Sunday, November 30, 2008

'Nothing' Doings

I wouldn’t for a second suggest that the current financial/economic crisis that we are enmeshed in isn’t “real,” or that the efforts to remedy it thus far aren’t well-intentioned, but it’s hard to shake the feeling that the words put forth to explain the situation—and thus the solutions put forward to redress that situation—are being done by folks desperate to be seen to be doing something, but not quite (at all?) sure what that something should be. And, IMHO, that inclination won’t diminish with a new Administration eager to prove itself. Let’s face it—even when doing nothing might be the best medicine (and I, for one, am at that point), we tend to believe that “something should be done.”

Meanwhile, we have retirement plan participants, most of whom—again—appear to be riding this one out. Oh, there are signs of change on the fringes—some modest reductions in average deferral rates, slight upticks in hardship distributions, and, on particularly volatile days in the market, a bump in transfer activity. Still, for the very most part, participants appear to have taken the “stay the course” message to heart. Nor are they sleeping through the crisis; all the major providers are reporting a significant increase in call center volumes—but participants appear to be doing little more than assessing the damage and checking on their options. That, of course, is widely taken to be a good thing.

I’ve always thought it was interesting that we bemoan the negatives of participant inertia (or sometimes try to turn that negative into a positive via “automatic” solutions)—except when it manifests itself during times of market turmoil. At those times, it’s the rare industry pundit who doesn’t applaud the “wisdom” and calm shown by participants. It’s that one time when “doing nothing” is not a problem to be solved, but an indication of prudence.

“This time” may be different, of course—and the call center inquiries may well suggest that participants are making an active decision to stay put, though it seems to me more likely that those inclined to make a change simply aren’t sure what to do. Human beings may, like an object at rest, tend to remain so—but with this much turmoil still going on after all this time, in my experience, people feel better if they can actually DO something.

"Action" Steps

So, here are some things participants can do:

Get started on rebalancing by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren’t realizing those as-yet-unrealized losses.

Increase your current deferral rates. When you think about just how much cheaper those retirement plan investments are compared with a year ago, it’s hard to pass up that kind of bargain. More so if you aren’t yet saving at the maximum level of the match.

Consider automated rebalancing. The vast majority of providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with your investment elections. It’s a good way to keep things in balance without having to worry (or remember) about the best time to do so.

Those 12/31 statements are now only about a month away—but there’s no reason to wait till then to start taking proactive steps on the road to portfolio “recovery.”

- Nevin E. Adams, JD

Saturday, November 22, 2008

Thanks Giving

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 2008:

I’m thankful that the election is over—and that the results were determined on Election Day (for the very most part). I’m thankful that so many made the effort to vote—and that, regardless of whether or not one always agrees with the outcome, we have the ability to do so.

I’m thankful that our nation has passed yet another September 11 without a terrorist attack on our soil—and thankful to the leaders of this great nation, and to the men and women in our armed forces, intelligence agencies, and Homeland Security for their continued sacrifices in keeping us safe.

Closer to “home,” I’m once again thankful that so many in Washington are concerned about the current state of employer-sponsored retirement plans, and the importance of fee disclosure—and once again (still?) just a tad worried that some of that concern will find form in a bad solution. I’m encouraged that we’re looking for new ways to replace the integrity of that fabled three-legged stool.

I’m thankful that, having figured out constructive (and voluntary) ways to get people into these programs—through devices like automatic enrollment—we are now focusing on how to help make sure they are saving and investing appropriately—through devices like contribution acceleration and asset allocation solutions. I’m also thankful that we’re seeing a growing number of retirement-income solutions come to market—because, after all, being able to live off what you have saved is what it is all about.

I’m thankful we have retirement savings accounts big enough for a 40% loss to hurt—but, of course, will be even more thankful when those “paper losses” disappear. I’m thankful we are talking about things like suspending the required minimum distribution rules to soften the blow, if not quite as sure that taking down the barriers on hardships and loans is a good idea. I’m thankful that so many employers remain committed to making those company matches that surely do so much not only to encourage the savings of workers, but also to help close the gap in savings adequacy.

