Sunday, September 26, 2010

Status Quo?

Last week, during our PLANADVISER National Conference, I asked a panel of four plan sponsors if their current adviser was a fiduciary—and if that status mattered to them.

It’s not the first time I’ve asked that question; in fact, I have asked it of these plan sponsor panels at each of our four such conferences to date (although the plan sponsors were, of course, different). I ask it for one simple reason: While I sense a certain unanimity of opinion on the matter in retirement plan adviser circles, plan sponsors frequently have a more nuanced view.

Sure enough, this year a plan sponsor panelist not only said that his adviser wasn’t a fiduciary, but that he wasn’t at all sure why that mattered. In fact, he wondered aloud why an adviser would want to go to jail with him if something went awry.

Now, you could tell that many of the advisers in the room were surprised, perhaps stunned, by that statement. And yet, IMHO, that plan sponsor demonstrated what I felt was a pretty insightful appreciation for the litigation shield—or lack thereof—afforded him in hiring a fiduciary. For my money, far too many plan sponsors think that when they hire a plan adviser who is a fiduciary (or a provider who touts itself as a “co-fiduciary”), they have, in fact, supplanted their own fiduciary obligations to the program. But here was a plan sponsor who understood that if something “went wrong,” even if his adviser were a fiduciary, he was still on the hook.

That said, this plan sponsor’s answer was the kind of response that should surely give pause to an industry that spends so much time and energy “angsting” over the fiduciary issue.

The truth is, hiring a fiduciary is no magic talisman against litigation for the plan sponsor—and those who think (or who are mislead into thinking) so are ill-advised, to put it kindly. So why should fiduciary status matter?

Consider for a minute, when you bought your last car, who was that salesman looking out for—even as he ostensibly went to lobby his manager on your behalf? What about that clerk that was so helpful as you considered that PC or big-screen TV purchase? How about that commission-based realtor? Did they really have your best interests in mind?

Advisers that have adopted fiduciary status routinely talk about how their fee-for-service approach insulates them from bias in making fund recommendations; note that it allows them to bring THEIR very best judgment to the fore. What is, however, IMHO, too often glossed over is that it’s not just their best judgment, even an unbiased judgment, that is the essential benefit to hiring an ERISA fiduciary. Rather, it’s that judgment applied, and applied solely, in the best interests of the plan and its participants.

And that matters most—or, IMHO, should matter most—to those who are themselves charged with making decisions that adhere to those standards

—Nevin E. Adams, JD

Sunday, September 19, 2010

IMHO: “Forever” More?

Last week, the Treasury Department and Department of Labor held two days of joint hearings on the subject of retirement income (see Lifetime Income Hearing Witnesses Demand Fiduciary Shield).

There was discussion about the need for product design enhancement (though much of the focus seemed to be on better explaining what was already available); better (i.e. cheaper) pricing for the kinds of institutional purchases these plans might provide (though I’m hard-pressed to see how you get any kind of aggregation benefit in terms of product just because the buyers all work for the same employer); and the challenges of portability, both when a plan changes providers and a participant changes employers.

There was also talk about misunderstandings about annuities that no amount of communication or education seems able to dispel (my guess is the hearings won’t alter that dynamic, either), and there was concern about differences in gender-specific annuity tables (and, let’s be honest, gender-specific savings habits and longevity experiences). And, of course, there was a LOT of talk about things that would encourage employers to embrace these options as an integral element of their plan design. To my ears, those recommendations tended to fall into two basic themes: some kind of QDIA-like default safe harbor, and/or some kind of fiduciary safe harbor for annuity selection by the plan fiduciary.

IMHO, you can’t not address those concerns. While there are any number of operational impediments to incorporating a retirement-income option, I still find that the big challenge remains plan sponsors’ concern about being on the hook for a bad annuity provider choice—not today, or a year from now, or even 10 years from now, but forever. And while, as with investment advice, the Labor Department has tried to offer guidance in the interests of encouraging higher adoption rates, so far as I can tell, it hasn’t budged the needle at all.

