Saturday, June 27, 2009

“Common” Sensitivities

Last week the Congress was voting on an issue on which I have a strong opinion, and, while I did not vote for my congressman—and will likely never vote for him (unless, of course, he undergoes some kind of philosophical transformation)—I e-mailed him to express my opinion. And then I called his office to express the same opinion (not only because I feel so strongly about the issue, but because in a day of templated e-mail solicitations, I understand that a phone call probably has a greater impact).

As I hung up the phone, my daughter, who was sitting in the room with me at the time, looked at me quizzically—so I explained to her what I had done, and the issue about which I had called. “Really?” she said—with an air of awe and wonder. And then, after a pause she said, “So, does that work?”

I’ve given a lot of thought to that question since then. Of course, we live in a Republic, not a Democracy, and for the very most part, we don’t get to vote on all the individual issues brought before our legislative bodies. Instead, we vote for the individuals that we hope will represent our perspectives on those matters. Now, sometimes we get the individuals that represent our neighbor’s perspectives, rather than our own—but, with all its imperfections, that’s the system that has stood this nation well through all manner of adversities and prosperity.

Still, as Thomas Paine wrote in 1776 in Common Sense, “There is something exceedingly ridiculous in the composition of monarchy; it first excludes a man from the means of information, yet empowers him to act in cases where the highest judgment is required."

Now, substitute the word “politician” or “representative” for “monarchy,” and you have the gist of the problem when you have a political “class”—one in which your elected representatives spend more time with other legislators than with people like you or me. That’s why the power of lobbyists can be so insidious, and why, IMHO, those who have been nothing but politicians for decades can become disassociated from the concerns of their constituents. It’s why, IMHO, so many seem to spend their time and energy worrying more about the interests of the people who help them get reelected, rather than the interests of those who actually reelect them.

But, to my daughter’s question—does it work? Well, so far as I can tell, my one call to one congressman the day before a critical vote had no impact at all, on this vote, anyway. That doesn’t mean that my call was wasted, of course. That said, over time, I’ve had any number of individuals tell me that they didn’t have the time, that they didn’t believe it would make a difference, or worse, that they were afraid that doing so would put them on some kind of “list.”

But as we commemorate the anniversary of our nation’s Declaration of Independence this week, we should all remember that we can only expect our interests – whether it be fee disclosure, participant advice, or issues of broader concern - to be represented if we are willing to make the effort to express them. And then, of course, hope that our elected representatives continue to realize that our representative form of government works only when it is representative.

—Nevin E. Adams, JD

Editor’s Note: If you haven’t read Common Sense—or haven’t read it in a while—check it out HERE

You should also check out the Declaration of Independence HERE

Sunday, June 21, 2009

Design Lines

It’s now been nearly three weeks since our Plan Designs conference in Chicago and, once again, I got so many interesting ideas, so much good information—well, I’m still making notes from my notes.

For those who weren’t able to participate this year, here’s a sampling—and here’s hoping you will be able to join us in 2010!

Participants who are automatically enrolled are even more inert than those who took the time to fill out the form.

92% of participants defaulted in at a 6% deferral do nothing. 4% actually increase that deferral rate.

The Obama Administration does not want to mandate a government retirement solution—but it might provide one.

Concerns about cost and control that target-date fund managers wield are generating a new interest in customized solutions.

The key to successful retirement savings is not how you invest, but how much you save.

Even if a plan has a plan adviser that is a fiduciary, the plan sponsor is still a fiduciary.

Most plans don’t comply with ERISA 404(c). Plan fiduciaries are responsible for every participant decision in plans that don’t comply with ERISA 404(c).

Hiring a co-fiduciary doesn’t make you an ex-fiduciary.

“Because it’s the one my recordkeeper offers” is not a good reason to pick a target-date fund.

Given a chance to save via a workplace retirement plan, most people do. Without a workplace retirement plan, most people don’t.

Nobody knows how much “reasonable” is.

Innovative doesn’t mean nobody’s ever thought about it, or that nobody’s ever done it.

Wherever you default participants, come back in a year, come back in five years—they’ll still be “there.” Make sure it’s a good place.

Nobody ever expects a 40% drop in the market.

You want to have an investment policy in place before you need to have an investment policy in place.

Don’t put it in writing unless you mean it.

Most participants can’t even remember their PIN.

Things participants may have to “unlearn”: “Don’t put all your eggs in one basket” (target-date funds).

