Sunday, April 25, 2010

Cynic’s “Cull”

I have always taken seriously the notion that news and information should be presented “straight”, and without commentary.

But there are times when it’s hard not to just scratch your head and say “huh?” or laugh out loud at some of the stuff that comes across our news desk.

Here’s a (somewhat cynical) sampling from just the past couple of weeks:

CONFIDENCE MIEN? A nationwide survey by Citi and conducted by Hart Research Associates found that 44% of investors report being confident in their ability to retire in financial security as they had planned (said another way, that’s nearly half who DO feel that confident) . More than a third (36%) said they might need to adjust their plans (so, do two-thirds not see any need to do so?), and (a mere) 16% said they are not confident in their ability to retire in financial security. Must be a lot of rich uncles out there…MORE

“NOTHING” DOING. Throughout one of the most stressful and volatile markets in memory, the vast majority of participants did exactly what they always do – nothing (though admittedly sometimes that’s the best thing to do). MORE

OUTSIDE INFLUENCES? Those with a workplace retirement plan are (also) more likely to be saving OUTSIDE of work (66% versus 57%, according to Transamerica). MORE

AVERAGE SAYS? Morningstar says that the 3.8% average target-maturity fund return in the first quarter was slightly below the 4% return during the fourth quarter of 2009 (what does an average of so many disparate offerings tell you, anyway?). Read MORE

FAMILIAR PHASES? MetLife reports that just over a third of plan sponsors say they are unfamiliar with at least some of the particular mechanics of how stable value works. (So apparently two-thirds are familiar with ALL of the mechanics?). Read MORE

CONTROL GROPE? Controlling benefits costs is now the top benefits objective for employers, edging out employee retention for the first time since 2006, according to MetLife. (Is that because costs are so high, or because these days folks aren’t worried about keeping workers?) MORE

WORK “OUT?” A recent report from Hearts & Wallets suggests a growing number of Americans now think of retirement not as when their portfolio reaches a certain level of assets, but when they are no longer able to find full-time employment (here’s hoping the former doesn’t come up before the latter is able to support that “decision.”). MORE

“FREE” FALL? (Still) leaving money on the table; Hewitt Associates notes that more than quarter of participants did not contribute enough to their 401(k) to receive their full employer match in 2009. MORE

STABLE, VALUED? Who needs diversified; While Hewitt Associates notes that premixed portfolios (including target-date and target-risk funds) now (finally) make up the largest portion of employees’ asset allocations (24.7%). The second-largest allocation was in GIC/stable-value funds (17.1%). MORE

KID "STUFF". More than four in 10 so-called “sandwich generation” parents (41%) continue to provide at least some financial support to their young adult children, according to the 2010 Families & Money Survey by Charles Schwab & Co., Inc. The biggest worries for mid-life parents are not being able to retire (29%), outliving their retirement money (22%) as well as not saving enough (22%). A distant fourth - the worry that their children won’t become financially independent (11%). (Personally, I’d be worried about not being able to retire BECAUSE my kids might not become financially independent). MORE

“UNDER” COVERED. A Centers for Medicare & Medicaid Services (CMS) report on the new health care reform law released Friday estimated that 1.4 million fewer Americans will be enrolled in employer coverage as a result. That’s a net number, by the way. The report goes on to note that about 14 million people may lose employer-provided coverage due to a variety of reasons, including more low-wage workers moving to an expanded Medicaid program and some employers, especially smaller companies and those with low average salaries, being “inclined to terminate” coverage (of course, no one knows exactly how this will play out (I suspect this is a conservative estimate), but IMHO 14 million losing their current employer-based coverage, while (ostensibly other) employers will be picking up (another) 13 million seems like a lot of disruption). MORE

So – what do you think? Did I miss any?

- Nevin E. Adams, JD

Saturday, April 17, 2010

“Different” Strokes

Having been born in the Midwest, lived a quarter of my life in the South, and now another sixth in the Northeast, I can tell you—people are different. However, having worked for huge firms and considerably smaller ones, I can also tell you that, when people come together in groups, they are not as different as you might think (or hope, as the case may be).

There is a “common wisdom” in our business that suggests that all plan sponsors are, more or less, alike; that large plans are the inevitable early adopters of trends that, sooner or later, trickle down to plans of all sizes. Consequently, those who make their living trying to discern trends and patterns frequently focus on the behaviors in evidence at larger programs—figuring that, in three years or so, those same characteristics will emerge across the spectrum.

