Saturday, January 26, 2008

Spend Thrift?

With lightning speed, the House managed to cobble together an economic stimulus package last week, the Senate will take it up this week, and President Bush seems anxious to sign it. Even more amazing in the current political environment (and in an election year, no less), there appears to have been true compromise on both sides of the aisle in pulling it all together.

But for those of us who focus not only on the importance of saving for retirement, but on trying to remedy the inefficient (and non-existent) savings behaviors of working Americans, there were huge ironies in the logic behind this particular stimulus, IMHO.

I fully appreciate the economic spiral that sometimes sets in – people get worried about their personal finances, quit spending on non-essentials, which leads to less revenues for businesses, whose employees get worried about THEIR personal finances, and who subsequently quit spending on non-essentials, which leads to…well, you get the point. I’ll also confess that my blood pressure rises dangerously every time I fill up my tank (there’s something wrong when a non-SUV costs more than $50 to fill the tank). Clearly, lawmakers figured that they needed to do something before everyone who was already “mad as hell” decided to “do” something (like elect new lawmakers).

Mixed Messages

So, what’s inconsistent with this message? For starters, the government wants people to spend these “rebate” checks – and spend them NOW. Indeed, there was concern about it being given to people above certain income levels (families making more than $174,000/year will get no rebate) because – they would be inclined to save or invest it, rather than spend it. Contrast this with the message of most enrollment meetings – how one should forgo that cup of Starbucks or that movie rental for an investment in long-term financial security. A little now adds up to a lot later on, right?

Secondly, there was a desire on the part of some lawmakers to extend this “rebate” to every working American – including those who don’t actually pay income taxes. What that means, of course, is that for them (and it’s a remarkably high percentage of Americans) this isn’t a “rebate” of income tax (they already have all that is withheld returned to them when they file) – it’s essentially a return of their FICA (Social Security) withholdings. Not actually, of course. That’s merely the rationalization for why they should get one of these checks (though what else could we be rebating?). Little wonder we tell folks that they need to prepare for the eventuality that Social Security won’t “be there” – at least not in its current form - when they retire.

“How” Now

Finally, what isn’t being said out loud – but has to be a concern for those banking on this stimulus package to live up to its name – is how people spend it. Specifically, they would prefer that people not use the rebate to pay down debt.

We all know the impact that debt can have not only on people’s ability to save for retirement, but on their current financial situation. We also know that taking a loan against one’s 401(k) plan balance, while frequently characterized as “borrowing money from yourself” is really just another case of “borrowing from Peter to pay Paul”. Still, our industry has been largely persuaded that workers won’t contribute to 401(k) plans if they don’t have some way to tap into those funds in an emergency.

There’s some reason for that underlying concern about rebate spending on debt – recent history, in fact. The government did something similar in 2001 (basically as an “advance” on the 2001 tax cuts). Government data indicated that only about 20% of the rebate check money was spent by consumers – and 60%, was used to repay debt. Of course, in 2001 just $38 billion was distributed in rebate checks (0.4% of GDP), versus $100 billion this go round (0.7% of current GDP). Paying off debt is not a bad thing, by the way, though it’s not likely to provide the intended economic jolt.

It remains to be seen if the stimulus package will work – and it’s by no means certain that the situation will feel as dire (or that it won’t) by the time the checks actually arrive (June is the current estimate). I also realize that there is a difference between trying to stimulate the economy and focusing on long-term financial security.

Still, I can’t help but think that the government’s response is promoting the kinds of behavior we would typically scold participants for; spending, rather than saving – and spending retirement savings, to boot.

- Nevin E. Adams, JD

Saturday, January 19, 2008

Beta "Test"

After months of research, informal talks with vendors, and not a few inquiries to a few “trusted advisers,” just before Christmas, we finally made our decision.

We bought a Blu-Ray DVD.

Now, that may not mean much to many of you. However, even the most casual renter of DVDs these days is frequently subjected to a commercial for that “next level” of viewing experience. The problem, of course, is that there are two levels: HD and Blu-Ray. The former has been around longer and, at this writing, that means that there are more movies in that format. The latter, if one is to believe the research, is “better” technology (you can put five times as much content/material on a Blu-Ray as on regular DVD versus just two times as much on an HD)—but your movie selection in that format (today) is smaller (none of this matters unless you also have a high-definition TV capable of displaying all this grandeur, by the way).

The other problem, of course, is HD and Blu-Ray are not compatible. You can’t play HD on Blu-Ray or vice versa (you can play regular DVDs on both HD and Blu-Ray players—fortunately, for those of us who have invested a small fortune in the current DVD format). Now, I’m not altogether sure that my aging eyes can discern the difference in quality between the two formats (there IS a noticeable difference between high-definition and regular), and I don’t now care, and never have cared, a bit about those DVD “extras.”