Things participants may have to “unlearn,” part two: “The advantages of tax-deferred savings” (Roth 401(k)).

The trust will come back when the market comes back (see”View” Points) .

The same provider can charge different fees to plans that aren’t all that different.

Disclosure isn’t the same thing as clarity.

Automatic enrollment (still) isn’t for everyone.

If your company has laid off a lot of people, you could have triggered a partial plan termination.

“Staying the course” is only a viable strategy if you’re on the right track to begin with.

It could get worse before it gets worse.

If you’re automatically enrolling participants, what is your match encouraging them to do?

If you can’t remember the last time you did a provider search, you’re probably overdue.

In health care, the participant spends the sponsor's money. In the 401(k) system, the sponsor spends the participant's money.

If our schools would devote half as much time educating our kids on finances as they do warning them (again and again) about drugs and s.ex, we’d all be better off.

It’s not what you’re doing wrong; it’s what you’re not doing that’s wrong.

—Nevin E. Adams, JD

You can read the musings from last year’s conference (still strikingly relevant, if I do say so myself): “Swimming” Pool

Saturday, June 13, 2009

'Value' Judgments

Way before we had “reality” shows where we could watch people make fools of themselves in prime time, there was “Let’s Make a Deal.” The concept was simple – get contestants to show up in odd costumes, and give them a chance to trade in something (of no value) that they brought with them for something of undetermined value that was hidden in a box, or behind a curtain. That first trade was easy – where things got more interesting was once the contestant had obtained something of value – and was then given a chance to trade it for something that might be of higher value – or not. Sometimes it worked out – and, of course – sometimes the contestant got “zonked.”

IMHO, there’s something of that going on in the current debate over workplace benefits. I think you’d be hard-pressed to find anyone who doesn’t think that Americans should have access to basic needs such as health care, or a secure (if not comfortable) retirement. Certainly we’re all striving to help ensure the latter, and we all know that the former (or, more precisely, the lack thereof) can have a huge impact on those efforts.

The question that, IMHO, is looming just over the horizon is—how much are you willing to give up to make that happen?

Let’s start with health care. On the campaign trail, then-candidate Barack Obama said repeatedly that, if you liked the health care you currently had, you’d get to keep it—oh, and it would cost less. Moreover, he was harshly critical of then-candidate John McCain’s proposal that health-care benefits be taxed, albeit offset by a tax credit.

However, in recent days, President Obama has been willing to reconsider the notion of taxing those workplace benefits (not his preference, but keeping his options open) in the interest of securing health-care reform. Now, with several competing notions of health-care reform emerging, we don’t yet know what the final result will be, but I think that workers who currently enjoy those workplace benefits tax-free could see some—or all—of that benefit disappear—albeit ostensibly for the greater good of ensuring that everyone has access to health care. How will workers feel about that? Will they feel that the value of broadening coverage is worth giving up that benefit? What if they have to pay more—and they get “less”?

Retirement Plans

Now, on retirement plans, the current Administration proposal—the automatic workplace IRA—purports to leave our current private-sector solutions in place. Indeed, officials go out of their way to emphasize that intent, and with more than half the nation’s workers currently without a workplace retirement plan, we clearly need something to fill that gap. On the other hand, the drumbeat that workers can’t (or won’t) save enough to provide an adequate retirement continues loud and strong. Some voices have already taken to task the “disproportionate” benefits of the 401(k) (that is, a plan that allows you to defer taxes is most prized by workers who actually pay taxes)-—while others are, for the moment, anyway, content to simply challenge its vitality.

The stridency of these arguments has, IMHO, strengthened in the aftermath of the extraordinary market decline, and I’m reasonably sure that the spotlight being cast on target-date offerings (which had, until recently, been a remarkably strong counter-point to the claim that participants were incapable of, and/or unwilling to, make solid investment choices) will do nothing to quell
those concerns. Meanwhile, the widely publicized announcements about 401(k) match suspensions are, for some, a reminder of just how tenuous that commitment can be.

Indeed, once you take away the promise of a defined benefit pension (admittedly an elusive fantasy at best for most in the private sector) and undermine the viability of the 401(k) as an effective retirement income generator, those looking to ensure broad-based retirement income coverage are left with little in the way of resources beyond Social Security and personal savings to fund those retirement paychecks. The former has well-documented fiscal challenges of its own, of course, and the latter—well, let’s just say that if you aren’t saving in a 401(k) or like vehicle these days, you probably aren’t saving.

