Saturday, March 28, 2009

The Mean-ing of Average

As if retirement savers didn’t have enough problems, last week Fidelity Investments reminded us how much money we’re going to need for health care.

According to Fidelity’s annual estimate, an average couple retiring in 2009 would need $240,000 set aside by age 65 in order to pay for health-care expenses in retirement (see “Retiree Health Care Estimate Jumps 6.7%”). Worse, that’s up from $225,000 in 2008—and even worse, the 2009 figure is 50% higher than the $160,000 Fidelity estimated in 2002 would be required.

Even those workers who still have employment-based retiree health benefits to supplement Medicare, but who must pay their own premiums, need to set aside a hefty amount, according to a 2008 EBRI report; men would need between $102,000 and $196,000 in current savings (50th and 90th percentiles, respectively), while women would need between $137,000 and $224,000, respectively, due to their greater longevity, according to the report (see “EBRI Pinpoints Retiree Health Expenses”.

That 2009 Fidelity estimate continues to assume individuals do not have employer-provided retiree health-care coverage, but it does take into account coverage by Medicare, while assuming life expectancies of 17 years for a male and 20 years for a female.

Now, those estimates are actuarially sound. EBRI notes that, on average, women age 65 live to age 85, while men will live to age 82. However, as Dallas Salisbury, EBRI’s CEO, has reminded me more than once, most of the population is not average. In fact, by the very definition of the term, “average” means that about one-half of men and women will die before they reach average life expectancy—and the rest will live longer.

EBRI research has shown that a couple retiring at age 65 in 2008 could need as “little” as $194,000 to cover health insurance costs and health-care expenses not covered by Medicare. However, if that couple happens to live far beyond average life expectancy, say to that experienced by the 90th percentile, and at the same time needs to use a lot of prescription drugs during retirement (again, the level out at the 90th percentile), EBRI notes that the couple could need as much as $635,000 in savings when entering retirement.

Indeed, setting aside the financial viability concerns surrounding the Medicare program (it’s actually in far more precarious financial shape than Social Security), that coverage attends to only a little more than one-half of the Medicare population’s health-care needs, according to EBRI. Not that most Americans are aware of those limitations, IMHO. In fact, I’d be willing to bet that many, perhaps most, assume that Medicare is all the post-retirement insurance they need. Of course, I’m equally sure that many assume that those Social Security checks will provide all the income they need¬ – only to discover too late that it is all they have.

Ultimately, these projections serve to remind us of a couple of key considerations. First, health-care costs need to be contemplated as a part of retirement savings—both because those costs can quickly wipe out funds set aside for living expenses, and because not purchasing the proper amount/kind of health care can have a deleterious affect on your quality of life. Second, one shouldn’t assume that Medicare will address every medical need, any more than you would assume Social Security will comfortably address every living expense. And finally, and perhaps most significantly, “average” is only one point of reality, and one that few of us actually live—or retire—in.

—Nevin E. Adams, JD

See also see “The Lure of Averages

Saturday, March 21, 2009

Business As Usual?

Like many, perhaps most, Americans I have viewed the unraveling “Bonusgate” scandal with a mixture of disgust and incredulity.

Essentially, the federal government, operating in crisis mode to restore the financial system and markets to “normal” - extracted through a kind of political blackmail (“you have to approve this now without questioning, or this will be on your hands”) enormous sums of money that they handed over, largely without condition, to allow certain firms to stay in business. Those firms, right or wrong, are still in business – and, much to the consternation of the American public, have then proceeded to conduct business as usual. That, of course, means honoring their financial obligations and – like it or not – that includes those now-infamous bonuses.

Of course, the American public is struggling to understand how a company that is so badly off it has to take on millions, and in AIG’s case, billions, of taxpayer dollars, can afford such apparent “largesse”. And, of course, most cannot even begin to get their intellectual arms around the enormous sums of money these companies are handing out (the largest bonus was $6.4 million, six employees got bonuses of more than $4 million, and 66 got bonuses of more than $1 million each of the $165 million, though the Connecticut Attorney General indicated over the weekend that those amounts could be understated).

Now, at least in theory, those bonuses were earned – and paid based upon objective, job-related criteria (and if they weren’t, that will surely come to light in short order, considering the number of regulators currently scouring the contracts). It may well be that they acknowledge extraordinary efforts and performance under conditions of extreme distress. None of that will matter to the average guy on the street, any more than it mattered to the US House of Representatives which last week passed a retroactive, targeted, and admittedly (even proudly) punitive tax on the individuals who received those bonuses.