But you see, I used to own—and loved—a Betamax. If you’ve been around long enough to remember cassette music tapes, you may remember that there used to be two videotape formats—Betamax and VHS. Betamax tapes were physically smaller than VHS, but held as much recording time and with superior quality. But being “better” obviously wasn’t enough. Sony was the only firm that made “Betas”—while everybody else made recorders in the VHS format. When my beloved Beta finally died—and with it my ability to enjoy my collection of recorded movies—well, let’s just say it was an expensive lesson in the travails of being an “early adopter.”

Personalized advice has been around ever since participants have been asked to make their own investment decisions. Granted, some of that advice came from Joe in the lunchroom, but it’s been there, nonetheless. There’s little question that personalized advice is “better” than less-focused solutions like target-date funds (when provided by a trained professional, that is). Even the most casual observer will generally acknowledge the short-sightedness of an approach that dictates that every single person who is thinking about retiring within five years of the year 2040 should have an identical asset allocation.

And yet, those prepackaged asset-allocation solutions are clearly taking the retirement industry by storm. The vast majority of 5,000+ respondents to PLANSPONSOR’s annual DC Survey already have those choices on their menu, and those asset allocation options are drawing a growing percentage of assets—and that’s before the final qualified default investment alternative (QDIA) regulations take hold. Participants seem to “get” them, plan sponsors like them, and providers can’t bring their version(s) to market soon enough. Moreover, the vast majority of advisers have embraced them as well—viewing them, rightly IMHO, as a valuable tool in the arsenal to help workers start saving and investing prudently. The assumption, of course, is that when those balances get big enough to warrant a more customized solution, the participant investor will be equally ready to embrace it, rather than simply remaining comfortable with the “easy” approach that doesn’t require thought or involvement—and has worked out well for the past 20 years. Perhaps even at the recommendation of a financial adviser.

When that time comes, participants may well agree that they now need a more personalized solution. But advisers that take that eventuality for granted would be well advised, IMHO, to remember that “better” doesn’t always “win.”

- Nevin E. Adams, JD

Saturday, January 12, 2008

Trading Places

Back in 2003, when then-New York Attorney General Eliot Spitzer launched his investigation into mutual fund trading practices, two distinct areas were highlighted: late trading, which was illegal on its face (particularly so when facilitated by the fund companies themselves), and market-timing, which, as we were reminded in a parenthetical comment in nearly every story regarding the scandal, was not (though nearly every fund prospectus claimed to discourage such patterned trading and promised to take steps to deter it).

That distinction was frequently glossed over in the coverage that followed—and the settlements that ensued. When all was said and done, a large number of chastened fund complexes had forked over a large amount of money (much of it to the coffers of the Empire State) and agreed to adopt new controls and procedures designed to ensure that the wrongdoing they never admitted to doing never happened again. So much commotion was raised, in fact, that the Securities and Exchange Commission was roused from its slumbers—just in time to adopt a “solution” to the problems resulting from the not-illegal-but-nonetheless-apparently-troubling practice of market-timing. Of course, the solution—initially set forth by a trade group that represents the mutual fund industry—was already available to those fund companies. But now, thanks to the codification in SEC Rule 22c-2, even the most casual mutual fund investor—including those who do so only via their 401(k) plan—has been forced to be aware of redemption fees—and we’re not just talking about cases of quick in-and-out, round-trip trades, either.

Setting aside what, IMHO, is still an absurd result, it’s all old news by now. Been there, done that, bought the T-shirt….

Here We Go Again

That’s why it’s been interesting to watch the debate over market-timing once again raise its ugly head—this time among the participants of the federal government’s own Thrift Savings Plan, or TSP. Apparently, there are a couple of thousand participants (out of a universe of 3.8 million in the TSP) who are trading “frequently”—and the TSP is taking steps to rein them in.

The Washington Post has reported that 2,018 participants who sold holdings in an international fund on October 24 had transferred in just a few days earlier (10/19). And, of that group, 323 participants were trading $250,000 or more. Moreover, during the previous 60 days, those 323 traders had made 5,804 exchanges in the international fund worth $1.9 billion, according to TSP officials (one participant has traded more than $1 million back and forth a number of times). These participants aren’t trading in mutual funds, of course, so the SEC’s 22c-2 strictures don’t apply.

Moreover, an analysis by (a Web site devoted to federal workers) claims that those who bought in on 10/19 did so at $25.13/unit, and those who sold on 10/24 did so at $25.32/unit, making 19 cents per unit in just a few days. A feat that looks pretty good until you consider that, at 10/31, that particular TSP fund closed at $26.31.