I’m also thankful that so many employers have remained committed to their defined benefit plans and—certainly ahead of the market turmoil of recent weeks—had made serious, consistent efforts to respond to the new funding challenges imposed by the Pension Protection Act. I’m hopeful that lawmakers also will respect those efforts—and will give those programs the extra breathing room they have surely “earned” on the implementation date of some of those new rules.

I’m thankful that the “waiting” on implementation under the final 409A and 403(b) regulations is nearly over. I’m appreciative of the “patience” of regulators on those critical issues, their willingness—particularly the Internal Revenue Service on 403(b)s—to work so hard to assuage employer concerns ahead of that implementation date.

Finally, I'm thankful for the home I have found at PLANSPONSOR and then with PLANADVISER, and the warmth with which its loyal readers have embraced me, as well as the many who have "discovered" us during the past nine years. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the year. I’m thankful for the constant—and enthusiastic—support of our advertisers.

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

Thank you!

Nevin E. Adams, JD

Saturday, November 15, 2008

Discontent Ed

In another week (or so), PLANSPONSOR will publish its annual Defined Contribution Survey. There are other surveys in this space, of course, but ours stands apart, IMHO, for its breadth and depth, painting a portrait of the industry that transcends size, geography, and provider. And this year the survey, now in its 13th year, is even bigger than ever.

Over the years, asked to rank the criteria used in selecting their DC plan provider, plan sponsors have reliably opted to put “others” first—and this year, as in every year we have asked plan sponsors to do so, they ranked service to participants as the most important criteria, garnering a ranking of 6.5 on a 7.0 scale. Once again service to plan sponsors was the second most important (6.50). Not surprisingly (particularly these days), investment performance was deemed the third most significant, while the financial strength of the provider was ranked fourth. Interestingly enough, the numerical importance of all of these declined slightly from a year ago (more on that in a minute).

There was, however, one service criteria that actually rose in importance—transparency of fees.

Transparency notwithstanding, reasonableness of fees remained a high priority—in fact, it was deemed more important than transparency (though one might well wonder how you can be sure of the former without the latter), while brand name funds (which dropped the most of any criteria in importance, and was the lowest ranked criteria in this year’s survey), and the industry knowledge of account managers and the sales force were relegated to near after-thoughts in the rankings. Clearly, it’s about what you do and how you do it, not how much you know.

If there appeared to be some deflationary trends in the weightings, there was an even more ominous trend for providers in the evaluations. Despite the rapid expansion of target-date funds, and the enthusiasm for qualified default investment alternatives (QDIA), “focus on participant asset allocation” garnered a rating of just 5.74. Still, that put it ahead of the two lowest rated categories of participant service, overall participant education program (5.68) and fees for participant services (5.59—down from last year’s 5.64).

As for plan sponsor services, compliance was the top performing category, just ahead of the industry knowledge of account reps (though one should remember the relative unimportance accorded that knowledge in the evaluation category). Once again, fees were a sore spot: The next-to-lowest ranked criteria was fee disclosure (5.73); the lowest was fairness of fees (5.72). Some good news: Staff consistency/turnover was rated 6.04, and responsiveness to problems/inquiries a strong 6.18 on the 7.0 scale (though still down from 2007).

As a general rule, plan sponsors in the micro-plan segment, those with less than $5 million in assets, were happier at all levels than other segments. And, while it may be a function of higher expectations, the largest plan sponsors were noticeably less satisfied. Consider that while responsiveness to problems/inquiries was rated a 6.30 by micro plans, large plan sponsors gave their providers an average rating of just 5.68 on that 7.0 scale.

Now, what does all this mean for advisers? Well, it suggests that plan sponsors are less satisfied with the status quo than they were a year ago. Moreover, since the bulk of these responses were received well ahead of the recent market tumult, one can surely imagine that the level of satisfaction has not improved (though admittedly some advisers and providers will “shine” in their response to the crisis).

More importantly, plan sponsors’ satisfaction with their provider is often “linked” to that of their adviser (particularly when the adviser played a role in choosing the provider). And that link—particularly in what may be an emerging season of discontent - is something, IMHO, that all advisers—and the providers they choose to work with—would be well-advised to remember.