As irritating as that situation is, however, what’s more concerning IMHO is how easily it could have been avoided. We know now, for example, that the agreement between the federal government and AIG had a provision in it that could have blocked the bonuses – but that changes were inserted – and inserted deliberately - at the last minute to allow them (1). We know that, of course, only after being treated to the spectacle of a U.S. Senator first expressing outrage that someone had inserted that language into his amendment – and then, less than 24 hours later, getting to watch that Senator admitting that he was the inserting “culprit” (albeit allegedly at the behest of the Administration – which, of course, denies such wrangling).

Ultimately, I suspect that tax won’t hold water in court – assuming it makes it into law, and that any of the bonus recipients are willing to contest the issue (once the current crisis is past, I suspect some would). I also suspect that the American taxpayer will be “stuck” with all of the other bonuses and expenditures paid by these firms; they’re legal obligations, after all, and in the absence of the intervention of a bankruptcy event or conditions imposed by the federal government along with those TARP infusions, not paying those bonuses is probably no different legally than not paying their electric bill. It is, it seems, “business as usual.”

Those implications notwithstanding, advisers have a vested interest in how this current imbroglio plays out. Many work for the firms drawing fire for these practices, of course, and even those who don’t, work in an industry tainted, at least for the moment, by its associations with the markets and those who sought to profit from the trust of others. Not to mention that the financial futures of many plan participants (and advisers) still rest on the futures of these institutions.

The $165 million is a lot of money, but a mere drop-in-the-bucket compared with the BILLIONS already promised to AIG and other firms – and as cathartic as it may be for some to watch the “fat cats” getting their comeuppance, the ultimate consequence of scrambling to close the barn door after the cow has already been loosed is likely less confidence in our financial services system, not more – and that will doubtless lead some to think that the solution is more intervention, not less – and that will, based on every historical precedent of which I am aware, retard, rather than accelerate the process of economic recovery.

It should be of no small concern that lawmakers would be willing to rush not just to judgment, but to a “solution” to the current situation with so little appreciation for its origins or implications. To attempt to dramatically, and radically redress a situation that, IMHO, could have been avoided with a modest amount of contemplation and thoughtful evaluation. The kind of contemplation and thoughtful evaluation one might reasonably expect to come naturally with the expenditure of billions and billions of taxpayer dollars, as a matter of normal business. The kind of thoughtful evaluation and contemplation we should be able to expect from those we elect to represent our interests and to guard the public trust as a customary means of conducting the people’s business – and that we should now demand in times that are anything but mundane or commonplace.

Because, IMHO, we’ll never get back to normal by simply conducting business as usual.

- Nevin E. Adams, JD

(1) Editor’s Note: The provision said the new limits "shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009. . .”

Saturday, March 14, 2009

A Good Deal?

A survey published this past week by Fidelity noted that workers cited health insurance, retirement savings plan matching contributions, and dental insurance as the three most important benefits, with health insurance ranking as No. 1.

That study (see Workers Underestimate Cost of Providing Health Benefits ) offered some interesting perspectives on health care and the expenses associated with that benefit. The good news was that workers very much prize this benefit – and in large part (72%) believed that what they got through their workplace was better than, or at least as good as, what most other companies offer. That said, more than half (61%) noted that they were paying more than they once did, but were getting the same – or less – in terms of benefits than they did in 2007.

However, a more striking finding in that Fidelity study, IMHO, was that more than half (53%) thought that that health insurance benefit was costing their employer less than $5,000/year, when a more typical range (depending on where you are, for health-care costs, like housing, can vary widely depending on where you live) is anywhere from $5,000 to $15,000. A benefit that, it should be noted, is still tax-free to workers (though there have been “designs” on that from both major U.S. political parties, see McCain’s View ).

Now, that workers underestimate the cost of providing health-care insurance is perhaps not surprising, in view of how insulated most are from the “real” costs under the current system (and let’s not for a second imagine that a nationalized version would do anything to close that gap). That’s why employers are increasingly predisposed to embrace programs that do a better job of “engaging” workers in the costs, even as those workers are asked to pay more. However, as the Fidelity survey illustrates, they may know they’re paying more, but most still have no real appreciation for the cost of the benefit they are being provided, and thus doubtless have less appreciation for the “deal” they are getting. Workers may appreciate the benefit – but how much more might they if they had a clue what it was costing?

When it comes to retirement programs, workers have long been asked to pay an increasing share of the costs; but, unlike health care, the shift of those costs has been less obvious, due to the imbedded nature of the expenses within/netted against the fund returns. As a consequence, surveys routinely show that participants (and plan sponsors) also underestimate those costs. In fact, in the extreme, a large number regularly opines that they pay nothing at all for those services.

Now, I’m not saying they aren’t being “told” now – or at least given the raw data with which to discern that impact. However, I suspect – and those aforementioned surveys validate - that the vast majority haven’t a clue as to the costs they are paying for those services. And, while it’s not here yet, the day is coming – and, IMHO, coming soon - when it will be mandatory to disclose that information to participants in a format much more likely to be understood and…“appreciated.”

