instruments rather than any of the three types embraced by the proposed rule.” Those potential preferences notwithstanding, the DOL noted that “The proposed rule, by providing relief from fiduciary liability, is both intended and expected to tilt plan sponsors' default investment preferences AWAY FROM SUCH INSTRUMENTS AND TOWARD THE THREE TYPES IT EMBRACES (emphasis added),” though the DOL goes on to acknowledge that the proposed rule leaves intact the current legal provisions applicable to the use of such instruments as default investments (basically that the plan fiduciary is responsible for the choice).

The DOL’s proposal also contains some interesting product-centric nuggets that advisers may find instructive. For example, in discussing the lifestyle/lifecycle choice, “The Department presumes that, in those instances when a participant or beneficiary chooses not to direct the investment of the assets in their account, the only objective and readily available information relevant to making an investment decision on behalf of the participant is age,” and then goes on to note that QDIAs are not required to take into account other factors, such as risk tolerances, other investment assets, etc. – and it extends this flexibility to the managed-account alternative. (Ironically, the proposal says that the age of individual participants does not have to be considered in the use of a “balanced fund” alternative, but rather the “demographics of the participant population as a whole.”)

Note that the DOL proposal says that “a qualified default investment alternative must be either managed by an investment manager, as defined in section 3(38) of the Act, or an investment company registered under the Investment Company Act of 1940.” Why? Quite simply, the DOL “believes that when plan fiduciaries are relieved of liability for underlying investment management/asset allocation decisions, those responsible for the investment management/asset allocation decisions must be investment professionals who acknowledge their fiduciary responsibilities and liability under ERISA.”

We are similarly reminded that, “like other investment alternatives made available under a plan, a plan fiduciary would be required to carefully consider investment fees and expenses in choosing a qualified default investment alternative for purposes of the proposed regulation.” Of course, the “silver bullet” in the proposed rules lies in the fact that “a fiduciary of a plan that complies with this proposed regulation will not be liable for any loss, or by reason of any breach that occurs as a result of such investments.” However, the proposal reminds us all that “plan fiduciaries remain responsible for the prudent selection and monitoring of the qualified default investment alternative.”

To some questions, the answers never change, IMHO – nor should they.

- Nevin Adams

You can read more about the proposed rules at

Saturday, September 23, 2006

'Best' Case?

On September 11, 2006, while the nation was focused on the fifth anniversary of the 09/11 terrorist attacks, a St. Louis law firm launched its own “attack” on a wide array of 401(k) plan practices, primarily centered around the application, and reporting, of fees. However, unlike the terrorist attacks, this 09/11 event has been launched well below the normal media radar screens. In fact, even today, some two weeks after the complaints have been filed in court by the St. Louis-based law firm of Schlichter, Bogard & Denton, I don’t believe it has been picked up by any major media outlet.

That a suit has been filed regarding revenue-sharing practices is hardly a surprise, of course – it’s not even the first (for example, see Nationwide ERISA Suit Survives Challenge). Moreover, a number of notable ERISA litigation firms have, for some time, effectively solicited these claims from participants via postings on their respective web sites. However, what is most striking, IMHO (aside from the relative “obscurity” of the filings), is the breadth of the allegations they contain.

These suits are not just about revenue-sharing, though that is clearly a key element of the fiduciary abuses alleged. Rather, the charges all revolve around the disclosure of fees to participants – more accurately, the lack of disclosure. Along the way how fees are calculated on company stock accounts, the use of non-institutional class shares by large 401(k) plans, the apparent lack of participant disclosure of hard-dollar fees (which are disclosed to regulators), ven and even the presentation of ostensibly passive funds as actively managed all are taken to task. And, as you can no doubt discern from that list, the allegations are made against large plans with billions of dollars in assets. All in all, regarding the fee structures in the 401(k) industry, the complaint says “At best, these fee structures are complicated and confusing when disclosed to Plan participants. At worst, they are excessive, undisclosed, and illegal.”

Nor does this appear to be the random work of some hack firm trying to make a name for itself. In reading through the half dozen of these complaints I currently have access to (there reportedly are, or will be, 20 or so), it is clear that the law firm has carefully reviewed plan documents and/or summary plan descriptions, 5500 filings, and participant communications. While each filing has certain consistent points and arguments, the allegations also reflect a working awareness of the unique structures of each plan, and the various providers. Moreover – and you can’t say this about every lawsuit I have seen filed in this business – they seem to understand how these programs actually work; the unitization of company stock holdings alongside a cash component, the difference in pricing between institutional class shares and retail offerings, the nuances of master trust reporting. Finally, and in a compelling fashion, IMHO, they do a fine job of restating the duties and obligations of plan fiduciaries.

Filing a complaint is hardly the same as prevailing against a vigorous defense in a court of law, or surviving an appeal - and at this point, we have only one side of the argument to consider. We cannot say with any degree of certainty that these plan fiduciaries and their service providers have not acted in accordance with ERISA’s mandates, or that plan participants have not been well-served by these structures.