There’s some logic to that perspective, IMHO. Plan fiduciaries frequently draw comfort and solace from the experience of others, and smaller programs can hardly be faulted for adopting plan designs and approaches that have been “vetted” by programs with more copious resources. Moreover, providers frequently introduce innovations with price tags that initially discourage smaller-program adoption (at least until later iterations are included as part of the “package”).

That said, I have always found it dangerously simplistic to assume that small plans will, inevitably, follow along eventually in the footsteps of their larger cousins.

"Less" Likely

Consider that smaller programs—let’s use $5 million in assets and less (though some would carve even that in half)—are significantly less likely to have adopted automatic enrollment than those with more than $200 million; in PLANSPONSOR’s DC survey, only about one in five small plans had done so, compared with more than half of larger plans. Now, a goodly number of those smaller plans already had safe harbor designs in place, so had no “need” of automatic enrollment. In fact, one could argue that the safe harbor design is a kind of automatic enrollment. Smaller programs were also much less likely to have a contribution acceleration design in place (just 8.7% compared with about a third of larger programs).

PLANSPONSOR’s Annual DC Survey, which captures the perspectives of some 6,000 plans, found that smaller programs were more likely to make participants wait to vest in employer contributions, and only half as likely to have embraced immediate vesting—differences that admittedly might be predicated on economic considerations.

Only about half of smaller programs had an investment policy statement (IPS) in place, compared with nearly nine of 10 among larger programs. Perhaps not surprisingly, smaller plans reviewed their plan investments much less frequently (49% said annually, the most common response, while more than half of larger plans did so quarterly). They were also less likely to review fees regularly—and much more likely to “never” review them (one in 10).

Consider also that smaller programs were less likely to have adopted a target-date (TDF) solution as a default (28.6% versus roughly two-thirds among larger plans); though, even among smaller programs, target-dates were the predominant default fund choice. They were, however, more likely to be unsure that TDFs were the “best” QDIA option (44%), and more likely to doubt that their recordkeeper was offering the “most appropriate” TDF option.

"More" So

Investment performance was significantly more important to smaller plans, and fee transparency was also noticeably, if modestly, so. Things like financial strength, market image/reputation, and recognizable “brand name” funds stood out in their ranking of preferred provider attributes. However, when it came to things like participant service, reasonable fees, and provider Web site, there was no apparent difference at all.

Smaller programs were more likely to offer advice, and MUCH more likely to offer advice via an adviser outside the plan. Smaller plan sponsors were significantly more focused on the quality of advice to plan participants than larger programs, more worried about the reasonableness of fees, and placed less emphasis on adviser independence but greater emphasis on the ability to negotiate on behalf of the plan than did larger programs.

Of course, the service criteria are expressed in relative, not absolute, terms. That certain aspects were more important to smaller plans does not mean that others were unimportant. However, for those who work with and/or focus on smaller programs, those differences can be significant.

After all, we may all be alike—but that doesn’t mean we’re all the same.

—Nevin E. Adams, JD

Monday, April 12, 2010

Trend “Setting”

Change is a reality of life.

Establishing and maintaining benefit programs that are competitive and distinctive requires an awareness of trends in the marketplace, in the population, in the legislative and regulatory worlds, and in the needs of the workers that your plan sponsor clients hope to attract and retain. While product development and enhancements can certainly play a role, there are also the overarching issues that drive and shape those developments.

Here are 10 of which you should be aware.

Sandwich “Spread”?

Much has been written about the impact of the retirement of the Baby Boomers, the so-called Silver Tsunami. Every day, hundreds—even thousands—in that generational bloc do indeed leave the ranks of the employed, though not always by choice. Still, many are staying—or making plans to stay—longer than they might have chosen in less-stressful times. Indeed, the Boomers increasingly find themselves with a new labeling—the “sandwich” generation—in which they are not only focused on their own financial concerns, but those of their parents and children as well. This may give participants longer to save for retirement (and less time to spend in retirement), providing those still-meager accumulations a much needed cushioning, and it may also ameliorate some of the nascent concerns about talent transitions. But it’s not like that was part of “the plan.”

The “To Versus Through” Debate

Target-date funds have long offered an apparent simplicity of design and implementation that have made them appealing to plan sponsors and plan participants alike, a unique combination that allowed participants to do the “right” thing (letting professionals manage their money and rebalance it on a regular basis) while, for the very most part, doing nothing at all. Ditto plan sponsors, who stood to benefit from the application of the protective umbrella of the Pension Protection Act’s qualified default investment alternative (QDIA) status for an investment option that required no special participant education, involvement, or attention.

