Sunday, April 30, 2006

Our Money's Worth

Last week, the LA Times ran a three-part series on 401(k) fees. The headline, “Fees Eat Away at Employees' 401(k) Nest Eggs,” didn’t seem to be a harbinger of real news. I figured it was just another one of those moments of journalistic “awakening” to things those of us in this business are already well aware of.

But as I skimmed the story, I realized that this was not just a story about outrageous 401(k) fees per se. While acknowledging that “Mutual fund management fees are the biggest expense,” the authors gave them a quick pass, noting that they are “prominently disclosed, have attracted wide publicity, and have been declining as fund providers compete for customers.” Well, they surely are the largest expense, they have been attracting publicity, and they surely are disclosed (“prominently” is another matter, IMHO). As for fees declining, well personally, I don’t see much evidence that most are, but that’s a point for another column.

So, if those mutual fund fees that are the biggest expense aren’t the problem, what is? According to the first installment of the series, administrative fees. Why? Because, according to the article’s authors, “They usually don't show up on quarterly or annual statements. Brochures touting the benefits of 401(k) investing rarely mention them. Employees have to work hard to find out how much they're paying — for instance, by scouring their plan's Web site for a record of all activity in their accounts.” (Ironically, the individual whose “plight” introduces the story, was tipped off by the reflection of those fees on his participant statement – go figure).

There was a time, of course, when those administrative fees were not only separately disclosed, but were often paid by the employer. Then, sometime in the 1980s, the mutual fund complexes introduced the concept of “free” 401(k) plan administration. They weren’t free, of course – but for the time, they represented an extraordinary expansion of service – call center support, daily valuation, Internet access – on top of education meetings, recordkeeping and compliance support, etc. - and all for no additional cost. Not only did most plan sponsors feel they had stumbled into a marvelous way to save the company money, passing up that range of capabilities (particularly at that price) would surely be a fiduciary faux pas.

Eventually the providers who weren’t fund managers were able to wrest revenue-sharing deals – and then they, like the fund complexes, could offer all those services “at no additional cost,” too. Today we widely recognize that services like participant recordkeeping are akin to shareholder servicing in a retail mutual fund, that participant call center support has a counterpart in the retail world, and that the part of the “prominently disclosed” mutual fund expense designed to cover the costs of distributing fund prospectuses has just as much applicability to a 401(k).

Of course, as the Times article cautions, in many, perhaps most, cases, we also sacrificed the “disclosure” of all the various fees and expenses associated with plan administration (actually, these expenses were generally netted against investment income, and labeled as such, in my experience). But I think it’s hard to credibly argue that these administrative fees are any less disclosed than any other mutual fund expense – and their purpose, if not specifically articulated in the prospectus, is no less obscure than the purposes associated with the rest of the operating expenses of the mutual fund.

But if they are no less obscure, they are obscure nonetheless. Participants and plan sponsors today have too little understanding for, and appreciation of, the cost of these programs, but it is doubtful that they were any better understood thirty years ago. However, it seems to me that in most cases, we’re still paying the same mutual fund expenses we once did – and getting a lot more for them.

- Nevin Adams

The LA Times series is online at,1,5289336.special

Friday, April 21, 2006

Where Withal?

For several years now, the Employee Benefit Research Institute (EBRI) has been publishing its Retirement Confidence Index. This year, as in years past, the index painted a relatively rosy picture from the standpoint of workers – with sizeable minorities and/or majorities feeling pretty good about their retirement living prospects despite having no real idea how much they were going to need, alongside an optimistic sense of how long they would live in retirement, and how much of their pre-retirement income they would need to live on. A sizeable minority also appears to be counting on receiving a pension to supplement those needs – and they also seem to be counting on the help of employer-provided retiree health-care insurance, though both are in increasingly short supply these days. In fact, based on its findings, one is tempted to retitle it the Retirement Over-Confidence Index.

What’s interesting to me, however, is not the respondents’ blithe assumptions about their prospects for a secure retirement (for weeks now, the personal finance columnists have had a field day with that) – it’s the astounding level of realism about some of the places it won’t come from. Just 3% are looking toward an inheritance, for example, and a like miniscule number are anticipating a source being the sale or refinancing of their home. Just 14% cited a workplace savings plan/401K, matching the number who cited money from an IRA or an employer-provider pension – and just one-in-five noted Social Security as a source. And, despite the reports that Boomers, particularly, plan to continue working in retirement, only 6% of the EBRI survey respondents cited employment as a source of retirement income (though about two-thirds said they planned to work post-retirement).

