Sunday, November 25, 2007

Motivationally Speaking

Two years ago, I wrote about the “next level” in defined contribution designs: a growing interest on the part of plan sponsors in focusing on service elements like participation rates, deferral amounts, and appropriate asset allocation—a precursor, if you will, for the designs that would eventually come to a fuller fruition in the Pension Protection Act. Since then, there have been any number of industry surveys that tout the boom in automatic plan designs—as does ours.

And yet, despite the pickup in automatic enrollment programs—23.1% of those 5,500 employers responding to PLANSPONSOR’s 2007 Defined Contribution Survey now have these programs in place compared with 17.1% a year ago—it has yet to manifest itself noticeably in participation rates. The average participation rate reported was 72.7%, and while that is higher than the 70.1% in the 2006 survey, it remains short of the 74.9% reported in 2005—before such programs were the hot trend(1).

One explanation for the modest uptick in participation rates lies in the fact that less than a quarter of responding employers have embraced automatic enrollment, of course—and that number varies depending on the market segment. Only 13.3% in the micro-segment have adopted automatic enrollment, compared with 35.9% among the largest programs and 34% in the mid-size segment. A second and just as plausible explanation lies in the fact that nearly two-thirds (62.1%) of respondents said that they had adopted automatic enrollment for new employees only, rather than extending it to all eligible employees. Indeed, more than three-quarters of large employers did so on a prospective eligibility basis, compared with 45.8% of micro-plans, though that may be a function of when the feature was adopted. Opt-out rates—7.7% on average, and 3.0% at median—are consistent with the findings in the 2006 survey.

However, what I found most striking in the survey results was that more than half of employers that had adopted the design say they did so because their organization “wanted to be more proactive in helping employees save”—dominating all other factors. Just 13% said they “needed more participation” to help pass discrimination tests (then again, only about one in five respondents said they had failed a discrimination test in 2006, and that was down considerably from the 2005 results), and half that number said that traditional enrollment/education efforts were not successful. And while it certainly has provided some inspiration, if not motivation, only about one in 10 said that the Pension Protection Act has made the feature “more attractive.” That finding may, of course, be attributable to several factors: that many of these employers had adopted automatic enrollment prior to the passage of PPA, that some have adopted the feature outside the provisions of the PPA’s auto-enroll safe harbor (the match requirements and retroactive solicitation are problematic for some, particularly for smaller programs), or it may simply be that the safe harbor provisions aren’t effective until next year.

Support for the former two reasons is evidenced by the survey’s finding that only 11.5% have implemented contribution acceleration (though that is twice the 2006 pace)—a feature that automatically increases employee deferrals by a certain percentage each year, and that is incorporated in the requirements for the PPA’s automatic enrollment safe harbor. Significantly, while nearly a quarter of the largest employers have adopted the feature, less than 15% in the mid-market have, as have only about one in 10 in the small market—and half that many in the micro-market. For those that have adopted the feature, a 1% annual increase is the clear “norm.”

Consider also that more than half this year’s respondents said that an automatic enrollment safe harbor would not affect their decision on the provision—and a sizeable number said that such a safe harbor was “not necessary.” Still, across all market segments, plan sponsors said that only two-thirds of active participants are deferring enough to take full advantage of the maximum employer match.

All in all, then, it appears that it is neither the PPA’s “carrots” nor the “stick” of burdensome nondiscrimination tests that will lead plan sponsors to adopt automatic plan designs—just the simple realization that some employees need help to become participants, and that, even then, participants frequently need help to do the right things.

- Nevin E. Adams, JD

(1)The survey database can include different—and certainly includes more—plan sponsors each year. Consequently, year-over-year comparisons, while instructive, may yield varying results.

Saturday, November 17, 2007

Thank Full

Thanksgiving has been called a “uniquely American” holiday, and while that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems a reflection on all we have to be thankful for is fitting.