All of which is leading what seems to be a growing number to suggest that the best solution to the challenge of ensuring adequate retirement income for all lies in a system that doesn’t depend on the responsibility and prudence of individuals, but rather one that, like Social Security, is the result of a government mandate. One that is based on a premise where the financial resources of the nation’s workers are “pooled” and ultimately redistributed, ostensibly in a way that provides a more certain result for all, but one that may well be distributed disproportionately to one’s individual contribution. Said another way, like Social Security, one in which what you put in and what you eventually get back are, shall we say, “unrelated.”

Now, as I said earlier, I think many—perhaps most—would agree with the proposition that we should look for solutions that provide the means for adequate retirement income for all. The question in my mind is—how much would you be willing to give up to provide that? Would you be willing to pay higher FICA taxes to prop up the current system, to give up the tax benefits of your 401(k) to help fund a broader initiative? Indeed, would you be willing to give up your 401(k)? Would you be willing to “make a deal?”

These are questions that we may be asked to answer in the coming months, though they may not be presented that plainly. But, IMHO, the answers – the decision to keep what you already have, or to take a chance on “what's behind door #2” - will determine not only the future of the 401(k), but that of the American retiree as well.

- Nevin E. Adams, JD

Saturday, June 06, 2009

“View” Points

We hadn’t gotten very far into the agenda of our Plan Designs conference last week when a plan sponsor asked the question that, IMHO, is on a lot of people’s minds these days. And while I don’t remember her exact words, the essence was this: “What can you say to participants who no longer trust their 401(k)?”

As we explored the question, we learned that her firm matched dollar-for-dollar up to 5%—a VERY generous match (particularly these days)—and yet, despite that, she said she has participants who are dropping out of the 401(k)—and/or talking about dropping out of the 401(k)—with an eye toward simply investing in a bank CD (not the music kind).

Now, before you ask, yes, her plan uses a financial adviser—and, yes, that financial adviser and her provider, and, so far as I could tell, she had worked hard to communicate all the “proper” messages. Her plan participants had been reminded about market cycles, reassured about the ability to get a “bargain” with their new contributions, comforted with the message to “stay the course”, and, yes—buttressed with a reminder about the buffer of the company match. All of which are, of course, legitimate points—and which, by the way, this plan sponsor heard again from those on the panel and those in the audience.

There were also a few “easy” off-line answers to her dilemma: If you can’t trust the adviser, get another one; if you’re not happy with the fund offerings your provider has put forth, change them (or change the provider). “Solutions” that, to my ears anyway, were more or less a “shoot the messenger” approach. Besides, so far as I could ascertain, that wasn’t really the problem here.

The problem—and one that wasn’t addressed, IMHO—is the question that has to be answered before a participant (or plan sponsor) can draw comfort from any of those rationalizations: How can I trust YOU to be telling me the truth? More to the point, why should I believe you?

And, as I listened to the various attempts of the panel (and the audience) to assuage this plan sponsor’s concerns, I was struck by how truly “pat” they all sounded—and, to someone who wasn’t prepared to just blindly suspend disbelief, how hollow. One well-intentioned adviser, after the session and, to his credit, in private, said, “After the markets come back, the trust will, too.”

I’m not so sure.

Like many, perhaps most, in that auditorium, I remain confident that, left to their own devices, the markets and economy will rebound (and that, not left alone, they will still rebound, but at a slower pace). That said, the voices of reassurance in the auditorium didn’t really seem to “get” the concerns expressed—and, to my ears, anyway—there was even a hint of condescension.

Reading between the lines of the question, I felt that I wasn’t just hearing a participant question being relayed. Indeed, at a time when much of what we have taken for granted has instead been “taken” from us (and, like it or not, that’s how it feels to many), I think many plan sponsors are also revisiting their trust; trust they have long had in reasonable (and disclosed) fees for services rendered, in sensible asset allocation models, in the ostensibly unbiased counsel provided to them by those they hire….

In the days since, as I’ve thought back to that session, I was reminded that human beings are willing to listen to people they trust—friends, family, co-workers—for counsel on their approach to many things, but you rarely trust someone, for long anyway, who doesn’t seem to understand—and appreciate—YOUR point of view.

—Nevin E. Adams, JD