In fact, if you look at all the places that retirement income WON’T come from, you might get to thinking that workers aren’t that far off base in their expectations. But then, you peel off all these realistic assumptions and you’re left with 48% who claim that “personal savings” will constitute an expected source of income in retirement. Not the kind of personal savings we typically think of – not their 401k, not a recaptured investment in a personal residence, not even from an IRA. And that’s where it all breaks down for me – because I just don’t see people saving outside of those vehicles.

Now, it is possible that there is a world of saving going on that just isn’t showing up on our collective radar screens – though I doubt it. What seems more likely is that people DO understand that they aren’t saving enough in those workplace plans and IRAs, that they have no real expectation that Social Security will be there for the fullness of their retirement, and they see no rich uncle in their family trees. And maybe, just maybe, their growing awareness of where it ISN’T going to come from can be part of a broader understanding about where it needs to come from.

- Nevin Adams

The EBRI Retirement Confidence report is online at

Saturday, April 15, 2006

Pay, Back?

Apparently, the nation’s savings problem is even worse than we think: Not only are we not saving enough, we’re spending more than we make. The Commerce Department's Bureau of Economic Analysis monthly report of the National Income and Product Accounts (NIPA) personal savings rate was a negative 0.5% recently. In fact, media coverage of the report noted that, in the course of 2005, Americans spent more than they earned for the first time since the Great Depression.

As it is currently defined, NIPA’s definition of personal saving is simply the difference between personal disposable income and personal spending. Personal income includes wages, asset income (dividends and interest), rental income, and supplements to wages, including those pension and 401(k) contributions. And yes, it counts those pension contributions made by employers to traditional defined benefit plans as though they were individual income – but not the subsequent gains (or losses) they might incur.

NIPA’s exclusion of capital gains – both from investments (including investments within retirement plans) and things like the red-hot housing market – is based on solid footing. These gains are perhaps transient and, in any event, probably shouldn’t be viewed with the same kind of permanency as a regular paycheck.

Still, when workers begin tapping into their retirement savings, the NIPA calculation ignores the retirement “income” – its logic is that those monies were already counted as income when the contribution took place. Moreover, since it ignores the subsequent appreciation in those accounts, it effectively glosses over potentially enormous increases in the savings dollars it originally accounted for. Think about it – the NIPA calculation counts the entire retirement plan distribution as spending (assuming the participant actually spends it), but never counts the market appreciation of that account over the years as income. Finally, its broad definition of “personal income,” which treats employer contributions as personal income at the point of deposit, also “misconnects” the savings behavior of employers with the consumption of those accumulations by retirees.

It’s easy to get lost in the numbers here but, essentially, as a growing number of the nation’s workforce enters retirement – or enters a phase in their lives where they start to tap into those retirement accumulations – as we begin to depart the accumulation segment of our working lives, and enter the deaccumulation phase – there will be a natural decline in the nation’s savings rate.

So, do we have a savings problem? Well, in view of how the NIPA numbers are compiled, it is hard to tell. However, an October 2005 Issue In Brief published by the Center for Retirement Research at Boston College titled “How Much Are Workers Saving?” (online at offers a suggestion – separate the income, taxes, and spending of retirees from the overall NIPA calculation. Researchers Alicia H. Munnell, Francesca Golub-Sass, and Andrew Varani took a stab at doing just that. According to their estimates, the 2001 NIPA national savings rate was 1.8% – a figure that consisted of a negative savings rate of 11.9% for the 65-and-over crowd, and a 4.4% savings rate for those still working.

Now, I’m not saying we don’t have a savings problem, though it is perhaps not quite as dire as the headlines would have us believe. However, it is worth noting that the above-referenced report also cautions that pension saving for most of the period since 1980 accounts for virtually all the saving of the working age population,” and that, since the mid-1990s, “savings outside of pensions for the working-age population has actually been negative.”

We need to remember that personal savings was considered a vital component of the traditional three-legged stool, alongside employer-sponsored accounts and Social Security. The fewer legs, the less secure our retirement will be.

- Nevin Adams

Sunday, April 09, 2006

The Right Choices

I had just wrapped up last week’s column when I got a call from my sister. My father, who had been battling cancer for several years now, had suffered a series of heart attacks. By the end of the day, he had passed.

As the family converged, my siblings and I tried as best as we could, together with Mom, to deal with the tasks that required our attention, and divvied up the ones that seemed to call out for individual attention. Having spent my entire professional career in financial services, and having picked up a law degree along the way, my “job” was to organize the will and assets.