It is, however, clear that a lot of practices this industry has too long taken for granted are now going to be subjected to a fresh - and harsh - degree of scrutiny.

- Nevin Adams

Sunday, September 17, 2006

Who ARE Those Guys?

One of my favorite Westerns is “Butch Cassidy and the Sundance Kid,” and one of my favorite parts of that movie is the part where they are being pursued – relentlessly pursued – after a particular train robbery by an unidentified posse. As they fruitlessly try one thing after another to shake their pursuers, the two outlaws’ frustration mounts, moving from a “can you believe it?” incredulousness at their ingenuity to a “now what are we going to do?” exasperation – a range of emotions conveyed several different times – in several different ways – by the same phrase, “Who ARE those guys?”

In our industry, the pursued aren’t train robbers, but participants – or more accurately workers who could be participants. The posse trying to “catch” them includes employers, providers, and, yes, financial advisers. Over the years we’ve tried many things, with varying degrees of success, to get everyone who is eligible to save via these programs to do so: the logic of tax-advantaged savings, the allure of “free” money via the company match, the looming financial requirements of retirement. Still, despite our collective efforts over an extended period of time, in the aggregate, somewhere between one-in-four and one-in-five workers eligible to take advantage don’t.

Enter automatic enrollment. The logic behind these programs is almost indisputable. Without their impetus, 401(k) plan participation rates linger in the mid-70% range. With them in place, plan participation rates rise to – and apparently remain at – the mid-90% range. There are, of course, plans that attain that kind of result without automatic enrollment – and I’m sure there must be a plan somewhere that has adopted automatic enrollment that hasn’t been able to sustain such a robust increase in participation (though I’ve yet to come across it). Still, it’s hard not to like something that so readily appears to “fix” the problem of getting that last intransient group of people to take advantage of the benefits of their 401(k). If it isn’t a “silver bullet,” it’s darned close, IMHO.

But who are these 20% that wouldn’t/couldn’t’ expend the energy to fill out an enrollment form, but who WILL let someone take 3% of their pay? Were they interested but just too busy (or too lazy) to return the form? Could they not figure out how much they needed, or could afford, to save? Were they so befuddled by the array of investment choices that they decided to make no choice at all? Do they appreciate the fact that this “forced” savings is taking place on their behalf – do they even know that this new deduction is taking place?

Almost certainly “they” are some – or perhaps in some cases, even all – of the above. People who are full of good intentions frequently fail to act on them. The choices we ask non-investment experts to make are, indeed, complex. Perhaps automatic enrollment “works” because it makes it easy for workers to do the right thing. Perhaps it works – not so much in terms of getting people in their plan, but in terms of keeping them there – because the years of retirement savings messages really have had an impact. Perhaps, having suddenly found themselves saving for retirement, they decide to stick with it. Perhaps that first 401(k) statement (and the company match it displays) reinforces that decision. Perhaps it works because the still-typical 3% we take from their take-home pay is small enough either not to matter or to be seen.

Whatever the reason(s), for now, we can take some comfort in the impact of a solution that appears not only to be readily deployable, but to work, at least in terms of turning eligible participants into participants. However, I’d feel a lot better saying it worked if I felt like we had a more consistent understanding of why it does. Who ARE these guys, anyway?

- Nevin Adams

Sunday, September 10, 2006

Never Forget

Five years ago, I was in the middle of a cross-country flight, literally running from one terminal to another in Dallas, when my cell phone rang. It was my wife. I had been on an American Airlines flight heading for L.A., after all - and at that time, not much else was known about the first plane that struck the World Trade Center. I thought she had to be misunderstanding what she had seen on TV. Would that she had….

So that day, when family and friends were so dear and precious to us all, I spent in a hotel room in Dallas. It was perhaps the longest day - loneliest night - of my life. In fact, I was to spend the next several days in Dallas – there were no planes flying, no rental cars to be had – separated from home and family by hundreds of insurmountable miles for three interminably long days. When I finally was able to get a car and begin that two day drive home, it was a long, lonely drive, but it gave me a lot of time to think - to pray - and to treasure the things I was still able to come home to. Most of that drive was a blur, just mile after endless mile of open road.

There was, however, one incident I will never forget. Somewhere in the middle of Arkansas, a group of Hell's Angels bikers was coming up around me. A particularly scruffy looking guy with a long beard led the pack on a big bike - rough looking. But unfurled out behind him on the bike was an enormous American flag. At that moment, for the first time in 72 hours, I felt a sense of peace - the comfort you feel inside when you know you are going - home.

Five years hence, I can still feel that ache of being separated from those I love – and still remember the warmth I felt when I saw that biker gang drive by me flying our nation’s flag. On not a few mornings since that awful day, I think how many went to work, how many boarded a plane, not realizing that they would not get to come home again. How many sacrificed their lives so that others could go home. How many still put their lives on the line every day – here and abroad - to help keep us and our loved ones safe.