Here’s my list for 2007:

First, I’m thankful for the voluntary nature of the defined contribution solutions in the Pension Protection Act—that plan sponsors were given guidelines and protections for adhering to specific safe harbor approaches, but were not forced to adopt those or prohibited from pursuing their own approaches to things like automatic enrollment (albeit without the regulatory protections). I’m thankful for the Department of Labor’s ongoing willingness—and enthusiasm—for soliciting and incorporating feedback on their regulations from those of us who have to work with them every day.

I’m thankful that, despite the mass coverage of defined benefit plan freezes—and the new restrictions imposed on these programs by the PPA and the accounting profession—so many employers remain committed to the concept. I’m thankful—as are, no doubt, the workers that count on those programs—that so many employers have been willing (and, I suppose in some cases, forced) to make the contributions to at least narrow, if not eliminate, their funding gaps.

I’m thankful for an extra year to gear up for 409A, the thoughtful and deliberative approach by the Department of Labor on the final qualified default investment alternatives (QDIA), and the availability (if somewhat later than one might have hoped) of a sample notice for automatic enrollment plans. I’m glad that 403(b) plan participants can look forward to some of the structural efficiencies and fiduciary oversight that have long been part of the 401(k) market—and thankful that plan sponsors were given some extra time to prepare for that fairly significant change.

I’m thankful that so many entities are concerned about how much we are paying for our 401(k)s—and only a little bit worried that so much of that well-placed concern will serve to make things worse.

Much as there is to be thankful for, there are some things still to look forward to. For instance, I’ll be thankful when:

• Those in Washington appear to worry as much about encouraging employers to set up workplace retirement plans as they do about scrutinizing and punishing those who have;
• Plan sponsors simply decide to eliminate company stock as a participant investment option—if only to deny the plaintiffs’ bar so many easy targets.

Still, all in all, I’m thankful to be able to play a small part in helping provide for the retirement security of others—and grateful that so many gifted professionals have committed themselves to being part of the solution to these issues.

Most of all, I’m thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues over the years, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers like you.

Saturday, November 10, 2007

The On Your Own-ership Society

Last week, as I was surfing the Web, I stumbled across an article titled “Time for Employers to Cut Cord to 401(k) Plans.” These days, I wouldn’t be surprised to see that kind of premise from a pro-business periodical (see “Why Knots”)—but the premise here was quite different. The article’s author—Bloomberg’s John Wasik—wasn’t suggesting that employers should get out of the 401(k) plan business because it made good business sense for them, but rather that “employees can benefit from having 401(k)-style plans cleft from their employers because the programs would cease to be a black box of excessive middlemen and management expenses.”

The article points to the recent round of hearings on the issue in Congress, “several government reports,” and a recent survey by AARP as proof that employers are not fully disclosing and reducing fees in these retirement programs. And thus, Wasik argues, “[G]iving you more control over your 401(k) will also give you the chance to find the best providers of the most diversified funds.” Wasik maintains that, by allowing individuals to do their own shopping for the best deals, a “competitive national market” would emerge. “Middlemen would get the boot and employees could improve their total returns,” he says.

Now, I’m a free-market libertarian from way back—and I’m leery of current trends that, IMHO, seem to disengage participants from the business of paying attention to these investment accounts. But as I told Wasik in a follow-up e-mail, “No offense, John—but are you nuts?”

I’ll concede that there are almost certainly situations out there where participants are being ill-served by the fees they are paying for their retirement plans, though I personally happen to think those situations are not as pervasive—or as egregious—as some would have us believe (it wouldn’t hurt to have more disclosure to be sure of that, however). I will also concede that many (most?) participants don’t know what they are paying for their retirement programs—though I think that most could get to a good approximation of that number with a modest amount of help.

