Saturday, April 25, 2009

IMHO: Famous Last Words

“It was a gray, chilly morning in midtown Manhattan and a line of unemployed, mostly white-collar workers, stretched for blocks around the Radisson Hotel. More than 1,000 middle managers, stockbrokers, consultants, secretaries and receptionists had come hoping to find a job. It was called a career fair, but there was no merriment - only a whiff of desperation.”—Intro to “60 Minutes” segment, “401(k) Recession.”

By now, you have no doubt either watched, had recommended to you, or at least heard about the “60 Minutes” special that ran a week ago Sunday. If you haven’t watched it yet, you should. Forewarned is forearmed, as they say.

No, it wasn’t very long (less than 15 minutes), but it was certainly enough to fuel the fires of those who are anxious to put the 401(k) out of our misery. Short as it was, you could basically cleave the segment into two propositions: that retirement savings shouldn’t be invested in stocks (or least not so much in stocks), and that fees—and hidden fees at that—are at least as much to blame for the decline in balances as the markets. Oh, and the real culprits—the ones that created the 401(k) and convinced employers to shed their commitment to pensions—are the same ones that have been fleecing all of us for decades. Well, at least we know who to sue.

The realities are, of course, more complicated than you’ll get in a 12-minute TV segment— particularly one that spends most of that time hanging out in a job fair with a long line of the unemployed who, for reasons I have yet to discern, showed up at that job fair with their 401(k) statements in hand.

Statement Impact

That made it possible for one interviewee to share that he had lost $140,000 (of course he hadn’t opened his statement until he was on camera)—though to lose that much he doubtless had the size balance many participants can only dream of. Another woman was able to illustrate her plight by pointing to a chart on her 401(k) statement—a chart that showed a steep increase from 2005 through 2007, before dropping just as sharply—to a point that, to my eye, seemed to be just about where 2005 started.

Now, nobody likes the idea of losing two years of savings and market growth, and it’s not that I don’t have empathy for their situation. I’m on the far side of 50 (albeit barely), after all—and my 401(k) statement isn’t looking any healthier than theirs. Of course, the “60 Minutes” crew was focusing mostly on folks who were un- or under-employed, and that not only hinders their ability to save, it could also mean that they’ll have to dip into those already-depleted savings.

When all is said and done, no one (except maybe “60 Minutes”) seems to be trying to argue that the 401(k) is “enough,” or that it was ever designed to be enough(1). Frankly, the only way it could be is if we mandate not only coverage, but participation, and participation at a rate of deferral that many workers would find prohibitive (unless, of course, you adopt some of the “pooling” aspects of Social Security). But let’s be honest—even with those pooling aspects (and a mandatory withholding of nearly 13% of worker pay), Social Security isn’t exactly on sound financial footing(2), and even defined benefit plans that were in solid financial shape two years ago—well, now aren’t.

Fee Sense?

More insidious were the claims about the impact of fees, and on that count, IMHO, the industry—specifically the mutual fund industry—has no one to blame but itself. Sure, the fees—well, at least the fee rates—well, at least most of them—are “disclosed” in the prospectus. Those kinds of disclosures may work for the lawyers, but they’re not much help to your average participant: “Where would you find it? Where would you find these fees in this prospectus? You can look on any page you want, and when you're all done reading it, and you will find some of the fees and the commissions here, but you won't find them all, and I'll bet you won't find half of 'em," Congressman George Miller (D-California), Chairman of the House Education & Labor Committee, told “60 Minutes.”

Moreover, in the “60 Minutes” segment, it was said “Miller's committee has heard testimony that they can eat up half the income in some 401(k) plans over a 30-year span.” HALF the income? I can understand that SOME investment funds with particularly low returns and SOME retirement plans with particularly high fees could create the potential for that situation, but….

Rumors Milled?

Therein lies the problem, of course. There are so many rumors and innuendos running around about 401(k) fees—what and how much is being paid, who it’s being paid to—and the rumors are all about how it’s all too much, and to people who aren’t doing anything to actually earn it. Rather than counter these accusations with the facts, many in the industry continue to hide (or appear to hide) behind the shroud of “we can’t.” You know the litany: “we can’t” tell participants how much they are paying because it’s too complicated to explain, or “we can’t” tell participants how much they are paying because it will cost too much to tell them, or “we can’t” tell participants how much they are paying because they won’t look at it anyway.

I don’t doubt the realities of the last two points, and the costs of complying with proposed disclosures by the DoL—less onerous than those contemplated by Congressman Miller—are staggering (3), but once you have cracked the mantle of trust, it’s hard to shake a sense that the real reason “we can’t” tell you what they are taking from your account is that they have something to hide (4).

