Saturday, May 27, 2006

“Guilty” Conscience

By any measure, last week’s convictions of former Enron executives Ken Lay and Jeff Skilling were a win for justice. Not because they perpetrated a fraud on the investing public, and not because that fraud cost a lot of people their life savings and their jobs – though all appear to be factual conclusions. Not because they cashed in their stock options while encouraging others to buy stock (doesn’t ANYONE know how stock options work in the real world?), and certainly not because they (perhaps more accurately, their appointees) timed a recordkeeping conversion at a particularly “sensitive” period in the demise of that stock’s value.

I’ve read a lot about the goings on there – via press coverage, a couple of books, and more than a little time spent with court documents related to their retirement plan lawsuits – and while I’m sure that the jury empanelled found the requisite amount of evidence to convict them on the charges presented, I’m not sure they shouldn’t be held guilty on another charge.

They were criminally stupid.

Now, don’t get me wrong. By all accounts, both Lay and Skilling were talented visionaries. Their transformation of a company whose bottom line was constantly exposed to the vagaries of the natural gas market and its inefficient distribution channels into a powerhouse (literally, in their case) that arbitraged those inefficiencies (both physical and intellectual) to their advantage was genius, IMHO. There is, of course, a difference between arbitraging identifiable inefficiencies in the market and actually creating them – and Enron, first driven, and then, apparently, blindly driven, by the need to keep “hitting its numbers,” demonstrated a willingness to do whatever it took to accomplish those goals.

They say that success breeds success – but in the case of Enron (and they weren’t alone), success seems simply to have bred the need for more success: success measured by earnings growth, rather than sustainable performance, and certainly not profitability. Earnings growth that, ultimately, apparently couldn’t be sustained any way other than the kind of financial hijinks with which the name Enron is now synonymous (not that they didn’t try; the list of “dry wells” – enormously expensive projects that had grand projections, but no actual return at all – is extensive). And - when all else failed, they simply made up the numbers they needed to make (their accounting contrivances to do so – even their ability to persuade the accounting community that it was rational to amortize the receipt of future income the way one typically amortizes large capital expenditures – are an incredible “achievement,” at least in hindsight).

Ultimately, the hubris of the Enron management team – their cocky, self-assuredness so much in evidence in earnings calls, the arrogance of their trading room, the names (and acronyms) they assigned to their self-dealing business ventures, their disdain for anyone who didn’t see things through their prism – couldn’t obfuscate the house of financial cards it was based on. And, whether they want to accept it or not, management, certainly senior management in any company, is – and IMHO, should be – responsible for the culture they foster, if not nurture.

Too often, still, firms are driven by the need to succeed “at all costs” (ironically, the responsibility for much of this push rests with the short-term emphasis imposed by accounting rules and an impatient investing public who ultimately pay the price when things implode). In their sometimes blind pursuit of those goals, they engage in questionable business practices, hire (and reward) individuals of dubious moral turpitude (frequently the ones engaging in the aforementioned questionable practices), and try to bully and/or bribe into submission any dissenting voice. One need look no further than the industry’s own mutual fund trading scandals – the recent issues about insurance commissions – or the most recent options back-dating inquiries to see the pervasive and corrosive effects of this kind of greed.

What we must continue to do is hold people accountable, not just for their actions – but for their inactions as well, for surely complicity in allowing bad people to do bad things is no less heinous in its consequence.

- Nevin Adams

Sunday, May 21, 2006

Scared Straits?

Last week, PBS’ Frontline ran a program titled “Can You Afford To Retire?” For those of us in this business, the title was almost painfully rhetorical. After all, how compelling would a documentary about people actually living the kind of retirement depicted in those 401(k) education brochures be?

Still, it’s one thing to make casual references to the tenuous financial future awaiting tomorrow’s retirees, and another thing to actually see the reality. Without question, it was an eye-opener, along the lines of that PBS special that brought together hardened criminals and young toughs several decades ago (back when I was young), “Scared Straight.”

