Saturday, December 27, 2008

The Way We Were

As a parent (or even a mentor), sooner or later, you’ll wind up sharing tales of the way things “used to be.” Whether it’s a tale of the proverbial five-mile walk to school in the snow (“uphill, both ways”), the challenges of adjusting a tinfoil-laden TV antenna to obtain a decent black-and-white picture on one of four channels, or the days of laboring to get a quarterly valuation completed by six weeks AFTER the valuation cycle, the story-telling traditions of humankind are part of what makes us – well, human. By sharing a sense of where we have been, we all gain a better sense of the importance of where we are – and an appreciation (hopefully) for the progress that we’ve made.

Now, according to a recent survey, it seems that we may well be on our way to a day when participant direction of their investment accounts seems as quaint a notion as a quarterly transfer.

The aptly, if somewhat inelegantly, titled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007” by the Employee Benefit Research Institute (EBRI) indicates that lifecycle funds, a.k.a. target-date funds, were available in two-thirds of 401(k) plans in the year-end 2007 database the firm maintains with the Investment Company Institute (ICI), up from 57% in the prior year’s report. That means that two-thirds of the EBRI/ICI database, some 14.7 million participants, had an opportunity to choose those investment options. And, in fact, EBRI reports that, among participants offered lifecycle funds, 37% held them at year-end 2007 (see More than a Quarter of 401(k) Participants Hold Lifecycle Funds.

Doubtless, the Labor Department’s embrace of the qualified default investment alternative (QDIA) design (among which target-date offerings loom large) accounts for much of the increase in availability. Still, at year-end 2007, more than one-third of recently hired 401(k) participants held lifecycle funds, while at year-end 2006, 28% of recently hired 401(k) participants did so.

The EBRI study noted that younger participants were, in fact, more likely to hold lifecycle funds than older participants: 29% of participants in their 20s held lifecycle funds, compared with 19% of those in their 60s. And more-recently hired participants were more likely to hold lifecycle funds than participants with more years on the job; 34% of those with two or fewer years of tenure held lifecycle funds, compared with 23% of those with five to 10 years of tenure – and just 14% for those who had been in the workforce for more than 30 years.

That augers well for the future, of course. And consider that, at year-end 2007, nearly half (48%) of recently hired participants holding balanced funds had more than 90% of their account balance invested in balanced funds, compared with a mere 7% in 1998. On the other hand, note also that “less than half” of those with an investment in what is ostensibly an already-balanced fund did NOT have more than 90% of their account in that option. Indeed, one of the issues with asset allocation solutions is that participants often still seem to view them as one more choice on the menu, rather than THE choice from the menu (see ). It remains to be seen how the current generation of target-date funds – many of which still have fee structures, glide paths, and underlying asset classes that are wildly varied – will hold up amid the current market turmoil.

Still, one can’t help but wonder if – a decade or so from now – we’ll find ourselves trying to explain to a new generation of retirement plan advisers how much time, energy, and effort we used to spend trying to help participants make their own investment decisions.

And if they’ll wonder why we did.

- Nevin E. Adams, JD

Saturday, December 20, 2008

Making a List…

There was a time when Christmas shopping for my nieces and nephews was a relatively straightforward process. Simply put, we’d spend a day or two at the mall, looking for things that we thought would be genuinely fun (in my case) in a generic sort of way—some flavor of electronic car, legos, dolls, etc.

Of course, as our family has grown ever more extended—and my nieces and nephews older—it became very nearly impossible to keep up with their various and sundry interests—and to a point where the only practical solution was a gift card (even then, pains must be taken to make sure it’s from a store at which they shop).

Nonetheless, and in the spirit of the holiday season, here are some “presents” that I hope participants find on their retirement plan menus during the next year:

(1) A workplace retirement plan. It’s easy to overlook this one, particularly for those of us who work with these programs on an ongoing basis. The sad fact is that roughly half of working Americans still don’t have access to any kind of workplace retirement plan. That means no convenience of payroll deposit, no assistance from an employer match, no education and/or advice about how to properly invest their retirement savings—and, in all likelihood, no retirement savings.

