Saturday, December 15, 2007

“Legends” of the Fall?

I went to see “I Am Legend” over the weekend. It’s the third cinematic version of the post-apocalyptic story that Richard Matheson wrote in 1954. This weekend’s reviews will (rightfully) be mostly about Will Smith—but Vincent Price was the first to take on the role in 1964 (in “The Last Man on Earth”), as did Charlton Heston in 1971’s “The Omega Man.” Each film, of course, is different—and I’m not just talking about the generous application of CGI. So different, in fact, that while I had read the book and seen the prior two film interpretations (Matheson influenced the 1964 version, but had nothing to do with “Omega Man”), I was distracted by things not happening the way they were “supposed” to happen in the story.

The “story” of this nation’s retirement has been similarly well-chronicled. For the very most part, the stories of late have been of the apocalyptic variety—and with some justification, IMHO. Last week, the Government Accountability Office (GAO) published the latest version, titled “Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers.

Gee, ya think?

I don’t mean to disparage the work of the GAO in this regard. They’re not the first—and they certainly won’t be the last—to attempt to project the consequences of our nation’s current preparations for retirement. Most, including the GAO projections, paint a dire picture indeed. In fact—and this was the headline for most of the coverage of the report—GAO projected that, for workers born in 1990, nearly 37% would reach retirement with no savings at all!

Now, I have a daughter who was born in 1990 (she actually went to see “I Am Legend” with me), and while she surely is an exceptional child, I have a hard time imagining that 37% of the kids her age will come to retirement with no savings at all. Not that I see it as an impossibility. Let’s face it, we live in an era where about half of working Americans don’t even have the opportunity afforded by a workplace retirement savings program, and where, on average, a quarter of those who do, don’t take advantage of it.

Still, one could at least argue that today’s workers are still “counting” on Social Security, that some have (and too many presume they will have) the underpinnings of a defined benefit pension, that many espouse the notion of working past the confines of a traditional retirement age as a choice, rather than a necessity. If they’ve been slow to respond to the call, perhaps they’ve been “encouraged,” perhaps even deluded, by our unwillingness to be straight with them about the need and their growing responsibility.

The Boomers remain a relatively optimistic lot when it comes to retirement, despite a litany of surveys and projections (including those like the GAO report) that suggest many are merely whistling past the proverbial financial graveyard. Time will tell if the urgings of those Cassandra’s are an accurate prediction too long ignored; a fundamental misapplication of averages, standard deviations, and longevity tables—or some of both.

The next generation—for this is the Boomers’ brood, after all—may fare no better, it is true. But they’ll surely do it with less justification—and despite access to a growing array of tools and resources—than their parents.

- Nevin E. Adams, JD

Saturday, December 08, 2007

The End in Mind

Having spent three days immersed in PLANSPONSOR’s second annual DB Summit, I was struck by just how relatively “easy” participant-directed plans—be they 401(k), 403(b), or 457- are.

Now, I hope you picked up on the use of the word “relatively.” I wouldn’t suggest for a minute that participant-directed programs don’t have their challenges. If the concept of saving is simple enough, the science of investing, compounding, and tax-deferral presents daunting intellectual obstacles for many. Even expert practitioners struggle with notions of “reasonable” fees, appropriate glide paths for target-date funds, and the applicability of QDIA regulations in the “real world.”

Over the years, our industry has worked to make participant-directed programs more accessible to participants. More recently, we have accommodated those who don’t want that access (for whatever reason)—or those who prefer to hire experts (or both)—with an assortment of automatic plan design features.

Meanwhile, IMHO, defined benefit designs have gotten more complex. Ironically, alongside the very Pension Protection Act provisions that have yielded such clarity to future defined contribution designs, we have managed, in a number of key areas, to take already convoluted calculations, turn them on their head, and introduce several new variables (several of which are, just weeks ahead of their implementation, still undefined)—all on results that must now sit up high and prominently on corporate accounting statements.

If their design is complicated, there is nonetheless a remarkable clarity of purpose to defined benefit pension plans, IMHO, and one need look no further than their name. The purpose of those traditional pension plans is imbedded in their very name—“defined benefit.” By design, plan sponsors need to project the ultimate benefit to be paid—and then figure out a way to pay for that. They need to consider how long people will live and what their pay will be in the distant future, project potential investment returns, consider the interest rate environment, and how much money has already been put aside for that purpose. Defined contribution plans, on the other hand, define only the amount(s) being contributed, not that ultimate benefit. And yet, by near-unanimous acclamation, the “results” of these programs—the benefits they provide—will define the financial security of our retirement.