We take a lot for granted in this life, nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are. As we remember that most awful of days, and the loss of those no longer with us, let’s all take a moment to treasure what we have – and those we have to share it with still.


- Nevin Adams

Saturday, September 02, 2006

'Best' Practices

These are momentous times for our industry, particularly for financial advisers. The shift from employer-funded defined benefit plans to employer-fostered defined contribution models may present challenges for this nation’s long-term retirement security, but it surely plays to the advantage of a profession dedicated to helping plan sponsors construct the right programs, and participants make the best of them.

Just as there is little question that those trends favor financial advisers, there is also no real challenge to the notion that you provide an invaluable service to these programs. It has been our privilege these past several years to lend a hand to your efforts—first via PLANSPONSOR magazine; then via, the NewsDash, and this publication; and, more recently, via our education arm, the PLANSPONSOR Institute and our PLANSPONSOR Retirement Professional (PRP) designation. Next month, we will take that outreach a step further with PLANADVISER - a new publication and Web site specifically developed for financial advisers.

It was in that spirit that, two years ago, we announced our inaugural Retirement Plan Adviser of the Year award, an award designed to recognize “the contributions of the nation’s best financial advisers in helping make retirement security a reality for workers across the nation.” Today, it is both my honor and privilege to launch the nomination process for our third annual campaign to acknowledge the contributions of the very best financial advisers in the nation.

The criteria that underlie the award are simple, but impactful; we want to recognize advisers who make a difference through increasing participation, boosting deferral rates, enhancing asset allocation, and/or providing better programs through expanded service or expense management. It is no accident that those criteria also underlie the new Pension Protection Act’s future designs for defined contribution plans, for only by getting more workers saving in these programs at effective rates, and invested in prudent ways, can they have any real prospects for retirement security.

This year, in response to popular demand, we are adding a new category – the Retirement Plan Adviser Team of the Year – which will acknowledge the efforts of an emerging generation of advisory support. Surely, no one is an island unto himself in these efforts, but this will allow us to acknowledge the efforts of teams as well as individuals.

We will acknowledge the finalists for this year’s Retirement Plan Adviser of the Year award in the December issue of PLANSPONSOR, as well as the winter issue of PLANADVISER. Those finalists will join me at the 401(k) Summit in San Diego next February 25-27 for the hugely popular “Best Practices” panel, where we will also announce this year’s Retirement Plan Adviser of the Year and the Retirement Plan Adviser Team of the Year.

In addition to myself, this year’s panel of judges includes the two past recipients of the award, Smith Barney’s John Mott and Dorann Cafaro of the Cafaro Group, as well as Steff Chalk of the Chalk 401(k) Advisory Board; Alison Cooke, managing editor of PLANADVISER; and Mark Davis of Kravitz Davis Sansone.

While these awards are designed to recognize financial adviser excellence, we trust the standards they embody will continue to provide a source of inspiration for those who make a difference every day. I look forward to getting to know you, and your practices, better through this process.

- Nevin Adams

Nominations for the award can be submitted online at

Information on the 401(k) Summit is online at

More information on the PLANSPONSOR Retirement Professional designation is online at

Sunday, August 27, 2006

Goal Oriented

I only discussed retirement investments with my dad once, and the conversation didn’t take place until he had already decided to retire. He had a pretty good idea about what he wanted to do – he just couldn’t figure out how to accomplish that via the all-too-typically complicated distribution request form. Consequently, at my mother’s instigation, he called in an “interpreter” – in this case, the son with the law degree.

It was a complicated discussion. Since hundreds of miles separated us, he had to read the form to me (I suggested faxing, but that was “more trouble than it was worth”; I chose to assume that was a reference to his difficulty with operating the fax machine on his end, and not the quality of advice he was hoping to get from mine). Fortunately, there is something of a boilerplate design to most of these forms and, in reasonably short order, I was able to wrest an English version of his options from the document.

Having outlined the options for him, I asked him if he knew what he wanted to do. Much to my consternation, he wanted to go with an annuity. Now, the market was still on its way up, and while, even then, we all “knew” a pop was coming, it was hard for his financially astute son to accept that he would want to trade the upside potential of having the money in his own hands/account and the ability to draw down that sum at a pace commiserate with his needs for relinquishing that to the notoriously expensive and somewhat inflexible option of an annuity. But what my dad wanted – more than anything else - was the certainty of a regular income stream. If I couldn’t guarantee him that result with the other options, he wasn’t interested.

Goal “Tending”

Ultimately, regardless of how (or when) we get there, the goal of saving for retirement is to have an income in retirement - a regular, secure paycheck that continues even after we are no longer gainfully employed. On the other hand, today’s approach to retirement savings is largely predicated on accumulating enough money to be able to, after retirement, have enough to live on. The problem, of course, is that if you get to retirement with the “wrong” amount of savings, it is darned near impossible to right the wrong.