However, it seems to me that getting the employer “out” of the 401(k) would have several immediate—and hugely detrimental—impacts to participants. First and foremost, our purported ability to find a better deal on our own notwithstanding (setting aside for a moment the reality that some significant number of participants don’t even want to take the time to fill out an enrollment form; see “For the People, By the People” ), how am I going to be able to find a better deal with my individual 401(k) balance than my employer can with the aggregated balances of me and all my co-workers? Even if some highly compensated workers managed to negotiate a special arrangement, do we really think that that the average participant could—or would?

Second, once employers become mere conduits for payroll deductions, workplace education on such matters as the importance of saving and investment will become a thing of the past—after all, participants will now get that from the provider they found on their own. Enrollment meetings? No need for that, since your 401(k) is a do-it-yourself option. And, IMHO, once we’re “on our own,” it won’t be long before that employer match will fade away (in Wasik’s defense, he doesn’t see the loss of the match as a consequence of his proposal—but I do). The model for all the above, IMHO, can be found in much of the current non-ERISA 403(b) space: the match, the lack of employer involvement, the low participation rate(s), the fees….

But the thing we would lose most with an employer-lite 401(k), IMHO, is the oversight of a trusted fiduciary. Granted, many employers don’t fully understand that role or the responsibility—too many don’t have the expertise, and far too many are willing to place those decisions in the hands of providers and advisers undeserving of that trust.

But many more are working hard every day to see that these programs are well-administered, reasonable in price and service, funded and supported in the workplace—and in the process, making a difference in helping ensure a more satisfying retirement for us all.

IMHO, it’s a contribution we can’t afford to be without.

- Nevin E. Adams, JD

Saturday, November 03, 2007

Theory of Relativity

I was having coffee with a buddy of mine a couple of weeks back, and before long the discussion turned to music; specifically the new Bruce Springsteen CD. Suffice it to say that he had just acquired it, and was enjoying it immensely. As it turned out, I had had a chance to listen to the album (yes, I’m old enough to still refer to them as albums) online – and had ordered it. I had not, however, received it in the mail yet.

My friend – who had picked up his copy at a Starbucks – hesitated – then asked me how much I paid. I then told him (about $10) – and, almost as a courtesy (after all, money had already changed hands) asked how much he had paid.

Well, I never did find out – though it was pretty clear he paid more than I did. In fact, I’ve seen the prices that Starbucks charges on the few CDs they stock there, and it may well have been a LOT more.

Now, I’m sure the Bruce Springsteen album that was delivered to my house (that very afternoon, as it turned out) was identical in every pertinent respect with the one my friend picked up along with his morning coffee a couple of days earlier. On the other hand, he had it in his hands immediately without making a special trip. Forty-eight hours earlier that probably seemed like a good bargain – but one that clearly lost some of its luster the closer mine came to delivery. In short, his comfort with the bargain he’d struck was clearly relative to my experience.

Things aren’t usually that clear cut with retirement plans, unfortunately. Every 401(k) plan is just a little bit different, and some quite a bit so. Every employer brings a different level of commitment to the process, as does every adviser – and the workforce that such programs are offered to surely represent a mosaic of difference as diverse as America herself. There is no such thing as a “typical” 401(k), and – much to the discomfiture of some – there is no such thing as a single reasonable amount to pay for the services that would ostensibly be provided to that 401(k).

Yet for all the buzz around the issue of reasonable fees, it ranked sixth on the list of criteria in selecting a provider in PLANSPONSOR’s 2007 Defined Contribution Survey - just behind variety of investment options. Still, in evaluating participant services, “fees for participant services” was the lowest ranked element – and “fairness of fees” and “fee disclosure” were the most problematic elements of plan sponsor service rankings. Today most plan sponsors feel that they are paying reasonable fees – but there are growing concerns that they aren’t. Concerns that are almost certainly fueled by the growing attentions of the Department of Labor, Congress, and the plaintiff’s bar to that very issue.

Sooner or later, like that Springsteen album, people are going to have a chance to realize that they are perhaps paying very different fees for what may well be, in every pertinent respect, identical services. And that’s, IMHO, going to make for some very unsatisfied customers.