- Nevin E. Adams, JD

Saturday, November 08, 2008

“Out of” Practice

Regardless of age, regular exercise is important – but I’m at an age where the demands of everyday life (and the toll of previous “misadventures”) frequently make that impractical, if not impossible. Nonetheless – generally after I’ve been away at a conference (where the hours, food, and drink have all been beyond my usual quotas) – I undergo a renewed “commitment” to exercise. Unfortunately, once you have gotten out of the habit – well, let’s just say your body has a way of reminding you how long it’s been.

Consequently, I was concerned a couple of weeks ago when I heard that GM had decided to suspend its 401(k) match for salaried workers (see “Benefits Cuts Next on GM Agenda”). Now, the giant automaker, like many other firms, is struggling at present. And, frankly, given a choice between having a job and having a matching 401(k) contribution, I’d opt for the former every single time.

Still, in recent weeks, that’s a move that we’ve seen a number of employers make (see “Tightening Economy Drives More 401(k) Match Suspensions”), and that is reminiscent of 2003, when a series of well-known employers – names like Schwab, BF Goodrich, Goodyear Tire & Rubber Co, El Paso Corp, and Textron Inc. – took similar steps.

The sad irony, of course, is that these moves are being taken at a time when the markets are also undermining the confidence of participants. They were also coming to light at a time when a new Schwab survey highlighted the connection between the level of an employer match and participant contribution rates (see “Schwab Finds Employer Match, Employee Savings Link”).

Now, the match that GM suspended was generous by industry standards – 100% on the first 4% of employee deferrals. And it’s not like GM hasn’t been down this road before; GM cut its match in 2005 ), and they also cut it in 2001 – but in both cases, they restored it the next year, and one would hope that, in this case, anyway, history will repeat itself.

It’s worth noting, however, that the VAST majority of employers are not even contemplating suspending the company match (for an “unscientific” sampling of PLANSPONSOR NewsDash readers, see “SURVEY SAYS: What Are Your Plans for Your Match?” at ), and that the actions of few name-brand employers do not necessarily portend a trend. Still, I have heard from a number of advisers that their plan sponsor clients are “looking at” the current level of their match. Frankly, it would probably be imprudent not to.

On the other hand, like my exercise regimen, dropping, or even reducing, the match has real consequences. There’s the obvious reduction in participant account balances, of course, but – as the Schwab survey reminds us – there is also a cause and effect on participant behaviors. Take away that “free money,” and not only do participants have less incentive to save, they may even see it as a signal that they should cut back on their retirement contributions as well.

And, like any exercise regimen, once you get out of the “habit,” it’s easy to find other ways to spend that time/money – and hard to get back to doing what you know you should be doing.

- Nevin E. Adams, JD

Saturday, November 01, 2008

Ballot Initiative

For all the talk of “hope” and “change,” this extended election cycle has offered little of either, IMHO.

Now, I realize that there are those among you who are highly enamored of one candidate or the other – or at least highly un-enamored of the other. But, IMHO, if you don’t have some concerns about how both of the candidates would conduct themselves in office on at least some issues, you haven’t been paying attention.

Truth be told, neither of the major U.S. party candidates would be my first choice for the office (don’t read too much into that – I don’t have anyone particular in mind), and frankly, I’m not all that keen on the folks they’ve chosen to back themselves up (though I can appreciate the rationale behind the choices). Nonetheless, our nation’s tried and tested method of screening and selecting representatives has, with all its flaws, done its job.

Now it’s our turn.

Come Tuesday, we have a real choice to make. And this one – more than most, perhaps more than any in my lifetime – feels like a “game changer.”

As individual voters, it may not feel like we can have much impact, particularly if your state reliably goes “blue” or “red” (whether you do or not). However, the reality is that our votes do make a difference – if not in the result, then at least in the margin of the result; not just in terms of who sits in the Oval Office, but the tenor of voices on Capitol Hill, the influences in state legislatures, the composition of that local school board….

These are the people who will set in motion policies and practices that can have an impact that can, for good or ill, be felt far beyond their terms of office.

You owe it to yourself, to those you love, to those who have fought and died to preserve your right – your privilege – your responsibility – to vote.

- Nevin E. Adams, JD