Having been on that side of things, I know how complicated it can be to provide those disclosures —and having worked and communicated with plan sponsors and plan participants for most of my adult life, I also know how unlikely many are to be attentive to those disclosures that may be so costly to provide (5). Still, no one is well-served by what appears to the average participant (or congressman) to be an enduring reluctance to provide a straightforward answer to a perfectly legitimate question: “How much money are you talking from my account?”

If the retirement plan industry doesn’t come to terms with that reality—and quickly —well, “we can’t” might be someone’s famous last words.

—Nevin E. Adams, JD

The 60 Minutes segment is online HERE

(1) see “IMHO: ‘Broken’ Record

(2) see “Vanishing Points?

(3) see “IMHO: ‘Know’ Way

(4) see “IMHO: No One (Else) To Blame

(5) see “IMHO: What Will Participants Do?

Sunday, April 19, 2009

“Second” Opinion

ERISA’s 404(c) has long been held out by some as something of a magic talisman: Comply with its strictures, they claim, and you have an iron-clad defense against participant lawsuits —and, IMHO, the implication is a defense against ALL participant lawsuits. Of course, any number of ERISA experts will tell you that it is nearly impossible to satisfy those strictures, certainly not for every transaction (and mind you, 404(c) is transactional protection)—not that that seems to dissuade plan fiduciaries from trying, nor plan advisers from purporting to help them achieve that end. Nor are plan fiduciaries, or the participants and beneficiaries they support, ill-served by those efforts.

That said, I have long been surprised at how broadly the judiciary has been willing to extend those protections. Good news if you’re the plan sponsor getting sued, of course—but not-so-good if you’re a plan fiduciary looking for some consistency in the law.

The most recent example was Hecker v. Deere (see “Appellate Court Backs Deere Case Dismissal”), one of the litany of revenue-sharing lawsuits that have been brought (see “IMHO: Fighting Words”). This particular case has drawn the attention of the Department of Labor (DoL), and not for the first time. In fact, it was almost exactly a year ago that the DoL tried to help the appellate court do a better job applying the law than the District Court had (see “IMHO: The Letter of the Law”).

This time, the DoL said in a friend of the court filing that a “[p]anel rehearing is warranted to correct the panel’s mistakes of law and fact in misconstruing section 404(c ) of ERISA and declining to defer to the Secretary’s reasonable interpretation of her 404(c ) regulation.”

Besides the issue of deference to the Secretary of Labor, at issue in the DoL’s filing: “whether participants and beneficiaries exercise independent control,” but more specifically, did that exercise happen “in the manner described in the regulation,” because only then would the plan fiduciaries not be liable for any loss “that is the direct and necessary result” of that exercise of control.

The DoL cites language in 404(c)’s preamble that clearly puts the act of designating investment alternatives as well as the ongoing determination that those choices are “suitable and prudent” outside the shield of 404(c), and goes on to note footnote language that, IMHO, confirms the obvious—that the choice of those fund menu options is a task “over which the fiduciary, and not the participant has control”—and thus, even if the plan qualified as a 404( c) plan, those protections would not apply. Moreover, and at issue in the Deere case, the DoL notes, “[I]f on the other hand, the fiduciary maintains imprudent investment choices—such as investments with imprudently high fees (emphasis added)—then under the Secretary’s regulation, any resulting loss is not a ‘direct and necessary consequence of the participant’s exercise of control,’ and the fiduciary is not exempt from liability for that loss.”

The DoL notes that the court’s decision “appears to rest in large part on a mistaken impression that plaintiffs’ claims hinge on the fiduciaries’ failure to ‘scour the market to find and offer the cheapest possible fund,’ as well as the conclusion that the fees were necessarily prudent because the Plan’s array of investment funds were offered ‘to the general public’ at the same expense ratios that the Plans paid.” To the DoL’s point, it’s one thing to say that there is no obligation to find/obtain the cheapest fee, another altogether, IMHO, to claim that a multi-billion-dollar 401(k) plan has no fiduciary obligation to negotiate a better deal on behalf of its participants than they could do on their own account in a retail environment. To fail to do so is not necessarily a fiduciary transgression—but, IMHO, it surely is worth a proper hearing.

To its credit, the DoL didn’t just take issue with the fact that the court basically ignored its earlier counsel, nor did it focus strictly on its belief that the court just plain got it wrong, though it did say that “[t]he court also may not have fully understood the potentially far-reaching ramifications of its decision, which permits fiduciaries to evade accountability for the imprudent selection and maintenance of funds in defined contribution plans.”