Of course, the 2008 market brought to light vast differences in the philosophies underpinning these designs in terms of asset allocation and glide path (in fairness, those were in evidence in 2006/2007 when more-conservative models were ridiculed for their lagging returns). Much of that difference was later explained as a function of whether the glide path was designed to take the investor to their anticipated retirement date—or past it (ostensibly till death).

The debate is not yet resolved, nor perhaps can (or should) it be. Still, ahead of changes on the regulatory front, fund manufacturers appear to be making a concerted effort to be clearer about those assumptions; and, if that does not make for an easier decision, it nonetheless makes it more obvious that a “decision” must be made.

The Match “Catch”

One of the more troubling trends of the past year was an apparent uptick in the number of employers cutting or suspending their 401(k) match. Coupled with the toll that the financial crisis had already taken on many defined contribution accounts, the retirement security of many participants (who were doubtless happy to have a job, even without a 401(k) match) was certainly under pressure.

Of course, it was never as bad as the headlines suggested. In fact, nearly 80% of the nearly 6,000 respondents to PLANSPONSOR’s annual Defined Contribution Survey said they had no plans to reduce, suspend, or eliminate their match, and, of the few who did say they were considering reducing their match, most were planning to reinstate it this year. Perhaps workers will no longer take such things for granted because, after all, “free” money really isn’t.

‘Share Alikes?

While company-stock-related lawsuits still seem to be the most common, that initial series of revenue-sharing suits is still “out there.” For the very most part, the plaintiffs have not fared well, but two widely publicized cases—one a $16.5 million settlement by Caterpillar, and a second involving Wal-Mart, where last December the 8th U.S. Circuit Court of Appeals found triable issues of fact in the case—are likely to keep plan fiduciaries “jumpy.”

Now, there are plenty of unique aspects to the Caterpillar settlement to differentiate it (see Tractor “Trailer”) the firm’s investment management arm was running the funds in question); and while the allegations against Wal-Mart were not dismissed, they have not yet been adjudicated (see The Benefits of the Doubt). Still, the omnipresent threat of litigation, coupled with new Form 5500 disclosures, are sure to keep things stirred up.

“Tell” Tales

Ah, yes—those new Form 5500 disclosures. Out of sight may have been out of mind, but beginning with the 2009 plan-year filings, the Labor Department has broadly expanded the requirements for reporting compensation earned by plan service providers on Schedule C of the Form 5500 to explicitly require the reporting of both “direct” and “indirect” compensation earned by plan service providers. And it is clear that the DoL views compliance with the Schedule C reporting requirements as part of a fiduciary’s obligation to evaluate the reasonableness of a service provider’s total compensation—at the same time that it stands to gain a better ability to use this data, which is now also to be filed electronically.

Pension Penchants

While many continue to talk about the wisdom of modifying defined contribution designs to more closely resemble the better attributes of their pension predecessors, trillions of dollars (and future benefits) still reside in those traditional defined benefit plans. Caught in the cross-hairs of the financial crisis, more stringent accounting rules, and tighter funding requirements, these programs are responding in a variety of creative ways: some outsourcing more, others less, some taking a more active stance in asset allocation, others opting for a stronger focus on liabilities. But, regardless, most are asking for—and by most accounts, receiving—fresh insights and inputs from the marketplace. That could be an opportunity for enterprising advisers willing to make the commitment.

The End in Mind

For years the retirement plan industry has focused on trying to help participants save as much as they could—all the way acknowledging that the real challenge was likely to be helping them live on that accumulated savings. As it turns out, a new generation of products has emerged that not only will help them do that, but will help them begin making those investments/preparations while they are still in that accumulation “phase.”

Issues in product design (or perceptions about issues in product design) remain, but those gaps are closing (including the gap in perceptions), and the prospects for future market turmoil seem likely to keep these offerings high on plan sponsor radar screens. And let’s not forget that the DoL has been asking for information on “arrangements that provide income after retiring.” (see IMHO: Safety "Knot?")

Conflict Ed?

What constitutes advice—and how those who can offer it can get paid for doing so—has long been a controversial issue. Earlier this year, the DoL took a step back from the position it took in the final regulations on the subject put together—by the DoL—in 2008 before being halted, and then withdrawn last November by the new Administration. The new proposed regulations largely seem to restore the status quo in favor of level-fee advice only. It’s not clear that is the end of things, nor is it (yet) clear that that will expand access to advice by participants. But it is clear that there is a “new” direction on advice (see IMHO: “Access” Points).

Executive “Order”

The 2008 elections brought in more than a new President and big majorities in Congress for his party; it also brought in new leadership at various agencies that have a large impact on retirement plans. That has already brought about shifts in direction on things like participant advice as well as a renewed interest in retirement income, while the financial crisis has reinforced the need for better disclosures on offerings like target-date funds.

