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.