Still, if what you ultimately want to wind up with is regular retirement income - an annuity, essentially - why wait 40 years to do so? Why “gamble” on the potential upside of making investment choices in a retirement plan – particularly when you don’t know how much it will cost or how much money you will have at retirement to purchase that annuity?

There are reasons, of course. Participants frequently don’t have any appreciation for what their income wants – or needs – will be in retirement. Indeed, that is what makes retirement savings so problematic for many; they lack a specific goal and, thus, tend to save what they think they can afford, rather than what they may need. But if participants really are weary of having to make, and revisit, all those investment and savings decisions, then perhaps we also need to rethink our traditional approach to helping them achieve their goal. Perhaps their retirement savings investments should be directed, not to the selection of mutual funds from a retirement plan menu, but to a more direct investment in a retirement income stream.

Work to Do

Not that we don’t have work to do. Most of the offerings out there at present are even more complicated than the retirement plan decisions participants already struggle with. Participants still will need help setting goals, evaluating choices and, no doubt, managing an accumulation of these investments over time. Imbedded under the auspices of employer-sponsored retirement offerings, plan sponsors also will doubtless be presented with significant challenges, both administrative and fiduciary, as we work toward a new goal-based solution.

Still, there are already a few firms that have applied this notion to retirement plan savings – that allow participants to invest in an annuity as an option in their 401(k) plan. If our goal truly is to help the participant achieve retirement income security, perhaps it is time we actually figured out the best way to help them make that investment sooner, rather than later.

- Nevin Adams

Saturday, August 19, 2006

Happy Returns

One of the “promises” of the newly enacted Pension Protection Act of 2006 (PPA) is that it will foster, if not encourage, greater levels of retirement plan participation. And while there are several areas that ostensibly facilitate this growth – notably the removal of EGTRRA’s sunset provisions and the expansion of investment advice – the thing that is really supposed to make a difference is automatic enrollment.

So, how does the PPA encourage automatic enrollment? First, it resolves the current dilemma faced by plan sponsors in states that prohibit (or appear to) deductions from a worker’s pay without their explicit permission. While this has been a relatively recent concern, the certainty that federal, not state, law governs these transactions is a welcome relief, and one that is provided immediately. Will it persuade employers who were not already actively considering automatic enrollment? Probably not.

The PPA also lays the groundwork for some much-anticipated clarity from the Department of Labor on the issue of an appropriate default investment election. Still, there seems little doubt that, when we do see the final rules, the DoL will officially embrace the use of some form of asset allocation vehicle. Of course, we were expecting this even if the PPA didn’t pass. Consequently, it will help tidy things up, but isn’t likely to transform current trends. This will be effective for plan years beginning in 2007.

Ironically, the biggest change – and it won’t take effect until 2008 – is the creation of something called a “qualified automatic contribution arrangement.” Implementing this special version of automatic enrollment exempts a plan from both top-heavy and average deferral percentage (ADP) testing (ACP - average compensation percentage – testing as well, if applicable). To qualify, a plan has to implement the program for all eligible workers prospectively; automatically defer in accordance with a schedule stated in the law (see Pension Reform Influences Automatic Enrollment Designs); match those contributions (the law specifies a schedule); 100% vest those matching contributions within two years; give participants notice of the program, the default options, and their right to opt out in a timeframe that gives them an opportunity to do something different – oh, and it must provide for that initial contribution to be increased annually in accordance with another provision in the law.

In my initial reading of the law, this was the provision that I found most questionable. Not in its ultimate result, or goal – but it struck me as making things just complicated enough mathematically to slow, not speed, the adoption of automatic enrollment. Why? Not the match requirement itself, or the vesting applied to that match – both are comparable in effect to the current safe harbor provisions (there are differences, however). No, what may make a difference to many plan sponsors, IMHO, is the requirement to increase those employee deferrals – and, at least potentially, the employer match associated with those deferrals.

The impact of the latter is obvious – and cost concerns alone may well keep plan sponsors from taking advantage of the option. The former – the decision not only to take money from workers’ paychecks without their involvement, but to increase that initial deferral – could be just as problematic. While I have found that plan sponsors generally are in favor of the concepts behind automatic enrollment, they are less inclined – at present, anyway – to combine that decision with taking even more from those paychecks without “permission.”

On the other hand, workers retain the ability to opt out at any time. They don’t appear to do so very frequently – but that option remains for anyone who truly can’t afford it (or thinks they can’t). But one of the larger concerns for plan sponsors with automatic enrollment is the accumulation of small balances – those deferrals that workers don’t notice until three paychecks later, at which point they stop the deferrals, but then discover that “I wasn’t paying attention to the automatic enrollment notices” doesn’t qualify as a reason for hardship withdrawal.
That’s why, IMHO, one of the real gems in the PPA is the ability, within 90 days of that first contribution, to return those contributions to the worker. In my experience, the inability to do so under current law has been perhaps the largest impediment to these programs – and its inclusion in the new law may make all the difference in the world.