Healthcare, Reformed?

By most accounts, much of the “oxygen” in Washington for the past year has been sucked up (out?) by health-care talk and proposals. With a bill now signed, employers can begin to focus on what that means for their programs—and their workers. What that will mean over the next decade is, however, anybody’s guess.

—Nevin E. Adams, JD

Saturday, April 03, 2010

"Out" Spoken

About two months ago, the Department of Labor asked the public for some insights on retirement income via a request for information, or RFI.

The RFI sought input on what it termed a “broad range” of topics, including the pros and cons of distributing benefits as a lifestream of income, why lump sums are chosen more often, what kind of information participants need to make informed decisions on retirement income products, their ideas about participant disclosures of retirement income, and developments in the marketplace (1).

The comment period is just about two months old now, and with 30 days left, I thought it might be interesting to see what kinds of comments have come in (the Labor Department posts these comments on their Web site (2)).

The good news—nearly 500 comments!

The not-so-good news—as broad as the DoL’s scope of inquiry was, very few of the comments really seemed to be on point.

Now, in point of fact, I saw very few comments (yet) from providers, industry organizations, or even advisers (did see a couple of familiar names); doubtless those are in process. I’ve little doubt that on an issue this important—and with trillions of dollars at stake—there will be additional comments in both the quantity and quality that this issue surely deserves (3).

It was nonetheless interesting, IMHO, to see so many contributions from “regular” people—401(k) participants (and ex-participants) of every age from across the country. In addition to the voIume of responses, I was similarly taken by their passion and, from what I could discern, a certain singularity of purpose.

Based on my Good Friday perusal, the most common sentiment expressed was “keep the government away from my 401(k).” Now, there were flavors of that, of course, but it was a clear, consistent, and vibrant message, nonetheless. Most of these seemed to be from individuals concerned that the DoL’s RFI was little more than a stalking horse for the proposal put forth by Teresa Ghilarducci that suggested that the federal government should give people a chance to convert their 401(k)s into a government-sponsored annuity (see “The Plot to Kill the 401(k)”).

Another sub-group pointed to the fiscal challenges looming over Social Security, and, in no uncertain terms, told those reading their comments that the federal government should put its own house in order before trying to “fix” 401(k)s. Some were simply frustrated with the level of government debt, others the (apparently) growing level of government involvement in their lives (4). Many were simply worried that, having worked hard and saved diligently, the federal government now stood ready to step in and “take” theirs in order to spread it around to others who hadn’t been as prudent (5). (It should also be noted that a distinct minority liked the notion of some kind of government intervention to shield their retirement savings against the turmoil to which their balances had been subjected.)

Now, it would be easy to discount those responses. After all, there was nothing in the Labor Department’s request for information to suggest that the groundwork was being laid for some kind of government takeover; no reason to conclude that seeking insights on why more don’t voluntarily opt for annuities is tantamount to plotting to force people to do so. At best, some might say, these are misplaced ventings against things that have nothing to do with the issue at hand.

However, IMHO, it seems to me to be a sign of something more. I’m struck by the fact that individuals, spurred perhaps by some as-yet-unidentified provocation, took the time to take a public stand in support of their 401(k) and their willingness to take personal responsibility. Nor is it just words alone—that level of commitment has been borne out in any number of surveys that show workers, even in these trying economic times, increasing deferral rates to fill those depleted account balances.

Even so, it’s nice to see a bunch of dedicated participants still willing to put their “mouth” where their money is.

—Nevin E. Adams, JD

(1) A couple of weeks later, I dedicated a column to that effort (see “Safety ‘Knot’” at ), in which I outlined what was, effectively, 30 years’ worth of experience working with retirement plans—and nearly as long listening to plan sponsors and plan participants. In truth, I wasn’t doing so with an eye toward contributing to the DoL’s efforts directly, more or less viewing my role as trying to inspire those of you who work with these structures on the front lines to do so.

(2) You can check out the comments for yourself at

(3) Editor’s Note: It’s not too late to weigh in: Comments must be submitted on or before May 3, 2010. Members of the public can submit their input to the Department of Labor, RIN 1210-AB33, by one of the following methods:

Web: Federal eRulemaking Portal at Follow the instructions for submitting comments.
E-mail: Include RIN 1210-AB33 in the subject line of the message.
Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210, Attention: Lifetime Income RFI.

(4) One commenter went so far as to sign his comment as a “Citizen Who actually saves, Living below my means Currently being punished for Wall Street's errors.”

(5) See also “IMHO: The Ant and the Grasshopper” at