The DoL also looked out to the future to see where a judicial misapplication of the law might take us and, I’m pleased to say, they cited this column (1). “These implications have not gone unnoticed,” the DoL said. “For instance, a commentator in PLANSPONSOR notes that if he were advising an employer with a 401(k) plan based on this decision he would ‘advocate giving participants LOTS of fund choices—via a brokerage window if possible,’ and would advise the employer that it ‘won’t have to worry about being prudent in the selection of the fund options for the plan because, according to [this Court’s] ruling, that [404(c)] safe harbor applies to that decision.’” The DoL then notes that “[e]ven if this Court meant to limit its holding to plans that offer a brokerage window of the type offered by the Deere plans…it is not hard to imagine that plan designers will advocate including this feature for all plans in order to immunize fiduciaries from any liability with respect to the selection of the plan’s option.”

Of course, the “counsel” I offered in that column was somewhat tongue in cheek. To me, it’s evident on the face of the matter that that would be an inappropriate result—and yet, as the DoL acknowledged by including the comment, you don’t need to reach very far from the court’s articulated rationale to arrive at that result.

In fact, the DoL has, consistently to my ears, and across administrations, said that, in the absence of 404(c)’s protection, plan fiduciaries are responsible for all plan investment decisions, even those made by well-informed, active, and engaged participants, even if that is further than many plan sponsors are willing to acknowledge.

That makes those protections all the more precious—and, with all due respect to the judges who consider these situations, all the more important that they get it right.

—Nevin E. Adams, JD

(1) IMHO: “Winning” Ways?

See also: IMHO: Letter of the Law

Saturday, April 11, 2009

“After” Thoughts

Last week, I attended a media briefing sponsored by BGI titled “Restoring Confidence: Saving the Future of Retirement.” That session featured insights from some new participant research, some perspectives about the current plan-trends landscape, some thoughts on annuitization in 401(k)s, and even some thoughts from a congressman who knows more than a little about pensions and 401(k)s.

Some random thoughts from, and stimulated by, that session:

• Research conducted by the Boston Research Group (BRG) (and sponsored by BGI) indicates that 33% of participants have put off looking at their statements because of the recent financial turmoil. I’m betting a like number never looks at their statements anyway.

• No news is actually bad news. Not only can participant statements provide some much needed motivation to do (more of) the right things, people might be surprised to see how well their accounts have held up.

• People have seen so many reports about how poorly indexes like the Dow and S&P 500 have performed that they probably overestimate their personal losses. Many, perhaps most, probably haven’t lost that much. Of course, some of those “too much in company stock” accounts may have fared worse.

• Data from the Employee Benefit Research Institute (EBRI) suggest that, in a “mere” two years, younger participants (who have smaller balances, on average) could be back to where they were last fall. It still feels like we’ve “lost” two years in three months—and most of that “recovery” is going to be funded from our own pockets.

• Disclosure is not (necessarily) clarity, and more disclosure is not (necessarily) more clarity. However, it beats the alternative.

• Two-thirds of participants in the BRG study who were previously confident that they would have enough to live comfortably say their confidence level was unchanged, and 18% said their confidence had actually increased. No word on whether that confidence was justified or not.

• Nobody is in favor of conflicted advice—there remains, however, disagreement as to when that potential conflict actually creates bias, and whether that conflict can (ever) be sufficiently disclosed.

• During the discussion, Congressman Andrews referenced a recent GAO report that purports to show that “biased” advice actually yields poorer investment results than unbiased advice. However, that recent (March 2009) GAO report is actually a report about a not-so-recent (2005) SEC analysis of (just) 24 defined benefit pension consulting firms registered as investment advisers, (just) 13 of which allegedly “failed to disclose significant conflicts.” The GAO report cautioned that “[b]ecause many factors can affect returns, and data as well as modeling limitations limit the ability to generalize and interpret the results, this finding should not be considered as proof of causality between conflicts and lower rates of return….” However, that distinction is NOT being made by those (including Congressman Andrews) who want to rely on the GAO report as saying exactly that.

• Interestingly enough, the GAO report, while only 16 pages long, is nonetheless twice as long as the SEC analysis it was based on (see “IMHO: Disclose Sure?” ).

• According to the BRG research, among participants whose 401(k) balances had declined over the past 12 months, 28% said they planned to delay retirement, while 20% said they planned to “work until they die.” Unfortunately, we don’t always have that option.