(2) The ability to roll over distributions from prior programs into their current plan. We all know how difficult it can be for participants to keep up with even a single 401(k) account. How much harder is it for them to keep up with—or remember—all those stray accounts left behind at prior employers, or rolled into retail-priced IRAs? It’s better for them—and it could well be better for the plan as well.

(3) The chance to automatically increase their deferral amounts. Plan sponsors have increasingly been willing to embrace automatic enrollment—but auto-escalation, even though it’s an integral part of the Pension Protection Act’s (PPA) automatic enrollment safe harbor provisions, has proven to be a harder sell. More’s the pity. This is a chance to let participants set in motion a systematic improvement of their retirement plan fortunes—and with a minimum of effort.

(4) The opportunity to select a target-date fund. Some target-date funds have better asset allocations and investments than others, but almost all are likely to provide more favorable investment results over time than most participants will achieve on their own.

(5) Some consideration of a retirement income alternative. It’s ironic to me that we spend decades working with participants trying to help them make prudent, well-reasoned savings and investment decisions—and then, at the most critical moment (distribution), most just get pointed in the general direction of a rollover IRA or annuity. Both can be effective, of course, but can be quite the opposite as well. We shouldn’t just leave participants to their own “advices” at this critical juncture—and there is a whole new generation of options to choose from.

(6) The continued support of an employer match. I’ll admit this is a tough one, and it can be expensive, particularly when the economy is in such turmoil, and when it seems like so many others are cutting back. Still, we know that the existence of a match has a notable impact on the level of contributions, and certainly influences participation. And even if it did neither, it goes a long way toward shoring up the adequacy of those individual retirement accounts. It is, quite simply, money well spent.

—Nevin E. Adams, JD

Saturday, December 13, 2008

The Gift of Time

My eldest has been carrying a heavier than “recommended” class load this semester, and that – combined with her choice of classes – has meant that she’s been trying to get ready for finals and writing several critical papers all at the same time. Now, she’s a gifted student, and more committed to her studies than most (or so she has convinced her father and mother) – but the pressure was certainly mounting. Just when she thought it couldn’t possibly all get done on time, she asked for – and got – an extension on one of the papers.

Not that she did so with enthusiasm. She is very conscientious about her work and deadlines, and on more than one occasion has pulled the infamous “all-nighter” to meet deadlines. This time, however, she was smart enough to acknowledge the need and make the request. And while the extension was modest, it seems likely to give her enough mental “room” to devote the requisite level of attention to the array of competing priorities that the end of a college semester brings with it.

You don’t have to be in school to know that things can get pretty crazy this time of year, even in the best of times – and these are surely not the best of times. Just about everybody I talk to in this business is busier than ever, caught up not only in the usual plethora of year-end duties, but in a whole new set of issues brought on by the roiling markets. Indeed, one need look no further than the provider firms and advisory businesses that have, in recent weeks, expanded their call center hours or capabilities to appreciate the uptick in activity.

In the middle of all this turmoil, it was refreshing, therefore, to get from Uncle Sam one of the rarest of gifts – time.

During the last week alone, we got another year to deal with the document requirements of 403(b), a(nother) reprieve on 409A reporting of deferred compensation, and some breathing room so that the funding requirements of the Pension Protection Act can be more rationally assimilated with the current market realities (though President Bush still has to sign the last, and the initial signals suggest that he’s not yet convinced this is a good idea, despite the unanimous voice vote of both houses of Congress).