- Nevin Adams

You can read more about the details of the automatic enrollment changes HERE. More about the likely impact from the perspective of employers and providers HERE. More about the Pension Protection Act of 2006 HERE.

Saturday, August 12, 2006

Market's Timing?

About a week ago, a friend of mine asked me how my retirement plan investments were doing. Now, we’ve had conversations about asset allocation from time to time over the years – we’ve even compared “answers” on our individual 401(k) plan choices – so it wasn’t as though the question was out of left field. The truth was, I hadn’t checked on them since early July – but I answered, “OK, I suppose – why?”

As I waited for his response, two obvious answers to my question popped into my head. Either his account returns were sizzling, and he wanted to rub that in, or his account returns were not-so-impressive, and he was looking for some reassurance on the choices he had made in his account (that he was merely interested in the status of my retirement savings account didn’t really seem plausible under the circumstances). Then, I remembered – the last investment choice he made was to invest in a lifestyle fund – and, sure enough, he wasn’t thrilled with his return.

There have been several studies published in recent months about the relative performance of lifestyle/lifecycle funds and, frankly, from what I can call from memory, they all suggested that those funds have outperformed what typical participants choose on their own (setting aside for the moment the “inconvenient” fact that those results are generally put forth by the very same firms that are touting their asset allocation fund wares). In view of how most participants invest, that is perhaps not as high a standard as we should impose. Still, the notion of a fund choice that offers participants a potentially better return for less involvement on a consistent basis is a winning proposition for most.

Of course, “average” covers a broad swathe – and often obscures as much clarity as it yields. Still, as lifestyle funds proliferate on retirement plan menus, and as things like the new automatic enrollment provisions (see Pension Reform Influences Automatic Enrollment Designs) further accelerate their adoption as default investment choices, I wonder if it will affect how participants view – and review – their retirement accounts.

The cynical answer, of course, is that they don’t pay attention now, and they – certainly the defaultees - probably won’t pay any more attention in the future. However, my sense is that participants do pay attention to their retirement plan statements, if only to make sure that their payroll withholdings were actually deposited. Moreover, while it’s become very trendy to talk about how uninvolved participants are, I can recall a time – and not so very long ago - when we fretted with good reason about how often people were checking out their account balances.

My guess is that, as participants begin to believe that there is good news in those retirement plan statements, they will, once again, pay more attention to the contents. What remains to be seen is if they will continue to value the balanced discipline of lifestyle funds during the cycles of the market that may well yield a higher return to a less balanced approach.

- Nevin Adams

Saturday, August 05, 2006

'Global' Positioning?

During our recent family vacation, I decided to add the GPS (global positioning satellite) option to our rental vehicle. While I have never had one in my personal car, we were going to be traveling in some VERY unfamiliar territory, and at hours of the day when I didn’t want to be trying to read maps, much less trying to guess how far to the next gasoline station in the middle of nowhere.

Over the long haul, it was a godsend. We got clear, quick, and for the very most part, accurate, directions to just about every location on our itinerary. Just about. Basically, the longer it had to react to the destination, the better it did. In close quarters – urban settings where the streets come up on you faster, and the opportunities to turn somewhat limited by traffic restrictions – well, let’s just say that my wife understands how I drive, and how I need to be directed - better than the satellites circling the earth, communicating with my car.

The analogy isn’t perfect, but when it comes to advice, some folks prefer to do it themselves – and they don’t mind unfolding a road atlas, mapping out a course, and keeping to it. Some prefer automated solutions – it was easier for the most part, and frankly more fun, keying in locations to obtain directions than it was to study a map and try to pick the best route. And some, of course, prefer to get their direction from a trusted source – someone who knows who the recipient of that counsel is, and expects…someone who can respond to “real-time” developments with concern, as well as expertise.

I think too often our industry attempts to compartmentalize investment advice delivery. We say that X% want to do it themselves, some other percentage wants to be able to get a quick automated sense of what to do, and some other percentage simply wants someone else to do it for them. But I think most people, actually want – and need – to tap into different kinds of investment advice at different points in time. They are happy to rely on an automated solution to fine-tune direction, or perhaps even to set it – they may well want to try to figure it out on their own, once they have developed a certain level of comfort with their ability to do so – and, when things get “hairy,” they’d much prefer the reassurance that most often comes from the voice of a real human being who knows their name.

Advice, in other words, shouldn’t be targeted at people as though they were simply a certain type of investor, IMHO. Rather, choosing the “right” medium for investment advice is, and should be, a decision based on an individual investor’s particular needs at a particular point in time.

- Nevin Adams

Sunday, July 30, 2006

Protect Shuns?

Last week’s Congressional machinations brought to mind Otto van Bismarck’s comment that “Laws are like sausages, it is better not to see them being made.” I had just about given up on seeing anything emerge from this session. Frankly, most plan sponsors I had spoken with would have been just as happy to see no bill as a bad one – and most of them (that is to say, the ones who weren’t troubled airlines) were hard-pressed to see how a “good” one could emerge from what was on the table.