I don’t fault the Labor Department for this; after all, there is a fine line between offering the level of protection that will actually change fiduciary behavior and just giving the store away. Clearly, the plan sponsor/fiduciary’s decision will have a significant impact not only on the choices available to, but the choices taken by, participants—and somebody knowledgeable needs to be accountable. That same rationale, though it’s often glossed over, is why the plan sponsor retains its customary level of prudent-expert responsibility for the choice of an investment advice provider, even if some protection is afforded them on the particulars of that advice; and why they are still on the hook for the prudent selection of a qualified default investment alternative (QDIA), even though they gain a great deal of protection from potential participant lawsuits so long as they comply with the safe harbor requirements.

That said, IMHO, there’s a world of difference between making a point-in-time choice of an advice or investment provider—a decision that can be monitored, reasonably readily benchmarked, and changed—and that involved in selecting a retirement-income option where the untangling can be considerably more “involved.”

It’s more than a little ironic that the very thing that makes it possible for those providers to offer those kinds of lifetime income guarantees also makes for a certain sense of irrevocability in the decision. Now, I realize that it doesn’t have to be irrevocable, certainly not in a forever sense (though there are generally financial penalties attendant with that decision). But that, I think, remains the real problem with annuity selection, not just for plan fiduciaries, but for plan participants as well. You not only have to weigh a lot of considerations that people generally aren’t comfortable weighing, you wind up making a call that seems like it not only has to be right for now, but “right” forever.

It is, quite simply, a decision that still seems perfectly suited to guarantee that no decision will be made for as long as it can possibly be postponed.

Ultimately, in fact, what we may need to help plan sponsors make these options more available is not a better way to help participants get into annuities—but a better way to help them get out.

—Nevin E. Adams, JD

Saturday, September 11, 2010

Listening Post

With our PLANADVISER National Conference just one week away, I found myself turning back to my notes from the PLANSPONSOR National Conference in June.

Some of these came from presentations, others originated from the audience, and still others arose in the dozens of side conversations at breaks and such in between the official conference sessions. Some, honestly, are something of a synergy among the three. See if they don’t get YOU thinking…

You may not be responsible for the outcomes of your retirement plan designs, but someone should be.

How you spend your weekend is a microcosm of retirement.

“Free money” isn’t.

Retirement income is a lot less of a problem when you have saved a pile of money.

You can lead a horse to water, after all—but you can’t make him think.

No one expects taxes to be lower in retirement any more.

Auto-enrollment is still viewed as a very paternalistic type of event.

When it comes to fee comparisons, eventually there will be better sources of information, but right now it’s still a bit mystical.

Providing revenue-sharing information to participants is like giving car keys and whiskey to teenage boys.

If you don’t know how much you’re paying, you can’t know if it’s reasonable.

You want your provider to be profitable, not go out of business.

Retirement income is a challenge to solve, not a product to build.

If you’re having trouble connecting with an employee group, find—or create—a missionary within that group.

When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they know enough—and usually chase returns.

While it’s a good idea to have fiduciary insurance in place to cover a loss, you should have a well-documented fiduciary process in place to avoid claims in the first place.

Now is a good time to renegotiate fees.

When advisers are examined, their plan clients usually are also.

Never ignore a letter from the IRS.

Left to their own devices, participants still don’t do anything.

Tax payers effectively subsidize the benefits of 401(k)s. Of course, they also subsidize the ability of many Americans to no longer pay federal income taxes.

A corollary: The tax benefits of 401(k)s are tiered toward those who actually pay taxes.

The best way to stay out of court is to avoid situations where participants lose money. The second best way is to have a well-documented prudent process.

Annuitization of defined contribution balances only makes sense if those balances are big enough to annuitize.

Some participants do opt out of automatic enrollment.

“Free money” is still a powerful incentive for participants.

The biggest mistake a plan fiduciary can make is not seeking the help of experts.

You can be in favor of fee disclosure and transparency and still think that legislation telling you how to do it is misguided.

The single most effective way for individuals to ensure that they have sufficient income in retirement is to accumulate more wealth; the amount of their savings before retirement defines their options in retirement.

I’m often asked how we come up with our conference and magazine topics, how we manage to keep our pulse not only on what’s coming down the road, but what people are focused on in the here and now.

The simple answer is—we listen. And when we listen, we all learn.

—Nevin E. Adams, JD