Much of the impetus for the enactment of the PPA—and in no small part, many of the potentially draconian funding and reporting requirements contained therein—was the product of concerns that the benefits promised were not being adequately funded, and that, ultimately, those commitments would be “dumped” on the federal government (in the form of the nation’s private pension insurer, the Pension Benefit Guaranty Corporation (PBGC). Those PPA-imposed strictures, in turn, have led a growing number of employers (though by no means as many as the headlines would lead one to believe) to rethink those commitments.

One can only wonder what might happen if we were to impose on individual workers and their defined contribution plans what we have already imposed on those defined benefit programs…a funding requirement sufficient to provide a promised benefit, rather than simply restricting how much money can be contributed to these programs.

What if we began—with the end in mind?

- Nevin E. Adams, JD

Saturday, December 01, 2007

Window of “Opportunity”

The past year has brought with it an extraordinary amount of change to our industry. And yet, I have yet to meet an adviser—in any setting—who isn’t brimming (some are even bubbling) with enthusiasm for the opportunities they see for their business in all this change.

That’s a very different perspective than I hear from their plan sponsor clients. Not that plan sponsors aren’t appreciative of positive change. It’s just that, as a general rule, my experience has been that plan sponsors are significantly more likely to associate change with work, rather than opportunity—and with some justification.

Consider the recent finalization of regulations on the qualified default investment alternatives (QDIAs). Plan sponsors finally have some reasonably clear definition of what constitutes an appropriate default investment choice (at least according to the Department of Labor), one that provides a fair amount of flexibility for the sizeable number of plans that previously relied on a stable value option as a default to effect a reasonable transition—and those that adopt the new QDIA approach will, in turn, receive protection from participant lawsuits that is identical to the ERISA 404c that so many have found so elusive (whether they know it or not). And they get that protection without all the work attendant with acquiring that elusive ERISA 404c shield. All this for, in many cases, doing nothing more than embracing as a plan default investment option the asset-allocation solutions that so many have already adopted over the past couple of years. A huge opportunity, right? Easy, right?

Second Thoughts?

Well, sort of. What they also have to do is put out a notice that lets participants that are to be defaulted into that QDIA know that they are being defaulted, and that they have the option not to be defaulted. Oh—and for purposes of previously defaulted monies they have to let those participants know as well…assuming, of course, that their current recordkeeper could tell the difference between someone who was defaulted and someone who simply managed to direct their monies to the default option (and I understand that many/most can’t). Oh, and to take advantage of the protections at the earliest possible date—12/24/07 (yes, that’s right, Christmas Eve)—they would have to have had that notice out to participants 30 days ahead of the effective date (Thanksgiving Week). Assuming, of course, that their recordkeeper was in a position to facilitate that communication—and we’ll ignore, for a second, the possibility/likelihood that their recordkeeper will assess a fee for their support of this effort. Oh, and what if the plan’s current default option doesn’t seem to meet the QDIA criteria (say a conservative risk-based fund that doesn’t take into account the plan’s age demographics)?

Of course, there’s no need for plan sponsors (or advisers) to jumble up an already hectic holiday season with an “everybody on deck” scramble to obtain those new QDIA protections on day one, and there’s an argument to be made that those who do may well regret their haste (at leisure, as they say). Furthermore, additional questions are already emerging as we all begin to work through actually implementing these regulations/requirements—and more are sure to follow.

Creating a Real Opportunity

The best advisers are working right now to understand those implications, and to assess the capabilities of providers in supporting the notice requirements. They’re evaluating the QDIA-applicability of current plan defaults (and doubtless gearing up to recommend new ones, where necessary)—and they’re providing a valuable sounding board for their plan sponsor clients in helping them evaluate a reasonable timeframe for taking advantage of these new protections without pressing them to take hasty actions that might turn out to be imprudent in result or application.

They’re realizing that there’s opportunity, sure. But they’re also realizing that there’s potentially a lot of work for their plan sponsor clients, between where they are – and where they want to be.

- Nevin E. Adams, JD