The advice provisions in the House-passed bill will, no doubt, create some stirrings in your world – if enacted - but it is by no means yet certain that it will be (for why, see Pension Reform Takes an Unexpected Detour). The encouragements surrounding automatic enrollment programs will almost certainly generate a bit of activity on that front, but I suspect the actual take-up rate will be relatively modest, certainly in the short-term. The participant information disclosures will probably generate more plan expense than true information. The sanction of cash balance plan design is certainly welcome – and long overdue – but even that is clarity on a prospective basis, with no real reassurance for plans that have already crossed that Rubicon.

The good news is that most of what was in the bill that the House passed was “anticipated.” The bad news is that it is generally anticipated to have a bad effect on the large number of still-very-viable pension plans, in the name of purporting to increase disclosure and transparency of these widely misunderstood programs – which, in turn, is designed to stem the tide of pension plan dumping on the nation’s pension insurance system. It may, in fact, have some impact on the latter – but I doubt it. Unfortunately, I have little doubt that it, in tandem with accounting changes that the Financial Accounting Standards Board (FASB) will insist on imposing later this year, will accelerate the trend away from these programs. None of this is new – or news.

These are all incredibly complicated issues, and one should, I suppose, be impressed that lawmakers have tried to deal thoughtfully with such a comprehensive list of changes. It is difficult, however, not to view the final result with more than a twinge of regret – and I routinely hear from plan sponsors a quiet, simple resignation to what seems to most to be an inevitable conclusion. More’s the pity.

As an industry, we are almost uniformly in agreement that these changes will condemn defined benefit plans to extinction, certainly once interest rates recover to a place where that action will be financially viable. As an industry, we are almost uniformly in agreement that workers don’t/won’t/can’t save enough to fund their own retirement, and we share a similar consensus that Social Security’s contribution will be more modest in the future than at present.

If we agree on so much, perhaps we ought also to just agree that defined benefit plans aren’t well-structured to fit the way we work, or the way the “experts” want to account for such obligations, rather than referring to these kinds of changes as “enhancements” to retirement security. Because, IMHO, while these changes surely protect something – most likely the perceived financial integrity of the PBGC – it’s difficult to see how this “pension protection” act lives up to its name.

- Nevin Adams
You can read more about what is in the Pension Protection Act at

Sunday, July 23, 2006

Feels Like the First Time

Like many of you, my job takes me away from home from time to time. For the most part, these are short jaunts, at least from a time standpoint. These days, it’s not unusual for me to make a cross-country trip – deal with business, and come back – all in the same calendar day. I get to visit some nice places but, frequently, all I actually get to SEE of those places lies between the target venue and the airport.

Over time, like all good “road warriors,” I have learned how to pack, know what size bags work best with the carry-on restrictions, and have invested in a series of portable toiletries that never have to leave my travel bags. When lugging my laptop and assorted work materials was beginning to take its toll on my back, I even bought a special backpack. I can almost get up the morning of my departure and pack with my eyes shut (in fact, I’m sure that I did for some of those early flights). Oh, and I NEVER check bags.

Then, last week, I did something I have seldom been able to do – I managed to couple a business trip to the West Coast with a family vacation. Now, bearing in mind that nearly all of our family trips have been in ground vehicles, all of a sudden I found myself needing to worry about the number of carry-ons, the process of checking bags for a family of five, and the need to pack everything I would need for three days of business – and another week of vacation. Oh, and what kind of picture I.D. DO you need for someone who is not yet old enough to drive?

Thanks to my wife’s superior organization skills (and her ability to wrest a modicum of order from the preparations of three occasionally unruly teenagers), we managed to get everything together, to the airport, and to security. That’s when I realized just how much the process of flying has changed since our last family trip. Things that have long since become part of my traveling “routine” – having to take off your shoes, sending your cell phone through with your luggage, being able (encouraged?) to bring food from the terminal onto the plane – even being able to send your laptop through the x-ray without booting it up (remember those days?). Things that I had grown accustomed to accepting without question were a new experience to the rest of my party.

It was kind of fun being the experienced traveler in the group (my kids actually listened to me, for a change). However, it also gave me a different perspective on things – and a renewed appreciation for the perspective of the “amateurs” that seem always to be gumming up the works when I am running late to catch a flight (I still think there should be lines for “I don’t know what I am doing here”).

Those of us who work day in and day out with retirement plans, and for whom making investment evaluations is just part of what we do, may well suffer from a certain lack of appreciation for the perspective of someone who hasn’t made those kinds of decisions in a long time – or perhaps ever. Can you still remember what it felt like to see that eight-page, glossy brochure for the first time? Can you recall the first time you heard phrases like “the time value of money,” or “the magic of compounding”? How many investment funds did you have to choose among the first time you made a retirement-plan election?

I wonder how much more effective our education materials would be – how much more impact those enrollment meetings would have – if we could remember how we felt the first time we sat in that room. Maybe you can – I’d recommend the effort to do so. It could make a difference.