But the TSP’s issue isn’t with the money these folks are making on those transfers. Rather, they are concerned about the cost impact of that activity on the folks who don’t trade; higher broker fees and transaction costs—especially in the international fund, where it's more difficult for the TSP's investment manager (BGI) to match buy and sell orders. They have—rightfully as fiduciaries, IMHO—expressed concern that a (relatively) few participants are driving up the costs for the vast majority who, like their counterparts in the private sector, never trade. Those trading costs stand out in the TSP, which enjoyed a total expense ratio of 3 basis points (that’s not a typo) in 2006. The trading costs for their international fund that year? Eight basis points (again, no typo). Now, those expense ratios may be a “problem” that your average 401(k) would love to have, but we’re talking about a $235 BILLION dollar fund. So, in crafting a recommendation to deal with this situation, the TSP’s chief investment officer looked to—mutual fund practices in the 401(k) industry and the SEC’s mandate under Rule 22c-2. Ultimately, unable to come up with a transaction fee that would be big enough to cover the trading costs, the TSP has decided to impose limits on the number of trades per month. Those limits—two per month—should be enough to satisfy anybody who isn’t trading funds for a living. Moreover, the TSP has imposed NO restriction on transfers from any of the funds to the G fund, the TSP’s most conservative option, to address the concerns of participants who might want to move their balances out of the way of some economic tsunami. More importantly, IMHO, it sends a message both to those participant-traders and to “everybody else.”

I also was struck by the TSP’s comparison of their solution with that adopted by the mutual fund industry. Though we frequently bemoan the bane of participant inertia, our industry has long been concerned about participants that would fritter away their day—and their balances—trading their retirement savings. That was the mantra against daily valuation in the first place, why we fretted over day traders in the middle of the tech-bubble, and, now, why a relatively few market-timers (setting aside for a minute that the incidents taken to task by regulators involved the complicity and/or active acquiescence by the fund companies; let’s face it, we all know the odds are against participant timers) have managed to burden an entire industry with an additional layer of costs, another complicated message, and random restrictions.

I can understand why the fund managers are in favor of these impediments. I’m (still) not altogether sure why the rest of us have been so willing to go along.

- Nevin E. Adams, JD


In the interim, a group calling itself TSPSHAREHOLDERS.ORG has launched a web site and a petition campaign to block the new transfer policies – and they have just under 3,000 signatures on that petition (one can’t help but wonder if it’s the SAME 3,000 that have been doing the frequent trading). They have some issues with the calculation of trading costs – and they claim that the big trading surge last October resulted in a “tracking error” (basically a difference between the price at which transfers were credited and the real cost of the transaction) – and they claim that the tracking error accounted for 56 basis points in the favor of those who stayed in the fund (see

Now, what’s missing in that analysis, of course, is the reality that that tracking error COULD have cut the other way – and those left sitting in that investment fund could just as easily have been stuck with a loss. But then, that’s how free markets work. Some people win and others don’t (what’s also more than a bit ironic, IMHO, is that up until the past couple of years TSP participants could only transfer once a quarter).

Saturday, January 05, 2008

Birthday "Presence"

Just after Christmas my family flew to Chicago for a surprise – my mother-in-law’s 85th birthday. It was a huge success – she wasn’t expecting us – in fact, wasn’t expecting to have all three of her children and their families in town on that day.

Over the course of our time there, I heard her tell several people “I never thought I’d make it this long.” Now, my mother-in-law doesn’t look (or act) 85. Still, even by today’s lengthening longevity standards, 85 is a long time – and, even as we planned our surprise trip “home”, we couldn’t help but wonder how many more birthdays we’d have together.

None of us know how many birthdays we’ll have – and how many of those will happen during retirement. Indeed, contemplation of our personal mortality is something that most, IMHO, reserve for special, isolated occasions (some not even then, of course). And yet, one of the most important aspects of planning for a financially secure retirement is making some attempt to predict just how long that retirement is going to be.

There are simple ways to deal with this complex and sensitive issue, not least of which the cogitations of actuarial science imbedded in those ubiquitous retirement projection calculators. After all, it seem so much more emotionally palatable to know that the “average” 52-year-old is likely to live to “X” than it is to actually think about the years that personally remain on this mortal coil.

Other Variables

If there are limits to our ability (or willingness) to focus on retirement’s “duration”, we nonetheless have the ability to influence other key variables in the equation of a financially secure retirement. We can, as a growing number of workers suggest they will, postpone retirement’s commencement by working longer. Not just age, but health, influences our ability to do so – a pertinent concern at a time of year when New Year’s “resolutions” are in vogue. Today’s workplace is certainly more conducive to such concepts than it was for our parents – and yet, I’m always struck by data on just how many of today’s retirees “attained” that status involuntarily, and earlier than they had planned.

A more obvious choice –one at the core of today’s retirement savings campaigns – is to save more, and perhaps to save more earlier. Unlike employment choices that may ultimately lie outside our control – or the uncertain and sometimes tenuous nature of human mortality – we all make choices every day about how to spend – or not to spend – the resources at our disposal. Admittedly those are frequently difficult choices – how much more have you had to spend to fill your automobile tank this week than you did even a year ago – and yet a tough choice now could mean the difference in an impossible trade-off twenty years down the road.

Like my mother-in-law, we may not ever think we’ll “make it” as far as we actually do. But if we’re lucky enough to get there – surprised or not - we surely don’t want to arrive empty-handed.

- Nevin E. Adams, JD