On the other hand, the Frontline piece suffered from a certain myopia. It spent an inordinate amount of time on the plight of workers at United Airlines, for one thing. As tragic as that situation has been for many workers there, IMHO, they have long enjoyed benefits and pay that many would envy. One of the workers featured – who, granted, had had to return to work driving a truck at age 58 – had chosen to retire at 55 the first time (ironically, to lock in free retiree health-care benefits, according to the program). Another, a 42-year-old flight attendant, was noticeably concerned about her retirement future – but then, at her age, one might argue that she still has time to do something about it. In sum, their plight was as much based on shattered expectations as anything else.

It was just as brutal on 401(k)s. Even at National Semiconductor, where they match dollar-for-dollar up to 6% of pay, trouble looms, apparently. The documentary highlighted something it termed “yield disparity” – a phenomenon that consultant Brooks Hamilton says is “observed in many 401(k) plans.” Basically, he claims that employees with higher salaries also see the best return on their investments – as though this was trading on some kind of inside information. The Profit-Sharing/401(k) Council’s David Wray, at least in the version that made it to the screen, was reduced to pleading that people hadn’t had enough time to let the 401(k) work for them. Of course, on the full transcript, you can see that he was talking about 50- and 60-year-olds.

The widely touted solution – automatic enrollment and contribution accelerations into asset allocation funds – will surely provide a better result, but do we realistically think we can auto-enroll people into true retirement security? (As a side note, I’m waiting for the documentary that calls to task the advisor/provider community for promoting devices like auto-enroll, contribution acceleration, and lifestyle funds – all of which, individually and in combination, greatly enhance their fees. Remember, you heard it here first.)

What I truly hate about pieces like the PBS report – and Time’s “Broken Promise” story last fall - and the progeny they spawn, is that they are inevitably in search of a villain, not a solution.
We need to acknowledge that our collective work patterns no longer support programs that are structured the way a traditional DB plan is – and that our traditional notions of retirement no longer fit our ability to fund them. We need to put more energy behind some of the creative solutions that are out there – be willing to give the current pension system a little breathing room – and continue to press hard on ideas like automatic solutions, but realize that they are, at best, a stopgap measure, not a real solution.

That solution will require that we first consider if retirement in the future will, or even should be, that cessation of paid employment that it was for our parents. Secondly, with that determination in hand, we need to adopt a realistic assessment of how much people actually need to live on in retirement. And thirdly – and most significantly, perhaps – we need to decide, collectively and as individuals, who will be responsible for attaining those goals. Our traditional model for retirement security was built on a three-legged stool, with contributions from our own pockets, help from our employers, and the support of the federal government. All of those sources today seem to be constrained at a time when their support is critical.
If there is good to come from the PBS coverage, it will surely be a heightened awareness by people – perhaps even the participants you speak with – about the seriousness of the issue. They say necessity is the mother of invention. It can’t get much more necessary than this.

- Nevin Adams

Sunday, May 14, 2006

Paying Through the Nozzle

About a week ago, I was feeling pretty good. Spring had (finally) decided to arrive in the Northeast, my eldest daughter had (finally) decided on a college (and that college – her top choice - had awarded her a VERY generous academic scholarship), and the markets had been performing so well I was actually looking forward to the arrival of my 401(k) statement. I had driven home from work with the windows down, the sunroof open, and the car stereo playing at volumes destined to make me prematurely deaf.

At the height of this euphoric emotional peak, I pulled into my “favorite” gas station (the one that is nearly always at least a nickel/gallon cheaper than the ones in my neighborhood), and proceeded to fill the tank.

If you’ve filled your gas tank in the past six weeks, you know where this is going. Let’s just say you no longer have to be driving a Hummer to be looking at a $50 fill-up.

Now, I’ve heard (and accepted) most of the rationalizations around the relatively irrational (IMHO) run-up in the price of gasoline. I realize it’s still cheaper by volume than milk, or that fancy bottled water that some people insist is different than what comes out of the tap. I know that, adjusted for inflation, gasoline is not all that much more expensive than it was decades ago. I understand that the Chinese finally have an economy that must be fueled, that we haven’t built a new refinery in more than a decade, that last season’s hurricanes took a toll on our capacity, that refusing to drill for new sources in far-flung places has a price, and that our national reliance on petroleum from other nations (particularly those in volatile areas) renders us vulnerable to these kinds of vicissitudes.