- Nevin Adams

Saturday, July 15, 2006

Life Lines

In this business, we spend a lot of time planning for, and talking about planning for, retirement security (and talking about helping others plan for retirement security). However, tomorrow’s version of retirement seems likely to be quite different from that image in the travel agency brochures—or that enrollment plan kit.

This came home to me in a very real sense recently when I sat down with my mother to work up a budget that would last—the rest of her life!

Now, I’ve done plenty of budgets in my life, both personal and professional. But even those that incorporated, in some form or fashion, elements of longer-term goals…bear in mind my eldest heads off to college this fall…have always tended to be a year-to-year process. Mom’s income isn’t getting any bigger—or not much bigger, anyway. There’s a serious dearth of promotional opportunities in retirement, after all.

I will confess to a bit of anxiety ahead of the event. Like many families, while I knew some of the details of their financial situation, we had never really sat down and talked about the whole picture while Dad was with us. When asked, I’d do some research on taxes or make the occasional recommendation on a mutual fund investment. I remember a reasonably animated conversation with my dad about annuities when he retired. We’d talk about things like the pros and cons of paying down their mortgage—and every so often Mom would ask me if we didn’t need to rebalance that asset allocation fund (but that’s a story for another day). I knew where the will was, what the will provided for, but I didn’t know many of the basics—their regular expenses or even their annual income, much less the sources of that income. On a rational basis, I know I should have imposed myself on their privacy years ago, but it’s hard in the real world to push deeper than “are you guys doing OK?” if it’s clear they aren’t really interested in sharing that information.

Now, three months after Dad’s passing, most of the dust had settled—the calls made, the funeral-related bills paid, the requisite beneficiary distribution forms completed and submitted, and yes, an ability to see what regular monthly expenses one person has, versus that of a couple that had been together for nearly 55 years.

Lest you worry, I think Mom’s going to be fine. She still has a pension, access to retiree medical, a long-term care policy, a tax-sheltered annuity, access to Medicare, and her house is bought and paid for. She doesn’t have Social Security—she “lost” that when my dad passed (she had an opt-out provision in favor of her teacher’s pension years ago). But Dad also had a savings plan, and it will pay her an annuity for the rest of her life. It isn’t much, perhaps, but, all in, it’s roughly what their combined retirement income was last year. If her needs don’t change drastically, she’s in good shape.

Things could change drastically, of course. Medical expenses remain the largest unknown, and while she currently has insurance to cover that, her son is all too aware of how fleeting those commitments can be. Gasoline is over $3 per gallon there already, and winter is coming. She’s got some problems with her knees that make getting around a bit of a challenge, and while her teacher’s pension has a cost-of-living provision, the politicians seem, in the aggregate, to lack any real sense of fiscal responsibility.

The bottom line is that, thanks to their planning ahead of time (aided by modest expectations), she’s in better shape a decade into retirement than many begin it. But the careful planning that made that possible isn’t over—it’s just beginning.

- Nevin Adams

Saturday, July 08, 2006

Critics "Cull"

At the end of two weeks on the road – the first for our Plan Designs 2006 conference, the latter a chance to spend time with the majority of our family that still lives in the Windy City – and an unplanned day in the office to “catch-up” on the things that don’t follow you via e-mail and voice mail, my kids (for whom the two weeks on the road actually constituted a vacation) were pressing to see the new “Pirates of the Caribbean” movie (in point of fact, they have been pressing for it ever since the release date was first published a year or so ago).

Now, truth be told, I was predisposed to honor their request. Like many, I hadn’t expected much from the first installment (I hadn’t even realized it was a “first installment”) and, instead, I found myself having a better time at the movies than I had in a long time. Still, in the part of the world that I live, a night at the movies with my family (including that trip to the concession stand) for a prime-time movie viewing costs nearly $100. Consequently, my paternal predispositions were at least tempered by the long list of reviews critical of this latest production – critics who said they had seen it all before, that it was (at least) a half hour too long, that Keira Knightley was too masculine, Johnny Depp too feminine…

Those concerns notwithstanding, I acquiesced – and while I suppose I must admit that it, like most sequels, lacked some of the “magic” of its predecessor (let’s face it, we now have expectations of a character like Captain Jack Sparrow), I’m glad I didn’t let the critics keep me at home. Even if it isn’t likely to be nominated for Best Picture, we had a good time (and may even have gotten our money’s worth). In fact, over time, I have learned that very few movie critics look for the same thing in a film that I do – and thus I take their recommendations (and rejections) with a hefty portion of salt.

