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