I appreciate that higher prices may ultimately help us break our national addiction to imported oil. I’ll also concede that the forces of supply and demand don’t always, in the short-term anyway, provide a very satisfying result – and that government-imposed price controls have never worked (though politicians who protest that these forces are beyond their control might take a look at those controllable, government-imposed taxes at the pump). However, I’ll also say, for the record, that I think most of this is the result of some commodity trader out there somewhere getting rich at my expense.

Whatever the cause(s), the sad reality is that, if I am going to drive these days, I have to pay a lot more than I did a year ago. That’s exactly the kind of unanticipated surge in expenses that needs to be part of any well-crafted retirement savings planning, of course. Sure, when I’m retired, maybe I could just decide to drive less - - - but those kinds of cost increases quickly wind their way through the price of just about everything we buy, including food (which has to be transported, after all). Moreover, there are physical limits on how low one can safely set the thermostat come winter (or how high, come the onslaught of summer’s heat).

Ultimately, what the recent surge in gasoline prices reminds us about an uncertain future is just that – and why the need to save for an uncertain future is sometimes the only certainty we have.

- Nevin Adams

p.s. you might want to check out

Monday, May 08, 2006

Brand “Hex?”

I don’t drink as much cola now as I did in my youth – I’ve never been able to tolerate the aftertaste of the diet sodas (yes, even the new and “improved” versions), and the older I get, the less excited I am about the caloric content of the “regular” sodas. Still, I’ll “treat” myself most family pizza nights to a “coke” – and if I’m dining out, I’m as likely to order a cola as anything else.

However, when I was growing up, colas were always readily available at home – and I gladly took advantage. I never really developed a strong preference for one cola over another – and once I was the one stocking the pantry, I would generally go with whatever was on sale. Still, when asked in a restaurant whether I would prefer Pepsi or Coke (yes, I can remember a time when you could still get both in the same place), I’d always order Coke – but asked if I minded Pepsi, the answer, inevitably, was no. While I know there are others who feel differently (including the folks who have worked so zealously to build those cola brands), for me, coke was coke – even if the coke was Pepsi.

My brand ambivalence changed in 1985 with the introduction of “New Coke” (yes, it was 11 years ago today). You can argue about whether or not that decision was a marketing misstep of historic proportions, or whether it was a brilliant counterstroke by Coca-Cola to shore up its eroding market share – but, for this consumer anyway, it worked. To this day, I’m still relatively ambivalent about the cola a restaurant puts in front of me, but we don’t stock Pepsi in our house (Mountain Dew, a Pepsi product, but not a traditional cola, is also a favorite, however).

The thing I remember most about that “New Coke” introduction is how swift – and how widespread – and how virulent – the response was. Here was a world-class company that had conducted goodness knows how many tests and focus groups – that had developed a formula that purportedly appealed to the broad spectrum of potential consumers. A product that, no doubt, like the Pepsi in all those Pepsi Challenge blind taste tests, was viewed as a better product in blind taste tests.

Ironically, the problem for Coke – one of the world’s most storied and valued brands – was that it forgot the power of the brand. For many, “New Coke” wasn’t an exciting new development – it was the betrayal of a principle. To its credit, IMHO, the folks at Coca-Cola didn’t dig in their heels and force the new offering down people’s throats (so to speak) – nor did they, immediately anyway, dump the new offering down the drain. For a time at least, you could get either – and eventually the market “spoke.” Now, I can’t tell you to this day that I actually liked “Classic Coke” better than “New Coke” – but I can tell you that it was a decision made without actively consulting my taste buds.

Those of us in the financial services industry know, respect, and frequently benefit from the power of brands. Whether it is the firm you represent, or the investment offerings you support, we see time and again that participants (and, yes, plan sponsors) have a propensity to favor names they recognize over other, potentially more rational, criteria. There’s a reason for that, of course. It’s easier to choose a name you recognize than to take the time to do a more complete analysis. That approach may work fine when choosing soft drinks – but it can be dangerous when applied to politics – and retirement plan menus.

- Nevin Adams

Random Thoughts

How Many is Many?

A headline from a recent article by Kathy Kristof about 401(k) fees counseled readers in its headline that “There are lots of ways around 401(k) fees.” The article proceeds to outline precisely two; “You can talk to your employer about offering more low-cost choices; and you can pay attention to the fees when you are making investment selections.”