The past several years, “critics” of retirement plan savings have had a field day. Oh, they aren’t generally as obvious as those that were chomping at the bit to make “Pirates” walk the metaphorical plank, but like many of those critics, there’s no news like bad news to fill a regular column. First they worried about the downturn in the markets, then there was the drum beat about how you couldn’t count on that employer match…and if that wasn’t enough to keep you up at night fretting about your retirement savings balance, fees remain an omnipresent concern.
Like the movie critic concerns about “Pirates,” all of those issues have a foundation in reality: Markets do, in fact, go down as well as up; that annual employer match IS discretionary (but from what I can tell, seldom treated as such); and, yes, fees can indeed take a heavy toll on that retirement plan balance. Unfortunately, if it bleeds it leads, and the headlines that accompany these pieces all too frequently seek to draw the reader in by painting a picture of looming disaster. The good news is that (apparently like the crowds flocking to see “Pirates” this weekend) most are looking elsewhere for true guidance in whether to save in their workplace retirement savings plan.

It’s perhaps a good thing to remember, as we head back to work today, that surveys continue to suggest that most workers listen to people they trust – friends, family, co-workers - for counsel on their approach to many things - retirement savings and cinematic selections alike. Financial advisors can join that inner circle, of course – but only once they have earned that trust. Generally, that is a function not only of expertise, but also an ability to see things from the perspective of the individual whose trust they endeavor to earn.

- Nevin Adams

Sunday, July 02, 2006

Fourth Coming

This week, of course, is the Fourth of July, the anniversary of the signing of the Declaration of Independence. While, these days, few would argue that the result we celebrate today remains largely unique in the history of the world, it is easy, looking back, to gloss over just how remarkable a sequence of events made this nation’s independence a reality. The bickering and machinations of Congress then were every bit as unpleasant, and occasionally unproductive, as the worst of today’s elected officials – even though, and perhaps in some measure because, hostilities had officially been underway since the so-called “shot heard round the world” the preceding spring.

The men that gathered in Philadelphia that summer to bring together a new nation came from all walks of life, but it seems fair to say that most were men with something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that they might well have signed their death warrants. Nor did they even represent the position of a majority of their countrymen at the time – historians have said that only about a third of the nation favored independence, while a third remained loyal to Britain (the remainder apparently just wanted to be left alone).
Ironically, despite tomorrow’s celebrations, the resolution that declared that “these United Colonies are, and of right, ought to be, Free and Independent States” was approved by the Continental Congress on July 2. In fact, only President of Congress John Hancock and Charles Thomson, secretary, signed it on the 4th (the former in a hand "large enough for King George to read without his spectacles"). Most of the 56 delegates didn't sign it for another month. One didn't sign until 1781.

Of course, that declaration was neither the beginning nor the end. The winter at Valley Forge still lay ahead, and Cornwallis' surrender at Yorktown was still more than five years off. An official end to the hostilities would not come until 1783. Despite all those sacrifices, less than a hundred years later, as the nation approached another Independence Day celebration, President Abraham Lincoln would find himself in the middle of an enormously unpopular war fought to keep the nation together, while two armies converged at Gettysburg.

In sum, as monumental an undertaking as it was to state for the ages a belief that we are created equal, “endowed by their Creator with certain unalienable Rights,” among those “Life, Liberty and the pursuit of Happiness” – we continue to enjoy the exercise of those rights only because people have, over the ensuing years, been willing not only to defend our rights, but to sacrifice so that others could enjoy the exercise of those same freedoms.

This Independence Day, let’s keep those who continue to risk their lives in the pursuit of liberty for all in our prayers.

- Nevin Adams

You can read more about the Declaration of Independence at

Sunday, June 25, 2006

Growing (Up) Pangs

This past week I watched my (now not so) little girl graduate from high school, and just 24 hours before that, this proud papa was beaming at a ceremony where she garnered so many awards, she had trouble carrying them to the car.

Just two days later we were driving her to a weekend orientation at the school that will be her new "home" come fall. Now, like most parents of teenagers, we feel that we have been practicing for Jennifer to leave home for some time now. She comes in from work, heads upstairs to do her homework - has to be summoned to meals – and, as soon as she is done ingesting her food, disappears back into her alcove. It's a bit like we are running a bed and breakfast, and she is a guest (except for the part where the innkeepers get paid, of course). In short, we, like our parents before us, have resorted to complaining about how little we see her. Except, of course, for those sporadic outbursts of emotion that inevitably flare up between kids who think they know best about all things, and parents who know better. Moments that call to mind (but fortunately not yet to mouth) thoughts like, “When are you going off to college again?”

Those occasional – and natural - tensions notwithstanding, the realization that she is getting ready to get on that road that will eventually take her out of our household really set in this weekend. Don’t get me wrong – I know there are many happy (and probably not-so-happy) times ahead. I realize that this is a beginning, not an end – and that, as a parent, you really want to see your children ready, willing, and just a little bit eager to strike out on their own. Or so you keep telling yourself.

Saturday was just a practice run of sorts for that day - just a couple of months from now - when we’ll actually be leaving her there for the fall term. But there was something about watching her head off with the rest of the kids for their activities that brought back memories of sending my little girl off to her first day of school.

And with those images came a startling reminder of just how quickly time flies, and how inexorably we march toward the future. A reminder that while you can put things off until tomorrow – tomorrow eventually arrives, whether we are ready or not.

- Nevin Adams