• Nearly half (45%) of all 1,000 participants surveyed said they would "save more” to replenish their 401(k) losses - though Warren Cormier noted that studies have shown that kind of good intention tends to be akin to people who, on New Year's Day, say they are going to go to the gym regularly.

• Nearly three-quarters (73%) of the BRG respondents said that "knowing I would have a consistent, guaranteed monthly income in retirement other than Social Security" would boost their retirement confidence. What’s up with the remaining 27%? Or is it simply that “consistent, guaranteed” is not the same as “consistent, guaranteed, and ENOUGH?”

• “Knowing how much money I would need to retire comfortably” was cited as a positive factor by just 61% of survey respondents. Doubtless the rest already have a sense that what they need and what they actually have are at variance.

• The BRG survey data indicated that 90% of survey respondents would be interested in a 401(k) plan option that would provide a means of securing guaranteed monthly retirement income. However, based on the (lack of) take-up rates in the real world, an acceptable source of “guaranteed monthly retirement income” wouldn’t appear to include an annuity.

• People confident about their retirement prospects behave differently (and generally, at least when it comes to saving for retirement, “better”) than those who aren’t. But are they more confident because they behave differently, or do they behave differently because they are more confident?

—Nevin E. Adams, JD

You can read the coverage of the session; Turmoil Dents Participant Confidence , Andrews: Dumping the 401(k) Would be a “Mistake”, Is the 401(k) Ready for Change? at

Saturday, April 04, 2009

Tweet Spot?

Those who try to figure out when certain trends reach a tipping point—who try to figure out when things have crested, the beginning of the end of the beginning—should note that we may have reached that point about three weeks ago—when I started “tweeting.”

And, no, I wasn’t commemorating the arrival of spring by making bird calls. “Tweeting,” if you haven’t heard, is reportedly now all the rage as a means of communication.

Well, sort of.

See, you “tweet” by establishing an account on (it’s free). And, once there, you can keep everybody up to date on what you’re doing.

Well, sort of.

What you actually do is update everybody who has signed up for your updates (“followers”). And, by update, what I mean is that you can tell those following your activities what you’re doing…in 140 characters (or less). Not 140 words…140 CHARACTERS. About half the length of this paragraph….

Now, I’ve been aware of Twitter and its capabilities for some time now. But, for a guy who long ago eschewed putting up creative status messages on AOL’s Instant Messenger, and who still finds Facebook’s “what are you doing now” box an annoying reminder of unfinished business (not to mention a mundane existence), the notion of incessantly updating the world on the trivialities of one’s daily existence just seemed—well, trivial.

Having said that, over the past several weeks I have found Twitter to be an interesting way to keep up with breaking news from a wide variety of sources (including politicians, many of whom are now “tweeting,” apparently), has already helped me find a good book, allows you to connect with people you wouldn’t normally be able to even find, much less interact with (although that cuts both ways), won’t tie up your e-mail, and has the potential, believe it or not, to actually help you find information and promote your professional activities.

Well, sort of.

As long as you can do so in that 140 character space—and only, to state the obvious, if somebody’s “listening.”

In point of fact, while for the moment it’s “fun,” I’m not yet sure how effective tools like Twitter will be in the long run, nor how its “soundbytes” will work for complex areas such as retirement planning. Not that I’m not intrigued by how Newt Gingrich spent his Friday evening (I’m more intrigued that he’d be willing to share that information), or how a “professional Wal-Mart shopping cart” finds the time (or Internet connection) to keep up with my postings, but there’s a great deal of this medium’s “information” that really isn’t worthy of that name. Still, it’s been interesting to meet the challenge of creating a message that (literally) fits the medium, and one that I’m sure I will improve on over time.

There’s a reason good advisers have an “elevator speech”—a “reason I should be hired to help you” explanation that can be delivered in the space of time an elevator ride consumes. Ditto the ability to share the essentials of participation and investing in a group setting in what are frequently “less-than-optimal” settings. Sometimes, perhaps most times, you simply don’t have all the time you’d like to explain things the way you’d like to explain them.

There is a science to being heard amidst all the clutter, IMHO. It’s all about attracting followers, and, from what I have discerned on Twitter, at least initially, you must follow to be followed (unless, of course, you’ve already attracted a following). You also have a much better chance of being heard, IMHO, if you’ve been referred/followed by someone they are already listening to.

Success in this “new” medium (it’s about three years old) seems to be about listening at least as much as you talk, sharing timely information that is useful (and entertaining), and doing so at a time—and in a setting—that is convenient for those whom you want to reach.

And in my experience—regardless of medium, message, or audience demographic—that’s always been the best way.

—Nevin E. Adams, JD

You can follow me on twitter at