There are those, of course, who may take issue with those extensions; let’s face it, those that manage to find a way to comply with the original deadlines might naturally presume that everyone would have made the same effort. Still, IMHO, with the possible exception of the 403(b) extension (and even there, plan sponsors have to conduct plan operations as if the document were in place from the original date, so the “relief” is probably less than it might otherwise seem), the extra time seems fair, reasonable, and timely. In each situation, plan sponsors, their advisers, and advocates took the time to make a compelling case about the need for a little more time (I will say that having to read/assimilate and report on all this activity makes our jobs a bit more complicated). To their credit, those in a position to grant those requests listened – and, IMHO, cautiously and carefully, acquiesced.

And for those of us impacted by such matters, the holidays just got a little bit easier.

- Nevin E. Adams, JD

Saturday, December 06, 2008

Unbelieve Able

As my wife and I drove to pick up our eldest for the Thanksgiving break, I saw something I never thought I would see again: $1.95/gallon gasoline (even more incredible, that was while I was still in the borders of Connecticut, which imposes some of the highest gasoline taxes in the nation).

Indeed, what with the election, the introductions of the new Administration’s team, the bailout/rescue of the week, and the continued jitters of the world markets, the reality that gasoline costs about half what it did in July has gone almost unreported. Still, I heard a report last week that suggests the net impact of that drop in price has put about $500 billion back in American pockets—now THAT’S a “stimulus package” we can believe in!

Still, what I find interesting about that dramatic turnaround in oil prices is that it happened so rapidly that the explanations of why it ran up so quickly are still ringing in my ears. I remember all too well the pundits laying the price hikes off on the growth in the emerging industrial economies of China and India, the impact of hurricanes on production in the gulf, concern about turmoil in the Middle East, the perceived vulnerability of the shipping lanes....Others, of course, cited the fact that we hadn’t built a new refinery in more than a decade, and that we refuse to consider drilling in areas that wouldn’t seem to pose a threat to man nor beast. But what I remember most vividly was how consistently the so-called experts denied that “mere” speculation could account for these kinds of increases.

Yeah, right.

IMHO, one of the most frustrating things about the current economic crisis is that nobody seems to know what is causing it and, thus, no one can offer a credible idea of how long it will last or what can (or should) be done to hasten its end, much less what the “rest of us” are supposed to do in the “interim.”

While financial pundits are, these days, prone to trace cyclical “corrections” to the bursting of “bubbles”—housing, tech—the resulting declines are generally not that sudden, nor are they, generally speaking, wholly unanticipated. Rather, they are the result of pressures on our financial system like the geological pressures that often result in earthquakes or the eruption of volcanoes. And, like those geophysical manifestations, there are often precursors to the actual “big event,” as well as significant after effects (nor do you have to be a financial genius to see them—how many times did you look at the soaring prices of homes in your neighborhood and think “this can’t go on?”). The problems at Freddie Mac and Fannie Mae that ostensibly triggered the most recent crisis were so blatantly obvious that even Congress felt compelled to hold hearings on the subject (and back in 2006, no less!).

At the outset of the current crisis, I was encouraged to see the federal government step forward to help and facilitate some—but not every—institution that appeared to be struggling. In hindsight, that may not have been as well-reasoned as one might want to believe, but at least there was the appearance of selective and intelligent, if not appropriate, involvement.

We want to believe that the so-called experts know what they’re doing. But with every passing day, it seems more and more obvious that they don’t. Little wonder, then, that the American electorate is increasingly disinclined to simply hand over a blank check. Little wonder also that some of the market’s “natural” remedies have apparently been staved off by people waiting to see how much the government would do—knowing full well that an outgoing Administration desperate for its legacy, and an incoming Administration anxious to prove itself would be more than somewhat inclined to do more than might otherwise be the case.

Retirement plan investors are consistently and, IMHO, prudently told to “stay the course” in times of turmoil; reminded that, even when change seems appropriate, even essential, to be careful about overreacting. It’s an approach that advisers, in large part, applaud and support.

Maybe it’s time the folks in Washington took a bit of THAT advice to heart.

- Nevin E. Adams, JD