And on that day, whenever it falls, those expenses – however fair, “disclosed,” and well-deserved they may be – will doubtless come as a shock to those participants. Participants who may well have been getting a good price, maybe even a good deal – but who thought they were getting it for a good deal less.

- Nevin E. Adams, JD

Saturday, March 07, 2009

“Passing” on the Ammunition

A couple of months ago, I started getting e-mails from readers curious about the announcements of plans reducing and/or suspending their matching contributions. As the weeks passed—and the number of reports grew—so did the inquiries. Those first inquiries were clearly seeking assurances that the announcements did not constitute a trend, that this was still just something a (very) few employers were embracing. Indeed, that was my sense of things (see "IMHO: Trend Spotting", borne out not only by one of our weekly surveys (see "SURVEY SAYS: What Are Your Plans for Your Match?", but also in a couple of industry reports as well (see "83% of Employers Surveyed do not Expect Employer Contribution Changes"—and I was happy to provide those assurances (and links to those surveys) to any and all who asked.

However, in recent weeks, those inquiries have taken on a different tone; this new wave of inquiries seems to be seeking validation, if not vindication. Now, not in every case—and not enough to persuade me that we were on the verge of a match-suspension tsunami—but enough to suggest that such a thing could be possible.

Resist “Tense?”

Throughout this process, I have resisted aggregating a list of employers that have cut their match—mainly because I worried that it would only serve to accelerate what I view as an ominous trend. Also in the back of my mind was a concern that such an accounting might be fodder for “enemies” of the 401(k), who would point to the actions as proof that that system was unreliable as well as risky.

Those concerns notwithstanding, it is a project that we have discussed undertaking —and, indeed, there have been a number of requests to provide a list of the companies that have chosen to cut or suspend their match. Sure enough, many of those more recent requests are apparently motivated by a desire to make the case for cutting back on the match to plan committee members, or as support for a communication about that move to participants.

Now, several of our stories on the subject detail a listing of similarly situated employers that have made that decision (see “Apparel Retailer Freezes Pensions to Cut Costs”, “J. Crew Cost Cutting Clips 401(k) Match”)—and you can make your own list at any time by going to our Web site(s), and searching for “match.” Still, my head kept seeing a need for cataloguing those individual decisions, even as my heart told me that no good would come of it.

Unable to resolve my internal “debate,” I settled on a solution that I thought would be simple, fair, and effective: ask our readers. I did so in our weekly NewsDash survey last week, in fact—only to discover that my internal dilemma was nearly perfectly embodied in that readership; the vote for and against compiling the list in last week’s NewsDash poll split right down the middle (see “SURVEY SAYS—Should We List the Match Cuts?”). I kid you not.

As I poured over the responses, however, at least half of those who supported the compilation conditioned that support on the ability to keep that information “in context.” Some went so far as to suggest (or at least imply) that that would require listing the thousands of plans that hadn’t cut their match, though most said that desire could be satisfied by simply noting how many 401(k) plans there were in existence relative to the listing. Others noted the difference in impact when an employer was continuing to support/maintain a defined benefit plan despite suspending the match, or how safe harbor 401(k)s couldn’t suspend their contributions as easily as those with standard 401(k)s. However, even if we were able to do all that, we still wouldn’t have taken into account the situations where employers were making a decision to keep jobs with those matching dollars. Let’s face it—if you don’t have a job, you’re missing more than a 401(k) match.

And then, the day after the survey results appeared, I got a long and, IMHO, thoughtful response from a plan sponsor. He concluded by saying: “I would add my vote to the list who say ‘no’ to compiling and publishing a list. It will only get picked up and appear elsewhere in print. The Wall Street Journal or CFO Magazine will cite the list and suggest that ‘everyone is doing it. In fact, if you haven't already suspended your 401k match, you're out of sync with what the cutting-edge companies are doing.’ Don't give them this ammunition.”

Now, that was only one voice—and one that wasn’t even reflected in the survey results. It was, however, a voice that spoke to my head AND my heart—and provided, for me anyway, a shining moment of clarity.

We will, of course, continue to report on the news and trends regarding employer matches, while presenting it in a thoughtful way that provides context for those decisions. I’ll apologize in advance to those of you looking for the convenience of the single listing (as I noted above, you can still make your own)—and trust that those of you who perhaps don’t see this as a big deal will at least appreciate the deliberations.

As for those of you who have made a decision, those who are still struggling with a decision, and those of you trying to help those who are struggling with a decision, I hope this discussion—and the comments of those who contributed to it—helps you with yours.

—Nevin E. Adams, JD

Editor’s Note: Unfortunately, the “news” about a match suspension will continue to be just that—and if this plays out the way it did the last time (2003), the restorations will be much less obvious, even invisible. But I’ll make this commitment now: We will happily and proudly report every single match restoration when they come back.