My parents each chose careers of service to others; Dad as a minister, and then a director of missions where he helped other ministers until his “official” retirement several years ago (far as I could tell, Dad’s only retirement was from the receipt of a regular paycheck), while Mom was a school teacher – a teacher who took a fairly significant “sabbatical” so that she could stay at home with her four kids until the youngest was ready to head off to school. They both loved what they did, but they aren’t professions that tend to make one wealthy (in a monetary sense, anyway).

Despite that, my Depression-era reared parents saved what they could. On top of the expenses of rearing four kids, Dad, considered self-employed for most of his working life, funded both the employer and employee portions of Social Security withholding and still found a way to set aside money in a tax-sheltered account (he also tithed “biblically,” for those who can appreciate that financial impact). Mom, covered by a state pension plan, saved diligently to buy back the service credits she had forgone during the years she worked in our home without a paycheck, and also set aside money in her 403(b) account. Somehow, despite all those draws on their modest incomes, they managed to accumulate a respectable nest egg.

Still, you can’t spend as much time dealing with retirement matters as we do without being concerned about how long that “respectable” nest egg will last. The scariest issues are covered – their house, long-term care insurance, retiree medical…and over the next couple of weeks, as some of the pain of our loss subsides, I’ll be working with Mom on her retirement income plan. I doubt that there will be trips to “Boca” on the near-term agenda – but then, Mom and Dad were never big on those kinds of things to begin with.

I’ve always been proud of my parents, who sacrificed so much along the way to give us the best they could. I’m also proud – and more than a little impressed – of how committed they were to saving what they could, when they could, and the results of that commitment. So often – perhaps too often, IMHO - these days, I think we are inclined to excuse inadequate savings rates as the product of strained finances, a tight economy, or the simple human inclination to indulge in short-term pleasures. My parents’ example reminds me – and hopefully you – that the decision to save is just that – a decision, a choice. Here’s hoping more of us make the right one - while we still can.

- Nevin Adams

Picking Winners

I know it isn’t for everyone, but the NCAA tournament (and, without meaning to give offense to to those who are adherents of other college sports, the Division 1 men’s basketball tournament has to be considered THE NCAA tournament) has always found a way to creep into the workplace. Not just the ubiquitous grid sheets, but even – in pre-Internet days – with folks importing tiny black and white TVs, or listening to the games on those little transistor radios. It’s much easier to stay up-to-date these days, of course (unless your workplace blocks access to such things).

Ultimately, the “magic” of the contest lies in the basic premise that on any night any team can beat any team in the nation – and you need look no further than George Mason University’s toppling of UConn last week to see that principle in action.

The tournament itself is a marvel of design, IMHO (for those who are interested in how this process works, it is outlined at You’ve got teams that performed well all season – and teams that perhaps languished most of the year, but who came on strong heading into the final weeks. You’ve got teams you’ve probably never heard of, from conferences that are just as obscure – alongside teams and conferences whose participation in these contests is storied. And then, there’s always the possibility that our own alma maters will have a chance to shine in the national spotlight.

However, for those of us who haven’t fervently tracked college basketball this year, the process of filling out those NCAA tourney grids can be daunting. The “smart” money tends to favor schools that are top-seeded, particularly if they have done well in previous tournaments. There’s an understandable tendency to be loyal to one’s alma mater – at least for one round. Still, anyone who knows anything about the way these pools pay off, also realizes that the way you win is by picking a key upset (or two).

In essence, most of us pick our teams by a combination of alma mater-oriented loyalty, a tendency to reward past performance, and an inclination, in the absence of any compelling distinctions, to go with the name(s) we recognize. What strikes me as intriguing about this process is that seems to have a strong parallel with how plan sponsors – and participants – go about making their investment fund picks. There really is power in an established name brand, participants continue to display a disproportionate affection for employer stock, and yes – ubiquitous fund disclaimers notwithstanding, past performance is, IMHO, commonly relied on as a proxy for the future.

These heuristics are certainly necessary when you have an imperfect knowledge of the choices, when you have a limited amount of time to make them, and when you lack the ability to make changes in those initial choices. However, as fans of Duke, UConn, or North Carolina can attest, even apparently good choices can turn out to be disappointments in short order. The good news is that when it comes to picking retirement plan options, we can take steps to cure that imperfect knowledge, and we can change those picks over time, as circumstances warrant.

The bad news – is that most don’t.

- Nevin Adams